Marijuana plants (Organigram photo)

Marijuana plants (Organigram OGI.v photo)

Legal marijuana is staking its future in Canada as a rush of investors and venture capitalists compete to win the easy, early profits from medicinal sales. Plus, it's become easy to find out all you need to know about starting a business in this industry by simply searching something as simple as mj consulting and you're at least half way there! As long as the use of marijuana is legal in your state and you have a license, you're good to go.

Yet every one of the hundreds of companies jumping into the fray have their sights set on one development they all believe is inevitable: recreational pot use.

Last year the Canadian government changed the rules around supplying medical marijuana, basically privatizing production. In doing so they created a $140 million a year industry, which Health Canada thinks will be worth $1.3 billion in a decade.

“Very rarely do you have a sector that is going from nothing to a multi-billion dollar industry in no time,” says Khurram Malik, Investment Banking and Equity Research at Jacob Securities, who covers the marijuana industry. He thinks Health Canada is too conservative in their estimate since they haven’t factored in the 40% growth rates of the past couple years.

“We expect it to be a $1.3 billion industry in the next couple years, not in 2024,” says Malik.

Several hundred companies have rushed in to try and get a piece of the weed action, clamouring for one of Health Canada’s much coveted production licenses. So far the government has issued just 13 licenses, with five held by public companies that now range in value from $25 million to $80 million. Those companies include Organigram (OGI:TSXV), Bedrocan Cannabis (BED:TSXV), Tweed Marijuana (TWD:TSXV), Mettrum Health (MT:TSXV), and T-Bird Pharma (TPI:TSXV).

These are impressive valuations for new companies without proven earnings. However, many investors think the prices are justified, in part because of the potential margins. Health Canada has recommended a price of about $7.60 per gram, which is what many suppliers are charging. But production costs are estimated to be around $1.50-$2 per gram.

“People like the sector because of huge potential margins,” says Aaron Keay, an investor, competitive poker player and deal-maker who has previously represented Canada on the soccer field.

Keay ditched the struggling resource industry, where’s he’s successfully raised millions and helped build a few companies, to position himself in the burgeoning medical marijuana business earlier this year.

And he’s not alone. Several resource companies have jumped on the hype, like Affinor Resources becoming Affinor Growers (AFI:CNSX), and Supreme Resources changing its name to Supreme Pharmaceuticals (SL:TSXV). But Keay says the company he’s helped put together, Organigram (OGI.TSXV), isn’t a latecomer or a pretender, as it actually has a production license and some strong differentiators.

Keay and a partner, Panama-based financier Dave Doherty, used their last shell company to help bring Organigram public in August, and put up $1 million in bridge financing to tide it over until the listing. Shares in the shell are up fivefold from the previous financing price, and those investors hold most of the freely-trading stock in Organigram. The rest is locked up for a minimum 4-month escrow period expiring in December.

Company CEO Denis Arsenault also believed enough in medical marijuana and Organigram to come out of retirement and put up $700,000 of his own money in the company. He has seen his investment grow by multiples already too, at least on paper.

The two aren’t the only ones trying to make big returns as first-movers in the medical marijuana industry. With the help of Jacob Securities’ Khurram Malik, and Jordan Securities’ Justus Parmar, Organigram more than doubled its initial $0.85 financing from $3 million to $7.5 million and the issue was still four times oversubscribed. Arsenault says the company won’t need to go back to the market for additional cash before reaching profitability, unless it’s to jump on a consolidation opportunity or to increase production capacity because of higher-than-expected demand.

Keay says interest was high because the company fundamentals are strong.

“Organigram could easily do $40-50M in revenue in a couple years, and they have the management team to navigate the marketing, production, and regulatory challenges,” says Keay.

Where share prices go in the near-term is really anyone’s guess. With no quarterly financials out yet everyone’s guessing at production numbers, profit margins, and just how smoothly companies can expand.

“It’s an industry in its infancy. So there’s going to be a lot of volatility and variability,” says Neal Gilmer, a research analyst at Clarus Securities. “All the companies are scrambling to scale production to meet demand. It’s hard right now to determine which companies will be successful at that.”

