Medipharm Labs Corp

TSX:LABS

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the MediPharm Labs 2023 First Quarter Financial Results Conference Call. Please be advised that today's conference is being recorded.

Before we begin, please note that remarks today may contain forward-looking information and forward-looking statements within the meaning of applicable security laws. This includes, without limitation statements about MediPharm Labs and its current and future plans, expectations, intentions, financial results, levels of activity, performance, goals or achievements and other future events, trends or developments.

Statements about MediPharm's acquisition of Vivo Cannabis Inc., the combined company resulting from the transaction with Vivo and its future financial and operational performance, the combined company's key business segments, product offerings, proforma and overall financial performance, potential future revenue and cost synergies resulting from the transaction and statements about the combined company's profitability and ability to grow the business going forward.

Forward-looking statements are made as of the date hereof based on information currently available to management of MediPharm and on estimates and assumptions made based on factors that MediPharm believes are appropriate and reasonable in the circumstances.

However, there can be no assurance that such estimates and assumptions will prove to be correct. Many factors could cause actual results to differ materially from those expressed or implied by forward-looking statements. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or production -- sorry, 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 Lab's filings with the Canadian and provincial security regulators, which are available on SEDAR at sedar.com. The company's remarks may also contain references to certain, sorry, non-IFRS financial measures, including EBITDA, adjusted EBITDA, gross profit and adjusted gross profit.

These measures do not have any standardized meaning according to International Financial Reporting Standards or IFRS and therefore, may not be comparable to similar measures presented by other companies. MediPharm believes that the non-IFRS measures referenced provide information useful to shareholders and investors in understanding our performance and may assist in the evaluation of the combined company's business relative to that of its peers.

For more information, please see the section titled Reconciliation of non-IFRS measures, the most recent MD&A of MediPharm, which is available on SEDAR. MediPharm's actual financial position and results of operations may differ materially from management's current expectations. As a result, we cannot guarantee that any forward-looking statements or financial outlooks will materialize, and you are cautioned not to place undue reliance on this information. Forward-looking statements are made as of the date hereof, and except as may be required by law, the company undertakes no obligation to update or revise any forward-looking statements. whether as a result of new information, future events or otherwise. 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 Labs First Quarter Results Conference Call.

Joining me on the call today are Keith Strachan, MediPharm's President; and Greg Hunter, the company's Chief Financial Officer. I will address some of our strategic initiatives and then hand the call over to Keith and Greg to provide more detail on the quarterly results.

In Q1, MediPharm was very busy with the acquisition of Vivo Cannabis, which closed on April 1. I am happy to report that despite this risk of distraction, we made progress in all areas of the business, improving our cost position and growing revenues. Revenue is up 20% over Q1 2022. G&A expenses were down 47% versus Q1 2022. Most importantly, we reduced our EBITDA to negative $2.1 million, albeit this includes a $1.5 million reversal of bad debt that will not continue on a regular basis. This represents our best EBITDA performance in the past 12 quarters.

MediPharm Labs transformative acquisition of Vivo has essentially doubled our revenue. The acquisition has added several new business units and synergistic capabilities to the MediPharm Labs portfolio. Vivo has an established Australian and German medical cannabis brand, Beacon Medical. They also have a patient-centric medical cannabis clinic business, Harvest Medicine, and they bring to MediPharm a long-standing Canadian medical sales platform with Canna Farms Medical. Now with 2 distinct international GMP platforms, the pro-forma combined company is expected to open many new product offerings for existing distribution channels and geographies. Annualized international revenues of the pro-forma combined company will represent about 40% of total sales. We now participate in over 10 countries globally.

Subsequent to the quarter, we have made significant progress on the integration of Vivo and MediPharm. We have already implemented a plan to reduce the combined nondirect labor workforce by approximately 30% since the announcement of the transaction. It is expected that all headcount-related savings will be fully implemented within 4 to 6 months. This is in addition to previously announced restructuring efforts made separately by both companies in 2022.

