Nevada legalized medical marijuana back in 2000, but dispensaries weren’t permitted until Senate Bill 374 passed 13 years later. With the state’s large tourism industry, and the most liberal medical marijuana reciprocity laws in the country, the Nevada market could see rapid expansion over the coming years and grow into what some analysts expect could be a $100 million a year market.
In this article, we will be focusing on DigiPath Inc. (OTC: DIGP), who received provisional approval from the State of Nevada in late-2014 for its DigiPath Labs subsidiary to open a cannabis testing facility. As a requirement for selling marijuana, testing services could grow just as quickly as the overall marijuana market, as growers, sellers, and patients demand high-quality products. The DigiPath Lab, which is set to open in a matter of weeks, will become one of the first licensed testing facilities for marijuana in the state of Nevada.
Below, we will take a further look as to why investors may want to look beyond some of the larger plays within the marijuana industry, such as pharmaceutical bellwether GW Pharmaceuticals plc (NASDAQ: GWPH) or Tweed Marijuana Inc. (OTC: TWMJF) (TSX-V: TWD), and consider adding smaller companies focused on niche markets like Nevada’s rapidly growing market.
Reciprocity Spurs Growth
Nevada may be just one of many states that have legalized medical marijuana, but a provision called “reciprocity” sets it apart from the rest. The provision permits any legally registered medical marijuana patient from anywhere in the world to purchase marijuana in any of the state’s dispensaries. While some states have similar provisions, Nevada is the first to implement reciprocity without restriction.
The state already receives some 40 million visitors per year, notably the casino and entertainment hub of Las Vegas. With reciprocity in place, any of these visitors holding valid medical marijuana cards will be eligible to purchase medicine from dispensaries operating in Las Vegas and other approved counties. These dynamics could create an enormous market for medical marijuana alone.
Marijuana Business Daily estimates that the market could be worth anywhere from the tens of millions to above $100 million, depending on how the market shakes out. Some analysts mention that they would not be surprised if out-of-state sales of medical marijuana account for 30% to 40% of overall sales for dispensaries. The move could also make the state a model for others looking to implement less restrictive policies.
Nevada voters will have the opportunity to decide whether or not to legalize recreational marijuana during the November 2016 elections. If approved, the Nevada Marijuana Legalization Initiative would legalize one ounce or less of marijuana for recreational use for those over 21 years of age. A 15% excise tax would be placed on the drug and be diverted to schools and other programs.
According to NerdWallet, Nevada falls into the third highest category of potential marijuana sales if the drug is approved recreationally, with an estimate of between $50 million and $100 million. These estimates were created using data from substance abuse cases to extrapolate a percentage of smokers and then looked at percentages of the overall U.S. cannabis market size estimate.
The true value of Nevada’s market could be even higher, since the state is already known for its tourism. While NerdWallet’s analysis primarily focuses on domestic users, the potential to target tourists visiting entertainment destinations in Las Vegas could significantly amplify those estimates by a factor of 1.5x to 2x or more, especially as the drug becomes more commonplace in society.
Tremendous Need for Labs
The potential for Nevada to become a tourism hub for marijuana has created significant demand for laboratory testing services. In the case of recreational marijuana, there is a high likelihood that testing will be a built-in requirement, while medical marijuana patients have become increasingly concerned that the medicine they’re purchasing may not have the ingredients they need.
Nevada’s Initiative to Regulate and Tax Marijuana explicitly states that, “cultivating, manufacturing, testing, transporting, and selling marijuana will be strictly controlled through state licensing and regulation” and “marijuana sold in the state will be tested and labeled”. These types of regulations promise to create a regulatory-driven market for cannabis testing services.
Consumers are also increasingly demanding testing services as a way to protect against potentially harmful contaminants. In Colorado, testing of over 600 strains of marijuana from dozens of producers found that THC levels are triple that of common buds from the 1980s and CBDs are virtually absent. The same tests showed many strains containing a high presence of pesticides, heavy metals, and other contaminants.
Management believes that it’s just weeks away from opening its Nevada cannabis testing laboratory, which could begin generating revenue and catalyze the stock over the upcoming quarters, making it an interesting opportunity for investors.
For more information, visit the company’s website at www.digipath.com.
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