Excellent news for Kaival Brands- the FDA announced it has authorized the marketing of certain electronic nicotine delivery system (ENDS) products, a first-ever ruling that allows marketing through the FDA Premarket Tobacco Product Application (PMTA) pathway. And fresh off an $8 million capital raise, and with news of the FDA's potentially market-changing ruling, Kaival Brands (NASDAQ: KAVL) stock soared. In fact, the timing of the FDA announcement couldn't be better. It likely adds to the revenue-generating firepower forming from KAVL's in-progress mission to launch into the U.K. Markets.
Indeed, KAVL investors like the news. And they should. Over the past sixty days, the U.S. Government has been relentless in not letting markets care for themselves. Instead, massive intervention has all but extinguished a multi-billion dollar flavored electronic delivery systems market. And while the intent may be well-founded, it's still a substantial reach that could have many unintended consequences for the world's largest tobacco and ENDS companies.
But, overnight, the U.S. markets have re-opened to an extent. And while new PMTA mandates impose high hurdles to clear before selling flavored ENDS products in the United States, that's not the case abroad. Thus, as KAVL re-engages its efforts to sell its non-flavored BIDI Vapor products in the states, they are taking complete advantage of penetrating markets where lucrative marketing opportunities still exist. The better news is that they are already advancing that initiative.
Penetrating United Kingdom With Bidi Vapor
Last week, Kaival Brands announced plans to launch distribution of its products in the United Kingdom, a market that can generate substantial revenues from its Bidi Vapor products. That initiative came after the two augmented focus and revised their marketing approach, putting intense focus toward growing their sales in international markets. Notably, they have already secured market and product approvals to distribute its entire BIDI® Stick product line (including non-tobacco flavors).
The more excellent news is that most countries aren't following the FDA's flavored-ENDS prohibition. Instead, markets overseas, while fully committed to safe sale and marketing of products, are more willing to let the industry manage itself. And that great news for KAVL, keeping its flavored ENDS products legal in much of the world.
Better still, those approvals are growing, and throughout the past twelve months, Bidi Vapor received marketing and distribution approval in 11 global markets, including the United Kingdom and Russia. And given the favorable dynamics of the U.K. market, Bidi Vapor and Kaival Brands could reap the rewards from focusing their time and strategic efforts on penetrating markets overseas, particularly those in the U.K. market.
Moreover, after completing a capital raise last month, KAVL is well-positioned to back its products with an extensive campaign to maximize its opportunities in new markets. That new funding, by the way, is ample to kick-start marketing, staffing, and benefit from a sales strategy that faces significantly fewer hurdles.
Tapping U.S. Markets To Accelerate Growth Overseas
And KAVL isn't entirely ignoring opportunities based out of the United States. The company made clear that simultaneously building out its U.K. infrastructure, they will actively engage in discussions to formalize international distribution agreements with its U.S. customers who have global distribution capabilities. Thus, while the FDA limited specific product marketing, billion-dollar market opportunities through the U.S. are still in play.
Remember, too. The U.K. market has always been in KAVL's crosshairs as an attractive market to launch its products on an international scale. In fact, strategy always expected the U.K. to be the stepping stone toward additional market penetrations. That plan is still in place, with KAVL expecting to soon roll out product placements across the European Union, which currently represents an ENDS market opportunity of $2.5 billion. And with it expected to eclipse $3.9 billion by 2023, earning just a tiny piece of that market can deliver substantial shareholder value.
A Great Fit For KAVL and Bidi Vapor
Know this, too. While the U.K. market is substantial, so are the demographics, which fit well with KAVL plans to maximize its opportunities. In the U.K., the target market is built with primarily adult consumers, with an average consumer age range of 35-45 years old. That compares to an average demographic in the U.S. between 18 - 24 years old. Noteworthy, too, is that adult consumers (cigarette smokers) in the U.K. appear more motivated than Americans to transition to vape products.
Of course, that's potentially excellent news for KAVL, with Bidi Vapor creating the BIDI® Stick to serve as an authentic, effective alternative for adult smokers of traditional combustible cigarettes, not as a product designed to attract first-time nicotine users. Further, while easy to say now, its product design and approach to marketing look to be a better fit overseas, especially with the U.K. ENDS consumers primarily composed of current and former smokers. Less than 3.5% of the total adult ENDS consumer population in that market is described as "never smokers."
Also noteworthy from an investor's perspective in the U.S. Markets is that while flavored ENDS systems are getting marketing denial orders, it's not a one size fits all declaration. On the contrary, KAVL expects Bidi Vapor to eventually receive authorization for its tobacco and menthol BIDI® Sticks. Thus, while the FDA's recent actions may likely eliminate a significant number of suppliers to the ENDS market, the end result of that order may end up having minimal impact on adult consumer demand for ENDS products. Better still, there may be far fewer competitors as well.
Before the recent PMTA update, hundreds of companies were competing in the marketplace. Now, a fraction of that number will survive as they lack the resources to develop the scientific evidence needed to meet the FDA's high public health protection standard.
KAVL, on the other hand, not only has a wealth of data, they have the advantage of tapping the capital markets if and when needed. And at this point, trading a little bit of dilution to own a substantial share of a billion-dollar market is a fair trade. Hence, when KAVL says they see blue skies ahead, it's safe to give them the benefit of the doubt. Few other companies are making the same forecast.
Moreover, unlike smaller players, KAVL is moving forward to penetrate new markets with a fortified balance sheet that positions them well to resume revenue growth. Although revenue guidance is lowered from FDA mandates, revenue growth matched with efficient operations can generate profitable returns. Thus, lower revenues can still result in EPS. Even better, with billions at stake and its U.S. connections able to accelerate growth overseas, those revenues and contributions to the bottom line may surprise to the upside.
Back In The U.S. As A Leader
And when it comes time to refocus in the U.S., it will do so with a substantially reduced competitive landscape, which better positions KAVL to reclaim its dominant market share in the U.S. for non-flavored vape products. Further, as the markets continue to shake out over the next month or two, KAVL should enjoy greater sales visibility and higher order price points.
Indeed, KAVL has earned respect by weathering two massive storms: COVID-19 and the FDA's broad decision on flavored ENDS. And while the share price is not where investors expected it to be, going forward, KAVL investors may benefit from seeing a bottom in the stock combined with potential and imminent updates on growing revenues. Hence, while the clouds overhead were dark, they have dissipated.
So, are better times ahead for KAVL? Most say absolutely. Admittedly, that optimism follows a tough few months. However, with KAVL being well-capitalized, having best-in-class products in a multi-billion dollar industry, and selling from a competitive landscape that shrank considerably, KAVL could become a market leader on several levels. And by following the rules and marketing only to adult consumers, that may very well be the result.
Thus, while many of its competitors got smoked, investing in the survivors, like Kaival Brands, may be a wise and potentially lucrative decision. After all, they are one of a handful that survived the shakeout. And in a multi-billion dollar sector, still standing can deliver massive rewards.
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