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 2022 Financial Results Conference Call. Please be advised that today's conference is being recorded.

Before we begin, please note the following caution respecting forward-looking statements, which is made on behalf of MediPharm Labs and all of its representatives on this call. The statements made on this call will contain forward-looking information that involve risks and uncertainties. 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 conclusions, forecasts or projections 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 and provincial security regulators, which are available on the SEDAR website at sedar.com.

I will now pass the call to David Pidduck, CEO of MediPharm. Please go ahead.

[David Pidduck, executive]

Thank you, operator, and good morning, everyone. We appreciate you joining us for MediPharm's 2022 Financial Results Conference Call. Joining me on the call today are Keith Strachan, MediPharm's President; and Greg Hunter, the company's CFO.

I joined MediPharm as CEO in late April, subsequent to Q1. Since joining, I've been spending my time listening to and speaking with different stakeholders. As an outsider until recently, one of the first questions I'm inevitably asked is, "Why move to MediPharm given the state of the overall cannabis space today?" My short answer is that throughout my career in the pharma and med tech spaces, I've been able to help companies manage through challenging transformative periods. I see a real opportunity for MediPharm to be one of the big winners in the space.

The company is not there right now, but the raw ingredients are. MediPharm's facilities, regulatory approach, quality processes and product lines provide a unique platform in the industry. It's more medical pharma approach positions the company well to succeed in the emerging global medical cannabis markets. The GMP licenses, their license and international sales presence allow for compelling growth opportunities and pharma partnership opportunities not available to most of our industry peers.

While I am new to this sector, I've been following medical cannabis and the industry very closely in my former pharmaceutical life. I'm here because I believe that MediPharm Labs is one of the most pharma-like cannabis companies in North America. The entire industry, including MediPharm, has many challenges ahead. However, I believe MediPharm is well positioned to succeed given their unique regulatory licensing capabilities, their opportunity pipeline, their existing global network and their strong cash position. I'm confident we can turn this company into a value creation engine for shareholders.

The team has made solid incremental improvement on financial, regulatory approvals and sales. However, in the past 6 quarters, MediPharm's financial performance has remained essentially flat. The flat results somewhat hide progress in the move from a largely B2B business to focusing on our more profitable self-owned brands. But we need to move faster. We're committed to speeding up our strong pipeline of organic growth opportunities, but we will now also be focused on prudent, strategic and opportunistic M&A growth opportunities.

I have reviewed the company's organic growth pipeline, both domestically and internationally, and it gives me good confidence for the future. We have many channels in different countries that the company has worked on opening that are primed and ready to deliver after years of regulatory investment. We are focused on international deals where we're more uniquely positioned due to our licensure status to drive revenue and now, most importantly, profitability.

And going forward, M&A activity will form an important part of accelerating our sales and profit growth. Over the next several months, we expect the M&A opportunity set to expand as weaker players continue to come under cash flow and profit pressure. But I want to be clear as we talk about M&A. We will be prudent. We will preserve financial flexibility. We will see deals with synergy in spaces where we have demonstrated the right to win. We will be both strategic and opportunistic. And we will be ready to successfully execute and integrate.

MediPharm is in a strong position to participate as the industry consolidates and to continue to build our leadership in the more specialty, medical and pharma segments. We are virtually debt-free, one of the best cash positions amongst our peers. We're fully built out with unencumbered assets and a team hungry to grow. With a solid balance sheet, MediPharm has the strength to execute deals that will be accretive both in the short term and over the long term. The company needs top line growth to better leverage its current infrastructure, and we are very focused on getting MediPharm to profitability as quickly as possible.

I've had the privilege to participate in several company transformations over the years. These transformations have required significant growth through M&A; successful product launches in new and existing markets; profitability improvement programs focused on costs, pricing and rightsizing footprint. I look forward to applying many of these learnings to the challenges and opportunities we face at MediPharm. We will be squarely focused on growth, profitability and driving shareholder value.

I will now pass the call over to Keith.

[Keith Strachan, executive]

Thanks, David. From a top line perspective, Q1 was slower than we would have liked to see. However, we expect improvement in Q2 given positive trends in sales-related activities. For example, in the Canadian provinces where we track provincial warehouse to retail depletions, we continue to see improvement each month and an 86% improvement year-over-year in the same period. On the international front, where sales were slightly down in Q1, activity picked up exiting Q1 and into Q2.

