Medipharm Labs Corp

TSX:LABS

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the MediPharm Labs First Quarter Financial Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Laura Lepore, Vice President, Investor Relations. Thank you. Please go ahead.

[Laura Lepore]

Thank you, operator. Good morning, everyone, and thank you for joining us on our first quarter 2020 earnings conference call. With me on the call today are Pat McCutcheon, Chief Executive Officer; Bobby Kwon, Chief Financial Officer; and Keith Strachan, our President. Before we begin, please note the following caution respecting forward-looking statements, which is made on behalf of MediPharm Labs and all its representatives on the call. The statements made on this call today will contain forward-looking information that involves risks and uncertainties, including those introduced by the COVID-19 pandemic. Actual results could differ materially from a conclusion, forecast or projection in the forward-looking information. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection, as reflected in the forward-looking information, are contained in MediPharm Labs filings with the Canadian Provincial Securities regulators, which are available on the SEDAR website at www.sedar.com. Now with that, it's my pleasure to turn the call over to Pat.

[Patrick McCutcheon]

Thanks, Laura, and good morning, everyone. To begin, I have never been more optimistic and energized about the significant opportunities ahead for MediPharm Labs in the global cannabis market. We are executing against an ambitious but focused multipronged, multiyear strategy that will position MediPharm Labs as a top global player. Our focus on product innovation, execution and good manufacturing practices, GMP, and our deep pharma industry experience is driving our business, creating further separation and advantages over our competitors globally. Last week, we announced our decision to bolster MPL's balance sheet and liquidity by completing a $37.8 million private placement with a committed institutional investor during a period of economic uncertainty due to the global pandemic. We are now better positioned than ever with a strong balance sheet. We know there is still a lot of work to do. However, the platform we invested in and built for tomorrow's Canadian market, and more importantly, international markets opening up, is also the foundation that would drive our next wave of profitable, sustainable global growth. I'll talk about the next phase of our strategy and execution in a moment. Turning to Q1. First quarter results reflected very challenging conditions in the Canadian cannabis marketplace. There is no doubt this weighed heavily on our performance. However, we took several countermeasures to address these current realities, which I will highlight. Q1 revenue was $11.1 million, 49% below last year due to lower overall volumes of bulk sales to contract and spot customers. This also included 1 dishonored contract that is subject to ongoing litigation. We also saw lower pricing. We flagged these market dynamics on our last call, as you may remember. Putting this in perspective, our results last year were mostly from one market, Canada. Our sales are from one primary product, bulk cannabis extract, and we sold to newer, less sophisticated cannabis companies finding their way in a new industry. We are extremely pleased to be one of the very few Canadian cannabis companies to be profitable in our first year. This was no small feat. As expected with any new market, there were underlying growing pains that emerge in the Canadian market, which were also heightened and acerbated by COVID-19. LPE manufacturers are unable to convert bulk concentrate into finished consumer products at scale. This is just a fact. Add to this, there has been agonizingly slow role of cannabis stores in Ontario, Canada's largest market. Complications from COVID-19 pandemic are expected to further extend this issue with slower construction and opening of stores even when . Adding all of this together, 2 few manufacturers being able to create Cannabis 2.0 products, 2 small retail distribution network and slower-than-expected entry by larger pharma and CPG, we ended up with an overabundance of bulk present and distillate in the market. This created significant downward pressure on our pricing and volumes and resulted in lower Q1 revenues and margins for MPL Canada. I remind you that our vision has never been to rely solely on LPs or the direct-to-consumer Canadian market, but to be ready for the global, medical and pharmaceutical markets, which I'll get into in a moment. Before I do, I'll share the counter measures we had started positioning for last year to deal with these realities. Some impacted Q1 and some will have greater impact in Q2 and beyond. First, we accelerated our finished good production to represent significantly more of our revenues, diversified growth going forward. We achieved this seamlessly because of the significant investments we started last year to our platform, adding flexibility and capabilities. For example, our large bake line, new and enhanced formulated oils and exciting topicals. By the end of Q1, we have successfully launched 3 new white label SKUs of Cannabis 2.0 products across 5 provinces. So far in Q2, we've launched an additional 8 SKUs in the vape and formulated oil segments for a total of 13 SKUs since December. We are expanding our finished good manufacturing and distribution that will lead to