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Organigram shares gain as British American Tobacco buys 19.9% stake, to cooperate on CBD products

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Cannabis Watch

Organigram CEO: BAT has the management, R&D, consumer insight and regulatory expertise to help Organigram pursue its goals

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Organigram Holdings Inc.’s U.S.-listed shares  were on track for a 51% gain on the week Friday, buoyed by the news that the Canadian cannabis company has received a C$221 million ($176.6 million) investment from a unit of British American Tobacco PLC. 

The tobacco company BATS, +0.51% has subscribed for about 58.3 million shares of Organigram OGI, +2.72%, equal to a 19.9% stake at a price per share of C$3.792, based on a five-day volume weighted average price on the TSX ending March 9, 2021. Organigram’s U.S. shares closed Wednesday at $2.89, while the TSX-listed stock closed at C$3.62.

As part of the deal, the companies have entered a product development collaboration agreement, and will create a Center of Excellence to work together to develop the next generation of cannabis products, focused initially on CBD. The center will be based at Organigram’s indoor facility in Moncton, New Brunswick, which holds the Health Canada licenses required to conduct R&D on cannabis.

“Both companies will contribute scientists, researchers, and product developers to the Center of Excellence which will be governed and supervised by a steering committee,” the two companies said in a statement.

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Organigram Chief Executive Greg Engel said it has been selective in choosing a strategic partner, but that BAT has the management, R&D, consumer insight and regulatory expertise to help it pursue its goals. BAT head of research Dr. David O’Reilly said the move will help the company as its moves to lower risk alternatives than combustible cigarettes and expands into new product lines.

The companies will each have access to each other’s intellectual property. BAT will have the right to appoint 20% of the Organigram board, as long as it maintains at least 15% of its outstanding shares.

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Organigram is expecting the deal to help it expand overseas including into the U.S. market. There are growing hopes that market will be cracked open under the administration of President Joe Biden, which has pledged to reform strict cannabis laws that continue to classify the plant as a Schedule I drug, grouping it together with heroin.

That has hampered the development of the legal sector, which is mostly limited to those states that have legalized for medical or adult recreational use and left companies mostly locked out of the federally insured banking system and capital markets.

In February, Senate Majority Leader Chuck Schumer said he would make reform legislation a key priority in the current Congress, bolstering hopes for an end to federal prohibition and helping to fuel a broad-based rally in the sector.

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“We view the strategic investment as a win for OGI, but note the

agreement does not allow for co-commercialization (though we believe this could be added over time),” said analysts at Alliance Global Partners, who raised their price target on Organigram stock to C$ 4 from C$2.25, but stuck with a neutral rating.

“In addition to product development, we believe OGI could benefit from BAT’s trove of consumer knowledge around preferred product formats, to be utilized within Canadian & other markets,” they wrote in a note to clients.

Raymond James raised its stock price target to C$6 from C$3.

“With its shiny new partnership with BAT, the wind is now at OGI’s back, in our view,” analysts Rahul Sarugaser and Michael W. Freeman wrote in a note to clients.

The analysts are expecting Organigram’s share of the Canadian adult-use cannabis market to grow to 12.5% through 2025 from 6.5% now, thanks to the new partnership. That will generate revenue of $86.8 million in 2021 and $92.0 million in 2022, growing to $583.9 million in 2025, they wrote.

“Given bottoming revenue in 2Q21 and project revenue growth through 3Q21 onward, plus the support of BAT now at its back, we maintain our rating on OGI at Outperform,” said the note.

Organigram shares have gained 183% in the last 12 months, while the Cannabis ETF  THCX, +0.64%  has gained 217% and the S&P 500 SPX, -0.15% has gained 59%.