By Jessica Rabe
We often write about the promise of disruptive innovation on US public companies, but the current health scare of vape products shows how it can go wrong. If you’re unfamiliar with what’s going on, here’s a quick recap:
- Health authorities have reported a total of 530 vaping-related illnesses across 38 states and one US territory, in addition to now 9 people who have died.
- The Food and Drug Administration is conducting a criminal probe. The Centers for Disease Control and Prevention as well as doctors/health officials have also encouraged people to stop vaping or “at least stay away from vaporizers, cartridges and liquids sold on the street”.
- Health officials and physicians “suspect the illness is an inflammation or injury caused by a chemical exposure to the lungs”, according to the Wall Street Journal. But “investigators still don’t know the specific cause of the vaping-associated pulmonary injury, sometimes called VAPI, or why a slew of cases have appeared over the past several months.”
- “Most of the victims were vaping a marijuana ingredient called THC, while some were vaping only nicotine products.”
- Here is a link to the full WSJ article for more information and how doctors discovered the vaping crisis.
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. 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.”
As for what this means for the legal marijuana and e-cigarette industries, three points:
#1: That 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.
#2: 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.
#3: 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.
While Juul says its products don’t contain THC or Vitamin E, President Trump is seeking to ban tobacco vape flavors, largely to make them less appealing to kids. Regardless, this is one more example of a disruptive, innovative product getting ahead of regulators and companies needing to answer for it. Altria’s stock is currently at a 5-year low, after all.
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. 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.