Medical marijuana labs are poised for major growth as more states mandate the testing of cannabis for potency and safety.
David Lampach, chief executive officer of Steep Hill Halent in California, estimates that US cannabis testing revenues could rise as much as eightfold by 2016.
“I think we’ll see the industry grow from $5 million-$7 million now to $20 million next year and $40 million within two years,” Lampach said in an interview with Marijuana Business Daily. “You can go state-by-state and sort of extrapolate. Colorado and Washington will probably be about $10 million next year, while California could go to $80 million in pure testing revenue” if it eventually legalizes cannabis for recreational use and implements mandatory testing.
But there’s much uncertainty ahead. Most states have yet to determine the approved processes, equipment and technology that will be used for testing. And the new rules will make it harder for smaller labs – as well as upstart facilities – to gain a foothold.
That means the cannabis testing industry will likely see a wave of consolidation, even as it expands. Some labs will team up via mergers or acquisitions (Steep Hill, for instance, recently merged with Halent Scientific), while others will be forced to close.
Lampach spoke with Marijuana Business Daily about these trends, what’s in store for the industry in the years to come and what it will take to compete in the testing marketplace of the future.
Q: What does the trend toward mandated testing – and regulations surrounding it – mean for labs?
A: It’s a huge boon to our business. As Washington and Colorado and other states come online, hopefully the challenges for us will be more like the challenges in the rest of business world: competition, expansion, etc.
Q: What will it take to compete in a regulated testing industry?
A: You’re going to have to be bigger. The labs that are going to flourish are the ones that can industrialize. It’s one thing to do testing on a small scale, but it’s another to do it on a large scale for an industry that’s pumping out tons of samples. There will be huge consolidation in general and fewer companies as a result.
Q: Is that why you merged with Halent?
A: To some degree, yes. It was massively important for us. Two prominent names in California merged. There might have been a short list of three or four big names in testing here, and when we merged that list got shorter and we got stronger. We feel we needed to do this to compete going forward.
Q: So you envision more of these of mergers in general among testing labs?
A: Yes, we’re for sure going to see that happen. Several years ago, the industry was small and decentralized and there were labs everywhere operating under no regulations. Now we’re seeing a trend towards consolidation. You’re going to see more testing companies going public, raising capital and making acquisitions.
Q: Will smaller testing labs even be able to survive?
A: I wouldn’t be surprised if the little guys basically don’t exist in the future. I’m not going to say all small testing labs will fail. But I think the odds are stacked against them. Other labs are establishing brands and reputations and have had time to get more key customers.
Small labs are still popping up, and there are a lot of little ones that test a few samples at a time, almost like a hobby. But to grow beyond that – which will be required to compete in a regulated environment – you need other things like insurance, human resources, etc. They will have a hard time doing that. And the logistics of moving around samples is huge.
Q: Won’t there at least be opportunities for smaller startup labs in new MMJ states?
A: Yes. There’s already a lab in Massachusetts. I do think there are opportunities for small labs in unestablished markets.
But keep in mind they’ll be competing against labs like us. I’m pretty confident that I’ve got a good team and in our ability to compete.
Q: Looking even further out, will we see large, mainstream testing labs enter the industry?
A: The big ones won’t touch cannabis yet, but they’re getting there. And when they do get there that will be a real challenge. Cannabis testing isn’t rocket science.
We’re not reinventing the wheel. People who know how to run industrial labs will be able to come in fairly quickly, and they will be able to do it faster and cheaper, and that’s all (patients and consumers) will really care about.
The only thing that will prevent them from being successful on their own is that labs in the space are already establishing a huge presence and are branding. In this case, the labs already operating will become acquisition targets. But whether the big testing companies buy existing labs or move in on their own, they are coming.
Q: Many states are planning to require testing but haven’t yet released details of what will be required. How is this uncertainty affecting testing companies?
A: The risk is that you go too hard in one direction. Maybe we overinvest in pesticide testing, and then Colorado says it’s not going to require that. It really depends on the market. In California, there’s an ongoing risk of dispensaries deciding not to test because they don’t have to. And then obviously in an unregulated model, there are people who are not doing a good job and giving testing a bad name.
As time goes by, though, everyone is going to have to get accredited, probably with ISO 17025.
Q: How much does it cost to start a testing lab these days?
A: For instrumentation, you’re talking in the $500,000 to $1 million range. That doesn’t include things like staffing and the cost of doing business. Then you’ll have to get (certified and licensed), and that will be expensive. We’re putting aside money now for that. The trend is that it’s getting harder and harder and more expensive.
Q: How are you preparing for the new regulated marketplace?
A: Well first we merged, and we’re raising capital. You have to spend capital on validation so that when the spotlight turns on you, everything looks right. That’s a big deal. There hasn’t been validation in cannabis testing, and it’s required in a scientific field.
It’s also important to focus on branding and licensing, as well as in branching out beyond just testing. We’re doing a lot more consulting. The key is to have staying power.
We’re also transforming the company into product research and development, leveraging the fact that we have thousands of samples passing through our lab. Testing will remain the core of our business, but we are ceasing to be just a testing lab.
Q: Aside from the changing regulatory climate, what are the biggest challenges of running a medical marijuana testing lab today?
A: Raising capital has been a long-time industry-wide challenge, but that is changing now. We managed to raise a good amount of money – hundreds of thousands of dollars – recently, which before was impossible for us. Anybody who had the stomach to invest in the industry went straight to grows or dispensaries, not labs. There really was no middle ground.
It’s still a challenge, but we’re seeing more investors look at labs and the sector in general. From an investor standpoint we’ve seen a changing dynamic and we see potential liquidity in the future.