The following article was written by Jessica Rabe, Co-Founder of DataTrek with a forward by Traders Magazine editor John D’Antona Jr.
To vape or not to vape, that is the question.
Over the last several weeks news and reports of 530 serious health issues, including an estimated 26 reported deaths due to vaping, have hit the public. Juul Labs, a maker of vape products and e-cigarettes has agreed to stop advertising in the United States and announced that its chief executive officer is stepping down as state and federal regulators examine hundreds of cases of people who are sick from what appears to be a vaping-related lung disease.
The company also said in a statement that it will not push back on a Trump administration plan to pull flavored e-cigarettes from the market until the controversial products win approval from federal regulators.
Juul said it will be “refraining from lobbying the administration on its draft guidance” that proposes banning fruit-flavored vaping products, unless approved by the Food and Drug Administration, in an attempt to make the e-cigarettes less available to young consumers.
So, how does this affect the cannabis market?
Jessica Rabe, Co-Founder of DataTrek noted that most of the victims were vaping a marijuana ingredient called THC, while some were vaping only nicotine products.
“While some victims only vaped nicotine products, most vaped THC – the marijuana compound that gets users high – which has hurt the stocks of public marijuana companies,” she noted. “Recent data from cannabis analytics companies Headset and New Frontier Data shows the impact this health scare has had on dispensary sales.”
Since the first vape-related death was reported in late August, the share of vape sales in states where recreational marijuana is legal, such as California, Colorado, Nevada and Washington has fallen meaningfully.
In California, for example, vape’s market share dropped by 12% from the week of 8/19 to 9/9. Consequently, “approximately one out of every eight dollars spent on vapes has shifted to other products such as flower and pre-rolls.” Vape’s market share dropped by even more – 24% – in Colorado over the same time frame. In other words, “one out of every four dollars spent on vape products has shifted to other categories.”
Bottom line: “the recent declines fall well outside the range of normal variations… total dollar sales of vape products are still above where they were at the same time last year, even after the recent news of six vape-related deaths. But they would be even higher were it not for the deluge of negative publicity surrounding vaporizers.”
New Frontier Data
The number of US adults who consumed marijuana in August 2019 totaled 24.7 million, or 9.7% of US adults. Of those US cannabis consumers, 5.4 million or 22% vaped last month.
There was an estimated total of 275 million vapes sold between 2017 and 2019, totaling an estimated $9.6 billion.
Dispensary sales data from Jane Technologies shows that in the week of 9/1 (after vape-related deaths started getting reported) “vapes’ market share has declined an average of 15%, with medical-use states (and Oregon, where a victim was linked to legal products), and adult-use markets with high canna-tourism rates (e.g., Nevada, Massachusetts) seeing the sharpest effects.”
“Long-established markets – including California, Colorado, and Washington – were least likely to see sales disruptions, suggesting that consumers in mature markets with well-known products and brands were less likely to question the safety of such products.”
“As vape sales have contracted, other categories (flower, pre-rolls, and tinctures) appear to be fulfilling demand as consumers reallocate their spending.”
Rabe dissected the data and came up with three important points with regards to the legal marijuana and e-cigarette industries.
First, almost a quarter of cannabis consumers vape is a meaningful percentage. Concentrates – typically sold as vapes – has been an increasingly popular product category over the years, especially as more states have legalized recreational marijuana. Vape pens are portable, discreet and emit less odor than smoking a joint, for example, and tend to deliver a more potent high.
Concerns about the health risks of vapes are negative for the legal marijuana industry as consumers have already started opting for flower rather than concentrates. The latter commands bigger margins and higher retail price points. The rise in demand for concentrates has been especially important in states with ever maturing legal recreational marijuana markets as flower prices continue to fall. A change in perception of concentrates to the downside is therefore not a welcomed development for marijuana businesses.
Second, while the specific cause surrounding these vape-related illnesses remains unknown, there has been some progress. For example, officials report that many victims purchased vape products containing THC on the black market. In order to stretch THC oil, many producers started adding in thickeners, such as Vitamin E acetate. While this ingredient is okay to consume orally or put on your skin, health officials report that inhaling it can cause the types of symptoms vaping victims have been experiencing, such as shortness of breath, chest pain and coughing.
In California, legal marijuana “products are tested for potency of THC and the presence of heavy metals, residual pesticides and other substances, but not for vitamin E acetate”, according to the Washington Post. Going forward, this is just one issue that needs to be addressed in addition to other quality controls. Until the FDA and CDC reach more conclusive findings in their investigations about whether vapes are safe, the outcome of these products remains uncertain.
Thirdly, Rabe said there’s been a growing trend over the last couple of years for tobacco and liquor companies to diversify their product offerings by partnering or taking stakes in legal public marijuana companies, but this vape health crisis demonstrates the risks involved in any nascent industry.
“For example, not only did Altria take a 45% stake in Canadian cannabis company Cronos Group last year, but it also took a 35% stake in Juul Labs. The former was to hedge against falling cigarette sales, while the latter assumed smokers would choose non-combustible products over cigarettes in the future. Of course, now vapes are in the crosshairs of federal and state regulators.”
So, what is the bottom line?
“Vaping made smoking more relevant and popular again, but these health risks pose a major headwind if the industry and regulators cannot identify what’s causing such deadly health issues and standardize safe products,” said Rabe. “ These risks extend to the legal marijuana industry, especially as high taxes and onerous regulations in states where recreational cannabis is legal allow the black market and its illicit, cheaper products to thrive. We still believe in the industry long term, but the issues here exemplify the risks inherent in investing in disruptive companies.”