Organigram (TSE:OGI) Well Poised for Cannabis 2.0

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

Organigram Holdings Inc (TSE:OGI) (NASDAQ:OGI) CEO Greg Engel joins Midas Letter to discuss the company’s strategy moving into the next calendar year involving Cannabis 2.0. Organigram are focusing on high volume areas with vape pens and a range of chocolates becoming available in Q1 next year. Organigram are also looking to differentiate themselves through dissolvable powders for beverages and deliver an experience that’s novel. The CEO also states the company are producing at a cash cost of $0.66 per gram and an all-in cost of $0.93, which he believes puts OGI among the leading positions in the industry from a cost perspective.

Transcript

James West: Greg Engel joins me now, CEO of Organigram Holdings, Inc. Greg, welcome back.

Greg Engel: Thanks for having me today, James.

James West: Greg, it’s been a tough few months in the cannabis sector, but Organigram has not only demonstrated that it’s plowing forward and developing, getting ready for Cannabis 2.0, but you’re also attracting the attention of a lot of analysts, who are still writing quite favourably about you and have projected higher prices for the company going forward. So my question, I guess, that we’ll build this conversation around is, what are you doing to get the analysts to put such big targets on your price going out?

Greg Engel: You know, I think there’s a couple of key things. One is, we’ve got a proven history delivering when Rec 1.0 launched, and I think when people look to 2.0 launch, that’s one of the considerations, is, are companies ready? What’s their plans? What’s the strategy behind what those products are going to be?

So we’re very focusing on the high volume areas with vape pens as our initial launch, and then, you know, we’re going to have a phenomenal range of chocolates available in Q1 next year. And then we’ve got a really unique offering in terms of dissolvable powder for beverages. So I think that’s one, is looking at, you know, how have you delivered, and what’s your strategy for 2.0.

I think the other is, when you look at the cost base of a company. We had some pickups in Q3 which impacted our revenue and our gross margin in Q4 in terms of production, but those trends have been reversed, and, you know, now we’re delivering again. We’re producing at a cash cost of $0.66 per gram and an all-in cost of $0.93, so arguably, putting us in one of the leading positions in terms of the space from a cost perspective which, as an indoor producer growing, you know, a very high quality product, is a great position to be in.

And I think, you know, when you look at companies going forward, costing has to be part of it. What are you spending on SG&A, what’s your operational cost, but what’s your cost of production, as well. So I think those are two of the key things that analysts are looking at when they’re looking at, kind of, who’s ready for the future, and who’s going to deliver in the future.

James West: Sure. At that cost basis, you could even afford to compete with the black market.

Greg Engel: Yeah, I think, you know, again, I got asked this question on our earnings call yesterday about who’s our competition. And I look at, you know, I don’t look at the other companies in the market; there’s a massive market out there in terms of, you know, the existing illicit market, and I think the way for us to compete with them – you know, I don’t necessarily think cost is the way to go after it. I think it’s differentiated products.

You know, delivering on kind of an improved cannabis experience, you know, especially when they get into the 2.0 products. What are you going to provide, and what are those products going to offer that are going to differentiate you? Because at the end of the day, that’s sustainable, right? And I think, you know, products like, as I said, our dissolvable powder for beverages is a way to differentiate ourselves and deliver an experience that’s different, because with that formulation, you know, based on the data we have on the formulation, we believe, you know, the onset effect will be 10 to 15 minutes versus a traditional edible or beverage, which is 60 to 90. 

So people are going to be able to, you know, measure their effect more effectively, and then also gauge whether or not they want to take more two hours out or something. So I think, you know, that’s going to be a big way to compete with illicit market

James West: So then, does Organigram envision not competing on price like HEXO announced their $4.50 price range product, which is obviously geared to go head to head with the premium dried flower. You’re saying Organigram’s strategy is not to engage on that direct price competition basis, but rather, to focus on differentiated products that the black market simply won’t have available?

Greg Engel: Yeah, I mean, that’s been our strategy from Day One in terms of quality flower, as, of course. And we’re fortunate we have a good partnership with The Green Solution out of Colorado, so we see, you know, not only state-level data, but we actually see store-level data for what’s happening in that market, and that’s the most mature market in the space.

And what we see is, you know, selling an ounce or 28 grams, it’s a very tiny fraction of who’s buying, right, in terms of the marketplace. So, you know, it’s more important to make sure that you’re delivering a product that has a great consumer experience, and having that differentiated product. We have a range of products; we’re certainly competing in, kind of the value range, but really, our core is in the mainstream and premium side, and that’s where we’re focused.

James West: Sure. Have you undertaken any sort of projection as to what percentage of your revenue in the future will be derived from the Cannabis 2.0 product category?

Greg Engel: I mean, certainly, again, we look at US state data, and our understanding is that dried flower and pre-rolls and that whole side of the market still, you know, in a mature market like Colorado, has a 45 to 50 percent share. So derivative based products, you know, primarily vape pens as well as edibles, have a, you know, 50 to 55 percent share of the marketplace.

