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Raymond James remains bullish on Organigram

British American Tobacco

British American TobaccoIt’s a new day dawning for Canadian cannabis company Organigram Holdings (Organigram Holdings Stock Quote, Chart, Analysts, Financials TSX:OGI), according to Raymond James analyst Rahul Sarugaser, who reported on OGI in an update to clients on Thursday. With a huge new equity investment from British American Tobacco, Organigram is now one of the industry’s best-capitalized companies, Sarugaser said.

Shares of OGI skyrocketed on Thursday as Moncton, New Brunswick-based licensed producer Organigram announced on Thursday a $221-million strategic investment from BAT who has subscribed for about 58.3 million shares, representing a 19.9-per-cent equity interest. Along with the equity investment, the two companies have announced a Product Development Collaboration Agreement to work on next-generation cannabis products. Under the terms of the agreement, both companies will have access to certain of each other’s intellectual property along with rights to independently commercialize products and technologies created under the partnership.

Saying that the collaboration agreement has been the result of extensive discussions and workshops and in-depth due diligence, Organigram CEO Greg Engel wrote in a press release,

“This is a tremendous milestone in the evolution of Organigram. It is instrumental in advancing our commitment to offering consumers innovative cannabis products and to furthering our long- term international strategy,” Engel said.

Looking at the agreement, Sarugaser said BAT has chosen an excellent partner in OGI, as over the company’s history it has demonstrated excellence in operations, engineering and R&D, particularly under CEO Engel since mid-2017.

“Organigram made one of the first investments in cannabinoid biosynthesis technology, a manufacturing modality we believe will be transformative for the global cannabinoid industry, through its $10-million stake in Hyasynth Biologicals, revealing early on the company’s propensity for identifying sector-disrupting technologies,” Sarugaser wrote.

“We understand anecdotally that Cronos’ cannabinoid biosynthesis alliance with bioengineering unicorn Ginkgo Bioworks was a major motivator behind Altria’s $2.4-billion investment in the company. See a pattern here? We do,” Sarugaser said.

Organigram’s share price hit a high of $11 in mid-2019 but the story has been mostly downhill since, but the stock has done well in 2021 so far, moving from the $2.00 range to $4.00 before the BAT announcement.

The new investment and product collaboration should be good not just for OGI but the whole of the cannabis space, Sarugaser said, as now the world’s second- and third-largest tobacco companies, BAT and Altria, have partnered up with Organigram and Cronos Group, respectively, while alcohol giant Constellation Brands has its $5-billion deal with Canopy Growth.

“This, in our view, portends a flood of investment, not just from other tobacco companies, but other alcohol and beverage providers, and large CPG companies more broadly. The reputational risk is evaporating, and as countries around the globe re-evaluate antiquated cannabis policies, the legal risk seems on the cusp of disappearing as well,” Sarugaser wrote.

On Organigram’s IP chops, Sarugaser pointed to the company’s proprietary nano-emulsion technology powering OGI’s Edison RE-MIX rapid-dissolving cannabinoid formulations, which were developed in-house. The analyst said Organigram’s long history of data-driven operational excellence and attitudes toward continuous process improvement is what originally drew him to the company.

“The BAT+OGI alliance focuses on the co-development of intellectual property to power next-generation cannabis products, with an initial concentration on CBD-based products aimed toward the U.S. market,” Sarugaser wrote.

“OGI also now has access to BAT’s vast operational, marketing, and regulatory expertise—including dedicated steering from 2 new BAT-nominated board directors —which we believe will drive the highly-effective deployment of OGI’s already-impressive technology suite both in Canada and internationally,” he said.

Organigram last reported earnings in early January where its first quarter fiscal 2021 (ended November 30, 2020) financials featured net revenue down 23 per cent year-over-year to $19.3 million and an adjusted EBITDA loss of $6.4 million compared to positive $5.7 million a year earlier.

Organigram attributed the drop in revenue to in part significantly lower wholesale revenue from licensed producers and a lower average selling price over the fiscal Q1. At the same time, Organigram generated a 30-per-cent year-over-year uptick in Canadian adult-use cannabis revenue to $16.8 million.

The company said in the fiscal Q1 press release that since July of 2020 it had launched 53 new stock-keeping units as part of its product portfolio revitalization, with 14 more SKUs expected to launch by the end of Q2 fiscal 2021. Earlier in March, OGI launched two new rec cannabis products, the high-quality, high-potency and pre-milled and pre-shredded dried flower product SHRED Tropic Thunder Jar of Joints and the cannabis-infused Trailblazer SNAX Milk Chocolate Bars.

Sarugaser thinks Organigram will generate fiscal 2021 revenue and EBITDA of $95 million and negative $23 million, respectively, and fiscal 2022 revenue and EBITDA of $132 million and $7 million, respectively. With the update, Sarugaser has maintained his “Outperform 2” rating for OGI.

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About The Author /

Cantech Letter founder and editor Nick Waddell has lived in five Canadian provinces and is proud of his country's often overlooked contributions to the world of science and technology. Waddell takes a regular shift on the Canadian media circuit, making appearances on CTV, CBC and BNN, and contributing to publications such as Canadian Business and Business Insider.

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