Not much has changed for Organigram Holdings Inc. (NASDAQ: OGI) since it reported first-quarter fiscal 2020 results in mid-January. Not much except the share price, that is.

Following the company’s announcement, the stock gained nearly 50%, rising from $2.16 to $3.14. At its most recent close, shares had dropped back to $2.20, a decline of 30%.

That’s in line with the decline at Aurora Cannabis Inc. (NYSE: ACB), which is down about 35%, and Tilray Inc. (NASDAQ: TLRY), down 32%. Other pot stocks, like CannTrust Holdings Inc. (NASDAQ: CTST), down about 45%, or Hexo Corp. (NYSE: HEXO), down 41%, performed significantly worse. Only Canopy Growth Corp. (NYSE: CGC), which lost about 25%, performed better than Organigram.

The S&P 500 has dipped just over 10% in the same time. Most of the decline came in the past week, as investors signaled more concern about the coronavirus outbreak that is spreading quickly.

Even accounting for the market downturn, Canadian cannabis stocks have performed poorly. In large part, that weak performance is due to the sharp drop in share prices that marijuana stocks suffered last year. Yet, Organigram seemed to be positioned for a better year in fiscal 2020.

Organigram Seemed to Have the Right Stuff

At the end of its first fiscal quarter, Organigram reported C$34.1 million in cash and short-term investments. The company also reported positive adjusted EBITDA of C$4.9 million and just C$84.5 million in long-term debt. Unlike most other Canadian pot companies, Organigram slowed the completion of a new growing facility and focused its investment on higher margin edibles and cannabis derivatives.

On February 20, the company rolled out several new cannabis 2.0 products, including new lines of vape pens and cannabis-infused chocolates. Some products were introduced last December, but they came too late to make any difference to first-quarter results. They could have a similarly modest impact on the company’s second quarter.

The limited impact is laid at the feet of the country’s regulatory agency, Health Canada. The agency failed to issue licenses as quickly as Organigram and other pot growers had expected.

In Ontario, the lottery system that the province used to grant licenses was especially slow. It has been replaced with a more streamlined system. However, the first licenses to be issued under the new system won’t be awarded until April.

Organigram, which sells recreational and medical cannabis as well as edibles, vapes and other paraphernalia, looks to be well set up to prosper. But then, the company appeared to be in good shape just six weeks ago.

Getting the Magic Back

The company’s new line of Edison-branded vape pens are designed and sold by a Canadian firm named Feather. The pens themselves are made in China. Given the impact of the coronavirus on Chinese manufacturing, this could become a challenge for Organigram.

Feather’s CEO, Pat Lehoux, told Bloomberg that shipments of the Edison pens are running two to four weeks behind schedule. Feather’s largest customer is Organigram, which has exclusive Canadian distribution rights to the Edison pens. Lehoux said he convinced Organigram to place an order for the pens to avoid the usual disruption surrounding Chinese New Year. At that time, no one anticipated the factory shutdowns due to the coronavirus outbreak.

The focus on high-margin derivative products gets a boost from Organigram’s development of a proprietary dissolvable powder. Consumers can add the powder to their own beverage of choice. Organigram plans to have the powder on the market by the summer.

Organigram’s next-generation product portfolio includes high-quality infused chocolate and a dissolvable powdered beverage product. First shipments of chocolate and dissolvable powder products are expected in calendar first and second quarters of 2020, respectively.

The dissolvable powder product is particularly interesting. The company-developed powder is expected to begin being absorbed within 10 to 15 minutes after being added to a liquid.

When beverage makers Constellation Brands Inc. (NYSE: STZ) and Molson Coors Beverage Co. (NYSE: TAP) invested in Canadian pot growers, their goal was producing cannabis-infused beverages. Organigram should not expect companies this size just to roll over and watch the value of their investments evaporate.

Neither wants to follow in the footsteps of tobacco giant Altria Group Inc. (NYSE: MO). The Marlboro cigarette maker has written down about two-thirds of its $12.8 billion investment in e-cigarette maker Juul. The marketing savvy and deep pockets of these companies could be a bigger headwind for Organigram than the coronavirus outbreak.

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