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Report on Business Cannabis Professional Organigram announces ‘rapid-onset’ drinks, while analysts advise investors to dampen their expectations

HIGHLIGHTS
  1. Organigram says it has developed nano-emulsification technology for cannabis-infused beverages that will get cannabinoids into the bloodstream in 10 to 15 minutes.
  2. Jefferies analyst Ryan Tomkins is warning that “the market may have gotten ahead of themselves” on Organigram, despite the company’s strong performance overall.
  3. BMO analyst Tamy Chen is cutting her Organigram sales forecast for the quarter by $5-million.

Organigram Holdings Inc. said on Monday that it has cracked the “rapid-onset” problem for cannabis beverages, becoming the latest firm to claim to have developed nano-emulsification technology that can get cannabinoids through the gut and into the bloodstream in 10 to 15 minutes.

“Organigram is planning to launch a variety of dried powder formulation beverage products in early 2020 in Canada,” the company said in a news release after market close on Monday.

“A key anticipated feature of the products to be developed by Organigram is the initial onset of the effects of the cannabinoids within 10 to 15 minutes. To determine the onset of effects, the cannabinoid particles have been studied at a size of 20 nm (nanometers). Organigram, subject to the receipt of any required approvals, plans to conduct further testing to confirm the onset of action and duration of effect,” the company said.

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At least two other companies, both with backing from alcohol makers, have made similar claims about having developed rapid-onset technology: Canopy Growth Corp. and Truss Beverages, the joint venture between Molson Coors Brewing Co. and Hexo Corp.

Organigram used its announcement to make a public call for potential collaborators, saying that it is “actively seeking a strategic partner with proven experience in beverage product development to take advantage of the liquid formulation it has developed.”

The announcement was met with little market fanfare on Tuesday, with the company’s stock trading down around 3 per cent, after a 10 per cent run-up on Monday. That Monday run-up came at the same time most other LPs were trading down in apparent sympathy with CannTrust Holdings Inc., which shed nearly a quarter of its value on the news that Health Canada had issued a non-compliance order to the firm.

Organigram, which reports its quarterly earnings July 15th, has largely outperformed its peers in recent months. Two analyst reports, however, suggest investors may want to curb their enthusiasm about the company, despite its overall strong performance.

“While Organigram have set themselves up well to succeed in the recreational market, at the same time we also think the market may have gotten ahead of themselves (like Q3) with estimates into next year,” wrote Ryan Tomkins, an analyst with investment bank Jefferies International Ltd., in a research note published Tuesday.

“We don’t think street estimates are factoring in competition in beverages, where certain peers have a head start as they already have beverage partners in place, while we also think consensus is not fully capturing the costs associated with a multi-category derivative approach, or indeed the likelihood they have to bring in a supply third party due to potentially limiting capacity.”

Mr. Tomkins noted “a number of headwinds that will affect sales” in the quarter, including Organigram’s shipment of products to Quebec going out in Q4 rather than in Q3, slower than expected orders from Ontario, and gross margin compression due to “abandonment of assets due to temporary issues in the [previous] quarter.”

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In Organigram’s Q2 management discussion document, it noted that “the main driver of lower biological assets in Q2 of Fiscal 2019 compared to Q1 of Fiscal 2019 was what the Company believes will be a temporary decrease in expected yields per plant in Q3 of Fiscal 2019 as a result of a growing protocol... that was initiated and abandoned in Q2 of Fiscal 2019 as well as an increase in estimated post-harvest processing and packaging cost.”

In a research note on Monday, Bank of Montreal analyst Tamy Chen cut her quarterly sales forecast for Organigram by $5-million, from $36-million to $31-million.

“According to Health Canada, total LP shipments to provincial distributors were 8,000 kg in April, down from 14,700 kg in March. Our prior FQ3/19 sales forecast had anticipated that the opening of retail stores in Ontario would have supported the March-level of sales volumes throughout the quarter,” wrote Ms. Chen.

Ms. Chen arrived at the 8,000 kilogram number by calculating the total month-to-month change in finished inventory held by distributors plus the amount of recreational retail sales in that month, as reported by Health Canada.

“In addition, our prior FQ3/19 sales projection [for Organigram] had incorporated initial shipments to Quebec, which did not occur until FQ4/19,” she added.

Despite the reduction in sales forecast, Ms. Chen maintained her Outperform rating for Organigram with a $9.50 price target.

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Russell Stanley, an analyst with Beacon Securities, maintained a bullish stance on Organigram in a note on Tuesday.

“Even after its recent run, OGI is still trading at just 13x our C2020E EBITDA estimate... This represents a 41% discount to the 22x average for the broad peer group, and a 73% discount to the 47x average amongst companies that trade on either NASDAQ or NYSE,” Mr. Stanley wrote.

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