I'll turn to a brief discussion covering our 3 market segments, which include pharmaceuticals containing cannabis, international medical, and Canadian domestic. On the pharmaceutical side, we continue to make progress leveraging our drug establishment license received in July 2021, the most important being the submission and review of our Drug Master File, DMF, to the U.S. FDA. When looking at the FDA DMF database, MediPharm is 1 of only 14 companies globally and 1 of only 2 in North America that can meet demand in this market currently. The API segment alone will be an absolutely massive opportunity as it develops.

To remind you of the potential of this space, the U.S. cannabis pharmaceuticals market was worth $943 million in 2021, according to Grand View Research. Compare this with the traditional pharma API business alone, which was worth $159 billion in 2020. Clinical trial work is long term by nature. And to be successful, you need more shots on net. This is exactly the approach we are taking: ensuring that our APIs are part of ongoing trials, which we expect will give us the best chance possible of becoming a part of a long-term highly profitable supply chain if these new drugs receive U.S. FDA and global marketing authorization.

To help drive this segment, in March, we added a VP of Business Development to the team. Located in the U.S., they have made a successful career of selling various APIs for pharmaceutical companies globally. This individual has continued to make progress entering Q2, and we expect to onboard additional pharma customers as the year progresses.

Internationally, the most notable progress was the receipt of sanitary product approval from the Brazilian Health Authority, known as ANVISA. ANVISA is known to be one of the toughest regulators in the world, which is evident when we see that they launched their medical cannabis program 2 years ago, and there are still just 15 products approved, MediPharm being the manufacturer of one of those 15 approvals and the only Canadian company with this authorization sets us up for success in this quickly growing market.

Also internationally, we continue to deliver to clients in Australia and Germany while adding a new major market with initial deliveries to the U.K., a country that is expected to follow Germany's framework as a robust medical market. While revenue timing can be lumpy given the size of our current business, as we leverage our sales investment and add more customers and go deeper with the current ones, we expect this to smooth out hand in hand with volume growth.

On the domestic side, in March, we closed the previously announced acquisition of Shelter Cannabis brands, which adds highly reputable specialty dry flower and pre-rolled products to our portfolio. This fills a key gap in our Canadian product offering while leveraging existing infrastructure and overhead and opening the opportunity to expand our current international flower business over time. I'm happy to report that the first shipments of dried flower and pre-rolls left our building on May 10.

We also continued to uphold our reputation of being a leader in innovation, launching Cannabis First, CBG oil, naturally derived CBG vape and water soluble CBN. These were delivered in late Q1 and available to consumers in early April. We expect to be able to report back on their performance following Q2.

We continue to invest in our sales force during the quarter, which led to new listings in Ontario, Alberta, Nova Scotia and B.C. With a qualified sales force on the ground and maturing in the field, we see significant opportunity to deepen the presence of existing products on the shelf while establishing a pipeline to speed tail growth of new products as they're introduced. We are strategically positioned in the Canadian market and tea room to run.

I'll now pass the call to Greg to discuss MediPharm's financials. Greg?

[Greg Hunter, executive]

Thanks, Keith, and good morning, everyone. As expected, Q1 revenue declined relative to Q4 given the seasonality in the cannabis market. We expect revenue to improve in Q2 as this seasonality dissipates in our investments in sales and marketing and new products, including shelter payoff. As David mentioned, growing our revenue base through organic and inorganic initiatives, reducing cash burn and driving towards profitability are top priorities in 2022. Status quo is not an option.

MediPharm continues to be well positioned in the industry with our strong balance sheet, unique licenses, including our drug establishment license, and our innovative pipeline of products and customers across multiple geographies. As Keith discussed, we continued to open new markets during the quarter with our first sales into the United Kingdom. We continued to drive our innovative pipeline by launching our new CBG:CBD tincture, a CBN THC water soluble tincture and a CBG:CBD vape in Q1. We are optimistic these will start to make a meaningful contribution in future quarters.

In addition, our Shelter brands started shipping from our Barrie facility in May and will contribute to revenue in Q2.

