The vaping crisis won’t bring down pot stocks: Raymond James

Will the vaping crisis bring down the pot sector? The recent rash of vaping-related illnesses and deaths shouldn’t be pinned on legal cannabis products, says Raymond James analyst Rahul Sarugaser.

The analyst thinks Canada’s rollout of new cannabis products this fall —along the pot companies supplying the edibles and concentrates— will ultimately suffer minimal damage related to the current vape scare.

We are just a couple of weeks away from the kickoff of Cannabis 2.0, when new regulations will come into effect on the legal manufacturing, selling and consuming of products such as pot edibles, cannabis drinks, topicals and extracts. And while it won’t be until at least December before Canadians will be able to legally buy their THC gummies and CBD ointments, a pall has been cast over the launch of consumables due to events unfolding mainly south of the border but also here in Canada in relation to the use of vape products.

Last week, the US Centres for Disease Control issued what it called the first national comprehensive data on lung injuries related to the use of e-cigarettes, saying that so far there have been 805 confirmed and probable cases of injury and 12 deaths across the US, all related to vaping. Moreover, the CDC reports that about 77 per cent of the cases involved THC-containing products with or without nicotine and 36 per cent involved exclusive use of THC-containing products. (So far, only one instance of vaping-related
illness has been reported in Canada.)

The reports have stoked concerns over vaping and the legalization of cannabis, all the while impacting the fortunes of publicly-listed cannabis companies operating both in the US and in Canada. Already in a major slump, the news regarding vaping has pulled marijuana stocks lower in recent weeks.

The long-term impact of the vaping crisis on cannabis companies should be minimal…

But the long-term impact of the vaping crisis on cannabis companies should be minimal, says Sarugaser, who on Monday delivered a report to clients on the issue, arguing that Health Canada’s response is likely to come in well below a complete ban on cannabis-containing vape products, since the problem is most likely coming from the illegal market and particularly its use of the compound Vitamin E acetate in black market formulations.

“While the CDC has yet to identify the specific cause of these vaping-associated illnesses and deaths, the US Food and Drug Administration (FDA), as part of its ongoing investigation, found that ‘most of those [vape cartridge] samples with THC tested also contained significant amounts of vitamin E acetate,’ a compound that is widely reported as a material used by illicit vape formulators to dilute — or ‘cut’ — cannabis extract products, thereby stretching supply of these relatively expensive cannabis-derived inputs,” Sarugaser says.

“And so, while we reiterate that neither the CDC nor the FDA yet concluded that a single substance is at the root of this outbreak, it is our prediction that unregulated vape products modified with vitamin E acetate are among the primary culprits,” he writes.

Sarugaser argues that while some speculate that Health Canada may consider a general ban on vape products, the outcome will probably be less severe, with the Canadian regulator likely choosing instead to double down on warning consumers about the hazards of using illicit products.

“Our experience in biotechnology and our time spent understanding the workings of the US FDA and Health Canada, in particular, leads us to postulate that Health Canada will be primarily motivated to action by solid data and causation-supporting evidence rather than political pressure. Furthermore, in contemplating state/provincial/federal action, an important factor must be considered: banning legal e-cigarettes would only serve to push users toward the illicit market, further aggravating the present health crisis,” Sarugaser says.

As far as Canada’s pot stocks go, Sarugaser believes the damage will be minimal and short-lived.

“We expect companies that have seen their stock prices decline more than the market average on account of the US crisis are likely to bounce back,” he says.