There’s much to support the bullish position on Kaival Brands International (NASDAQ: KAVL). Take last June for instance, in which tobacco industry giant Philip Morris (NYSE: PM) signed a deal with KAVL's wholly owned subsidiary, Kaival Brands International, LLC ("KBI") for the development and distribution of electronic nicotine delivery system (ENDS) products in markets outside the U.S., subject to regulatory assessment. That deal has broadened KAVL’s opportunities in a multi-billion-dollar market that increasingly few other companies can access due to regulatory and legislative restrictions. Not only is KAVL one of those select few, but the deal also exposes the possibility that PM might need KAVL more than the other way around.
Of course, securing $PM as a partner is a substantial win for KAVL. That value is immediately recognizable, but KAVL’s enviable position within the restrictive ENDS market is where the real opportunities come into play. In fact, if KAVL did intend to go about expansions on its own, it likely wouldn't have any issues raising capital. For example, investors responded favorably to KAVL’s announcement last July regarding the launch of PMPSA's custom-branded self-contained e-vapor product, VEEBA, being sold in Canada with royalties due to KBI pursuant to the international licensing agreement. That momentum strengthened further in August following KAVL’s announcement that the U.S. Court of Appeals for the Eleventh (11th) Circuit ruled in favor of Bidi Vapor in its appeal of the U.S. Food and Drug Administration’s (“FDA”) Marketing Denial Order (“MDO”) issued to the non-tobacco flavored BIDI Sticks. The court set aside or vacated the MDO, and remanded the PMTAs back to FDA for further review.
In a separate development, the FDA entered the tobacco-flavored Classic BIDI® Stick into the final Phase III scientific review in May 2022. Based on the countless documents submitted by KAVL, as well as the company’s unwavering commitment to only market its products to consumers of legal consumption age, there is a good chance that the FDA will approve the review. As evidenced by competitor Juul’s $438 million settlement over marketing its product to teens, combating underage use and misleading claims is a primary concern of the FDA. Fortunately, it’s one that KAVL is well-prepared to address.
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Thriving In A Changed Sector
Increasingly restrictive and often ambiguous legislation has shaken the entire ENDS sector, with federal regulators determined to keep tobacco and nicotine products away from the hands of young adults. Despite having good intentions, their inconsistent intervention and unclear regulatory guidelines have all but extinguished a multi-billion-dollar flavored electronic delivery systems market. Many domestic brands, both small and large, have simply been unable to survive the challenges imposed by the FDA, with mom-and-pop vapor shops closing their doors across the nation. Fortunately, Kaival Brands appears to be one of those companies that can meet the high expectations of regulatory agencies. Why? Because they have ENDS products and data that are compliant with the newest orders, unlike many of their rivals. Indeed, competitors that rely on flavored products or have failed to submit required PMTA documents may not have the means to get a second chance at enjoying the same marketing luxury as KAVL.
There's even more to like. Though certain BIDI Vapor products may once again become available in the US thanks to its own or joint efforts with $PM, the better news is that, unlike many of its peers, KAVL never planned to rely on a single market. Make no mistake, full product access in the U.S. could generate hundreds of millions in additional revenues. However, it is critical to note that KAVL is fully equipped to capitalize upon enormous overseas markets that permit broader opportunities than the United States. Thus, while KAVL prepares to re-engage the U.S. market with its non-flavored BIDI Vapor products, investors should keep in mind that the company’s full portfolio will enable it to seize international opportunities that are unreachable by competitors focused only on the domestic market.
In fact, that initiative is already underway.
BIDI Vapor Can Shine Abroad
It’s important to remember that the majority of the world isn’t bound to the FDA’s flavored-ENDS prohibition. International markets, while firmly committed to the safe sale and marketing of goods, are more considerate of letting the sector manage itself. And that's great news for KAVL, who can continue to sell its flavored ENDS products across much of the globe. Better yet, global marketing approvals are increasing in number, with KAVL earning their share of that benefit. Over the course of a year, BIDI Vapor received marketing and distribution approval in 11 foreign markets, including the U.K. and Russia. BIDI Vapor and Kaival Brands can benefit greatly from concentrating their time and strategic efforts on breaking into these international markets, especially given the favorable dynamics in markets such as the U.K.
