(Bloomberg) -- The vaping health crisis is happening at a very bad time for the Canadian cannabis industry.

With pot stocks already down over 40% since the end of the first quarter, news that an Ontario youth has been diagnosed with Canada’s first reported vaping-linked illness while hundreds have fallen ill in the U.S., is further battering the sector.

It’s not clear what’s causing the illnesses or whether they’re tied to nicotine, cannabis or both. As long as that uncertainty persists, so will questions about whether the big bets many Canadian pot companies have made on vaping will pay off.

Canada has taken a staggered approach to legalization, and the first legal cannabis vapes will appear on stores shelves along with edibles and beverages on Dec. 16. Pot companies are optimistic vapes will be the most popular format with consumers, and that they’ll help to boost flagging margins in an industry that’s struggling to become profitable.

Vaping accounts for 24% of the legal U.S. market, according to Cowen & Co. analyst Vivien Azer, and many companies are expecting it to take an even larger share of the Canadian market. Tim Pellerin, general manager of Canada for Pax Labs Inc., predicts Canadian vape sales could reach C$600 million ($452 million) by 2021.

The illnesses haven’t dampened companies’ optimism, at least in public, but there is concern that sales could be more muted than expected if they continue.

“Market confusion is never good,” Mark Zekulin, chief executive officer at Canopy Growth Corp., told reporters after the company’s annual meeting in Toronto last week. “We’re seeing unknowns that people need and want answered.”

Tough Regulations

Canada’s highly regulated market should provide assurance that legal vape products will be safe, he said.

That was echoed by Cam Battley, chief corporate officer at Aurora Cannabis Inc.

“In Canada we’ve got perhaps the world’s most respected regulatory system with respect to cannabis,” Battley said in an interview. “That likely will give both patients and consumers confidence that any product that reaches the market will have gone through rigorous testing and will be compliant with all regulations.”

The impact on the market will come down to whether the cause of the illnesses is identified by Dec. 16, said Trina Fraser, partner at Brazeau Seller Law in Ottawa.

“If we can get to the bottom of what the root cause is and we can offer assurances to consumers that that ingredient is not used in cannabis vape pens in Canada, I don’t think it should have any effect on demand,” she said. “If it is a more systemic problem and these products generally are an irritant or somehow a precipitant to lung disease, that would be devastating to the vape industry.”

It’s not just Canadian regulations that could impact Canadian cannabis companies. Cronos Group Inc., for example, is leveraging shareholder Altria Group Inc.’s expertise to develop vape products that could eventually be sold on both sides of the border. The Trump administration said on Sept. 11 it will move to take all flavored e-cigarettes off the market within 30 days.

A U.S. ban on flavored e-cigarettes would complicate Cronos’ plans, according to Bloomberg Intelligence analyst Kenneth Shea. “That’s because we believe the FDA’s toughened stance to reduce youth consumption of vaping products could extend to unflavored and cannabinoid products too,” he wrote.

Upcoming Events This Week

MONDAY 9/23

  • CannMed, a conference focused on cannabis science and medicine, runs through Sept. 24 in Pasadena, California

TUESDAY 9/24

  • Canopy Growth Corp. CEO Mark Zekulin and Acreage Holdings Inc. CEO Kevin Murphy keynote the C3 Canna Summit in New York

WEDNESDAY 9/25

  • Organigram Holdings Inc., Cronos Group Inc., Canopy Rivers Inc. and Supreme Cannabis Co. present at CIBC’s Eastern Institutional Investor Conference in Montreal

THURSDAY 9/26

  • The Cannabis World Congress & Business Exposition runs in Los Angeles through Sept. 28
  • CanEx Jamaica is held in Montego Bay through Sept. 28

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Shopify, Already in Canadian Pot, Starts U.S. CBD Platform

Former Canopy CEO Linton Takes on Advisory Roles at Three Firms

Revised Pot Banking Act Would Aid Legal Hemp Industry

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To contact the reporter on this story: Kristine Owram in Toronto at kowram@bloomberg.net

To contact the editors responsible for this story: Jacqueline Thorpe at jthorpe23@bloomberg.net, Chris Fournier

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