Turning to the P&L performance for the first quarter. Q1 revenue decreased sequentially from $5.7 million in Q4 to $4.9 million in Q1.

Looking at international revenue components for the quarter. International revenues decreased sequentially from $2.2 million in Q4 to $1.9 million in Q1. Australian revenue declined from $0.9 million in Q4 to $0.6 million in Q1. German revenues declined sequentially from $1.3 million in Q4 to $1.1 million in Q1. Our first sales into the United Kingdom represented $0.2 million in the quarter.

International revenues represented 39% of total revenues in Q1 versus 38% of revenues in Q4. As discussed in prior quarters, international revenues will remain lumpy as the market matures. We are confident, international revenues will continue to grow with our sales and marketing investments in existing markets and with our expansion into new markets such as Brazil. Canadian domestic revenues decreased sequentially from $3.5 million in Q4 to $3 million in Q1, driven by market seasonality.

With the strategic investments we have made in sales and marketing, expanded distribution points, entry into new provinces, new and innovative products and Shelter brands, we are confident we will improve domestic revenues as 2022 progresses.

Gross profit for Q1 was negative $0.4 million compared to Q4 gross profit of negative $5 million. Even adjusted for the $2.4 million inventory write-down and $1.5 million of accelerated depreciation in Q4, Q1 gross profit improved. While still negative, adjusted gross profit exhibited a third sequential quarter of improvement.

General and administrative expenses in the quarter decreased sequentially from $10.4 million in Q4 to $4.9 million in Q1. Q4 included a receivable impairment of $6.1 million and an employee compensation reversal of $0.3 million. Q1 includes severance expense of $0.4 million. Adjusting for these items, G&A expense in Q1 was consistent with Q4.

As I've already noted, growing the top line is critical as we push towards profitability and cash flow generation. We continue to invest in revenue-generating functions in order to achieve these objectives. As a result, marketing and selling expenses in the quarter increased slightly from $1.4 million in Q4 to $1.5 million in Q1.

R&D expenses decreased sequentially from $580,000 in Q4 to $300,000 in Q1. These investments will vary as we selectively allocate resources to advance our capabilities and product portfolio with a vision to become one of the most sophisticated cannabinoid producers in the world and capture a sustainable portion of the global cannabinoid medical and pharmaceutical markets. Adjusted EBITDA for Q1 was negative $5.7 million, which improved from negative $6.6 million in Q4.

Moving to the balance sheet. The efforts of our team over the past year have continued to pay off with improvements in working capital as we continue to drive towards cash generation. Trade and other receivables decreased $2 million from $16.9 million in Q4 to $14.9 million in Q1. This decrease was driven by a continued focus on collections. As discussed in previous quarters, there is one large customer owing a total of approximately $8.5 million at the end of Q1, which is subject to legal proceedings. Adjusted for this one customer, trade and other receivables is approximately $6.3 million.

Our cash balance on March 31 was $28.3 million, which decreased from $34.1 million at December 31. We are materially debt-free and have outright ownership of our 2 primary GMP assets in Canada and Australia.

With that, I'll turn it over to the operator to open the line for questions.

[Operator]

[Operator Instructions] And your first question comes from the line of Shaan Mir from Canaccord Genuity.

[Shaan Mir, analyst]

My first question is just on the Shelter acquisition. So I was just wondering if you could offer any commentary on the pricing strategy with Shelter. Are you looking to place it as a premium craft offering? We've heard from other operators that they're able to secure the wholesale biomass to less than growing cost. Is that something that you're noticing? And if so, is there any desire to play in the lower pricing tier category?

[Keith Strachan, executive]

Shaan, thanks for joining in. This is Keith here. It's a great question. I think when we looked at Shelter, when we acquired the IP of those brands, we actually were trying to make sure that we didn't break anything that they were doing well with. So Shelter, we review that as an opportunity. They kind of play in the mid-tier space. So they're definitely -- we're definitely not a premium brand, like as far as the small craft growers just because of the volume that we plan to sell. So some of those smaller cracked opportunities of the higher premium, call it, it's usually limited time offers. So we do want to have a smoother revenue than that. So it is a bit higher, but we're not in the value brand either.