As a result of all of these efforts, total nondirect labor headcount between both companies will have been reduced by approximately 45% compared to January 2022. And restructuring has been implemented at all levels, including the C-suite. Senior level executive positions have now been reduced by 50%. These senior level changes represent a large portion of employee-related cost savings. These significant headcount reductions are paired with cost synergies relating to combining and centralizing some company functions and reducing various public company costs previously incurred by both MediPharm and Vivo.

Post transaction, we continue to have a strong balance sheet with limited debt and a solid cash position relative to our peers. We have less than $2.5 million in debt on closing and we have unencumbered ownership of all of our major assets. This strong balance sheet with $20 million in cash is expected to provide confidence in the combined company's ability to execute on our strategic growth road map, including further M&A.

While Greg will share more details later in the call to summarize revenue, gross profit and EBITDA, all improved versus prior year versus prior quarter and versus trailing 12 months. All key metrics, both financial and nonfinancial, are going in the right direction and according to plan. We are exactly where we plan to be for readiness to start the Vivo integration. In 2023, we will continue to focus on reducing costs, driving revenue growth in selected segments, progressing our pharmaceutical milestone and pursuing synergistic M&A. We will remain focused on executing our strategy. And as discussed, we are still committed to driving $7 million to $9 million in annualized EBITDA improvement from the Vivo transaction and being EBITDA positive in the first half of 2024.

I will now pass the call over to Keith.

[Keith Strachan, executive]

Thanks, David. In Q1, we continued to build on the same positive organic growth trends in segments that grew in 2022. In the quarter, we experienced significant year-over-year improvement in the Canadian domestic market, international medical supply and pharmaceutical projects. Our focus on these growth segments combined with moving away from less certain segments such as, Canadian B2B allows for better planning and rightsizing across the business.

As a reminder from our last call, our B2B business has been reduced 80% over 2 years, while our various growth segments have grown between 40% to 75%. As we grow sales domestically and internationally, our focus on pharma has also paid benefits in many ways. In February, we started in-depth correspondence with the U.S. FDA in response to our Drug Master File in November on-site inspection. Most of this interaction revolves around the unique characteristics of CBD as an active pharmaceutical ingredient. CBD as a unique organic pharmaceutical molecule does not yet have a published monograph, typical of most pharmaceutical APIs, making this review process more complex. MediPharm's application is the first Canadian API application to be working through the issues of organic cannabinoids with the FDA.

We are also the first North American purpose-built cannabis facility to have an on-site FDA inspection. Academic clinical work progressed in Q1 with trial approval by the FDA in the U.S. for our partnership with the University of Southern California. A major milestone as we prepare to start dosing the trial participants in the coming months. Our working pharmaceutical cannabis projects, both commercial and academic are revenue generating for MediPharm and more importantly, sets a clear distinction between us and other cannabis companies around the world. Our GMP suite of licenses not only help in future pharmaceutical opportunities. But in the near term, we are eager to explore emerging opportunities where our pharma approach sets us up for success especially internationally, where GMP requirements continue to become more stringent for existing and new markets.

These quality and GMP attributes contributed to international progress in Q1. In Brazil, Q1 was our best quarter to date. We completed sales of $500,000 to 2 pharma partners. This is a promising market for us. The medical cannabis market was already a $100 million market in 2022 according to Kaya Mind Data. With the market growing 156% and from 2021 to 2022, we are confident this market is still in its infancy. Brazil's prescription market only allows for products with full local marketing authorization. A process that takes on average 6 months after already possessing 12 months of stability data. We are the only Canadian company with these GMP product registrations. The registration needs to be tied to a domestic company, so we have chosen to work with established pharmaceutical companies in the region to ensure compliance and success.

