Vape heavyweight Pax Labs Inc. is partnering with four Canadian cannabis producers to supply the domestic market with marijuana oil, ahead of the launch of new legal product formats in October.

Using cannabis through a vaporizer is widely expected to emerge as one of the most popular formats in the legal Canadian pot market given its popularity in American states that permit recreational cannabis use. It’s also a higher margin product relative to dried flower and believed to be key to introducing legal cannabis to users who aren’t fans of traditional methods of smoking the drug.

According to recent Scotiabank research report, vape products and cannabis concentrates represent roughly one-third of the total market in states such as California, Colorado, Nevada and Washington. For example, demand for vape products in Colorado accounted for 23 per cent of the legal market in 2017 from 12 per cent in 2014, while the use of cannabis flower declined to 54 per cent from 66 per cent during the same period.

“As new products such as vape pens are added to store shelves, we expect some customer spend to shift from the current flower and oil offerings,” Scotia analysts Ben Isaacson and Oliver Rowe wrote in the report released last month. “Additionally, these new formats could attract more users from the illicit channel, where the products are currently offered, increasing the size of the addressable legal market.”

Aphria Inc. (APHA.TO), Aurora Cannabis Inc. (ACB.TO), Organigram Holdings Inc. (OGI.V), and Supreme Cannabis Co. (FIRE.TO) will supply Pax with cannabis extracts, distillates, and resin for its Pax Era pen-and-pod vape system, a device similar to the Juul product which is a dominant player in the U.S. nicotine vape market. 

Pax Labs quickly emerged as one of the biggest companies in the tobacco and cannabis sectors given the popularity of its devices which are used for vaporizing marijuana flower, oil, and waxy extracts, but it doesn’t grow or sell the plant.

Pax Labs founded Juul, which has about three-quarters of the U.S. vape market, and carved the company out as a standalone entity in 2017. Last December, tobacco giant Altria Group Inc. invested US$12.8 billion in Juul for a 35 per cent stake in the e-cigarette maker, valuing the company at US$38 billion.

As well, vaping has drawn the attention of practically every Canadian cannabis producer. While Health Canada’s final regulations on cannabis extracts and concentrates are yet to be released, most major pot companies are said to have a vape strategy in place despite not releasing much info on those products.

Ray Gracewood, senior vice-president for marketing at Organigram, said the company is earmarking about one-quarter of its cannabis for the concentrate market in anticipation for the demand it hopes to see for vape products. The company also plans to produce cartridges and disposable devices for the Canadian market, he added.

“We think the vaporzier market will be the second-biggest market next to dried flower in the short term and the biggest driver to get new consumers in the space,” he said in a phone interview with BNN Bloomberg.

Cowen & Co. analyst Vivien Azer said in a report on Wednesday that Cronos Group Inc. is expected to be a major player in the vape segment as it leverages its $2.4-billion strategic investment from Altria.

Azer said Cronos is using Altria’s old R&D facility in Israel to advance its next-generation vapor devices, which uses technology that Altria developed over the last several years for the tobacco market. She added that she expects the vaporizer market in Canada to be larger than what is seen in the U.S. as companies use more innovative technology to win customers.