Burning retail market lights up Canada’s cannabis vape race

Ontario will triple its pot-store count beginning in October, just two months before the introduction of new product formats that are expected to significantly boost sales in Canada’s most-populous province.

While chatter about the next wave of legalization in Canada tends to focus on products like edibles and beverages, many of the biggest players entering the space say consumers will opt for the more conventional format of vapes.

The Canadian market for vapes could be as big as C$600 million ($451 million) by 2021, according to Tim Pellerin, Pax Labs Inc.’s general manager of Canada.

San Francisco-based Pax, which split from e-cigarette company Juul Labs Inc. in 2017 to focus on cannabis, captures about 17% of the U.S. market for pot vape devices. It’s the top seller in the extremely fragmented market, and hopes to capture at least as much share in Canada. Pax has partnered with Aphria Inc., Aurora Cannabis Inc., Organigram Holdings Inc. and Supreme Cannabis Co. to sell their oils in its devices.

“We’ll be disappointed if we’re not able to match or exceed our performance in the U.S. market” in Canada, Pellerin said in an interview.

It’s shaping up to be a fierce fight, with two tobacco giants joining the fray via investments in Canadian pot companies.

Marlboro-maker Altria Group Inc. bought a 45% stake in Cronos Group Inc. via a C$2.4 billion investment that closed in March, while Imperial Brands Plc announced last month that it will invest C$123 million in Auxly Cannabis Group Inc. by way of a convertible debenture.

Imperial decided to invest in cannabis after conducting a strategic review to identify new opportunities to offset declining tobacco sales, according to Chief Financial Officer Oliver Tant.

“It’s relatively obvious to most that the tobacco sector is ex-growth and over the longer term that inevitably presents some challenges,” Tant said in a phone interview. “We looked at caffeine, we looked at high-energy drinks, it wasn’t limited to cannabis, but cannabis seemed like the one we had the most obvious overlap and connectivity with.”

Oxford deal

Imperial dipped its toe into the sector last year with an investment in closely held Oxford Cannabinoid Technologies Ltd. and decided to investigate the Canadian market after it legalized recreational pot in October.

“I think we probably talked to the majority of the larger listed entities” before settling on Auxly, Tant said.

Auxly will be Imperial’s exclusive global cannabis partner and will gain access to its vaping technology and Liverpool-based R&D lab Nerudia, which is already licensed to work with cannabis.

“The vape IP is a huge portion of the non-financial value in this transaction and ensures that Auxly is going to have best-in-class vape devices,” said Hugo Alves, who will replace Chuck Rifici as Auxly’s chief executive officer this week.

Imperial’s technology won’t show up in Auxly’s vape devices when they’re first released on Dec. 16, the day vapes, edibles and beverages will join dried flower and oils on legal Canadian store shelves.

Vape market

“We’ve been at it now for close to a year, so I’m happy to report that our vapes are designed, our oils are formulated, our pens are tuned to our specific oil and the hardware is ready,” Alves said. “Our collaboration with Nerudia is forward looking.”

Tant believes the Canadian market for derivative products like vapes will be worth about C$6 billion by 2025. Although Imperial is taking a go-slow approach for now, he sees future opportunities to expand its investments in cannabis.

“We’re taking a pretty cautious approach to investing in the space, we haven’t spent the $1.4 billion that Altria spent in Cronos,” he said.

Tant said he wishes Canada’s pot regulations were less fragmented across provinces, while Pellerin at Pax said he wishes advertising rules made it easier to communicate with the consumer.

“We continue to be in an environment which I’ll say is the worst it’ll ever be from a category standpoint,” Pellerin said. “It’s still very difficult to talk to the consumer through all the constraints and controls in place right now.”