So you know, certainly we expect, you know, with the products – and that’s why we went in the categories we did, right? Vape pens, we know, are 25 percent of the market in US states. Edibles are, you know, 13 to 15 percent, and then, kind of the other categories fall off pretty quickly; small percentage points. So we wanted to compete in the leading categories, and you know, as I said, our beverage tech is one that we believe is a bit of a disruptive technology versus the other companies who are going into beverages, because they’re going to have to have challenges with shipping and storage space – especially in today’s legal stores. When you look at those, you know, points of retail distribution today, they’ve got limited storage space. So, all of a sudden, carrying beverages that are taking up a lot of space is going to be a challenge.

But we believe, with our, you know, our dried powder, that it’s going to be a discreet offering where people can, you know, take it to a party, take it to a social event, but also take it to a sporting event or a concert or anything, and add it to the beverage of their choice. So, it gives a lot of flexibility. 

James West: That’s interesting. Do you envision that the edibles segment is going to be subject to over-regulation in the same way that premium dried flower was in terms of packaging and advertising and promotion?

Greg Engel: Yeah, it’s going to be a challenge. I mean certainly what we’ve seen is that, you know, the packaging is going to be very similar. We’re going to have child-resistant packaging which, in fact, is actually more applicable, though, in edibles, right? I mean certainly, you know, one of the kind of confusing facts going back to Cannabis 1.0 is, I don’t necessarily support that we ever should have had the packaged dried flower in a child-resistant package, because what can you do with that product? If you eat dried flower, it’s not going to have any effect on you, right? So there’s no risk.

But there is a risk of consumption, so having, you know, having edible products in a household where there are children, it’s important to have, you know, especially young children, having child-resistant packaging.

But you know, the biggest challenge still continues to be our lack of ability to market and differentiate these products, right? So we’re going to be dependent, as we are today, upon the staff in the retail environment, and that’s why retail buildout has been so critical, right? In the provinces where we’ve seen, you know, retail buildout, those staff are in a position to actually talk more to the consumer and talk to them about kind of what’s in the product, and I think it’s going to be important. We rely, you know, as do other companies, on online, you know, reviews that people will make of our products, and I think that’s going to be important as well, going forward.

So you want to deliver on a quality experience up front, and then people are more likely to post reviews about your product, which I think is going to be key.

James West: The province of New Brunswick elected to privatize its government-run cannabis retail business, and it immediately occurred to me that, oh, I wonder if Organigram is going to make an attempt to take over that business. Has that occurred to you guys at all?

Greg Engel: So we’re not a vertically integrated company today. We don’t have retail experience. But we certainly have been approached by a number of different retail partners, possibly, about doing that. So you know, certainly, you know, to be frank, I think, you know, supportive of whatever plan the government wants to make, but you know, they made the decision at a time when their retail footprint was just about to turn profitable, right? And so, you know, I think they’re in a position where they’re looking to say, can we bring in a more proven retailer to come and help us with this.

You know, so I think, I guess I would say, we’re open to participating in a partnership with an existing retailer, whether or not that’s a retailer who’s in the cannabis space, or someone who isn’t, today, right? New Brunswick is an important market to us, and I think we have to consider that. We haven’t made any final determination of what our plan is going forward.

James West: The involvement of the government in the commercial sale, or the retail sale, rather, of cannabis products has come under a lot of criticism by market participants and a lot of people point to California and Alberta of examples where less government participation means faster path to profit, greater access to product in the legal sense for all of the customer base. Do you think that’s a fair criticism that government, perhaps, shouldn’t be in the retail side of the business?

Greg Engel: I think it’s really dependent on how it’s kind of rolled out, right? We’ve seen, you know, the experience in Quebec is very positive, and certainly the stores that are there – same as in PEI and Nova Scotia, where the government stores have done a phenomenal job. You know, the consumer experience there is great, the access to products is great. You know, I think where one of the early concerns, for example, with Nova Scotia from a Federal government, was co-location with alcohol beverage, and you know, I think we’ve seen that that’s not really had an impact in terms of, you know, increasing impaired driving, or anything like that.

So it depends on the model, right? It really depends on, you know, Alberta has done a great job, and the other provinces have gone with private models in western Canada, you know, we’re seeing strong rollout and strong consumer experience. But in Atlantic Canada and in Quebec, where we’ve seen government participation, you know. And the Cannabis NB stores in New Brunswick, you know, were great stores and great experience; they probably just started with too many stores for the supply that was available at the time of launch. And so, if they had started with, you know, eight or ten and then scaled up as more supply and the 2.0 products came online, you know, I think then, from a profitability perspective, they may have been in a stronger position. 

But I know you’ve been to the stores in New Brunswick; it’s a great experience when you go in. You’ve got staff that are focused, they’ve got a high level of knowledge. 

James West: Sure.

Greg Engel: So, for the consumer experience, it’s a positive side.

James West: Yeah. All right, Greg, well, that’s an awesome update. Thanks so much for joining us today.

Greg Engel: Great. Thanks for having me, James.

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.