After hiding in the shadows for decades, the cannabis movement is experiencing a long-overdue coming-out party. Following the legalization of recreational marijuana in Canada, and the ongoing push to legalize at the state level in the U.S. and in various countries around the world, the potential for legal marijuana is truly budding.

Projections by various sources suggest that legal marijuana could become, at minimum, a $50 billion a year industry (globally) by 2029, with peak sales potential of as much as $166 billion. That's not a dollar figure Wall Street and investors will easily overlook.

All eyes are on derivative expansion in Canada

But what you may not realize is that traditional dried flower won't necessarily be the marijuana industry's workhorse. Rather, the younger generation of adult cannabis users prefer derivative products, such as oils, edibles, infused beverages, topicals, concentrates, sprays, and vapes -- the latter of which projects to be a leading source of derivative revenue generation for cannabis companies.

According to regulatory agency Health Canada, all forms of derivative consumption, save for alcoholic infused beverages, should be legal by no later than the one-year anniversary of Canada's recreational legalization date, Oct. 17. That's going to roll out the red (or should I say "green") carpet for these significantly higher-margin products, relative to dried flower, and give cannabis stocks all the more incentive to expand their portfolios to include popular derivative options.

Late last week, that's exactly what we saw happen.

Vape giant PAX Labs chooses 4 top marijuana stocks to be its supply partners

San Francisco-based, PAX Labs, a vaporizer powerhouse and the company that developed the extremely popular Juul device that was spun out in 2017 via Juul Labs, announced on Friday that it had signed agreements with four Canadian pot stocks to supply it with cannabis extracts, resins, and distillates for its PAX Era pen-and-pod vape system. The PAX Era aims to be the go-to vaping device in Canada, assuming Health Canada does indeed legalize new forms of consumption by this coming October.

The four companies chosen to partner with PAX Labs were Aurora Cannabis (NYSE:ACB), Aphria(NYSE:APHA), OrganiGram Holdings (NASDAQ:OGI), and The Supreme Cannabis Company(NASDAQOTH:SPRWF). You'll note that the largest marijuana stock by market cap, Canopy Growth, and one of the more controversial pot stocks, Tilray, are notably absent from this partnership.

Here's why Aurora, Aphria, OrganiGram, and Supreme Cannabis are logical partners

You're probably wondering why PAX Labs chose Aurora, Aphria, OrganiGram, and Supreme Cannabis as its supply partners. The answer, I believe, is twofold.

First, all four of these marijuana growers have made clear the importance of diversifying into derivatives. For instance, Aphria is constructing an extraction center with 25,000 kilos of annual extraction capacity for the expressed purpose of meeting derivative demand.

Similarly, OrganiGram recently announced a phase 5 expansion at its Moncton facility in New Brunswick, part of which would be devoted to additional extraction capacity. In an interview with BNN Bloomberg, OrganiGram's senior vice president for marketing, Ray Gracewood, noted that roughly a quarter of its cannabis is being set aside for an expected surge in vape demand. 

And then there's Aurora Cannabis, which has either pushed into or announced its desire to add nearly every type of derivative product at some point. Since derivatives carry a much higher margin than dried cannabis, they'll be an important component of any successful growers' lineup of products.

The second reason Aurora Cannabis, Aphria, OrganiGram, and Supreme Cannabis make sense as partners is that they bring different consumers and varying product qualities to the table. OrganiGram, for example, caters primarily to the adult-use market. Meanwhile, Aurora Cannabis has a stated focus on the traditionally higher-margin medical marijuana community. PAX has stated that it would like to go after both sides of the aisle when Health Canada waves the green flag on new consumption options, and partnering with cannabis stocks that have a unique focus on the adult-use and medical marijuana market will help it meet this goal.

There's also strength in PAX Labs being able to offer top-notch quality for its PAX Era device. That's where Supreme Cannabis comes into play. Even though Supreme Cannabis' 7Acres facility will only produce a modest 50,000 kilos per year when at full capacity, Supreme is one of a rare number of growers focused on ultra-premium and premium-quality cannabis production. More affluent consumers who don't have ties to traditional cannabis culture are Supreme's core customers. And since these well-to-do consumers have money, they're less likely to have their buying habits changed due to fluctuations in Canada's economy.

Clearly, there's going to be quite a bit of vape competition, especially with Altria entering the space via a $1.8 billion equity investment in Cronos Group, which closed in March. Then again, PAX is about as established a name as there is in the vaporizer segment. This suggests Aurora, Aphria, OrganiGram, and Supreme Cannabis may have just landed one heck of a valuable partnership.