Note: This article includes non IFRS measures, including cultivation costs per gram, and adjusted EBITDA. See the Company’s latest MD&A.

On October 17, 2018, Canadians from coast to coast celebrated the first day of cannabis legalization. Across the country, executives from cannabis licensed producer Organigram Holdings Inc. (V.OGI, OGI, Forum) were alongside them. They wanted to celebrate the emerging market in as many different customer environments as possible and had travelled to each major market in Canada the day before.

By 5 p.m. ADT, the Organigram executive team was seated around a boardroom table back at the company’s headquarters in Moncton, New Brunswick. While their competitors continued to celebrate, they were focused on what was coming next. What would the next wave of cannabis legalization, “Cannabis 2.0,” look like? How could they position themselves for success?

For the next two hours, the executives bounced around ideas on how to best leverage Organigram’s expertise in the market. The company’s Senior Vice President of Marketing and Communications, Ray Gracewood, recalls that everyone in the room knew where the market was headed. In one short year the cannabis industry would evolve, and there was a massive opportunity to reach a whole new consumer group.

That meeting led to the development of a strategy that would take Organigram all the way to the end of 2020.  Gracewood said that everything from the products they focused on to the phased rollout of the strategy was rooted in sticking to the company’s core strengths.

“A corporate focus on sticking to business fundamentals and the values of our company are central to our successes. You do what you say you’re going to do. In the last year leading up to legalization, it had been very easy to get far based on a lot of talk. The reality of the market over the last eight months has been: the strongest companies with the best management teams and the most realistic plans have seen success. A lot of our major success points have to do with how we’ve been able to deliver on the commitments we’ve made, not just for the market but to customers and consumers.”

A Robust and Successful Operation

It may sound simple in theory but sticking to business fundamentals has made Organigram one of Canada’s leading licensed producers. The company runs an extremely efficient production facility in Moncton, New Brunswick, with an indoor three-tier growing system which maximizes square footage and has a current licensed production capacity level of 61,000 kg/year. In Q2 fiscal 2019, the company reported a cultivation cost of $0.65/gram, the lowest of any publicly reported Canadian licensed producer.

(Image via Organigram. Click image to enlarge)

While many competing LPs opted for greenhouse production, Organigram isn’t afraid to innovate and capitalize on a thoughtful indoor-growth model. By spreading plant growth vertically across three levels, it can maximize its cultivation footprint while keeping the environment controlled to maximize yields for lower costs.

The success of the operation has led to an expansion plan that is expected to increase target production capacity to 113,000 kg/year1. The multi-phase expansion is modular, replicating rooms that were previously approved for growth and splitting up submissions to license rooms to streamline the process.

1 Several factors can cause actual capacity and costs to differ from estimates.
See “Risks and Uncertainties” in most recent MD&A
*Expected construction completion; Health Canada license amendments submitted once construction completed
(Image via Organigram.)

When Organigram first started as a medical cannabis producer in 2013, it gained valuable experience with Health Canada’s licensing process. In its transition to providing adult recreational cannabis, it was able to use that expertise to quickly enter the market, and is one of only four Canadian LPs with distribution agreements in all 10 provinces.

Now, the company finds itself reaping the rewards. It achieved record net revenue of $26.9 million in Q2 fiscal 2019, the first full quarter of adult-use recreational sales (which accounted for $24.5 million), with a positive adjusted EBITDA of $13.3 million .

Successful Businesses run on Integrity and Innovation

The essence of the strategy formulated by Organigram’s executives on October 17, 2018 is one and the same as the one that led to a $1.4 billion-dollar market capitalization: Stay focused on business fundamentals and make decisions that would be made in any other business environment.

(Image via Organigram. Click image to enlarge)

As Gracewood points out, it is easy for executives to lose their focus in an industry with as much noise and interest as cannabis. The Organigram management team steers instead towards responsible decision-making and disciplined capital allocation, both vital for maximizing return on investment for shareholders.

But when Organigram’s executives looked forward, they kept coming back to one key idea as the driver of their business: innovation. Though it may seem paradoxical to discipline, innovation is exactly how the company was able to achieve such low cultivation costs.

With the next wave of cannabis legalization in Canada a few short months away, Organigram is already busy following through on their innovation strategy. “Cannabis 2.0” is set to legalize cannabis-infused edibles, beverages, topicals and extracts like vape cartridges. In this interview, Gracewood explained why the company’s strategy is set to be promising.

