Managing a Cannabis Lab
How to survive the challenges of the cannabis testing industry
Managing any laboratory can be challenging in the best of times, but managing a cannabis testing laboratory comes with a unique set of concerns. Since the industry is relatively new and extremely competitive, information about managing a cannabis testing laboratory is not often shared. An important next step in the growth of this industry will be the open discussion and even debates about cannabis lab management as these insights become common knowledge.
The management of a cannabis laboratory is an interesting combination of understanding which principles to apply from other more mature industries and an awareness of which challenges are specific to cannabis. A robust quality system and requirements for technical expertise are similar to food, pharmaceutical, and diagnostic testing industries, but the lack of consensus methods, variety of state regulations, and complexity of matrix are unique to cannabis. These challenges and the inherent volatility of a developing industry necessitate a certain creativity in dealing with constant fires and flexibility to pivot rapidly in order to run a successful laboratory.
Running a cannabis lab: the four phases
Most cannabis laboratories are built from the ground up due to the scarcity of existing laboratories in areas deemed to be suitable for cannabis licenses and also due to very specific requirements for regulatory compliance testing. Based on this model, the building and development of a laboratory can be divided into four phases:
Phase 1 is the initial phase that involves the buildout of the physical location, purchase and installation of equipment, and hiring key scientific personnel. Phase 2 is the ramp-up phase that involves validation, building quality systems, and licensing. Phase 3 is the operations phase where the laboratory is licensed, fully operational, and focused on continuous improvement. Phase 4 is the growth phase with expansion of the laboratory capacity, evaluation of additional markets and initiation of research and development projects. A laboratory can alternate between phases 3 and 4 several times based on revenue, investment strategies, and market conditions. Understanding which phase a laboratory is going through can allow management to focus on immediate issues specific to that phase and prepare for problems that may arise in the next phase.
Setting up a cannabis testing laboratory requires a large amount of capital (commonly estimated to be $2-3 million) and this becomes apparent very quickly in phase 1. Finding a suitable location, build-out costs, and purchasing all the equipment required for regulatory compliance testing can add up very quickly, and this is before hiring experienced scientists and staff or investing in a quality system. Apart from the costs involved, it is also important to properly budget time. It almost always takes longer than planned to set up a laboratory and it is better to be prepared about the time it takes to jump through all the regulatory and scientific hurdles. It is not uncommon for a laboratory to take about a year to become fully operational.
Phase 2 involves method development, validation, and setting up a quality system—all of which form the scientific foundation of the lab. One of the major challenges in this phase is the cannabis matrix itself. Yes, the rumors are true—cannabis is indeed a very dirty matrix. Analytical method development, especially for analytes with low action levels such as pesticides, can be extremely challenging. The variety of products and the resulting variety of matrix interferences are staggering. It is important to focus on developing and validating methods by matrix carefully and deliberately—documentation and use of matrix spikes will be key. Phase 2 also involves the setup of a quality system. A good quality system is worth the investment and can help mitigate long term risk, but it can be expensive to maintain. It impacts cost due to the expenses of personnel, audits, and proficiency tests. It impacts capacity due to the number of quality control samples run with each batch and any re-runs due to non-conformance. Regulatory authorities in many states are becoming increasingly stringent about validation requirements and data packages. This means that the method development and validation process cannot and should not be circumvented or sped up unnecessarily. Any shortcuts attempted may lead to a less robust method and poor-quality standards, which will inevitably lead to more time spent in less than pleasant exchanges with regulatory bodies and clients.
Once a laboratory has arrived at phase 3, significant barriers to entry have been overcome and the laboratory is now licensed and ready to perform testing for regulatory compliance. This may seem like quite a feat but the operational challenges have only just begun. These challenges have to be addressed before moving into phase 4 prematurely. The cannabis testing space is increasingly commoditized as witnessed in markets like California, where the cost of compliance testing has dropped by 50-70 percent over the last two years. Since legalization, the illicit market has stymied growth of the legal cannabis market, but more testing laboratories have been licensed. Prices dropped in response to the competitive nature of the testing space, but there are additional market demands to also speed up turn-around times (TAT). New laboratories are faced with finding efficiencies almost as soon as they are operational. Many laboratories that enter phase 3 discover that they spent a lot of time on analytical method development but not as much time on process and workflow development. It is important to look at the layout of the laboratory, the position of the instruments, and the movement of the sample through the laboratory to seek out efficiencies. An operational laboratory should create metrics to track performance and productivity regularly and make improvements as needed.
“As the industry evolves to discuss standards, best practices, and consensus methods more openly, transparency and enforcement should also be prioritized.”
It is not possible to talk about managing a cannabis testing lab and not address the dark side of the industry. Laboratory shopping remains an issue as more laboratories open and cost of switching laboratories is negligible. Rumors of unethical practices swirl through the industry since lab shopping also leads to potency inflation, extremely low compliance failure rates, and data integrity issues. In California, Nevada, and Washington, investigations by the regulatory authorities have led to laboratories losing their licenses in the last few years. However, the specific reasons for laboratories having their licenses revoked or suspended are usually not shared. As the industry evolves to discuss standards, best practices, and consensus methods more openly, transparency and enforcement should also be prioritized. Laboratories are tasked with testing to regulatory compliance standards to ensure the quality and safety of the product for the consumer and this is a responsibility that should not be taken lightly.
Setting yourself up for long-term success
Looking at all the challenges in the cannabis testing space, it may seem daunting to set up a cannabis testing laboratory. However, the long-term prospects of the industry are promising as more states establish testing regulations and the march toward federal legalization appears inevitable. There are ways a laboratory can survive the current challenges and position themselves to reap the long-term benefits:
Have realistic, achievable goals: A new lab in a developed market like California is not realistically going to capture a major market share in a short amount of time. Management should be strategic about capital expenditure such as equipment so that sales can meet capacity on an ongoing basis.
Access to capital: With a continuous volley of issues such as COVID-19, vaping deaths, and a growing and thriving illicit market, the one way to survive in the short term is to have access to a reliable source of capital.
Focus on strengths and differentiators: Few labs are able to differentiate themselves from the current competitive atmosphere. Examples of differentiators are R&D projects such tissue cultures, soil analysis, stability studies, or technology-based tools like data analytics and novel software platforms. The strength can be a specific area in science, a novel service, or even marketing, but it is important to be self-aware and know what that strength is.
Automation: With pressure on margins due to the contraction of prices in compliance testing, labs will need to find innovative ways of scaling up and creating economies of scale. The best way to do this is through automation, but it needs to be strategic since automation can be an extremely expensive investment.
For a new laboratory manager, the challenges of setting up a new cannabis testing lab may seem daunting, but none of them are unsurmountable. As the industry matures, testing laboratories will continue to work toward consensus methods, best practices, and a uniform quality standard. Scientific integrity and a focus on quality can mitigate risk, strengthen a business, and make it scalable. Ultimately, although a testing laboratory is a business, it is important to realize that laboratories are tasked with regulatory compliance testing to ensure the quality and safety of the products and this is a responsibility that should not be taken lightly