Some marijuana investors may have quietly suspected the outbreak of hundreds of respiratory illnesses and at least 14 deaths among the "vaping" crowd was closely linked to the usage of tetrahydrocannabinol (THC), or the component of marijuana that creates a psychotropic euphoria. But it wasn't until Friday of last week the U.S. Food and Drug Administration (FDA) explicitly said as much when it warned all consumers to stop vaping any product containing THC.
It's not an outright ban, to be clear, and the FDA concedes it will need to do more work in order to establish a cause and effect relationship. Many of the reported health problems appear to be caused by tainted black-market cannabis, as well.
Nevertheless, given that 76.9% of the 805 reported illnesses reported to date have involved individuals who had combined the use of nicotine and THC within 30 days of their symptoms, it's not a stretch to say consumers will now think twice before taking a drag from a vaporizer -- or vape.
That's a problem for some cannabis companies like Aurora Cannabis (NYSE:ACB) and KushCo (OTC:KSHB) both of which saw vaping as a key part of their growth plans. Aurora was the first licensed pot producer to launch a vape-ready CBD oil cartridge when Canada legalized marijuana a year ago, while the bulk of KushCo's business is vapes and related consumables.
Conversely, it's a paradigm shift that favors outfits like HEXO (NYSE:HEXO), which has been working on the development of cannabis edibles and beverages.
FDA recommends not vaping THC
There was no ambiguity about the FDA's stance. In light of recent developments, the regulator bluntly wrote, "Do not use vaping products that contain THC" in a public statement, adding, "Do not modify or add any substances, such as THC or other oils, to vaping products, including those purchased through retail establishments."
Insiders and followers of the cannabis-legalization movement have been quick to push back on the idea that vaping in and of itself is inherently dangerous. Just days before the official FDA warning, for instance, Aphria's (NYSE:APHA) interim CEO Irwin Simon said the panic "shows why legalized vaping is so important, why it's controlled and regulated through an approved market."
Canopy Growth (NYSE:CGC) CEO Mark Zekulin also clearly stated in September -- when the vaping-related crisis was in full swing -- that "we're ready to launch vape products into Canada," adding, like Aphria's Simon, "and the difference is this is really a regulated environment, so there are rules that will govern the products that we put to market."
They may be right in that regard. The bulk of the illnesses to date have stemmed from the combination of nicotine and THC that was provided outside of regulatory channels. Only 36% of the known respiratory problems were the result of using THC by itself.
Still, a perceived one in three chance of developing some sort of potentially fatal health problem is more than enough risk to make even the most die-hard marijuana fans think twice about inhaling anything but air.
Winners and losers from the warning
Although vaping has been around for more than a decade, vaping marijuana (for its THC) is a fairly new phenomenon. Legalization in some parts of the U.S. and in all of Canada has helped expand the market, legitimate as well as illicit.
Seeing where the market was headed, the cannabis industry has been moving to meet its targeted consumers where they wanted to go. Cronos Group (NASDAQ:CRON), as an example, just inked a deal with MediPharm Labs (OTC:MEDIF) to supply vaporizer pens to power sales of its COVE brand consumables. Canopy Growth has also been prepping a new lineup of vapes. During Aurora's fourth-quarter conference call, CCO Cam Battley acknowledged the company had made a significant investment in vaping, which in May he described as "a terrific market segment that doesn't need a lot of market development."
Given the hard data that's been gathered in the U.S. in the meantime, though -- along with the FDA's firm stance -- even a more regulated environment may not be enough to help Canopy Growth or Aurora Cannabis compel would-be cannabis vapers in Canada to give the alternative a try.
At the other end of the spectrum, edibles have suddenly become a compelling alternative to the alternative. That's to say, if neither inhaling the smoke of slow-burning cannabis nor a heat-vaporized source of THC is palatable, then ingesting cannabis for recreational purposes turns into a marketable consumer option.
That shift favors names like HEXO, which is co-developing a cannabis-infused beverage with Molson Coors Brewing (NYSE:TAP). Their first drink is slated to debut in Canada in December. While the co-venture wasn't initially intended to bring a THC-based drink to the market, HEXO's next partner may well be a food brand that fills the growing void if the THC market's complexion is shifting.
Other edibles names stand to gain, too.
Vaping ambitions go up in smoke
As is stands right now, there are more questions than answers. Chief among those questions is whether or not the FDA will be able to identify a specific causation for the surge in lung illnesses. It's arguable that the 805 reported illnesses as of late September represent the most aggressive users/abusers of a product that wouldn't be quite as dangerous if used more responsibly.
Nevertheless, cannabis is already a contentious issue. While most Americans are now pro-legalization, a faction among the 34% of the population against it tend to be adamantly, vocally against it. They're likely to use the recent fatalities as a weapon of sorts. The FDA may also take sweeping action, as it, too, appears caught off guard. Both factors ultimately work against vaping and related marijuana players.
That prospect leaves cannabis investors in something of a lurch. The uncertainty of how important vaping was and still is to growth plans leaves investors guessing about what's next. Canopy Growth, for example, was prepping for a major launch of a vape-pen line, but vaporizing doesn't yet account for a significant portion of its revenue. It may be able to pivot with a limited degree of disruption.
While the fallout from the FDA's new warning hasn't fully gelled, the agency tipped its hand on Friday. Investors would be wise to keep this developing story on their radars and start figuring out how vaporizing-dependent their favorite pot companies are or were intending to be.
At best, the cannabis industry's vaping names suddenly have a serious fight ahead -- if not a regulatory one, at least a perception-based one.