In Q1, we also completed our first delivery of pharmaceutical drug dronabinol to Germany, which is a 95% plus THC isolate used in a pharmaceutical API and widely used by compounding pharmacies in Germany. In that market, dronabinol is the second highest prescribed cannabis drug behind pharmaceutical drug, Epidiolex. Throughout 2023, we will continue innovation as it relates to pharmaceutical, medical and wellness markets with a focus on nonsmokable formats. With our recently acquired clinic network, Harvest Medicine and academic research partners, this innovation will, in many cases, be backed with data on effectiveness and recommended dosing.

Before turning to Greg to discuss financials, I'd like to take a moment to discuss our 3 key commercial focuses of realizing revenue synergies post the recent Vivo transaction.

Number one, Canadian direct-to-patient sales, Vivo operates a top 10 revenue-generating direct-to-patient medical platform. This platform is known by prescribers and patients as a leading provider of medical cannabis flower. We have already begun to add MediPharm products to this e-commerce site to allow patients the opportunity to purchase both existing flower and now nonsmokable format from the same provider.

Number two, Australian portfolio expansion. Vivo, [indiscernible] brand, Beacon Medical has been consistently in the top 3 flower brands by revenue in Australia. The second largest medical cannabis market globally. In the coming months, we will leverage this brand equity and existing infrastructure to launch high-quality cannabis oil and 2.0 products into this market. The launch here will be executed quickly as patients and physicians already know and trust the Beacon Medical made. This additional revenue will begin in Q3 2023.

And third, GMP flower in Germany. Currently, MediPharm provides its German cannabis oil partners with medical cannabis flower to complete their medical offering in field. Currently, this flower is purchased from various GMP flower sources and then process through our established EU GMP supply chain. With the addition of Vivo and GMP assets, we are adjusting the supply chain to integrate more steps internally. These changes should improve our gross margins by 30% to 50%, depending on the SKU. These supply chain changes are underway, however, they do require regulatory registrations, and we expect the revenue and cost synergy impacts in Q4 of this year.

We expect all 3 of these key initiatives to drive meaningful incremental revenue.

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

[Greg Hunter, executive]

Thanks, Keith, and good morning, everyone. As David and Keith discussed, we continue to focus on growing our revenue base through organic and inorganic initiatives, reducing cash burn and driving towards profitability as key priorities.

Before reviewing the results for the quarter, let me add some additional commentary on the progress we made on these priorities. On April 1, 2023, we closed the acquisition of Vivo Cannabis in an all-equity business combination. As a result of the arrangement, Vivo shareholders received 0.2910 common shares of MediPharm in exchange for each Vivo share. In aggregate, MediPharm issued 107.9 million shares valued at approximately $8.1 million. The resulting combined companies owned approximately 73% by former MediPharm shareholders and approximately 27% by former Vivo shareholders.

As previously discussed, we are committed to delivering $7 million to $9 million of annualized synergies. In the first week post closing the transaction, we implemented plans to reduce the combined MediPharm and vivo nondirect labor workforce by approximately 30%, resulting in over $4 million of annualized savings which will be implemented by the end of Q3. This is in addition to the $3 million of annualized savings from the restructuring we completed in late 2022. In addition, during the quarter, we resolved the long outstanding dispute with one customer that resulted in the recovery of a bad debt by collecting inventory valued at $1.5 million.

Turning to the P&L performance for the first quarter. Revenue for the first quarter increased sequentially from $5.6 million in Q4 to $5.8 million in Q1 and increased 20% versus Q1 2022. Revenue in the Canadian adult-use and wellness segment was $3.5 million and increased 42% versus Q1 2022. This growth is driven by our new and innovative products, the launch of our shelter Wildlife brand, strong performance of our leading oil brands and select investments in sales and marketing. Revenue in the International Medical segment was $1.8 million and increased 43% versus Q1 2022 and increased 173% sequentially from $0.7 million in Q4 2022. Revenue in the Pharmaceutical and B2B segment was consistent with Q4 2022 at $0.5 million.