increased sell-through of bulk concentrate inventory into the consumer market. Second, we recorded a $12.7 million noncash adjustments to our cannabis inventory to reflect net realizable value. This will enable us to make our products more competitive. In hindsight, our procurement forecast for inventory was overly optimistic. To be frank, I'm not sure anyone could have foreseen the challenges that so abruptly shifted market realities several months ago. We stocked up to ensure that we can deliver as promised to our customers as we always do. Third, we broadened our Canadian client base with new strategic agreements, adding Avicanna, a biopharmaceutical company originating in Johnson & Johnson's Toronto Innovation Incubator, JLABS; and Argentia Gold, a leading regional LP with unique distribution advantages to our roster, moves that will diversify and add significant revenue. We also launched our supply of highly anticipated Ace Valley Vapes, a white-labeled brand line to multiple provinces in late May. Fourth, we accelerated the launch of our own MPL-branded wellness products and shipped topicals to a contract manufacturing customer. We are also scaling up several new product formats, including high demand islets. Fifth, and as you know, we added a very important new channel to the Canadian medical market, having been selected by Shoppers Drug Mart to supply high-quality concentrate products to medical patients through the National Medical Cannabis by Shoppers' online platform. Shoppers have been extremely pleased with the pace of sales of our vapes and formulated oils. They have performed ahead of expectations, and we are on third replenishment order after selling out of multiple SKUs. And finally, we cut SG&A expenses in our Canadian operation in Q1 and Q2. We recognize that the issues affecting the industry will not be resolved overnight. We know that there will be continued uncertainty due to the impacts of COVID-19 for the economy and the slow pace of Canadian cannabis retail development. For many in the Canadian industry, it is a survival of the fittest moment. For us, we are built to survive and ready to grow sustainably. Long-term growth and value creation will also come as we execute on our strategy to penetrate much larger international medicinal wellness and adult-use markets. Multiple markets, providing multiple products to multiple customers. From Day 1, this has been our vision and we have prudently deployed capital to make a reality. We are now on the verge of seeing our investments in this strategy pay off, especially in the large pharmaceutical space, where our GMP-certified capabilities are exceedingly attractive. A major turning point for us was reached in early May when our new Australian facility secured GMP certification and license to manufacture therapeutic goods. This is a major catalyst in our evolving globalization strategy. This groundbreaking achievement means MPL now has 2 GMP-certified production facilities in 2 of the largest legal markets, Canada and Australia. This is also what sets us far apart from any of our Canadian extraction peers and most LPs. This give us the ability often through mutual recognition arrangements among participating regulatory authorities in the 53 (PIC/S countries in the field of GMP to enter into Asian Pacific, European and Latin American new medical markets. Already, we have entered into relationships with customers in New Zealand, Australia, U.K. and Europe. Let me give you some details. In late April, we announced 2 supply agreements with New Zealand-based producers and distributors, Helius Therapeutics and Cannasouth Limited, to bring pharmaceutical quality GMP-certified oil products to this new medical market. On May 15, our Australian team secured our very first U.K. supply deal with Cannaray Limited, that will see us deliver again from our Australian operation, a range of cannabis oil products. Cannaray is a leading U.K.-based medical cannabis and CBD lifestyle product company that chose NPL over our competition because of our GMP-certified capabilities. These arrangements and other recently secured multiyear deals with companies such as Burleigh Heads Cannabis and Compass Clinics in Australia will fuel future growth. In fact, we expect to commence international sales of GMP-certified products in the second half of 2020. As we ramp up to fill new orders, I've been very impressed by the significant progress our team has made converting a robust pipeline of new customer demand into a solid diversified international portfolio of business, very unique in the global cannabis markets. This is the moment we worked so hard to achieve. We will see revenue from these customers under our vision later this year and growing into next year and beyond. We've already made good use of our 2 country GMP platform and internal supply chain. In June, we completed a finished goods shipment of 35,000 GMP-certified units in addition to a significant volume of bulk oil to be manufactured into end products. This was done from MPL [ Barrie ] to MPL Australia under approved import/export licenses, the first of many and another point of clear differentiation relative to our peers. The flexibility we've achieved in manufacturing absolutely strengthened our hands by giving us import/export optionality that we did not have before, and it's just the start of our next phase of international growth. And with that, I'll turn it over to Bobby to provide his report before I return with final thoughts.

