OrganiGram (OGRMF) Gears Up for Recreational Legalization
January 11th, 2017
Prime Minister Justin Trudeau’s election in October 2015 put Canada on a path to legalize both medical and recreational cannabis on a federal level. Over the next 12-18 months, the government is expected to update the Access to Cannabis for Medical Purposes Regulations (ACMPR) to address both medical and recreational cannabis and pass legislation to create a market that some analysts believe could be worth $4.5 billion by 2021.
OrganiGram Holdings Inc. (OTCQB: OGRMF) (TSX-V: OGI) is ramping up production to capitalize on the new market opportunities as an existing licensed producer of medical marijuana. With a focus on capital efficiency and certified organic product, the company is well positioned to become a leader in the space as the recreational market unfolds.
In this article, we will take a closer look at the company’s efforts to ramp up production, strengthen its recreational brand, and drive long-term value for shareholders.
Ramping Up Production
OrganiGram’s current production capacity is approximately 4,200 kilograms per year, while financing is already in place to expand to 26,000 kilograms per year by the end of 2017 (see Figure 1). The active expansion includes a 15,000 square foot extract processing facility that could prove instrumental as the recreational market evolves and consumer preferences shift from dried cannabis to edibles, tinctures, and other cannabis consumables.
Figure 1 – Expansion Plans – Source: Investor Presentation
In terms of revenue, the company generates $8.47 per gram in revenue with a $1.05 cost of goods sold. The existing 4,200 kilograms per year (by Januray) translates to $35.6 million in revenue with gross margins of around 88% in 2017. When the company completes its expansion, these revenues could soar to over $220 million assuming similar selling prices per gram, making it one of the largest licensed producers in the rapidly growing market.
OrganiGram plans to drive demand for its cannabis and related products through a series of branding initiatives targeting the recreational market. Over the long-term, many analysts believe that the recreational marijuana market could eclipse the $9 billion beer industry, $6 billion wine industry, and $5 billion spirits industry with $7 billion to $10 billion in annual sales given that cannabis has far fewer side-effects than alcohol.
On September 1st, the company announced an exclusive Canadian product development and distribution agreement with TGS International’s The Green Solution™ and NectarBee™. As a proven market leader with over $100 million in sales and 225 unique cannabis products, the agreement provides OrganiGram with recognizable and award-winning cannabis product lines to accelerate its launch in Canada’s new recreational market.
On November 23rd, the company announced another licensing agreement with TPB Productions Ltd., which represents the Trailer Park Boys. Under the agreement, the company will work with the popular brand to develop branding, packaging, and a competitive product portfolio targeted towards recreational marijuana consumers. The deal also includes product placement opportunities as well as branding of peripheral cannabis items.
These agreements bring a combination of innovative products and leading branding to an already premium-quality and attractively-priced product.
OrgraniGram Holdings Inc. (OTCQB: OGRMF) (TSX-V: OGI) is well positioned to capitalize on Canada’s upcoming recreational cannabis legalization. With expansion and branding efforts underway, the company is creating the capacity for upwards of $200 million in annual revenue moving into 2018 and beyond. Investors may want to keep an eye on the stock with its relatively modest market capitalization and strong growth potential.
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