Marijuana stocks have had quite the tumultuous past year. Near the beginning of 2019, the industry was viewed as being on the cusp of profitability, with sales ramping up in Canada, derivative products set to hit the market later in the year, and legalization momentum building in the United States. But by year’s end, cannabis stocks had endured a steep nine-month downtrend once a fiery first quarter ended.
To our north, Canada has been contending with supply issues since day one of legalization in October of 2018, with the country’s most populous province, Ontario, having only 24 dispensaries open on the one-year anniversary of adult-use sales commencing. Furthermore, the launch of high-margin derivative products was delayed by two months. Meanwhile, select U.S. states have been hurt by high tax rates on cannabis products and a resilient black market.
Unfortunately for the pot industry, the hits just keep on coming.
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Vape-related lung illnesses put a serious scare in the cannabis industry in 2019
During late spring and early summer, the Centers for Disease Control and Prevention (CDC) began reporting on a mysterious lung disease that was cropping up throughout the U.S. and was associated with vape users. Initially confined to a few states and a few dozen cases, e-cigarette, or vaping, product use-associated lung injury (EVALI) would wind up being diagnosed in 2,602 hospitalized patients by Jan. 7, 2020, with 57 people having died from these vape-related illnesses.
Aside from the obviously terrible news of nearly five dozen people losing their lives, there’s the fact that vaping is viewed as the single greatest revenue generator of the derivative industry. Although dried cannabis flower is expected to remain the leading dollar generator among cannabis product sales, estimates from Cowen Group in March 2019 suggest that vaping could account for nearly a quarter of all U.S. weed sales. I’d figure that Canada’s sales breakdown would be pretty similar. Since derivatives are a much higher-margin product than dried flower, growers in Canada and in select U.S. states are expected to lean on vape sales (among other derivatives) to drive top- and bottom-line growth.
Late last year, after months of research, the CDC unveiled findings that appeared to be somewhat of a positive for the legalized cannabis industry. The agency reported the findings of a study on Dec. 20 that examined bronchoalveolar lavage (BAL) fluid samples from 51 EVALI patients in 16 states, as well as 99 healthy people. In 48 of the 51 EVALI patients, vitamin E acetate was identified in the BAL sample. Not surprisingly, none of the healthy patients had any signs of vitamin E acetate in their BAL sample. This led the CDC to conclude that vitamin E acetate was a likely culprit in EVALI, although the agency still cautioned that other substances and product sources may be risk factors.
Since vitamin E acetate is found in unregulated products, this would mean consumers simply need to shift their vape-liquid buying to legal channels. Problem solved for both the consumer and pot stocks, right? Well, not so fast.
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Select legal products have also been responsible for EVALI
On Jan. 14, the CDC provided data from a new study that revealed some unsettling evidence. It found that 82% of EVALI patients had used a liquid containing tetrahydrocannabinol (THC), the cannabinoid that gets users high. Of these patients, half were willing to share where they purchased their THC-containing products.
As you might have expected, 78% reported acquiring their THC-containing vape product from informal sources, such as a friend, family member, or the black market. But 16% reported purchasing these products from legal channels, such as an adult-use dispensary or medical marijuana dispensary. Another 6% reported acquiring these products from informal and commercial sources. So at least 1 in 6 EVALI patients in the new study bought their vape products from a legal source.
This finding allowed the CDC to double down on two key points that it’s been trying to drive home with vape users for months. First, even though it’s identified vitamin E acetate as a likely cause of EVALI, the agency’s research is nowhere near complete on other substances and product sources that may be at fault.
Second, and more important, the CDC’s recommendation continues to be that users not vape products that contain THC, whether purchased from legal channels or acquired from informal sources. This latter point could prove damning to North American cannabis companies that are leaning heavily on high-margin vaporizers and vape accessories to drive near-term sales.
Image source: Getty Images.
Vape-focused cannabis stocks feel the pinch
Whether the companies are direct or ancillary players, there’s no doubt that the CDC’s ongoing findings on EVALI are liable to hurt near-term sales.
For instance, nearly two weeks ago, we saw ancillary player KushCo Holdings (OTC:KSHB) report weaker-than-expected fiscal first-quarter sales. Even though year-over-year sales improved by 38% to $35 million, this was about $6 million below what Wall Street had forecast for KushCo in the first quarter.
What makes this sales miss notable is that KushCo generates most of its revenue from the sale of vaporizers. Though KushCo does have a burgeoning business in packaging and branding solutions, and will see growth from its hydrocarbon gas operations as demand for cannabis oils increases, vaporizers are its top seller for the foreseeable future. For what it’s worth, KushCo has cautioned that sales would be weak in the first half due to the EVALI scare, but anticipates them picking back up in the second half of its fiscal 2020.
As for direct players, a company like Cronos Group (NASDAQ:CRON) is arguably the most exposed to this new data from the CDC.
Last March, Cronos Group closed an equity investment from tobacco giant Altria Group (NYSE:MO) that sent $1.8 billion in cash to Cronos in exchange for a 45% equity stake. Given Altria’s prowess in navigating vice industries, and its ownership stake in vaping device maker Juul, it was a logical partner to work with in terms of rolling out vape products in Canada. But it’s quite possible that Cronos could encounter weakness, even with Altria’s expertise, due to the CDC’s latest findings.
What’s more, Canada’s fourth-most-populous province, Alberta, enacted a ban on vaping products in mid-December, just as derivatives were set to roll out. Alberta wants to review the safety of vaping products containing THC before approving them for sale. This is just another way that Cronos Group’s near-term growth could be constrained.
Suffice it to say that this vape-related lung disease scare isn’t going away anytime soon.
Sean Williams owns shares of KushCo Holdings. The Motley Fool recommends KushCo Holdings. The Motley Fool has a disclosure policy.”>