Though more in focus today, the United Kingdom is one of those international markets where Kaival Brands has always planned to introduce its BIDI Vapor products. The U.K. market has the potential to generate billions of dollars in revenue, a goal that could be reached quicker than expected thanks to there being far less red tape pervading its industry. Furthermore, entry into the U.K. markets could serve as a catalyst for rapid expansion across Europe owing to already-secured marketing and product approvals to distribute its entire BIDI® Stick product line (including non-tobacco flavors).
Established U.S. Connections and Favorable Demographics Can Accelerate International Growth
That expansion is still a primary focus, with KAVL anticipating that a successful launch in the U.K. could help its products penetrate the European Union’s $2.5 billion ENDS market. Gaining even a small share of that market, which is predicted to surpass $3.9 billion by 2023, could result in sizable revenues and enormous shareholder value.
Initially focusing marketing efforts on the United Kingdom is a strategic move. Not only is the size of the U.K. market appealing, but the demographics make it a perfect match for KAVL’s offerings. The target market in the United Kingdom is made up primarily of adult consumers, with an average consumer age of 35 to 45 years old. This is compared to an American demographic that ranges in age from 18 to 24 on average, which can be difficult to reach due to FDA marketing restrictions. Moreover, while easy to say now, its product design and approach to marketing may resonate even stronger with U.K. consumers than adult smokers in the United States. ENDS consumers are primarily composed of current and former cigarette smokers, with less than 3.5% of the total adult ENDS consumer population in the United Kingdom described as "never smokers." Considering KAVL’s marketing focus toward current adult smokers looking for a superior alternative, this certainly works in KAVL’s favor. Also noteworthy is that surveys of adult smokers in the U.K. indicate they are more motivated than Americans to switch from cigarettes to vaping products. With BIDI Vapor products serving as an authentic, effective alternative for adult smokers of traditional combustible cigarettes, these demographic differences could be potentially excellent news for KAVL.
Best of all, while working to expand its presence in the U.K. and EU, KAVL can simultaneously benefit from existing business relationships as well. KAVL has emphasized that it will actively engage in discussions to formalize international distribution agreements with its U.S. customers who have global distribution capabilities. Therefore, despite FDA limitations on the marketing of certain products domestically, there are still billion-dollar market opportunities in play through its U.S. connections.
Non-Flavored ENDS Bring Great Domestic Opportunity
In fact, investors should be careful not to overlook the full scope of opportunities that KAVL is positioned to capitalize upon in the U.S. market. With $PM support, KAVL's interests in the American market are back on the table. Although the FDA’s actions may have closed a substantial number of suppliers to the ENDS market as a whole, their restrictions are not likely to have as strong of an impact on the types of ENDS products preferred by adult smokers. This is excellent news for $KAVL, as it means there will be far fewer competitors taking a share of the multi-billion-dollar industry.
Remember: hundreds of companies were competing in the marketplace prior to the most recent PMTA updates, which have since left a fraction of that number still standing as many lacked the resources to develop and submit the scientific evidence required to meet FDA guidelines. KAVL, on the other hand, not only submitted volumes of data, but has positioned itself to tap 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 exchange. Therefore, it is safe to give KAVL the benefit of the doubt when they say their future is looking bright. In its current condition, there aren't many other businesses in the sector that can make the same prediction.
While the FDA’s regulatory rampage may have caused a considerable number of companies to go up in smoke, the survivors, like Kaival Brands, inherited the ability to accelerate growth and capture market share far faster than expected. Simply put, KAVL is one of the last competitors left standing in a billion-dollar sector. Thus, with near-term expansion and potential selective market exclusivity on the horizon, positioning in KAVL sooner than later may be more than a wise consideration; it's timely.
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