We are finding that buying wholesale flower is very advantageous kind of price line, and we've been able to find multiple cultivators within the supply chain, some of that existed with the original Shelter business and some that came with the relationships that MediPharm had. We hope to make that even more margin accretive as we get better on volumes and forecasting with that. The product launch, I think, as you heard we said, just last week, we delivered. And this week, it will be available to Ontarians for the first time from MediPharm. So we're really excited about that.

[Shaan Mir, analyst]

My next question, you may have addressed this in your prepared remarks. My line cut off a bit there. But in the last quarter, Australian revenues had come down sequentially about 50%. And then this quarter, that's followed up a bit more than 25% decline there. So is there any commentary on what's driving that movement in that market? And how we should expect the top line to evolve in the coming quarters from Australia? And if I could tag on, just maybe any commentary on what the leadership structure is there now with Warren gone and that CEO Asia Pacific role eliminated, kind of anything on how those operations are being overseen? And after that, I'll pass along the queue.

[Keith Strachan, executive]

Thanks, Jim. I think I'll talk about the leadership structure there, and then I'll pass it over to Greg just to touch on the revenue that we've been seeing quarter-to-quarter. So as we announced at the end of -- when we announced our Q4 earnings on March 31, a part of that was some reorganization of the Australian facility with no longer having like a region-specific CEO. So we do have a new leader there. He has worked with us since 2019, very experienced. He came from a background of pharmaceutical. He worked in places like Catalent, which makes capsules for people around the world. So he's now running our plant there.

As you -- and Greg will get into the financials. But as we see kind of the revenue go up and down and just kind of the size of what's happening there and the bench strength of what we have here in Canada, it just didn't make sense to have the replicated executives. So we are looking at how we save costs, and this is one way of doing it. So I'll pass it over to Greg to touch on the revenue piece.

[Greg Hunter, executive]

Yes. Thanks, Keith. So yes, as you noted, the lumpiness within the Australian revenue, you said Q4 was down relative to Q3 and Q1 was down relative to Q4. One of the biggest moving pieces was some larger spot sales we had in some isolate -- within Australia, and that was a large part of Q3's revenue. So if you look at Q3 and Q4, if you take out the large spot that we had on the isolate, relatively consistent. And then into Q1, again, as I said in the opening remarks, we do expect the international revenues to remain lumpy as the market develops. But again, it's the isolate that was the big one.

[Operator]

Your next question comes from the line of Scott Fortune from ROTH Capital Partners.

[Unknown Analyst]

This is Nick on for Scott. First question from us. I appreciate the commentary on the M&A side. Just looking, is there a segment you're specifically looking to improve, be it on the sourcing or procurement side, brands or distribution? Just some additional color there would be helpful.

[Keith Strachan, executive]

Yes, I think we see -- if you look back at our last 5 or 6 quarters, it's been relatively flat on the revenue side. We see a great opportunity for consolidation and M&A in the space. We think that we're very well positioned. David mentioned in his remarks, we are virtually debt free. We have a strong cash balance and a really clean balance sheet. So I think that we are really in the driver's seat of what it looks at that. I think for us, we're looking at how asset-light we could get into new regions. So some places where we are self-contracting some things in places like Europe, is there an opportunity there to do an acquisition that would help with that and get us better margins in that region and then even looking at regions that we're not in. So continuing to look at the U.S. as an opportunity.

And then I think beyond that, and I think we'll have more communication in the future as we kind of get together and set the guardrails on what that looks like. But I think beyond that, too, is just kind of new novel either products or delivery methods, especially on the medical side. So like we pride ourselves on being a GMP facility with a drug establishment license. We're in a number of trials. So we have placed our bets on the future of pharmaceutical industry and drugs containing cannabis. And we think that if there is some acquisitions in that space, that we'd be very well positioned to take part.

[Unknown Analyst]

Okay. Great. I appreciate that color. And then next one for me on the Canadian oil side. You mentioned last quarter your success within that segment and your market share despite employing kind of premium pricing and having products on shelves for a limited amount of time kind of compared to competitors. Can you just provide an update on this product segment and how you're potentially looking to expand within this category?

