Global Growth Boosts Organigram’s Strategic Expansion Plans

Organigram has long been thought of as one of Canada’s foremost licensed producers and overall dominant industry players. Currently second in net cannabis sales nationwide, the company is widely regarded as a standard-bearer for indoor cannabis grow operations. Four of the six financial analysts covering Organigram rate the company as a buy, and none of them currently recommend selling Organigram shares given its competitive advantages and market position. While Organigram battles to earn a profit in a tough Canadian marketplace, the company continues to deploy strategic investments abroad in order to access more lucrative growth markets.

A key element of this strategy is its partnership with British American Tobacco (BAT). Since 2021, BAT has committed approximately $350 million to Organigram, enabling the company to leverage the resources of the global conglomerate. What makes this partnership unique is the depth of collaboration between the two companies. Unlike other corporate investments in the cannabis industry, such as Constellation’s stake in Canopy Growth or Altria’s involvement with Cronos Group, the Organigram-BAT relationship has strengthened over time. BAT and Organigram personnel currently work together at Organigram’s state-of-the-art facility in Moncton, New Brunswick, on developing the next generation of cannabis products.
The most recent investment of $124.6 million from BAT, at a price of $3.22 per share, led to the establishment of the “Jupiter” strategic investment pool, an $83 million strategic investment fund dedicated to international expansion.

In turn, Organigram’s ongoing relationship with BAT was key in the facilitation of its €14 million (~C$21 million) investment in Sanity Group GmbH, a Berlin-based medical operator in the German cannabis market with a distribution network of over 2,000 pharmacies working with approximately 5,000 physicians. BAT had already been a prominent investor in Sanity Group, along with notable investors such as Casa Verde Capital (founded by Snoop Dogg), Will.i.am of the Black Eyed Peas, Navy Capital and more.
Organigram’s investment in Germany is central to the company’s commitment to expand internationally and diversify revenue streams. On a panel discussion held at the recent Benzinga Cannabis Capital Conference on October 8-9, Organigram CEO Beena Goldenberg stated that, “We’re at a point where we feel we’ve established ourselves in Canada as a top player. We know how to grow great quality cannabis and it’s time to expand beyond Canada.”

Beena Goldberg identified high excise taxes as a primary barrier to profitability, where up to 50% of gross revenue can be diverted to government coffers before factoring in other business taxes and expenses.

German Market Offers Substantial Growth Opportunity

Organigram views its investment in Sanity Group as a strategic opportunity to capitalize on the international growth it so covets. Sanity Group not only enhances Organigram’s European presence, but also offers a pathway to launch its own brands through an exclusive distribution network. This partnership further strengthens Organigram’s European revenue potential through a significantly expanded commercial agreement. Unlike a mature Canadian market growing at mid-single digits, the nascent German market is growing at breakneck pace.

According to Sanity Group co-founder and CEO Finn Hansel, his company is ontrack to perhaps quintuple calendar year-over-year sales, recently stating sales could increase from “150 kilograms per month to German patients and now in October, if everything goes well, we will hit 700 kilograms. So, we will almost have five times the amount of product we are selling into the market than we had in January (of this year).”

Finn Hansel further emphasized that there are no signs of a slowdown in German growth for the foreseeable future. He highlighted that Sanity Group is among the few companies in Germany well-positioned to manage this type of prodigious domestic growth opportunity. While not the only player, Sanity stands out with a strong brand presence and a robust network of cultivators—including Organigram as a core partner.

Finn’s words are corroborated by domestic cannabis sales data released by competitor operators following the enactment of the Cannabis Act (Cannabisgesetz, CanG) on April 1, 2024.

For example, IM Cannabis Corp. recently reported that preliminary Q3 2024 sales results in Germany by its German subsidiary, Adjupharm GmbH, spiked a 50% sequentially after the country legalized personal possession of cannabis and nonprofit marijuana clubs. The company noted that “demand for cannabis products in pharmacies has increased significantly” since the Cannabis Act went into effect in April. This represents the type of early-stage growth opportunity Organigram is anchoring itself with through its strategic investment in Sanity Group.

As per their latest quarterly report, the company has secured two new international supply agreements in Australia and the UK, bringing its total to seven partners across Germany, the UK, Australia, and Israel. It is also exploring additional global partnership opportunities.

Balance Sheet Proficiency

Organigram’s balance sheet is another key advantage that sets it apart from competitors. Following BAT’s investment and a subsequent equity raise, the company now boasts $173 million in pro forma cash and virtually no debt. This financial strength provides Organigram with the flexibility to capitalize on market opportunities, particularly as the cannabis industry begins to rationalize. In contrast, select peer competitors are burdened with significant debt through the over-purchase of domestic assets that have generally under-delivered on ROI.

The company’s latest financial report indicated improving metrics across the curve on a yearly basis. In Q3 Fiscal 2024, net revenue rose by 25% to $41.1 million, driven by increased recreational cannabis sales, while cost of sales decreased to $27.2 million due to greater scale and operating efficiencies, leading to a 36% adjusted gross margin, up from 19% in Q3 Fiscal 2023.

Net income went back into the black, reaching $2.8 million and marking a significant improvement from the $213.5 million net loss in the same quarter last year, which was impacted by impairment losses. Additionally, cash used by operating activities improved, dropping to $0.2 million, down from $14.8 million in Q3 Fiscal 2023.

Moving forward, expect international sales to carve a bigger percentage of net sales and margin enhancements as Organigram’s international investments yield results. While Organigram cut its teeth in Canada to become a leading cannabis operator, the growth story is clearly international. Fortunately, Organigram has positioned itself to capitalize on the global cannabis movement through years of principled management, foresight, and partnerships that are the envy of the industry.