In early December, the equity research department at Merrill Lynch, a subsidiary of Bank of America (BAC), released a research report that discusses the POTential of the cannabis industry. During the last two years, the use of medical marijuana in the United States has grown significantly. Approximately one million people current use medical marijuana in the United States and we expect this number to double over the next three years.
The report is primarily focused on how the Life Science Tools (LST) sector is levered to the growth of the cannabis industry due to their use in drug manufacturing quality assurance/quality control (QA/QC) as well as in research and diagnostics.
What is the Life Science Tools sector?
The LST sector consists of a diverse set of companies that supply various products to customers across several industries. The end markets of the LST sector include pharma, biotech, academic, government, industrial, and others. Life science tools play a critical function in drug and food production by enabling QA/QC and can play a key role in the adoption, quality, and safety of cannabis products.
Cannabis QA/QC involves testing for potency, metals, pesticides, and residual solvents by using tools such as gas chromatography, high performance and ultra-high performance liquid chromatography, and mass spectrometry. Merrill Lynch expects to see an increase in cannabis regulation and QA/QC testing as the industry expands. This expansion will create an opportunity for investors in the LST sector.
Increased regulation is a catalyst for the Life Science Tools sector
Unlike most industries, increased government regulation is a catalyst for the LST sector. As the industry continues to grow, increased regulation will serve as a catalyst to many LST stocks. Just recently, illegal pesticides were found in marijuana products being sold to the public in Colorado. This finding increases the need for regulation and it is only a matter of time before the government gets involved.
The LST sector will be one greatest beneficiaries of the growth in the cannabis industry. Under conservative estimates, Merrill Lynch estimates the cannabis testing opportunity for the LST sector could be in the range of $50 to $100 million by 2020. This new burgeoning sub-sector has created a new revenue opportunity for LST companies that provide cannabis QA/QC tools.
Where is the opportunity for investors?
Merrill Lynch identified several companies within its coverage universe that are levered to this growth. Due to their leadership positions in the gas chromatography and high performance/ultra-high performance liquid chromatography markets, Agilent (A), Waters Corporation (WAT), and Thermo Fisher Scientific (TMO) are key providers of cannabis QA/QC tools. Merrill Lynch also believes that PerkinElmer (PKI), Danaher (DHR), and Bruker Corp (BRKR) could benefit from the cannabis QA/QC market opportunity.