As if the bloodbath concerning cannabis stocks hasn’t been bad enough in 2019, the growing crisis surrounding vaping deaths and sicknesses has further encouraged negative sentiment for the cannabis industry in general, and specific companies with significant exposure to vaping.
This is especially true for some Canadian companies that were looking for legalization of derivatives in October 2019 to boost their revenue and margins. That may not turn out the way many expected it to as governments are starting to take measures against vaping; that is likely to continue for some time.
In this article we’ll look at how this could impact the near term performances of Canopy Growth (CGC), Cronos Group (CRON), and Aphria (APHA), all of which specialize in vaping.
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State of the cannabis sector
Since the first calendar quarter of 2019, cannabis stocks have been taking a beating. For Canopy Growth, Cronos Group, and Aphria, they all started to spiral downward near the end of January and early February. None of them have found sustainable support since then.
At the macro level there have been concerns over the trade wars going on, investors becoming more risk averse, the cannabis market in general being over-hyped for the short term, and investors scrambling to safer equities.
Individual cannabis companies, as a whole, have reported disappointing results as measured against investors’ expectations, and that has put further downward pressure on their share prices. This isn’t likely to change anytime soon.
Many Canadian cannabis firms were counting on derivatives to increase sales and margins, leading them eventually to being profitable. While that will help some companies because they are going to sell products besides vapes, for Canopy Growth, Cronos Group, and Aphria, it could be devastating because of positioning themselves in that segment of the market to meet soaring demand.
The vaping crisis could result in further disappointing results for these companies, which could disproportionately impact their top and bottom lines, as well as share price; they could easily under perform their peers that have less exposure to the vape market.
The vaping crisis is growing
The argument could be made that the vaping crisis is primarily located in the U.S., but that would be the wrong conclusion to draw in my opinion, because sicknesses related to vaping are being reported in Canada, and it’s only a matter of time before more media coverage focuses on that.
With the growing number of deaths and sicknesses, especially in the age group from 18-34, it is generating a lot of emotion that will result in little resistance in taking measures against vaping, as has already happened in several states.
Think of what would happen to Canadian cannabis companies if Ontario alone were to take measures to remove or significantly reduce the vaping threat. Ontario is by far the largest Canadian province, making it the most important market for cannabis companies based in Canada. It’s one of the reasons the slow approval process for retail outlets in the province has had such a detrimental effect on the performance of companies that were counting on sales there to drive growth.
As all this relates to vaping, Canopy Growth, Cronos Group, and Aphria are not only getting hit from the growing negative sentiment of the general cannabis sector, but from the vaping crisis that is unfolding as well. If this results in much lower sales than expected, these companies will experience more downward pressure on their share prices.
One positive here is sales of Canadian derivatives aren’t going to start until the latter part of December 2019, so it’s possible there will be answers to the vaping issue by the time sales start to ramp up in the first calendar quarter of 2020. If that’s the case, then these three companies may avoid much of the fallout. On the other hand, if it gets worse, it could be even more of a negative catalyst for them than expected.
One possible bright spot for Canadian companies is they are already operating under stricter guidelines than the U.S. has had in place, so it may help at least reduce the number of health incidents associated with vaping, potentially limiting the regulatory response.
Vaping safety is of course driven by more than just government regulations, and if the Canadian public decides it’s not safe to use, or that it includes significant risk, sales will be much lower than anticipated.
In the U.S., federal investigations have found that many of the illnesses associated with vaping have included THC as a component. If the same is discovered in Canada, it’s going to be difficult to ignore the potential risks that vaping would represent.
To get an idea of how this could impact these companies, in the U.S., analysts have estimated vape sales in established markets have dropped by up to 30 percent. As more news of health risks are reported, that’s certainly going to fall even further.
Consequently, consumers are gravitating to using lower-margin products as they had before the vaping crisis. If this escalates, even if Canada maintains its approval of vapes in October, it won’t have an impact on how consumers will view it.
The reported number of deaths and injuries identified in the U.S. as of this writing were 16 deaths and 805 lung injuries related to vaping. The number could rise further because earlier cases that were thought to be pneumonia, are now known to be linked to vaping
There is no doubt in my mind the Canadian government is going to have to come up with some measures to combat this. To count on existing regulations as a protection against vaping health issues isn’t likely to be enough for consumers or investors.
Until this is resolved, it may be better to provide stricter guidelines for vapes, or to take them out of the market altogether until more information is available as to the causes behind the deaths and damage done to lungs.
It would be better to engage at the front end of the problem, then to wait until vaping products are scattered about Canada and then decide to take strong measures. That would be much worse than dealing with it immediately. Disruption in the supply chain could be catastrophic in the short term if things are allowed to go on as they are concerning vaping and Canadian derivatives.
When considering that about two-thirds of the victims of vaping have been 34 or under, it’s not difficult to see the public backlash on vapes if the government and companies could have done something to stop it.
My view is that there is no easy or good answer for vaping in the near term. That means Canopy Growth, Cronos Group and Aphria are probably going to get hit hard from the issue. I don’t see any way around it.
I think it’s a mistake to hide being the stricter guidelines in Canada, as some cannabis companies have suggested. It will be far better to make sure the vaping products are as safe as possible no matter what the Canadian market decides.
The only way to ensure ultimate safety is to not sell them at all at this time until the cause or causes behind the health issues are resolved. To go ahead with sales is extremely risky for these companies. If their vaping products end up causing health issues or even death for consumers, it’ll be a long time before the companies will be trusted again.
These companies could focus more on other derivatives until the risk associated with vaping is understood, significantly reduced, or eliminated. They would take a temporary hit because of reduced sales, but the alternative could devastate them.
However this plays out and whatever Canada and the companies decide, vaping isn’t going to be the positive catalyst in the short term these companies were counting on. This needs to be taken into serious consideration when thinking of taking a position in any of them.
The best-case scenario for the companies would be for answers to come before they start sales in late December.
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