The chief executive of Organigram Holdings Inc. â one of the best-performing licensed producers in terms of gross margins since legalization â believes that the core driver of his companyâs relative success in the space was its decision to cultivate cannabis not in massive greenhouses, but in smaller indoor facilities instead.
âI had visited 54 different greenhouse sites in Canada, and I had seen a lot of issues. What we saw in an indoor environment was that you can consistently control the environment, and that has really paid off for us,â said Greg Engel, in an interview with the Financial Post at the GMP Cannabis Conference in Toronto, where he was presenting to investors.
The Moncton, N.B.-based company brought in net revenue of $26.9 million for the quarter ending Feb. 28, 2019, a 117 per cent increase from its previous quarter. Although the company did not disclose the amount of cannabis it sold last quarter, Engel said it was able to meet demand from all provinces with which it has supply agreements.
Organigram, which only grows premium cannabis that fetches a higher price, operates a three-storey indoor facility that currently yields 36,000 kilograms of cannabis annually. One of the biggest differentiators between greenhouse growing, and indoor growing is cost, the latter generally costing more than the former.
But Organigramâs cost of growing has decreased significantly over the past year, and is now almost on par with the per gram cost of growing in a large greenhouse. In the quarter that just ended, it cost the company just $0.65 to cultivate a gram of cannabis, compared to just over $2 four quarters ago, according to Engel.
âThe reason for that is because we decided to focus on a group of five to seven core strains instead of trying 15 to 20 different strains. We started seeing increasing yields on these strains over time. We then made a decision to go from 1,560 plants to 1,080 plants but we got three per cent more yield per room because the plants in and of themselves are more efficient,â Engel said.
The company is also less focused on branding and marketing strategies than others in the space, a decision that to some extent reflects in its lower-than-average administrative expenses relative to other licensed producers.
For Engel, getting Organigramâs product to market, especially in the early months of recreational legalization was critical. âGiven branding restrictions, the only way you can build a brand is if your product is on the shelf consistently. We made the call to get aggressively into pre-rolls which have very broad distribution so we got our brand exposure there,â he said.
Royal Bank of Canada analyst Douglas Miehm called Organigram âone of the strongest operators in the space,â pointing out that the companyâs recreational revenues were second only to those of Canopy Growth Corp., the biggest licensed producer in Canada. âIt appears that Organigram is capturing a greater proportion of rec (recreational) volumes that we expected,â Miehm wrote in a note.
Investors, however did not react kindly to Organigramâs latest financials â the companyâs stock fell 10 per cent on Monday, and recovered only slightly Tuesday.
âWe believe todayâs stock decline reflected the recent wave of negative sector sentiment following underwhelming calendar Q4/18 results by most LPs,â wrote Bank of Montreal cannabis analyst Tamy Chen in a note. âOver the coming days, we believe Organigramâs stock will reassert itself due to superior results relative to the sector.â
Many licensed producers in Canada, especially those operating large greenhouses have struggled to consistently deliver product to market due in part to supply chain challenges in packaging and distribution and in growing the cannabis plant itself on a mass scale.
âLots of operators are just not executing right now, thereâs no question about that,â said Jason Wild, president and chief investment officer of JW Asset Management Inc., a New York-based hedge fund that invests heavily in American and Canadian cannabis companies.
Wildâs sentiment was echoed by banking veteran Boris Jordan, who runs Measure 8 Venture Partners, a VC firm investing in the cannabis space. âManagementâs numbers are always higher than what we think they are worth. So we give them some money, and tell them to make sure they are hitting those numbers before we give them more.â Â
⢠Email: [email protected] | Twitter: VanmalaS