[Bobby Kwon]

Thanks, Pat, and good morning, everyone. Let me begin my remarks by echoing Pat and saying that while we had a soft start to the year and Q1 results clearly not where we want to be, we've made excellent progress in many areas of the business that will set us up for sustainable growth in the future. From my past experiences with large multinational companies like Unilever and J&J Pharmaceutical, both in Canada as well as U.S. and Europe, I'm confident MediPharm's approach to creating a global company with longevity is the right one. Working with the leadership team, we are actively building critical capabilities and executing on key priorities that will support us through this next phase in our evolution. Looking closer at Q1. Our results are reflective of the transition we're undergoing as we evolve and grow into our leading global platform and expand product offerings to deal with the structural reality playing out in the Canadian cannabis market as described by Pat earlier. Despite the realities of the domestic market, further hindered by the economic uncertainty due to COVID-19, we are moving forward with the position of strength and flexibility underpinned by our balance sheet. In addition to $21 million in cash and equivalents we reported at the end of first quarter this year, on June 8, we were pleased to have completed a private placement offering with gross proceeds of $37.8 million, 1/2 of which remains in escrow, subject to shareholder approval in early August. This capital will enable us to continue to fund key initiatives that support growth as we navigate near-term market turbulence. Operationally, we are building on our Cannabis 2.0 capabilities to create new product formats and offerings that will help us diversify revenue streams in Canada. As a global active pharmaceutical ingredient or API supplier, we are also investing in our international platform to drive growth from increased exports and international sales. Moving to Q1 financial results. Revenue came in at $11.1 million, 49% below $22 million in Q1 of last year primarily due to lower volumes of wholesale bulk oil, including 1 dishonor contract and lower average selling prices as we continue to experience wholesale pricing compression broadly in line with the Canadian adult-use market. In part, the price compression is reflective of an increasing proportion of our domestic bulk oil sales to spot customers, whereby in Q1 2020, spot sales made up 58% of total domestic bulk sales compared to 46% in Q4 and 24% in Q1 of last year. Similar dynamics drove the revenue decline compared to Q4 2019. White label product sales, which comprised 13% of quarterly revenue, were up from 0 in the fourth quarter of 2019. We expect to see this trend to continue with the positive momentum we're seeing, following the launch of our MediPharm-branded and white label 2.0 products. Quarter 1 gross profit, before inventory write-down, was $1.9 million compared to $6.9 million in Q1 2019. Gross margin, before the inventory write-down as a percent of revenue, was 17% compared to 31% in Q1 last year. The 14-point drop was a result of lower average selling prices, coupled with the impact of fixed production costs spread over lower volumes partially offset by lower drive to our input costs. Turning to operating expenses. For Q1 2020, operating expenses, excluding share-based compensation, was $8.3 million compared to $3 million in Q1 last year. The delta reflects the company's initial ramp-up through its early phase of operations. On a more comparative basis with Q4 2019, operating expenses, excluding share-based compensation in Q1, was essentially flat to quarter 4 of 2019. Underlying, SG&A, or selling, general and admin expenses were nearly $1 million lower in quarter 1 of 2020 compared to quarter 4 2019 as a result of tighter spend control, cost saving measures and lower T&E due to COVID. This lower SG&A spend was offset by strategic investments in R&D to support innovation and new product development. As a result of the factors we've discussed, adjusted EBITDA in the first quarter amounted to a loss of $5.7 million compared to positive $4.3 million a year ago. On a net income before tax basis, Q1 loss was $22 million compared to a loss of $300,000 in Q1 2019. Accounts receivable at quarter end was $24.8 million, comprised mostly of trade receivables or B2B customers, but with an increasing amount to provincial distributors and retailers, reflecting our diversification efforts. In terms of past due amounts. Excluding the 1 customer we are in legal litigation with, the total amount of past due was $2.7 million, which has all been collected with approximately only $200,000 remaining as of today. As noted earlier, we took a noncash inventory write-down to net realizable value in the amount of $12.8 million, reflecting the continued price compression we are seeing in our bulk business. We continue to be disciplined in our inventory management by better aligning procurement to demand while keeping a sharp eye on our cash. In Q1 2020, we purchased 11% less dry flower compared to last quarter, following an even larger reduction of nearly 50% in Q4 versus Q3 of last year. Looking ahead, whilst we expect many of the same dynamics experienced in Q1 to persist into Q2, exacerbated to a degree by COVID-19's impact, we are on a solid path forward. We've made excellent progress to accelerate and diversify our growth as a provider of medicinal, wellness and adult-use products, not only in Canada, but much more broadly around the world through our multi-jurisdictional GMP-certified manufacturing footprint. Since the early part of this year, cash preservation and liquidity have become front and center objectives for the business. We've achieved cost savings, and we'll continue to pursue additional cost containment initiatives going forward, but not at the expense of our profitable growth trajectory. In terms of future capital expenditures, we have deferred or halted lower priority capital projects. However, we continue to prioritize capital investments that support new product launches, investments in R&D, clinical trials and the commercialization of our Australian facility. Finally, I would like to highlight the tremendous progress the team is making on implementing our SAP ERP solution, one of our added critical capabilities. This has been a huge undertaking for a company our size, but a necessary one that will support our ambitious business goals going forward. Now back to Pat for summary comments.