Gross profit for Q1 was positive $0.4 million or approximately 7% which is the second consecutive quarter with positive gross margins. Gross margin continues to improve, driven by product mix, production efficiencies, price increases and cost reductions, including the sale of our Australian subsidiary and restructuring initiatives implemented in 2022. General and administrative expenses in the first quarter decreased sequentially from $3.4 million in Q4 to $1.5 million in Q1. Q1 included $0.5 million of transaction-related fees and a $1.5 million bad debt recovery as discussed previously. Excluding these 2 items, general and administrative expense was $2.6 million which is a 47% decrease versus Q1 2022, reflecting the progress on our cost reduction initiatives.

Marketing and selling expense of $1.4 million was $240,000 lower than Q4 and R&D expense of $40,000 was a $100,000 lower than Q4. These investments will vary as we selectively allocate resources to advance our capabilities and product portfolio.

Adjusted EBITDA for Q1 of negative $3.1 million improved sequentially from negative $3.7 million in Q4 2022 and improved from negative $5.6 million in Q1 2022. This improvement is driven by both gross margin and reduction of expenses. Moving to a few notable items on the balance sheet. Trade and other receivables of $13 million was consistent with Q4. 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.

During Q2 of 2022, we received a favorable summary judgment with respect to this legal proceeding awarding MediPharm $9.8 million. Subsequent to the summary judgment, the customer appealed the decision and a court date has been scheduled for August 14, 2023. Adjusting for this one customer, trade and other receivables is $4.5 million. Our cash balance at the end of Q1 was $20.2 million and was impacted by a $750,000 loan to Vivo as part of the transaction that closed on April 1. Although we still have work to do to get to profitability and become cash flow positive, Q1 was a strong step in the right direction. Sales and adjusted EBITDA improved year-over-year compared to Q1 2022, and sequentially compared to Q4 of 2022.

Gross profit was positive for the second consecutive quarter. We settled a long outstanding receivable by receiving $1.5 million of product. And finally, we implemented a restructuring program that will save over $4 million on an annualized basis as we progress towards our synergy target of $7 million to $9 million.

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

[Operator]

[Operator Instructions] Your first question comes from the line of Aaron Grey with Alliance Global Partners.

[Remington Smith, analyst]

This is Rami Smith on for Aaron Grey. So my first question is in regards to Australia. So how do you believe the competitive landscape will be impacted by the rule change in July? And it does appear that there are a number of additional competitors increase in the market. Some will probably get pushed out with the rule changes. I'm just curious on your thoughts there.

[Keith Strachan, executive]

Hey Rami. It's Keith Strachan. Thanks for the question. Something that we've been interestingly following for a long time, as you mentioned, the rule changes in July, what happened if the TGA, which is the health authority there, has decided that incoming goods that are imported to the country need to be GMP.

Up until now, you can get them in without being GMP on the special access program that allows some of our peers to sell non-GMP units in the area. So we think come July that obviously, there will be many cannabis producers in Canada, specifically that will no longer be able to sell into that region. We've seen an increase in incoming business development inquiries around both Cannabis 2.0 products as well as Cannabis flower because of, obviously, our recent acquisition of Vivo.

With Vivo, we do have the Beacon Medical brand in Australia, which is top 3 flower there and we're just working through the process of adding on product like oil and GMP purchases. So we are being careful that on those incoming business opportunities that we're not letting someone into the market that are just going to compete with ourselves, but there are some good partners that we will continue to work with that we've worked with in the past. Just only other thing I'd say on that is with the July change, the way that we believe we see it as that would be changing the process starting July 1.

So there's probably is a lot of inventory flowing into Australia currently. So we might need 3 to 6 months to see some of that work its way through the system a lot of flower. So it doesn't have a long shelf life, at least for appeal to patients anyway. So we'll see that move quickly through rather than, let's say, oversupply of distillate in the Canadian record.

[Remington Smith, analyst]

And then my second question is in regards to Germany. So your expectations for the adult-use market there with their phased approach that they'll be implementing. And how do you believe any decriminalization may benefit that medical market as some peers have looked for decriminalizing and the removal from the Narcotics list helping to drive a notable increase in patient growth there?

