Stand by for the next leg of the weed rush, as Organigram (OGI.V) has burst out of the gates with an MOU with the New Brunswick government, agreeing to supply 5 million grams annually, for a likely return of $40 million to $60 million per year.
While an MOU is something akin to a handshake deal minus the ‘deal’ part, and New Brunswick isn’t exactly the biggest province in the Canadian weed market, the move was unexpected and shifted OGI’s share price up $0.33, or 14.5%.
That would normally be the clarion call for all other LPs to get on the auto-dialer this morning to other provincial governments (if they can find the person to make such a deal), and lock in their own partnerships.
But doing so may be problematic. For a start, most provinces are miles away from even figuring out how they’ll go from prohibiting weed to selling the stuff. Rules are likely to change many times before they become set in stone, so agreements like Organigram’s (such as they are) are pretty unlikely at this stage.
Where OGI has an inside track in New Brunswick being as they’re headquartered in the Maritimes, their record of product recalls and adverse health reactions in patients may see them on the outside looking in when it comes to larger provincial deals that don’t involve homerism.
Aurora (ACB.T) is likely to get the catbird seat on any future deals with the province of Alberta, Hydropothecary (THCX.V) and The Green Organic Dutchman (TGOD, coming soon) will be in good shape to secure Quebec deals, and Ontario will be all out war as they’ll likely to go out to tender rather than doing handshake deals with buddies.
As for OGI, it should be remembered that an MOU isn’t set in stone by any means, and the company statement that the deal will bring in ‘somewhere’ between $40 million and $60 million annually makes it clear prices are yet to be negotiated.
But I’m not hearing any panic from other LP CEOs Friday. The off-the-record responses from a quick round of texts this morning has been a mixture of:
“That was quick. Credit to them.”
“OGI LOL. Who does an MOU?”
One competitor, however, raised a very interesting point that should pour a bucket of cold water on Organigram’s hype machine:
“5m gms @ $60m is $12/gm. thats more than theyre charging patients for directly. if NB wants to wildly overpay for pretend organic have i got a deal for them. Let’s see greg bring that shit to ONT.”
This brings a REALLY good point, but it’s not the one the CEO in question is making.
OGI isn’t getting $40m-$60m in this deal.
Not even close, though they’ve worded the news release to encourage you to think that way:
The agreement is estimated to have at least a retail value of between $40 million to $60 million per year
OGI is taking the figures that the NB government might expect to make off their weed and leaving them out there for you to erroneously see as OGI revenue.
Nobody, not even a hometown buddy, is going to pay $12 p/gm for wholesale weed (OGI currently sells for $10 max).
Other LPs are budgeting for $5 per gram as a wholesale price, which would mean if OGI hits the same price that other, less expensive growers expect to be paid in similar deals, they would bring in around $25 million annually.
And that’s if the deal ever moves to an actual for-realsies signed agreement.
Let’s take this a step further: That wholesale deal with NB means OGI DOESN’T GET TO SELL IT RETAIL. So the weed they might spend $3 per gram growing that they currently sell for $8 per gram?
Yeah, now they’ll be selling it for $5.
Investors need to take this into consideration when wetting their pants over one-customer-per-province weed deals. While the total figures bandied about may look enticing, they’re actually locking in a halving or more of current LP margins.
So is this yet another example of OGI over-promoing their news, like when they tried to bury their product recall in a news release posted five minutes before the end of the last trading day of 2016?
UPDATE: So we did some back of the envelope calculations based on Organigram’s most recent quarterly numbers. From what we can tell, their all-in grow costs, even ignoring the cost of their year long product recall, come to around $4.96 per gram.
Most LPs are expecting provincial retailers to set their prices at around $5 per gram wholesale. Aphria’s grow costs, from a similar calculation, look around $1.50 per gram. Canopy is under $3.
ORGANIGRAM growing costs are a few cents under $5, and run to $8+ if you factor in recalls.
Let’s say the NB deal goes ahead and NB is going to sell retail at $8-$12 per gram (which, again, is higher than OGI’s current retail max of $10 per gram). They’re going to need to buy product at $5 per gram MAX, which means OGI in its present form would not be able to fulfill that deal and make any profit. In fact, by removing OGI’s ability to sell retail in NB, they’ll make LESS with this deal than they do currently.
Added to this: With other LPs growing for significantly less than Organigram, what OGI has actually done with their MOU is give their competitors a target. I will guarantee you that whatever OGI sets as their wholesale price, Canopy, Aphria, Aurora, Supreme and others will come in lower.
If you’re buying OGI because you think today’s news was good, boy howdy, it’s going to be a long weekend.
Come at us, OGI. Tell us our numbers are wrong.
And when you factor in the cost of Organigram’s product recalls, these cost per gram numbers get CRAZY.
UPDATE II: Canopy has announced a similar deal, pegging that retail value for 4 million grams at $40 million (which makes sense at $10 per gram, even if it is of no consequence to the supplier). Here’s the thing: Canopy can make money on the deal because they’re running on a 60% margin. OGI can’t, because right now they’re running on a NEGATIVE margin, to the point where they’re buying 24% of their product from other growers. Unless their most recent costings have been savagely improved upon, or will be soon, OGI is in trouble, and definitely in no place to satisfy a wholesale order for 5m grams.
— Chris Parry