[Patrick McCutcheon]

Thanks, Bobby. I'd like to thank Bobby and the entire team for closing the private placement during this pandemic period. Bobby has added great strength to our bench with his large-cap company pedigree. It's been integral in assisting us as we evolve our strategic priorities towards achieving our goals as a focused pharmaceutical global player. Before concluding, I'll quickly highlight our top priorities for growth and why I'm more confident than ever in our future. First priority. We are accelerating and moving faster on expanding our own NPL cannabis brands and launching multiple white label products for deeper and more diverse market penetration. We are executing on multiple streams of revenue. Strategically, having our own brand introduced a new component to our revenue to complement our traditional white label business. There is also inherent value in retail brands if they are differentiated, which ours, most certainly are. Our second priority is to expand our international business. We will be selling into multiple jurisdictions from our 2 platforms. We are securing our EU GMP certification, specifically from German health authorities that will allow us to sell medical cannabis oil products directly from Canada to European jurisdictions. We are focused on expanding our distribution network throughout Asia Pacific markets and Latin America, where Brazil presents one of the world's greatest growth opportunities. And finally, we're commercializing our Australian facility. Our third priority is the negotiation of new supply agreements with large pharmaceutical companies and participation in additional clinical trials. Stay tuned for these exciting new partnerships. In summary, we are now able to manufacture multiple products in adult use recreation, wellness and medicinal. We are growing our client roster to have multiple customers who rely on us for high-quality industry-leading products. And we are now able to serve multiple jurisdictions because of our GMP certification, multiple products, multiple customers, multiple jurisdictions. The power of our platform, the momentum in our business and the strength of our world-class management team give me incredible confidence. We are well on track to capture the major global growth opportunities that are already in front of us. I'd like to thank our employees for staying extremely focused through the disruptions of COVID-19 and thank our fellow shareholders and customers for your continued confidence. I believe that confidence is well-placed as our business model has been stress tested through one of the most difficult economic and market environments on record, and we are most definitely stronger for it. Thank you so much for standing with us through these short-term headwinds as we mature into a major global cannabis pharmaceutical company. Now we'd like to answer your questions. Operator, could you please open the lines to our callers?

[Operator]

[Operator Instructions] And our first question comes from the line of Scott Fortune from ROTH Capital.

[Scott Thomas Fortune, MD & Senior Research Analyst]

Obviously, the Canadian market, the 2.0 market has been very slow to roll out you're seeing that kind of in the channel side of things. But I just want to kind of focus on your new initiatives, the new in-house high-quality products that you can provide. Can you provide additional color on potential new product offerings and channel expansion for that brands, in light of the tough Canadian market? And kind of since for the second half of Canada 2.0 market kind of opening up here from a retail side things.

[Patrick McCutcheon]

Thanks so much, Scott. It's Pat here. I'll start, and then I'll actually probably pass the question for -- to Keith for a little more color. But the fact of the matter is we've launched a number of new SKUs, as we mentioned in the earnings call. We're really putting a lot of resources behind enhancement of not only our number of manufacturing lines, but also volume for our vape lines with numerous SKUs launching for a number of partners as well as our own line of SKUs. We've also just launched now a topical line, where we've done our first delivery to shoppers with another consumer manufacturing partner. We feel that the topical element or a section of the actual wellness products in the creational market are a great opportunity for us, and we're expanding those lines to include a number of follow-on SKUs in the topical area. We've also added now a number of new clients, as mentioned, for a unique and differentiated formulations with our lines for a number of different medical and wellness categories and the provincial and medical channels. And we've actually just -- we've positioned ourselves now and moving away from the significant amount portion of our sales last year being one product with the both extract and distillate now to these multiple lines, where we are also excited to actually now move these multiple new products of our platform on the heels of our GMP certification into new international jurisdictions, starting with Australia. As we mentioned, with sending that initial load of 35,000 final package models. I'll pass it over to Keith for just a couple of more points on this one.

[Keith Strachan, Co]

Scott, Keith here. So as Pat mentioned, really focused on multiple products and diversifying that portfolio away from just that single product bulk. So we've been working hard on the MPL side of our own brands. We're sticking in the health and wellness and medical side as that fits with MediPharm Labs for global distribution. So we're looking at those as far as channel diversification goes. We're really looking at those global opportunities, and some of that comes through innovative products. So where we have our R&D team, a world-class R&D team working on things like THC products -- THC-free products, that could actually move into other jurisdictions a little bit easier. I think that's the type of work that we're doing now that really is going to help see that revenue diversification going forward.

