With four quarters of profitability under its belt, Organigram Holdings Inc. (OGI.V) is an anomaly in the Canadian cannabis market.

Organigram has higher margins than most of its peers and one of the lowest costs per gram in the industry even though it grows indoors, generally considered the most expensive method of production. Chief Executive Officer Greg Engel attributes this to its ability to get higher yields from its pot plants than companies that grow in greenhouses, as well as its automated packaging lines.

“We built a facility and designed a facility that was very focused on high-quality product because we felt there was a market opportunity that was sustainable,” Engel said in an interview at Bloomberg’s Toronto office.

Organigram’s streak of profitability comes as the industry undergoes a period of significant upheaval. CannTrust Holdings Inc. (TRST.TO), previously considered one of the more reputable pot companies, plunged 48 per cent last week after Canadian regulators said it grew cannabis in unlicensed areas of its greenhouse, forcing it to halt all sales and shipments of its products.

That came less than a week after Canopy Growth Corp. (WEED.TO) fired co-CEO Bruce Linton amid shrinking margins and a $323 million net loss in its most recent quarter.

Lower Valuation

Moncton, New Brunswick-based Organigram, meanwhile, reported its fourth consecutive quarter on Monday of positive adjusted earnings before interest, taxes, depreciation and amortization, or Ebitda. Revenue of $25 million missed estimates and gross margin fell to 50 per cent from 60 per cent in the previous quarter, but Eight Capital analyst Graeme Kreindler said he views this as an “isolated event” related to a temporary change in cultivation protocols and the timing of shipments to provinces.

Organigram said it cost 95 cents to produce a gram of dried flower in its most recent quarter. That was up from 65 cents in the previous quarter but still compares favorably with $1.42 at Aurora Cannabis Inc. and $1.48 at Tilray Inc.

No other large Canadian pot producer has managed to post such a long string of positive Ebitda. However, although it’s one of the best-performing pure-play pot stocks this year, up 64 per cent, its valuation as measured by its price-to-sales ratio is well below those of its largest competitors.

Engel is unperturbed. “At the end of the day, the worst thing that can happen to a company is you’ve got an artificial stock price that you can’t sustain,” Engel said.

Competitors also spend a lot on stock promotion, he said. This “may in the short term be helping their stock price, but I’m not sure that’s sustainable without ongoing spending,” he said.

The problems at CannTrust and Canopy signal a shakeout in an industry that’s still maturing nine months after Canada legalized recreational pot. Organigram is lucky because it had its wake-up call early, said Engel.

The company had to recall several lots of its medical pot in late 2016 and early 2017 after it was found to contain an unapproved pesticide. Engel, who was CEO of Tilray Inc. at the time, was hired after the recall to “make a major cultural shift,” he said.

“As a result of that recall, we had monthly ongoing inspections by regulators, and historically the industry was always complaining or defensive about the inspections,” Engel said. “My approach was to embrace them. At the end of the day it’s a partnership, not an adversarial relationship.”

In the interview, Engel shared his views of the nascent industry:

Beverages and Edibles

Organigram isn’t being coy about its desire for a partner that can help it develop cannabis-infused beverages, similar to Constellation Brands Inc.’s investment in Canopy, Tilray’s partnership with Anheuser-Busch InBev SA or Hexo Corp.’s joint venture with Molson Coors Brewing Co.

Organigram has developed a rapid-onset technology that will allow its drinks to take effect within 10 to 15 minutes, similar to alcohol, and has also created a flavorless cannabis powder that can be added to any beverage.

“We wanted to go to these negotiations offering as much as possible,” Engel said. Organigram is seeking a partner from the alcohol industry that can help it develop beverages infused with THC, the cannabis compound that gets you high. It’s also seeking a consumer packaged goods partner for drinks infused with CBD, a non-intoxicating substance that’s thought to have health and wellness properties.

Biosynthetics

Engel hopes Organigram’s investment in Montreal-based Hyasynth Biologicals Inc. will also help it lure a partner. Hyasynth is developing large-scale biosynthetic production of cannabinoids, or the active compounds found in cannabis. This method, which uses yeast to produce the compounds in a lab, is cheaper than extracting them from plants and will help lower production costs for products like beverages, edibles and vape pens, said Engel.

U.S. Market

“We’re very actively looking at the CBD market in the U.S.,” where the substance is legal at the federal level as long as it’s derived from hemp with very low THC content, Engel said. Organigram doesn’t plan to grow its own hemp but is looking at a range of possibilities, including investments in existing brands, products and companies.

Corporate Governance

Organigram has a fully independent board of directors, a rarity in the cannabis sector. The CEO sees good corporate governance as essential to a well-run pot company.

“This is an industry that’s still very much moving from founders and executives being chairmen or multiple insiders on boards, and I think some of the challenges we’ve seen in the industry have been because of a lack of governance,” he said. “You have to have independent governance that has oversight and holds management accountable.”