The big day, for 2019 at least, is about five months away for Canadian marijuana stocks. After officially legalizing recreational marijuana on Oct. 17, 2018, Canada's regulatory agency Health Canada expects derivative products to first make their way onto dispensary-store shelves by mid-December. Derivatives are, for example, non-dried-flower products, such as vapes, edibles, topicals, concentrates, and nonalcoholic infused beverages.
Just as opening the door to the adult-use pool of consumers was viewed as a big deal for the Canadian pot industry, the ability to sell derivatives is expected to be a game changer. More than half of all cannabis products being purchased are currently oils, and derivatives have considerably higher long-term margin prospects relative to traditional dried flower. In short, derivatives are expected to fuel pot industry growth for many years to come.
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Marijuana stock to big beverage companies: Help wanted
Although every single major marijuana grower plans to diversify its product line to include some form of derivative products, not every grower has been as vocal as Atlantic-based grower OrganiGram Holdings (OGI 2.24%) about its desire to find an infused beverage partner.
Earlier this week, OrganiGram announced its intent to launch a dried powder formulation of cannabinoids -- including tetrahydrocannabinol (THC) and cannabidiol (CBD) -- in early 2020 in Canada. THC is the psychoactive cannabinoid that gets users high, while CBD is the nonpsychoactive cannabinoid best known for its perceived medical benefits.
This dried formulation can be added to any beverage of consumers' choosing, providing them the option of controlling their dose and experience. And since there's likely to be very little competition in the dried cannabinoid powder market, especially given OrganiGram's proprietary formulation that allows for more rapid onset of cannabinoid effects, it should have little issue generating healthy margins.
But the announcement of bringing a dried powder to market was only half the story. OrganiGram also intends to create a liquid beverage line with its nano-emulsion formulation, but it intends to seek out a partner to help with this process. The desire to find a partner should come as no surprise, since OrganiGram first announced its intent to seek out an established partner to help develop beverages for its faster-onset cannabinoid formulation back in April.
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Could these brand-name companies be the perfect infused-beverage partners for OrganiGram?
With derivatives not hitting the market for at least five more months, OrganiGram does have time to shop its product around. However, I do believe there are a few logical partnership opportunities at its disposal.
First, there's Diageo (DEO 0.14%), which, unlike Molson Coors Brewing, has shown little weakness in global alcohol demand. Sales for the first half of fiscal 2019, ended Dec. 31, 2018, showed 7.5% organic net sales growth and 3.5% organic volume growth, so it's not as if Diageo is hurting for growth catalysts. Nonetheless, the company has been rumored to be looking for a cannabis industry partner since last August. Since OrganiGram's formulation is unique, it should pique the interest of Diageo. And with deep pockets and plenty of branding appeal, Diageo would have little trouble marketing OrganiGram's infused beverage line in Canada.
A second possibility is Heineken (HEINY 0.32%), which is already involved in the infused beverage industry in California. Lagunitas, which is owned by Heineken, launched a cannabis-infused sparkling water line under the brand name Hi-Fi Hops in a few select locations in June 2018. These beverages were sold with either 10 mg of THC, or a hybrid of 5 mg each of THC and CBD. With a solid presence throughout North America, Heineken could look to OrganiGram, which is one of four marijuana growers to have supply deals with all of Canada's provinces, to further expand its reach.
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A third potential partner, but perhaps the biggest leap of all, is global beverage giant PepsiCo (PEP 0.48%). Coca-Cola announced last year that it would bow out of the cannabis beverage space, which presumably opens the door for PepsiCo to one-up Coca-Cola, which isn't something that happens all that often. The thing is, PepsiCo hasn't exactly committed to the marijuana space. Company executives have promised a hard look at the risks and rewards of entering the cannabis beverage arena, but have yet to fully commit or reserve themselves. Should PepsiCo take the risk and dive into infused beverages, the uniqueness of OrganiGram's formulation, coupled with PepsiCo's branding, could be a perfect match.
Keeping in mind that this is all purely speculation on my part, OrganiGram should have a number of solid brand-name beverage partners to choose from in the months that lie ahead.
