What does the recent Vaping Crisis mean to HighBridge & the Cannabis Industry?

There is much publicity and speculation on this topic. Edibles are a force in the retail cannabis market, and HighBridge expects to create a much larger beverage presence with its products. However, the fact is Combustibles, by a wide margin, remain the consumer’s number one choice.

The consensus is that the vaping issue stems primarily from illegal or uncontrolled product.

Responsible producers are working with Lawmakers and Health officials and, we expect, will find timely solutions. It is doubtful that the current vaping problems will have any significant long term effect on the industry as a whole. And, as HighBridge does not participate in the production or marketing of combustible products, we expect little, if any, adverse effect on our marketing forecasts. In fact, the current crisis may lead some cannabis users to turn to edibles and beverages. HighBridge is firmly committed to production of high quality products, and believes that as consumers look for alternatives to combustible products, the HighBridge Brand will stand out.

To provide as much information as possible on this issue, we believe the attached article, taken from the September 24, 2019 National Institute of Cannabis Investors Newsletter, is “spot on”.

I’m Here to Answer Your Questions About the Vaping Issue

Your concerns about the vaping crisis answered…by Greg Miller, Executive Director, NICI.

There are twin vaping scandals sweeping the nation right now, which could affect vape companies, dispensaries, and even the entire cannabis industry. When this issue first occurred, I alerted you about what’s really happening with the mysterious vaping issues. I’ve been updating you on that issue and even shared breaking news on a change in the FDA’s approach to vaping. But I know many of you continue to have questions on the subject. That’s why I will be answering the great questions you’ve sent in that are surrounded around vaping.

I know a lot of you want to know what this means for your investments, and I’m going to share links to the alerts I’ve been sending our members regarding specific model portfolio members.

Now, let’s take a look at a question a member had about President Trump’s proposed ban to vaping products… Proposed Vape Ban and an Investigation Let’s take a look at the first question.

LW asks:

“What is NICI’s take on a proposed Presidential Executive Order to ban vaping products, and why is there not a full investigation into persons or products that have been altered to facilitate illegal use?”

LW, this is a worrisome question because what you’re proposing could happen. An Executive Order or regulatory decision, which effectively bans vaping, is certainly within the realm of possibilities. I think it’s unlikely and would be a terrible idea. And it looks like President Trump is at least partially coming to the same conclusion. He recently tweeted that he likes vaping as an alternative to combustible cigarettes and emphasized that enforcement should be directed toward counterfeits (and presumably illicit brands). Trump’s approach is the correct one regarding the vaping illness. As the evidence piles up, it’s becoming clearer that one or more actors in the illicit market are behind the vaping illness and that legitimate producers of tobacco and nicotine vapes are in the clear.

But what’s less clear is whether people will recognize that. In part, that’s because there is a second vaping crisis. After a long investigation, the FDA has concluded that the largest nicotine vape maker, JUUL Labs, has been improperly marketing its products. Some of its marketing tactics have been geared towards children.

It is this conclusion, as much as the vaping illness, that is behind Michigan‘s and New York‘s temporary ban on flavored vapes. What is especially interesting is what this means for cannabis vape producers. It’s not at all clear that the federal government can ban cannabis vapes – they’re already technically illegal! But there may be overreactions on the state level. We’re already seeing Governor Cuomo indicate that New York’s eventual legalization of recreational cannabis might include a ban not just on vapes, but on smokeable products altogether. And California’s governor is pushing to create more required disclosures. This is a big, complex crisis and it’s too early to predict any specific outcomes.

But there is some good news…

There are the investigations you are asking about. Several companies that make “carrier oils” for vape products and that specialize in sales to the illicit vape markets have received subpoenas. Two men in Wisconsin have been arrested for producing over 5,000 illegal vape pens per day. There is a crackdown on illicit cannabis oils. And investigators at the Centers for Disease Control and elsewhere are continuing to focus on finding the sources of the vaping illness. That’s why I say that even if this ends up affecting vape manufacturers in the long run, the outcome will be good for legitimate cannabis companies that offer tested products to consumers and that respond to the concerns of health authorities and regulators.

As Bruce Linton said this week,

“good companies prefer more rules.”

What to Know About Vaping Companies in the Short Term

Keith D. asks:

“Greg, what do you think the near-term affect will be for the companies in our portfolios that concentrate their business in the vaping market and vaping supplies?”

I’m cautious, Keith. If the twin vaping crises don’t result in a ban or in long-term negative publicity for vape companies, those companies will benefit in the long run from increased regulation and consumer preference for safe, tested products. But the crises could lead to over regulation or misguided regulation which hurts vape producers. Hang tight for now and see how this works out, but don’t initiate any new positions, and don’t even do what is normally my favorite thing to do, which is to add shares on downturns.

Understanding Vaping, Stocks, and Science

Graham B. asks:

“Vaping oils have been reported as a significant health hazard rather than a healthy alternative to cigarette toxins: lung alveoli are naturally bathed with moisture, which is adversely disrupted by vaping oils. Should we not avoid vaping companies and wait for scientific health studies to address this issue?”

Graham, I’m not sure the science agrees with you, though scientists are definitely asking more questions.

There are several things going on here.

The first thing to realize is that millions of people vape with no ill effects, at least in the short term. But the long-term effects are still unknown.Fewer than 10 million people worldwide have been vaping for 10 years, and almost no one has been vaping for 20 years. And of course, there’s widespread agreement among scientists that inhaling anything besides air is a bad idea, but it’s not at all certain that vaping oils are particularly harmful to lung tissue.

Some people think they are, some think it depends on the particular oils, and some believe that the temperature to which the oils are heated will be an important consideration. Should we avoid them altogether for the long term?

I think that’s premature.

Alcohol is bad for people, but investors who avoided alcohol companies after prohibition were much worse off than those who realized that many people choose to make their own risk assessments. The same is true for companies that make cigarettes, sugary treats, or a host of other things bad for human health. So, it really depends on your goals as an investor. Cannabis is unusual – it is both a legitimate health product and a legitimate sin product.