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HIGHLIGHTS
  1. Drop in vape product sales in legal states seen largely offset by edible and pre-roll purchases
  2. Vape-related illnesses come just weeks ahead of cannabis vape product legalization in Canada
  3. Companies with heavy vape exposure see drop in share prices

The wave of respiratory illnesses linked to vaping and electronic cigarettes should ultimately speed up consumers’ shift away from cannabis black market products in the United States, where regions with legalized pot have seen a drop in vape sales offset by higher edible and pre-roll product sales, Canaccord Genuity Capital Markets said.

While medical dispensaries have been unaffected by reports of respiratory illness from vapes sold largely on the illicit U.S. market, THC vape demand in states where recreational cannabis is legal has dropped by roughly 5 per cent to 25 per cent, the financial services company said in a report.

Cannabis vaping products are on track to be legalized next month with the first licensed products expected to reach retailers in early 2020 and analysts have said Canadian cannabis companies need to band together and assure consumers that regulated vaporizer products will be safe when they reach store shelves later this year.

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The ongoing vape-related health crisis could dampen demand for new cannabis vaporizer products, said BMO Capital Markets, adding that vape pens and edibles have the potential to generate gross margins in the 55 to 65 per cent range, compared to gross margins for flower products of around 50 per cent.

Nine people have died in the United States from vaping-related illnesses while there are 530 confirmed and probable cases of illnesses. The Centers for Disease Control and Prevention (CDC) said on Tuesday this number could soon climb much higher, The Associated Press reported.

The CDC has not yet identified a common electronic cigarette or ingredient causing this, but on Tuesday, Massachusetts imposed a four-month ban on sales of all vaping products, including all sales of e-cigarettes and supplies for both tobacco and marijuana.

In Canada, officials are investigating four cases of a severe lung disease tied to vaping products.

Last week, the Canadian vaping industry launched a new trade association – the Vaping Industry Trade Association (VITA) – to unify the sector’s voice, though it does not have a cannabis industry member.

The sell-off for stocks with heavy vape exposure “has been severe,” Canaccord said, pointing to sharp drops in Greenlane Holdings Inc., KushCo Holdings Inc., Slang Worldwide Inc., and Tilt Holdings Inc. as “meaningfully underperforming” the broader cannabis sector the past month.

While many cannabis companies have exposure to vape items, Greenlane, KushCo, Slang and Tilt each have more than 60 per cent of their revenues tied to these products, Canaccord said.

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“Since the end of August, the stocks within our coverage universe with the most significant exposure to vaping (Greenlane, KushCo, Slang and Tilt) have underperformed the market significantly with an average decline of 32 per cent over the period compared to 4 per cent for the Alternative Harvest ETF,” Canaccord said.

Meanwhile, falling vape demand in legal markets has largely been supplemented by a rise in edibles, pre-rolls, and other products, Canaccord said.

“While we are likely early days in resolving these industry challenges, longer term we expect associated revenue and EBITDA impact to our vape related coverage names to be more modest than the selloff suggests - vape is a lower-margin business and THC vaping illnesses have largely been a black market phenomenon (with the exception of one case),” Canaccord said.

“It follows that supply chains and customer spending are likely to respond by shifting more dramatically to the tier one products and legal channels served by our coverage names.”

While the U.S. Food and Drug Administration advises consumers to avoid THC vape products that contain vitamin E acetate, the CDC has warned people to avoid vape products sold on the black market.

This follows strong growth in vape sales in June and July, in key states Arizona, California, Colorado and Nevada.

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