Taking Advantage of Canada’s Cannabis Testing Market

The partnership between Abattis Bioceuticals and Emerald Health Therapeutics to run Northern Vine Laboratories as a joint venture promises to take advantage of a growing market for lab testing and extract products.

Canada’s Testing Market

Canada’s legal cannabis industry is projected to reach up to $22.6 billion in size, according to Deloitte, driven by the legalization of recreational cannabis next year. While the base market accounts for up to $8.7 billion of that figure, the remainder of the annual revenue is expected to come from growers, infused product makers, security, and testing labs. Markets and Markets expects cannabis testing industry to be worth $1.5 billion by 2021.

According to Health Canada, there are just 33 laboratories licensed to conduct activities with cannabis compared to more than 70 licensed producers. Third party lab testing isn’t currently required by Health Canada, but the agency has already required ‘expanded’ testing for licensed producers to ensure that pesticide and additive requirements are being met. The ongoing recall issue could lead to eventual requirements for third party testing to eliminate obvious conflicts of interest.

Deloitte expects consumer cannabis demand to be at least 600,000 kilograms per year, which exceeds the capacity of licensed producers. As production scales up, the demand for cannabis testing services is expected to see a sharp increase. There are already anecdotal reports of cannabis testing activity holding up the release of product onto the market – a development that could become much worse next year after recreational legalization goes into effect.

Cannabis Oils and Extracts

While many observers and investors have typically thought of the cannabis market as being about cannabis flower, cannabis extracts represent the fastest growing subset of the industry. Health Canada data shows that dried marijuana sales grew 46% between Q1 and Q4 of 2016 compared to more than 275% for cannabis oils and concentrates. In mature legal (at least at a state level) markets such as Colorado, dried flower and extract sales are already roughly equal.

There are many different ways to produce cannabis oils and, like many producers, Abattis and Emerald both have had their eyes on how to produce for this market, both independently and potentially in some joint fashion. But there is another angle as well.

Emerald & Abattis Joint Venture

Abattis Bioceuticals recently sold a 53% stake in its Northern Vine Laboratories business to Emerald Health Therapeutics to form a joint venture. Emerald Health will contribute its strong cannabis supply and extensive life sciences industry experience. Abattis will contribute its significant lab expertise. With their respective sets of expertise and the Dealers License, there are various business opportunities that weren’t possible beforehand.

Licensed Dealers have the right to prepare any manipulation, formulation, dosage form, strength, or package size of cannabis, including mixtures and other additives, controlled substances, and other substances, which gives them a critical R&D and intermediary role within the industry. This creates many possibilities for product innovation. In a recent Q&A with CFN, CEO Robert Abenante called these possibilities “staggering”, pointing out that there are many different verticals that could be addressed, ranging from personal care products to pharmaceutical products.

Licensed Dealers have the right to import and export oils, which Licensed Producers are not permitted to do. Wherever the product might be sourced, over the long term the joint venture would have the potential opportunity to sell oils around the world. In the near term, in a market that is expected to be supply-constrained, the flow could possibly be the other way: cannabis oils could potentially be imported by Northern Vine and sold in Canada through Emerald’s Botanicals subsidiary with its Licensed Producer designation.

Finally, there is the significant potential growth in the analytical testing business.

Looking Ahead

Northern Vine Laboratories, with its Dealers License and lab facility, is uniquely positioned to take advantage of these important related business opportunities in the cannabis market. They could be a boon to both companies’ shareholders.