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Labs Prepare for the Pot Pipeline Opening

In a sprawling industrial park just outside of Vista, inconspicuously tucked in a tan, nondescript building is Coastal Analytical, one of San Diego County’s few marijuana testing facilities.

Such labs are gearing up for a huge increase in demand. Come January, all products sold at medical and recreational marijuana dispensaries, from topicals to edibles, must be tested at state-licensed labs. That’s a stipulation under Proposition 64, the measure California voters approved last fall to legalize marijuana.

With entrepreneurs across the state rushing to capitalize on the potential for explosive growth in the industry, labs are poised to play a key role. And state regulators are encouraging more testing facilities.

“My projections are a six-fold increase in testing volumes in the first six months of 2018, which is staggering,” said Samuel David, the CEO of Coastal Analytical, while sitting in his lab, full of chemistry equipment like a mass spectrometer and autosampler, with white lab coats hanging above them.

Broader Range of Analysis

Marijuana analysis labs in San Diego have been around for a decade or so. But testing hasn’t been required. David said most dispensaries currently don’t order testing, and if they do, they’re generally only interested in potency, while the state will demand a broader range of analysis.

Loosened regulations throughout the county will also spur more testing.

The San Diego City Council earlier this year agreed to allow medical marijuana dispensaries to also offer recreational cannabis starting in January. On Oct. 3, the body approved marijuana cultivation, manufacturing and testing facilities.

Areas throughout the county are still wrestling with regulations, while cities like Carlsbad have come out against dispensaries. But Carlsbad is among the six cities in which voter petitions seek to allow cannabis dispensaries.

To prepare for the volume influx, David in recent months invested in new equipment, and will expand with another Oceanside location that’s 1,000 square feet, similar in size to Coastal Analytical’ present spot. He’s eyeing further expansion.

Coastal Analytical and existing labs hold key market advantages, namely potential competition has a barrier to entry. It costs about $1 million to get a new lab off the ground — a tall order considering marijuana businesses often run into banking issues.

Federal Obstacles

The federal government regards marijuana as an illegal drug and can pressure banks not to touch cannabis cash. David said it took two tries to get a bank account, and after much effort he now has credit to finance big purchases.

Investors, David stated, have been wary of such problems, yet are waking up to the business potential.

“They recognize there’s money to be made, and they’re looking toward those that have market share,” he said.

Coastal Analytical opened in 2013.

“There was a social stigma, but not a professional one,” David said of his job. “This is good science.”

David holds a master’s in material science and worked as an analytical chemist for 10 years. A former roommate exposed him to the industry, and he quickly saw a need for analysis. He said in recent years dispensaries have recognized that testing safeguards buyers and improves breeding programs.

Greg Magdoff started Pharmlabs in Ocean Beach in 2011. He said ramping up demand led to the opening of another Pharmlabs in Coachella eight months ago, with another planned for Long Beach.

“If there’s not labs, the industry is not going to move forward smoothly,” Magdoff said.

Each lab, he said, brings in about $1 million in revenue annually, and he’s anticipating a tenfold increase in volume.

Magdoff said Pharmlabs’ scientific approach made it one of the first labs to gain accreditation from the International Organization for Standardization, which the U.S. Drug Enforcement Agency demands of its labs. Cannabis testing has gone mainstream, he said.

The California Bureau of Medical Cannabis rolled out proposed testing regulations in May, which are expected to be finalized in late November, and shortly thereafter labs will be able to apply for permits.

The draft rules require analysis for cannabinoids, moisture content, water activity, residual solvents and processing chemicals, pesticides, microbiological impurities, mycotoxins, filth and heavy metals. Testing, the bureau says, is necessary to ensure that consumers are aware of factors like additives and potency.

Alex Traverso, chief of communications at the bureau, said the agency is seeking to encourage the opening of more testing facilities. That way, California avoids the bottleneck in testing that occurred in states like Oregon in the early days of legalization.

“We’re trying to be proactive and talk to as many labs as we can to see what some of their concerns are and how we can tailor our regulations to be friendlier, so that it’s more conducive for labs to seek out that state license,” Traverso said.

In response to feedback, he said the final regulations may be less stringent than the current draft, or some of the rules could be phased in over time.

“I don’t know that there’s a particular magic number. But we want to make sure there’s good coverage up and down the state,” he said.

Traverso said there aren’t stats on the number of existing labs, but that will be tracked beginning in January.

The Rules

For the economics to pencil out, labs must be in relative proximity to dispensaries, because marijuana can’t be mailed under federal law. According to the draft rules, labs have to collect 0.5 percent of the total cannabis batch for testing, and batches must be under 10 pounds.

Existing labs may have the advantage now, but that doesn’t necessarily mean they’ll dominate the market long term, said Jack Scatizzi, managing director of Canopy San Diego, a tech accelerator for marijuana startups.

“Perhaps sitting on the sidelines, and waiting until Q2 or Q3 to see how things shake out, is the smart play,” Scatizzi said.

Recruitment poses a challenge, he said, given that labs must compete with biotech companies for talent. Labs armed with the most chemistry degrees will likely prevail in the market.

“The labs that produce reproducible results are going to be the ones that win,” Scatizzi said. “If they don’t have actual scientists, they may get passed by very quickly.”

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