[Keith Strachan, executive]

Yes. I think we've been doing great with our oils. We bounced. We definitely punch outside of our weight class when we look at who the top sellers are there and then where we sit. And as you mentioned, it is a premium product for us at pretty much double the price of any of our competitors and there. So -- and now we're seeing, as we get to have more experience in the field and we're looking at some of the bigger retailers in Canada, we can see -- share with them our successes. We're the top oil brand in some of those larger chains, which I think will help us. And as you mentioned, a good way for us to grow revenue is to expand in that category that we're already successful in.

So we recently launched a CBG oil. It was the first CBG oil to launch in Canada. And there's one other one today, but I think that adds to our portfolio. So if you're one of the 2,500 stores that carry our oil now and add that oil, it's something that's natural. So that's a great opportunity for us. And then we added in our water soluble. So rather than taking it as a sublingual drop, you can now take a water soluble cannabis oil and put it into our full beverage and use that as a delivery method. So we are continuing to both innovate and grow that category.

I think in the future, we'll look at things like different carrier oils. So most of it today is MCT based. Obviously, not every consumer wants that. So things like carrier oils are delivery methods for new, two per capsule, things like that, is a great way to get our quality premium GMP product out to more patients and consumers.

[Operator]

Your next question comes from the line of Aaron Grey from Alliance Global Partners.

[Aaron Grey, analyst]

So first question for me. I just want to talk about Germany a bit. Obviously, you guys are very focused on the medical side, but a lot of conversations in the market about potential adult use and the timing of becoming one. Could you just remind us about where you guys would stand in terms of potentially wanting to participate within the adult use market that might come online within Germany, whether through your partnerships or otherwise?

[Keith Strachan, executive]

Thanks, Aaron. Yes, I think it's a very interesting topic to follow in Germany last fall when they had an election and elected the coalition government, and there was a lot of buzz in the industry in Germany about what that meant for cannabis. I think they recently said that they would be publishing some track rigs in the fall of 2022. So I think looking forward to that, seeing different ways that we might participate.

Like -- listen, I think I saw a few months ago, a survey that was done here in Canada, 50% of consumers going into cannabis retailer, doing it for a wellness reason. So they're self-medicating or they're going there for some sort of wellness therapeutic benefit. And so as a medical wellness product producer, if you get an adult use market the size of Germany, which is 3x the size of Canada, it's definitely somewhere that we will participate. And I think we could do it in a number of different ways, but working with STADA, which is one of the largest, not only just a generic drug company, but they also are branded wellness company. I think it will probably create an opportunity through that and through some of our other great partners. So really excited for it, but kind of waiting by to see what the regulations look like before we can determine how exactly we'll participate.

[Aaron Grey, analyst]

All right. Great. And then on the medical market for Germany, talk about the competitive dynamics that you're seeing there. Obviously, a lot of competitors talking about heightened competition, some pricing pressure, but then we're also hearing about an increased amount of sales coming from outside that's covered by insurance and people paying more out of pocket. So is there any more color you could offer in terms of the dynamics that you're seeing in Germany and growth opportunities they're seeing specifically from the medical market?

[Keith Strachan, executive]

Aaron, yes, it's -- a lot of progress being made there. We're seeing more and more insurance providers in the country look at regional, even tenders, which is something that they would do for more popular established drug lines. So the fact that that's now coming into play for medical cannabis shows that those insurers are seeing that as a product going forward. And obviously, some of our partners have done really well in there. And there's definitely more entrants into the space, so there's more people coming into the space, especially with the news of possible adult use there. So I think we'll see competition.

But we've done well with competition in Canada. And I think we're happy to see it. It just shows that it improves our business model and why we've been working to get in there since 2018 and have been selling there for a while. I think when people say they're renting into the German market, there's a lot of work to do. Depending on the product type, registration could take anywhere from 2 to 6 months. Permitting could take anywhere from 1 to 3 months. So entering the market and actually selling the market are 2 different things, and we're happy that we've been there since Q2 of last year.

[Operator]

And there are no further questions at this time. Mr. David Pidduck, I turn the call back over to you for some final closing remarks.

[David Pidduck, executive]

Thanks, operator, and thanks, everyone, for your time. I look forward to our next update. And everyone, have a great week.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.