Malik says most companies are struggling to meet expectations, like Greenleaf Medicinals, which lost its license in April after it had to recall a shipment of mouldy weed.

“Everyone’s having challenges scaling up. To grow marijuana in general is pretty easy, it literally does grow like a weed,” says Malik. “But to grow it at scale, and to grow it using Health Canada’s protocol and exact standards is a complete nightmare…. One of these companies could blow up. It’s the frank reality that they could realize they just don’t know how to grow.”

Dennis Arsenault is the President and CEO of Organigram (OGI.v)

Dennis Arsenault is the President and CEO of Organigram (OGI photo)

Arsenault says Organigram is well set-up for reliable production growth. The company’s master-grower has 21 years of experience (at least half of which was legal), they have the grow operation already set-up and running, with Health Canada approving their first shipment in early September, and he says the company is looking at a 500% increase in production next year.

Looking at the company’s numbers, Malik thinks Organigram’s setup will result in lower costs, too. He figures that it will cost Ontario producers about $1.50 per gram, while Organigram’s lower cost-base in Moncton, New Brunswick means it could produce for about $0.90 per gram. And because the company has a large property, it can expand production capacity without having to apply for a new permit.

“So, on paper, they can have the highest margins, and can keep efficiently growing,” Malik says.

As per the company name, Organigram has also managed to have its growing process certified as organic. Arsenault says customers are interested in an organic product, which will be important as the space gets more competitive. The company also differentiates itself by being the only fully bilingual company, and the only licensed producer east of Ontario.

“Everything’s beneficial when we start fighting tooth and nail for market share in a few years. But for now, we’re all sold out,” says Arsenault. “I’ve made sure we’re branded right, we have competitive advantages, and we have a low-cost environment to be able to function in any market.”

Because demand is so much higher than production right now, Malik says expanding production and getting customers are the the most important goals.

“The companies that can scale up quickly at cost while maintaining brand presence are the ones that are going to win. And it’s not easy to do,” says Malik.

The race is also on to get customers in these early stages, because it’s difficult for customers to switch from company to company. Patients have to sign on to one company and file an application to switch, so it’s important to sign on some of the 40,000-or-so current medical marijuana users now.

Getting to those customers is another challenge, because companies aren’t allowed to market directly to patients. Generally they have to rely on the pharmaceutical industry’s unreliable model of marketing to doctors and clinics. Organigram says it has big plans in the works for getting new customers, starting with a 10-year partnership announced earlier this week with Trauma Healing Centres. Trauma is busy opening 13 centres across Canada. In the deal Organigram will be the preferred marijuana supplier for treatment of post-traumatic stress disorder, and has agreed to supply up to 1,500 kg of marijuana next year, then up to 3,000 kg in 2016, and rising by 20% a year for the 10-year deal. No price was disclosed.

The big question is just how much competition there will be in the industry. Right now there are well over 1000 companies that have applied for production licenses and are eager to compete in the market. Health Canada hasn’t announced any specifics as to when, or how many more licenses might be awarded.

With so much potential competition in such a fast-evolving market, Malik says the next few years will be turbulent.

“In the next five to eight years there’s going to be a lot of carnage in the space, a lot of M&A and attrition,” says Malik. “Then big tobacco and big pharma will come in and pick off the consumer brands.”

Arsenault says that while more supply may be on the way, he’s getting Organigram ready to meet the coming demand.

“We all know it’s going to go recreational legal,” says Arsenault. “When the dust settles, the people with the best product are going to capture a big part of the market.” So if you're interested in better understanding how much weed is going to cost, consider an unofficial guide to weed prices to give you some perspective on how it could look in your area.

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Here are the company's latest news releases:

Nov 10, 2014: OrganiGram Signs Letter of Intent With Trauma Healing Centers

Oct 21, 2014: OrganiGram Announces Appointment of President

Oct 16, 2014: OrganiGram Receives Organic Certification for Medical Marijuana Growing Process

Sep 2, 2014: Organigram Passes Product Testing And Ships Medical Marijuana To Customers

Aug 28, 2014: OrganiGram Completes Initial Harvest and Prepares for First Shipment

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