[Keith Strachan, executive]

Yes. I think it's really interesting what's happening in Germany. It's actually just there a few weeks ago again, visiting with some of our clients and also we have the Beacon brand there as well. Be it quite small to start.

We actually never had a bank loan or we're very bullish on changes for recreational cannabis there. Our partner in STADA, one of the top 5 generic companies in Europe. And obviously, they're more wellness-focused and pharma focused. So we weren't really banking on that. And we had a strong opinion that imports wouldn't be legal for the recreational market federally just like the recreational market in Canada federally. So I think what we saw in the German government come with a very small pilot program that doesn't limit some of the commercial abilities. So I think some of those other international companies that we're really banking on having like a consumer rec brand, there maybe put back a little bit further on their time line.

But overall, I think it's encouraging that they continue to talk about cannabis, it's making the news and the headlines there. And what that does really is it lowers the stigma. So if you're a patient that's thinking about the therapeutic benefits of cannabis and you may be trying something different than it's kind of top of mind. I think the more things like a pilot program or home growth happens, the less stigma there is and then the more comfortable patients and physicians are in trying as a therapeutic benefit. And that ultimately will help drive sales for companies like STADA, who are very focused on the prescription market there and have seen increases specifically in their extract sales, which is more of a pharmaceutical prescription product versus just flower sales.

[Remington Smith, analyst]

And then my last question is just in terms of M&A. I know you talked to a little bit in your opening remarks. Would you just feel like there's a number of opportunities in the market? And then those opportunities more so within Canada or elsewhere as well?

[Keith Strachan, executive]

I think there's a lot of opportunity. We continue to explore and we keep like a pretty robust pipeline of opportunities, both small and big. As Dave mentioned in his remarks, we are staying focused. As we do these is really important for our company, our size.

And I think what we're looking for is other unique medically focused companies like ours, but also other ways that we could get to profitability after. As you saw, we've made great strides in lowering our operating expenses between year-over-year, and we continue to do that even subsequent to the quarter and some of the announcements we made. But we have to do -- we can't take on any more call it, burn from an acquisition. We'll be looking at acquisitions that are already at least EBITDA positive, and that way we can bring them on and with probably a focusing more on that medical and international plant where we feel that we are best positioned to win.

[David Pidduck, executive]

Yes. This is Dave. Maybe Keith, the only thing I would add to that is, it's a pretty good time if you have a strong balance sheet. There are -- I think you hinted that there's a lot of opportunities out there. We want to be smart about it but we also want to use our I'll say, our balance sheet strength to maybe look at some good opportunities.

And we are open to international opportunities. We're open to Canadian opportunities and we want to find -- in Vivo, we found a really good fit, both from a financial synergies, but also from a call it, strategic alignment in terms of our pharmaceutical medical focus. So finding the right opportunity -- there are lots of opportunities out there, and we think M&A will be part of our recipe and our intention and plans going forward. And we feel pretty good about the status of where we are at with Vivo. Now to be confident that we're going to do -- we're going to do a pretty good job with the Vivo acquisition and integration and that kind of gives us confidence that we should be able to do that again.

[Operator]

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

[Scott Fortune, analyst]

I just want to focus a little bit on gross margin. You saw another good progression on the quarter. But can you provide a little more color on kind of the cadence of gross margins kind of from your existing business. And then adding on Vivo, how should we look at kind of the margin side of things as we progress through 2023 here with all the cost savings and such going forward?

And do you still have some higher cost inventory that you're working through on that kind of thing that might affect gross margins going forward? Just kind of a little more color in detail on the gross margin as we look out through the year here.

[Greg Hunter, executive]

Yes. Thanks for the question. It's Greg here. Yes, we're happy with the progress on gross margin. Obviously, we have more to do, but 2 consecutive quarters in a row with positive gross margin. And Q1, as you know, is just the legacy MediPharm where 7% gross margin. We're looking to double that percentage just on the legacy MediPharm business. So somewhere in 10% to 15% on the legacy MediPharm is what we're targeting to get our gross margin, too.