[Scott Thomas Fortune, MD & Senior Research Analyst]

Okay. No, I appreciate the color. And then second question, a follow-up for me is on the international supply. Congrats on new supply agreements. It looks like the Australian market is opening up. But how quickly you're seeing sales potentially here in the second quarter? Obviously, second half strength there, but you mentioned negotiations with potentially larger clinical trials or pharmaceutical players coming onboard. Kind of step us through what the second half can look like as far as the international or the global revenue side? And any timing on the EU GMP certification here?

[Patrick McCutcheon]

Yes. So this is one of the most exciting pieces of our opportunity going into the latter half of the year with our international business. As we've seen a number of disclosed new partnerships between Australia and New Zealand, a number in Europe now, as well as U.K. This is the second part of our business where a number of additional contracts, obviously, is longer-term periods with significant increased margin relative to the distribution opportunities in Canada between the recreational side in medical and these international jurisdictions. We've really taken advantage of our GMP certification in Canada as well as in Australia. And actually, the way that we're executing on this strategy is purchasing products from Canada, extracting that product, certifying it, sending to Australia for distribution into these other areas, namely New Zealand. And we're starting with 2 contracts into Germany and U.K., all from our Australian platform. With regards to EU GMP certification, we were expecting to have an [ auto ] -- actually inspection recently. We've passed a number of pre-inspections already, and we're prepared for this. And we're pushing actually for a virtual inspection. However, at this point, the German regulatory actually is not doing any other inspections which is, in essence, a challenge for our ability to move product from Canada into Europe directly. However, it's also somewhat of an advantage for us because with our Australian platform and our ability to move products from Australia into different regions of Europe, it actually gives us kind of a secondary option, which is current right now to access these different markets and actually gives us an advantage because the German market is not approving any other new LPs to do such a distribution strategy.

[Bobby Kwon]

Yes. No, that's great, Pat. That -- just to add on to that, Scott, just pulling out of your question there around large pharma, and Pat mentioned that in the call and really, we're finally seeing large pharma more and more in the space. I think a couple of years ago, we saw a couple of smaller R&D-type contracts. But now we're seeing some bigger ones even with some news out of the United States yesterday. We're having a lot of those conversations, most of them international-based. And really what it comes down to is when a large pharmaceutical company comes to MediPharm, what they see in the mirror of what they're used to in their own manufacturing space. So what we have is professionals that come from the pharmaceutical world, whether that's GSK or Eli Lilly or Apotex or Purdue that are now running the MediPharm Labs world-class operation. So when they come in and they see things like a quality management system, that is the same as pharmaceutical lab, or they see an SAP that's running at the same level as a pharmaceutical company. It just gives them that comfort, the confusion for us to work together on future contracts. So we're working hard on those. A lot of them are international base. A lot of those meetings have moved to more virtual in the last couple of months, but we're again excited to get some more news prepared in the second half of the year and see some of that come to fruition.

[Operator]

And our next question comes from the line of David Kideckel from AltaCorp.

[David M. Kideckel]

Congrats, everybody, on the quarter here. I want to dig a little deeper here with international revenues. Maybe for this Q2 moving forward and also for the back half of the year, given that we're almost done with Q2 anyway, a couple of weeks ago. So I'm just wondering if you can provide any guidance with respect to what you think the next quarter is going to look like when it comes to maybe segment, when you're segmenting different customers of yours, whether that's international, within the MPL Labs or in the white label within Canada. How should we be thinking about the percentage of the revenues coming from various business segments? Or do you think it's largely still Canada and international pharmaceutical and those more aspirational parts of the business are still maybe in the back half of this year?

[Patrick McCutcheon]

Yes. Thanks so much, Steve. I'm just going to pass this to Bobby first to start. And then Keith actually to add the final color at the answers. Thanks so much.

[Bobby Kwon]

David, thanks for your question. With respect to product mix, I mean, the way the market is continuing to evolve, this sort of trend will continue to evolve and develop in Canada more towards sort of the finished goods side of it domestically. And that's obviously, as you know, a function of how the retail distribution channels and everything else will open up and how quickly and extensively the consumers sort of come into the market. But with that backdrop, to answer your question with respect to the international side gain, with all those sort of growth catalysts that Keith and Pat alluded to, that will gradually ramp up and certainly, we are working actually quite aggressively to push that pace for lots of different reasons. One being medical focused, it's higher margin. We certainly have the advantage of our 2 platforms, Barrie and Australia to take advantage of these different jurisdictions. But to give you a precise sort of pinpoint as to how that curve will come, honestly, I think I would be sort of remiss not to give you that precision because it doesn't exist. But suffice to say, it will be a little bit sort of up and down. But gradually, certainly pushing towards a greater share of our portfolio and by that, by zoom out rather than sort of closer in. It would not be out of the sort of realm of possibility that we could see international sort of balancing towards that sort of, I would say, maybe 1/4, 1/3 of the portfolio as we possibly exit into next year. But again, that is subject to lots and lots of different variables. So hopefully, that gives you a little bit of color.