“The time for talking about conceptual ideas is very quickly dwindling, and the reality for a lot of companies is going to be in their ability to be flexible and essentially build businesses inside their business. For us, that’s been more about having a defined strategy and discipline. What are we really good at, what can we do, and what kind of capital and time will we need to invest? These are projects that we’ve had in the works for the better part of a year. We’ve already hedged our bets.”

Organigram had to make some assumptions on how the legal cannabis industry would grow. After researching other regulated markets and the illicit market, the result was a short list of potential products, with the biggest targets set on the two largest derivative segments - vape pen technologies and edibles. Together, they account for 36% of total US recreational cannabis sales.

Once regulations for Cannabis 2.0 products were publicized by Health Canada, it became clear that Organigram was on the right track.

(Image via Organigram. Click image to enlarge)

Products for Cannabis 2.0 and Beyond

Within the edibles market, Organigram saw the biggest potential in chocolate. As an approachable medium that is easy to make premium and position to specific demographic groups, the company estimates that chocolate could represent up to 40 per cent of the edible category.

Making a chocolatier out of a cannabis cultivation facility isn’t easy, so Organigram evaluated what resources were needed and committed them. The company committed to invest $15-million in a fully automated production line with capacity of up to four million kg/year of chocolate cannabis edibles, established a production team with more than 25 years of chocolate-making expertise, and partnered with Canada’s Smartest Kitchen to develop premium products and expand R&D.

Arguably a bigger play was in the emerging vape pen industry. To capture the largest chunk possible of the vape pen segment, which Organigram estimates will account for 25 per cent of the recreational cannabis market in Canada, The company is developing a diverse product line that uses different delivery mechanisms.

The most prominent product is the result of a partnership with Pax Labs, Inc. Organigram is one of only four Canadian suppliers for the Pax Era premium oil vaporizer and will be producing PAX era pods using its well-known Edison Cannabis Co. brand. That same brand will also be the exclusive Canadian offering for Feather Company’s disposable and cartridge-based vape pens.

To properly develop its increasing portfolio of products, Organigram’s expansion plans include a 56,000 ft2 refurbishment within the existing Moncton campus. The space will be utilized as an edibles and derivatives production facility, additional extraction capacity and office space. Primary construction is slated to be completed in October 2019, to get products ready for December, the earliest regulations will allow them on store shelves.

And Organigram plans to keep innovating at every turn by staying on top of technological advancements. One promising development has been in combining beverages with nanotechnology, with a water-soluble cannabinoid nano-emulsion that is, subject to testing, expected to provide an initial onset within only 10 - 15 minutes.

Another prospect is Organigram’s investment in Hyasynth Biologicals. The biotech company is developing biosynthesis, a disruptive technology that can produce pure cannabinoids without growing a cannabis plant. As the process improves, it has the potential to scale up and dramatically reduce the cost of cultivating cannabinoids.

Broadening Horizons for Successful Growth

By diversifying its investments in a thought-out manner, Organigram is focused on growing the right way. Given the company’s impressive base in cultivation technologies and market reach in Canada, it is in a comfortable position to explore prospects, including the naturally enticing international market.

(Image via Organigram.)

Again, the company is taking a measured approach with any potential moves and has chosen partners carefully.

Organigram is positioned to enter the German medical market through a partnership with German company Alpha-cannabis. The partnership gives the company access to more than 5,000 nationwide pharmacies in that country and future public tender bids.

Given how far Organigram has already come, it’s easy to see that the company’s diligent innovation strategy is a good bet. In this interview  l, Gracewood looked back to when he started at Organigam as one of only 30 employees. Less than four years later, that number is over 700, and the drive to innovate is alive and well.

“When I look at what we’ve been able to do over the last three-and-a-half-years, it’s a pretty incredible feat. Looking into the future, into true technology advancements and how they open up new possibilities and form factors and consumer groups, that’s the most exciting thing for me. It’s a total game-changer when you start to talk about things like rapid onset, water solubility, and some of the bigger ideas that fuel the potential growth of the regulated industry in Canada.”

Organigram has already proven itself in the Canadian market. It is a success story that other cannabis companies dream of emulating, with innovative indoor-growing cultivation that rivals other top cannabis LPs at a reduced cost. It managed to both stay true to its roots as a medical producer in Atlantic Canada and capture a sizeable portion of the adult recreational market.

But where other companies would start to stretch themselves too thin, or become complacent with their level of success, the company is set on continuing to do what it does best. With a focus on innovation as the driver of success, and a smart and disciplined approach to investments, Organigram is showing the cannabis industry how to grow properly.

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