OrganiGram (NASDAQ: OGI) had trailed its Canadian rivals in expanding its geographic presence through strategic partnerships, till it finally established an alliance with British American Tobacco (NYSE: BTI) last month. With the new investment from BAT, OrganiGram recently acquired soft chew manufacturer Edibles & Infusions Corp to gain inroads into the edibles market.
While the management expects edibles to be a high-growth business, it feels loosening of regulatory restrictions is necessary to open up the market. In an interview with AlphaStreet, OrganiGram CEO Greg Engel said the limitations placed by Health Canada in terms of package size were making it difficult to replace illicit markets.
“One of the biggest challenges for edibles in Canada is that there are restrictions from the government on the package size. You cannot have more than 10 milligrams in a package, which leads to a disproportionate portion of the edible cost on the packaging. So it’s an environmental issue, while also leading to higher cost to consumers,” Engel stated.
The CEO stated that edibles currently account for just over 4% of the Canadian recreational cannabis market, but this could increase to almost 15% with regulatory changes and the introduction of more products. He is also looking forward to more clarity on the norms surrounding the marketing of brands as the current regime makes it difficult to inform consumers about the differences of the products.
Shifting focus to high-margin products
OrganiGram’s most popular brand has been SHRED, a low-cost high-potency dried flower product that was launched last year. Despite its popularity, low margins offered by the product have helped little in the firm’s profitability ambitions.
The executive pointed out that the entire market has been witnessing value skews due to high excise tax as a portion of revenue, putting pressure on product pricing. Engel said the company is advocating for a change in the taxation system to a percentage model as seen in the US, versus the current dollar per gram model.
OrganiGram is currently shifting its focus to its high-margin high ASP Edison brand, which it expects to accelerate the firm’s financial performance going forward.
Elaborating on the strategy, Engel said, “Being an indoor producer versus greenhouse, we are in a better position to produce higher quality products. We have been undergoing a big genetic evolution, which will help bring those higher ASP products under Edison to market. We had good success with three of our recent launches, and we have a couple of new genetics coming up this quarter.”
Earlier this week, the New Brunswick-based weed company missed second-quarter street estimates, hurt by the pandemic-driven production disruptions and the lower ASP on products. On the other hand, the company has a strong balance sheet that is relatively debt-free.
OGI stock has gained 64% in the trailing 12 months. The stock has a 12-month average price target of $3.59, representing a 45% upside from Friday’s trading price.
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For more insights into Organigram, read the latest earnings call transcript