With four Canadian cannabis giants suffering a combined $10 billion drainoff in market value since the U.S. vaping crisis that started in August, it remains to be seen how much the troubles will affect the firms’ CBD business.
Publicly traded Tilray, Canopy Growth, Aurora Cannabis and Cronos Group all have seen their stock prices tumble as the hysteria over vaping, envisioned as a major CBD sub-sector, continues to unfold in the USA. Shares in the four companies have dropped on average around 37%, with Tilray being the biggest loser at a whopping 48%.
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While CBD has yet to be directly implicated in vaping illnesses reported in the USA, all four of the Canadian companies announced initiatives and deals in CBD and vaping in recent months, projects that could be curtailed due to the rough waters.
For reference, in U.S. states that have legalized recreational marijuana, vape commands between 10% to 25% of the total market.
CBD makers have said “Cannabis2.0” will usher in innovative products and delivery systems such as edibles, drinks, vapes and other applications in a next wave of growth for the sector, with margins on some products projected to be greater than those in the marijuana sector. (CBD is also showing up in baked goods, bath bombs, candies, capsules and tablets, cosmetics, patches, skin care and pain creams, sprays, sex lubes, suppositories and tampons!)
Canopy: ‘Unique, high-margin’
Canopy Growth in August touted the creation of a suite of “unique, high-margin” vapes, edibles and beverages under an arrangement with New York-based Constellation Brands, which has invested around $6 billion in Canopy Growth since 2017 and owns 38% of the company. The companies said at the time they were developing a range of CBD products planned for launch in the growing U.S. market next year. Also in August, Canopy announced an exclusive vape distribution deal with Greenlane Holdings of the USA for its Storz & Bickel vapes.
Canopy Growth has also said it plans to launch vaping products and edibles, including cannabis infused chocolates, in Canada before the end of the year.
Tilray: Focus on subcategories
Tilray in August said it had a strategy to attack the vaping market by subcategorizing the opportunities into disposable vapes and vape cartridges, and said it would offer a full spectrum of products under each. The company also said it was building inventory to prepare for selling vapes when they become legal in Canada, expected later this year.
Tilray earlier this year entered a joint venture with beer giant Anheuser-Busch InBev to develop CBD-infused drinks for the Canadian market as early as December (noting the partners overcame the challenge of getting active ingredients to remain stable and potent over the lifecycle of a drink product).
Cronos: ‘Next-generation vape’
Cronos Group in May opened a research & development center in Israel specifically to develop next-generation vaping devices for the cannabis market. The company said at the time that its Cronos Device Labs would be staffed by a 23-member team that will develop vaping devices. Cronos recently received a $2.4 billion investment worth 45 per cent of the company from tobacco giant Altria. Altria also has invested $12.8 billion for a 35 per cent stake in Juul, an e-cigarette brand which has seen fast growth in the USA.
In August, Cronos announced the acquisition of four of Redwood Holding Group’s subsidiaries, with plans for a line of CBD-infused skin care and consumer products under the Lord Jones brand. (Some analysts have noted that the cosmetics sector may provide the easiest path to market for CBD.)
Aurora: ‘Terrific segment’
As cannabis companies look broadly for “Cannabis 2.0” products to deliver the next wave of development and profits, Aurora has mainly played up opportunities in the vaping market, and analysts say no cannabis company has bet as heavily on vaping as Aurora.
In May, Aurora said it expects vaping to be “a terrific market segment that doesn’t need a lot of market development,” noting that vapes and gummies have been the best-selling and most profitable cannabis derivative products in the U.S. The company has said it plans to aggressively pursue the United States cannabis market with an acquisition in the hemp-derived CBD space as its likely first big play.
Aurora recorded a $1.74 million net loss and quarterly revenue of $74.9 million, which missed analyst estimates and its own guidance of $75.7 million to $81 million.
Things don’t look good
While the vaping crisis may just be a bump in the road for Canada’s cannabis giants, all of whom are leveraged with big, broader cannabis plays, stakeholders working strictly in the hemp CBD space can only expect added pressure as the overall vape market heads downward. For those producers, this all comes together as some analysts have already predicted a glut in domestic CBD production in the USA that could drastically drive down prices and ripple back down the value chain, where they’ll end up sitting on huge amounts of inventory.
As for what happens next in the Great Vape Crisis, Canada itself may offer the next signal. Having one year ago legalized cannabis dried and fresh flower, seeds, plants and oils, the next wave of adult-use laws covering products such as products as edibles, beverages, vapes and topicals are scheduled to go on the books this week; such products could be on the market as early as December.
But things don’t necessarily look good.
A teenager in London, Ontario was recently reported as the first Canadian to have a vaping-related illness. With nearly 300,000 Canadians using e-cigarettes daily, more can be expected.
And there is the usual pushback. Earlier this year, Health Canada announced proposed measures to restrict advertising and marketing of vaping products, although they have yet to become law. And recently the Canadian Medical Association, the Canadian Lung Association and Heart & Stroke Foundation of Canada appealed for political action to stop the promotion of vaping products.
Meanwhile, more than 500 people in the U.S. have been affected and nine have died from vaping-related illnesses. We’ll see what the CDC investigation reveals, but that’s sure to bring pressure for tighter regulations on vaping that will take a long time to work out.