The cannabis industry’s fear of big tobacco trying to elbow into the industry has finally come true with today’s announcement of a $175 million investment into Organigram Holdings Inc. (NASDAQ: OGI) from a wholly-owned subsidiary of British American Tobacco or BAT (NYSE: BTI). The BAT subsidiary has subscribed for approximately 58.3 million common shares of OGI, which represents a 19.9% equity interest on a post-transaction basis for total proceeds of approximately C$221 million (“Investment Proceeds”) at a price per share of C$3.792.

Big Tobacco has had to keep its distance from cannabis due to the restrictions and regulations for that industry. Cannabis remains a federally illegal product. However, the cannabis industry has always feared that as soon as legality occurred, big tobacco would try to take over. While BAT isn’t stepping into the THC portion of the business, it is dipping its toes in the legal CBD side.

“This is a tremendous milestone in the evolution of Organigram. It is instrumental in advancing our commitment to offering consumers innovative cannabis products and to furthering our long-term international strategy,” said Greg Engel, Chief Executive Officer of Organigram. “We have been extremely selective about aligning with a strategic partner and, in BAT, we’ve found a leading consumer goods business with sophisticated management, innovative product platforms, an impressive dedication to research and development, deep consumer insights, regulatory expertise and a commitment to responsible stewardship and consumer safety among many other enviable attributes. This collaboration is the culmination of extensive discussions and workshops and in-depth due diligence.”

A Balance Sheet Decision

BAT’s investment is expected to strengthen Organigram’s balance sheet, accelerate its R&D program and product development activities and bolster its ability to enter the U.S. and other international markets. In January, Organigram  released its results for the first-quarter ending in November causing the stock to tumble. A shift to value products hurt the company, which also warned that the second-quarter revenue could be impacted as well. The company delivered net revenue of $19.3 million for the first fiscal quarter of 2021 versus last year’s $25.2 million, which the company blamed on significantly lower wholesale revenue from licensed producers and a lower average selling price in the quarter.

Organigram also told investors that a negative non-cash adjustment to cost of sales for unabsorbed fixed overhead costs in Q2 Fiscal 2021 was anticipated to persist as a result of the company’s plans to cultivate less than its cultivation capacity. “Some production inefficiencies are anticipated to persist in the near to medium term and impact gross margins while Organigram continues to launch new products and optimizes production and staffing.”

“In our view, the cannabis industry is still in the nascent stages of product development. We believe that product innovation backed by core fundamental R&D is necessary to establish a long-term competitive advantage in the cannabis industry,” stated Paolo De Luca, the Company’s Chief Strategic Officer.

The company acknowledged that with the significant capital injection, Organigram is better positioned to expand into the U.S. and further international markets at the appropriate time and subject to applicable law. Upon closing, Organigram will have pro-forma cash and short-term investments of approximately C$296 million (of which approximately C$30 million will be reserved in order to satisfy certain of Organigram’s obligations under the PDC Agreement and the balance of which can be used, among other things, for growth opportunities and other strategic investments including advancing Organigram’s international strategy).

Tobacco Use Declining

According to the World Health Organization, “During nearly the past two decades, overall global tobacco use has fallen, from 1.397 billion in 2000 to 1.337 billion in 2018, or by approximately 60 million people, according to the WHO global report on trends in the prevalence of tobacco use 2000-2025 third edition.”

The WHO also said that a new report shows that the number of male tobacco users has stopped growing and is projected to decline by more than 1 million fewer male users come  2020 (or 1.091 billion) compared to 2018 levels, and 5 million less by 2025 (1.087 billion). “By 2020, WHO projects there will be 10 million fewer tobacco users, male and female, compared to 2018, and another 27 million less by 2025, amounting to 1.299 billion. Some 60% of countries have been experiencing a decline in tobacco use since 2010.”

So, it was inevitable that big tobacco would look to replace its declining sales and cannabis was the logical choice.

Center Of Excellence

Licensed cannabis producer Organigram Inc. said it entered into a Product Development Collaboration Agreement with BAT to create a “Center of Excellence” to focus on developing the next generation of cannabis products with an initial focus on CBD. The company said the Center of Excellence will be located at Organigram’s indoor facility in Moncton, New Brunswick, which holds the Health Canada licenses required to conduct research and development activities with cannabis products.

According to the statement, both companies will contribute scientists, researchers, and product developers to the Center of Excellence which will be governed and supervised by a steering committee consisting of an equal number of senior members from both companies. Under the terms of the PDC Agreement, both Organigram and BAT have access to certain of each other’s intellectual property and, subject to certain limitations, have the right to independently, globally commercialize the products, technologies and IP created by the Center of Excellence pursuant to the PDC Agreement.

Dr. David O’Reilly, Director, Scientific Research at BAT, commented: “Today’s announcement underscores BAT’s commitment to accelerating our transformation and building A Better Tomorrow. Our multi-category, consumer-centric approach, which is key to our transformation, aims to provide choice and meet the evolving needs of adult consumers. Choice that provides reduced-risk alternatives to combustible cigarettes, as well as going beyond tobacco and nicotine into new and exciting areas of product innovation.”