Illegal Vape Creates Opportunity for Legal Cannabis

Prohibition Partners expects the size of the legal cannabis market to be $103.9 billion by 2024. In “The Global Cannabis Report,” released this month, the firm forecast the size of the legal medical cannabis market to be $62.6 billion by 2024. Prohibition Partners also expects the legal recreational cannabis market to be worth $41.3 billion by 2024.

Black market sales

However, the legal cannabis market continues to face market share and revenue erosion from illegal players. Black market sales have also affected the credibility of this still-nascent industry.

In the “Global Cannabis Report: 2019 Industry Outlook,” New Frontier Data estimates the current size of the addressable cannabis market to be $344 billion. This estimate includes both legal and illicit cannabis markets.

According to market researcher TheCannalysts, as reported by Marijuana Business Daily, regulated cannabis sales accounted for only 14% of the demand by volume in Canada in June 2019.

Illicit products have been seeing strong demand mainly due to lower prices and easy availability. Recreational cannabis legalization in Canada is also pushing medical marijuana users toward the illicit market.

CFAMM (Canadians for Fair Access to Medical Marijuana the Arthritis Society) and CPhA (Canadian Pharmacists Association) studied the penetration of the illegal market in the medical cannabis segment in a July 2019 survey. Accordingly, access issues and high prices have resulted in increased demand for illicit products from medical cannabis users.

However, the tables seem to have turned around now. As major competition to the regulated industry, illegal vape products may now help boost sales of legal cannabis products.

Vaping crisis: A huge challenge for the cannabis sector

In 2019, the vaping crisis has significantly subdued cannabis stocks. According to the Centers for Disease Control and Prevention’s latest outbreak report, there were 2,051 EVALI (e-cigarette, or vaping, product use associated lung injury) cases in the US. Notably, the disease has caused 39 deaths as of November 5, 2019. Around 79% of the affected patients were younger than 34 years.

The vaping crisis has increased the uncertainty around vaping products developed by regulated cannabis players. Despite these concerns, Aurora Cannabis (ACB) had already disclosed plans to launch vape products in December 2019. The company also entered into a supply agreement with PAX Labs.

Aurora Cannabis aims to compete in all consumer segments and product categories in the vaping segment. On September 29, as reported by CNBC, Canopy Growth (CGC) CEO Mark Zekulin also highlighted plans to launch vape products in Canada in late 2019.

In its second-quarter earnings call, Cronos Group (CRON) highlighted its focus on next-generation vape products. The company also disclosed plans to launch these products in Canada in late 2019. Continuing uncertainty about potential causes of the vaping crisis has affected the sentiment for regulated vape products.

Illegal vapes may increase the demand for legal cannabis products

On November 8, the CDC announced new laboratory findings from ongoing investigation for a multistate outbreak of EVALI (e-cigarette, or vaping, product use associated lung injury). The agency found vitamin E acetate in the BAL (bronchoalveolar lavage) fluid samples of all 29 tested EVALI patients. The agency highlighted this as the first potential cause of lung injury. However, the CDC  did not rule out the contribution of other chemicals as a cause of EVALI.

According to GLJ Research analyst Gordon Johnson, as reported by TheFly, regulated cannabis players breathed a sigh of relief after this news. According to the CDC, Vitamin E acetate is used as an additive in vaping products. Johnson explained that this product is usually not present in legal cannabis products.

However, Johnson believes that the Canadian cannabis sector is overvalued. He anticipates a correction of 40%–100%. He also highlighted his plans to benefit from the rally in cannabis stocks after this news. Johnson plans to initiate and build a short position in Tilray.