And then on the Vivo side, as you can see from their prior gross margins are anywhere from the 10% to 15% range. So obviously, it's going to take some time with the synergies to kick in. But as we look later into the year, we're targeting on a consolidated entity somewhere in the 15%-ish range on gross margin as we move forward. And obviously, we'll look to continue to improve that with efficiencies, cost reductions and as I said, some selective price increases as well that we're trying to put through.

[Scott Fortune, analyst]

Real quick. Are you seeing this price increases being taken pretty easily as you bring them through here?

[Keith Strachan, executive]

Scott, it's Keith. Yes, we continue to look at price increases as a way to help with gross margin. And I think that when you look at just everything in the world is taking a little bit more of our expenses and the industry expenses go up as well.

So we have been -- during price increases, we are -- we have increased the pricing on most of our wild life portfolio, which is our flower and pre-rolls. We've done some price increases selectively on our minor cannabinoid oils, and that's mainly in Canada. And then internationally, some of those are already higher priced. So we haven't done the price increase. But I think also in the world of cannabis sometimes holding your price steady is also price increase. So we have not done any price decreases for sure. We're not following any race to the bottom and definitely not looking at dumping inventory at this point because we've managed that closely at this point.

So we continue to see prices at least steady and grabbing price increases where and when possible. And we'll continue to do that as well. And I think talking with some of our peers, it seems that they're also working on that objective as well.

[David Pidduck, executive]

Sorry, Scott, the only thing I would add to that is SKU rationalization. So I think getting the margin up also includes getting rid of SKUs where price increase isn't going to fix it. We, like other companies, had individual SKUs that were being sold below cost. And I think part of the gain is, yes, increase the prices where that's appropriate, but also actually exit the business and get out of individual product lines that represent a burn.

So in addition to what Keith was saying, I think we have been very ruthless both and what we consider for launching, but also looking at our entire portfolio line by line and products and segments where we shouldn't be participating and making sure that we get out of those. And I think we'll continue to do that and that also helps our mix and our margins.

[Scott Fortune, analyst]

Perfect segue to my follow-on question here. Kind of as you look at the nice bump you had in do us revenues up 42% year-over-year, but provide a little more color on the metrics or statistically this will continue to contribute to the increase kind of innovation or areas where you look to kind of move into, obviously, you can expand on the medical side. But just kind of step us through kind of the key initiatives for product introduction or those key SKUs that can drive the growth going throughout 2023 with go on board here, too. That would be great. A little more color on that.

[Keith Strachan, executive]

Thanks, Scott. I think the innovation and product is twofold for us. Internationally, there's really been a lack of innovation, obviously, as those are just new markets. So if you look at somewhere like Australia, it's largely a flower market with extract but now that we have the ability to move GMP 2.0 products into that region, particularly inhalable distillate some cartridge. We've done extensive work on making that GMP process, which is something that very rare.

We're probably one of the only companies in the world that have actual stability on something like a vape purchase. So it's like taking something that folks use as a wellness product maybe in legalized markets in the United States or in Canada and making that GMP is a big part of what we can do to really increase sales in places like Australia and even Germany in the future. And then I think on the other side of just the Canadian wellness market, we were innovators when it came to minor cannabinoids, one of the first out of the gates with things like CBN and CPG.

So we'll continue to look at things like that, but then also delivery methods. We do have some capital launching the first time, which fits well into our wellness portfolio. And then we'll look at other kind of other methods of delivery and innovation as well. And that links back to the M&A comment too that we had as far as opportunities, whether it could be M&A, that's something else we look at is what innovative products or innovation pipeline when they bring to the table on that in the transaction.

[Operator]

There are no further questions at this time. I will turn the call back to David Pidduck.

[David Pidduck, executive]

Okay, everyone. Thanks for joining us today. Have a great week, and we will talk again at our Annual General Meeting at the end of June. Take care.

[Operator]

This concludes today's conference call. You may now disconnect.