[Keith Strachan, Co]

Thanks, Bobby. Just -- David, just to add to that. Really excited about international, and that's why we've invested so much in this GMP platform to be ready as those come. We actually have a lot of contracted agreements for international business. As I know we've talked about in the past, the process is still a little bit lumpy, being brand new international market, there's a lot of permitting. So for example, someone will send us an import permit, which will take some time on their end. We send that to Health Canada, which takes some time on our end. So there is a little bit of lumpiness in the delivery, especially at the beginning until we get the cadence going to these contracts. But a lot of these agreements are already in place. The key for us is building to the highest global standard so that as new medical markets come online, we're prepared to jump right away. A great example of this is in Brazil. Could be a massive market for medical cannabis. They've opened up registration just a couple of weeks ago for products. Number one qualifier for the registration is that you have GMP from at least a fix nation. So by us having that fixed nation GMP from the [ TGA ] out of Australia automatically puts us into an opportunity where we can -- with only built probably a handful of other producers in the whole world, where we can compete such a massive market. So as we see more countries come online and they're doing more of the coffee approach on some of that, then I think that, that makes a big difference for us kind of being ready to fit that legislation. And then back to kind of big pharma. Looking at the space, these companies are all international. So the more jurisdictions that we can qualify for and be in, it really helps qualify us for those relationships as well. It really makes it worth their effort and return on investment to be distributed in all the countries they are distributing with their other products.

[David M. Kideckel]

Okay. That's very helpful. My other question is moving a little bit here, but we saw a really big announcement from Willow Biosciences yesterday, a biosynthetic company, and not only are they going to be able to expedite time lines. But I think more importantly, they're going to be able to manufacture biosynthetically for rare cannabinoids. So given that MediPharm Labs, highly focused on pharmaceuticals, I'm wondering given that you're a cloud-based company, not in biosynthetics, but do you -- number one, are your conversations focused at all, whether it's CPG or pharma or whether that's big pharma or not. Number one, are they focused on rare cannabinoids? And number two, do you have any discussions as it relates to any sort of biosynthetic capability that MediPharm would have preference for, say, over a plant or not?

[Keith Strachan, Co]

Yes. I think, David, I think that it's great to see advancements in the space, including what's happening on the synthetic and biosynthetic fields, and we're watching that closely. As someone who hasn't invested in any cultivation, we're obviously able to play in those as they come up a lot more in the -- probably the medical space, as you said, in the pharmaceuticals. So we've really built our platform on being the formulation sale and product production. So there is an opportunity where we could see biosynthetics or chemical synthetic actually being used as an input. But on the pharmaceutical side and that medical, I'll get Pat to add a little bit more.

[Patrick McCutcheon]

Yes. Thanks, David. I think we actually touched on this in the past. One of the things that we're really excited to do is launching our clinical trial portfolio or a number of different therapeutic areas. And each one of these trials actually we're looking at putting multiple arms. One of the arms or a segment of the arms will be focused on a bio-based formulation by a lot of extracted cannabinoids. But also, we're looking at combination formulations as well as then independent synthetic formulations as well that have a unique formulation that would enhance actually the dependability of patent opportunities down the path. A number of these trials that we're looking at are already actually using some of the products that we have commercialized. So it's actually -- it's a unique strategy and working with the uniqueness of the cannabis industry, where we actually can put in products that are already commercialized, already creating and showing revenue for our platforms globally. And then looking at how those products actually stand up 2 different synthetics in some of these trials that we're going to be launching a number of pages of disclosure over the next couple of months. But -- It's a very interesting category, and we feel that it's very important to look at the differentiation between the full spectrum of biological-based cannabinoid formulation is versus synthetic and then also, what combination therapies could look like. So it's very exciting element of how we're going to look to the future for opportunities for new patents in this space.

[Operator]

Our next question comes from the line of Adam Buckham from Scotiabank.

[Adam Buckham, Associate Director of Cannabis Equity Research]

So I just want to dig a little more on David's first question, but more so on bulk extract. The magnitude in private label declined Q-over-Q is somewhat surprising even knowing about the current headwinds in the market. And you guys have some contracts in that spectrum. So I'm just wondering if you can provide some color when Q1 '20 versus Q4 '19 in terms of contracted revenue and what the current dynamics are in that market in Q2 '20?

[Patrick McCutcheon]

Yes. Thanks so much, Adam. We can start off with answering that question with Bobby to take the lead, and then I can add actually some color to a couple of different elements in terms of future strategy.

[Bobby Kwon]

Thanks, Adam. Thanks for the question. Yes, I mean, the decline with respect to the bulk sales is gaining tracing to those dynamics that you are well aware of. In terms of -- so the number of long term sort of contracted sales that we had, just to give you a little bit of color. In Q4 '19, we had across, I think, from memory, about 6 contracted customers that took in volume and that decline to -- in the case with a couple of contracts sort of coming to a natural conclusion for no other reason. And I guess in light of the market dynamics that even they were seeing, they didn't exercise their sort of optional component of it. So when you play that out in Q1 against around sort of purely contracted customer sales in Q1 was around -- it was half. So 3 contracted customers. So that sort of plays into, again, the dynamics we're seeing. With respect to looking forward into Q2, I mean, again, I think it will be more in line with sort of what we saw in Q1 in terms of the number of contract customers, not necessarily the volumes. And I would say without sounding as if I'm making an excuse in Q1 for the 1 customer you know that we're in litigation with. Had that contract being honored, it would have obviously softened the reduction we saw in quarter 1 as we reported, and it was a material amount in sort of the several million dollar range. So that dynamic will play out in Q2 going forward. But we're working busy, as you know, in terms of trying to diversify that revenue stream because that is a structural reality in the Canadian domestic market with respect to the bulk sales. And that's why we're aggressively and prudently pushing out on new product development, new channels. We've got more boots on the ground sales, coverage and activation to drive that. So it's a classic scenario where we're in this transition period, trying to manage the portfolio shift in a way that is sustainable and going forward to be protected.

[Patrick McCutcheon]

Yes. Thanks so much for that, Bob. Just to add a couple of points. One of the things I'll also mention that as much as we've had a challenge with our 1 client, what we've done with the rest of our clients is actually now clearly build, and enhance our relationships to now focus on assisting them, with actually moving bulk product into any products that they're targeting in new segments of the wellness recreation as well as actually the medical side. We feel this is really important to kind of protect the longevity and sustainably sustainability of these relationships with some of our larger partners. And many farm has been able to create a great complementary partnership as to some of the strategies that are continually involved in with some of our larger vertically integrated players. Also, as I mentioned before, I think we're signaling it quite well through the earnings call, is that -- with the addition of these new international contracts and our ability to navigate now the international global regulatory jurisdictions has really differentiates us as a company relative to a number of our peers in this space that we have access to now actually, in fact, to release that overflow or oversupply of the Canadian market into these different international jurisdictions. Now obviously, as we've discussed and as you'll see, a number of contracts with smaller volumes, but all starting to -- as early as the last couple of weeks, are looking like the volumes will be increasing and specifically in the back end of the year. There's an important piece of, obviously, our vision and our strategy, which has not changed from Day 1, and we feel it is the right strategy actually to continue into the long term. The Canadian market has always been our first priority. However, now when we look at the international market, it creates a much larger total addressable market and opportunity for us going into the future, mainly in the back half of the year, highlighting that.

[Adam Buckham, Associate Director of Cannabis Equity Research]

Okay. That's great color. Just shifting a bit here on margins. On a near-term basis, do you expect the headwinds and what you're seeing in your private label and bulk business to continue to put pressure on margins moving ahead? Or will white label and international start to offset that on a near-term basis?

[Patrick McCutcheon]

No, it's a great question, Adam. Thank you. And again, I'll pass it to Bobby, to first one.

[Bobby Kwon]

Yes. So Adam, to your question, I think given the headwinds that we're all facing, the added uncertainty with COVID at the moment. I think the question of when is more difficult to sort of comment, quite honestly. But what I can comment on certainly on the sort of the what in terms of the drivers and the areas that we're really, really keenly focused on, in terms of trying to enhance and drive margin improvements. And they follow under sort of several buckets for me and that's of key priority for all of us and one is really just echoing some of the themes I mentioned earlier. Whereby us leveraging our sort of very sharp and world-class R&D capabilities, we're trying to diversify and broaden our product offerings through innovation and product development, which hopefully will go up the food chain and that includes things like the MediPharm-branded products in a very targeted selective way. So doing that, we'll obviously hopefully add to the mix. Certainly, as we've echoed a few times, we're going to build out and push out aggressively on the international side, where it's clearly all medical-focused and with, at the moment, much higher margin profile. So again, that will enhance that profile. And certainly, not least, but a relentless focus within the business around cost savings containment, cost reduction initiatives, and cash preservation. So all to say, Adam, certainly, my expectation is that as we look to sort of the back half of this year. And as we exit the year, certainly, we will improve the margin structure. The steps that we took in terms of the inventory write-down is, obviously, part and parcel of step in that direction to help rightsize our cost base to reflect the market dynamics. So at least, in the near term, yes, you'll see some progress, but I think you'll see a pickup in that progress as a function of all these measures that I spoke to sort of coming together and gathering some momentum in the back half.

[Operator]

[Operator Instructions] Our next question comes from the line of Aaron Grey from Alliance Global Partners.

[Aaron Thomas Grey, MD & Head of Consumer Research]

First off for me, I just want to go back to finished formulations. White label products made up 13% of revenues this quarter. And you mentioned next quarter, are you seeing more in terms of shipments about double as you added on about 8 SKUs? Just want to get some further color in terms of what you've seen from repurchase orders, I guess, sell-through from the SKUs you've already launched to date. And how best to think about the growth for that white label category, in terms of continuing repurchases of existing SKUs, and additional SKUs as we look for that business to evolve over the next couple of quarters?

[Patrick McCutcheon]

Thanks so much. Sure, I'll pass it over to Keith to start answering that question. Thank you.

[Keith Strachan, Co]

Thanks, Aaron, great to hear from you. So yes, I think we can see on those white label products, an uptick in kind of the percentages. As Pat mentioned, looking at multiple products going forward, Q1, we launched over 5 SKUs. Since then, we've launched another 3. So our new product commercialization team is working rapid fire to meet market demand and really fill gaps where we see them such as the health and wellness side of the adult-use market here in Canada. So I think that we'll continue to see that uptake. Just kind of anecdotally, as far as like shipments leaving our dock and sell-through, without getting right into the stats, we're seeing double the amount on a weekly basis going out to distributors and retailers from Q1 to Q2. So we expect that ramp up to continue throughout the year. So we're building those relationships. We just started in the kind of end product distribution arena in January. So as a leader in the space, this is a little bit of a new part to us just this year in 2020. And I think we're doing quite well, seeing that growth from January to today and increasing those shipments. And I love seeing those kids leave the building every day.

[Aaron Thomas Grey, MD & Head of Consumer Research]

Absolutely. No, and that's great to hear in terms of those kind of sell-through rates kind of seemingly increasing. A second question for me would just be around probably the Shoppers Mart. It's been great for your own products. Just kind of any update that you're seeing there in terms of how that partnership has kind of evolved, kind of helped you to get into the medical side without your own kind of license or any update on what you're seeing there, and expectations kind of going forward in the near term?

[Patrick McCutcheon]

Yes. Thanks so much, Aaron. This is one of the most exciting new segments of the market that we're actually putting significant resources behind. Obviously, Shoppers is one of the most highly respected medical distribution groups in cannabis now in Canada, and it's been great to further accelerate our relationship with them. We're the first company actually that have our vape SKUS added to the shelf at Shoppers. Now as you've seen, we've got a number of other products, including topicals with another one of our CMO partners. And now even more exciting from our perspective is the launch of our 2 new SKUs of the MediPharm brand portfolio, one being a very high-quality CBD oil, 25:1, which is now available. And we've already seen the reordering actually accelerate significantly faster than we originally expected. I think it's because, first, the level of the MediPharm falling leases has actually now created a great adhesion with our customer base as a high-quality provider as well as our products being competitively priced now in that segment. We've also just now released our next follow-on product to this, which gives patients another opportunity for a higher dose of CBD on a daily basis with the 50:1. Both of these products being full spectrum, so added efficacy relative to some of the products that are available now. And also very exciting for us is that we transitioned these products not only for distribution in Canada, but also for our international deals, which we're excited to disclose a couple of these new deals where these products in particular will be moved outside of the country.

[Operator]

Ladies and gentlemen, that was our final question for today. I would now like to turn the call back to Pat McCutcheon, Chief Executive Officer, for closing remarks.

[Patrick McCutcheon]

Thank you so much, operator. I will close by saying we really look forward to hosting our second quarter conference call in August and keeping current with you on all of our progress in between. We're also very excited for both our near-term and long-term opportunities in Canada. But as we've continued to signal through the call, and maybe in the question-and-answer period, the international opportunities. We feel very strongly that on the heels of these 2 GMP certifications the MediPharm is a significantly differentiated and that we're going to be able to position with a very strong back half of the year. We're excited to keep everyone updated with our new disclosures as we move forward. Thank you so much, everybody. Make sure you stay safe, and have a great day. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.