Medipharm Labs Corp

TSX:LABS

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Welcome to the MedPharm Labs Second Quarter 2021 Conference Call and Webcast. I will now hand the call over to Keith Strachan, MediPharm Labs, President and Interim CEO.

[Keith Strachan, Co]

Thanks, operator, and good morning, everyone. With me on the call today are Greg Hunter, our CFO; and Chris Taves, our new Chairman. 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 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 conclusions, forecasts or projections in the forward-looking information, and the material factors or assumptions drawing the 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 SEDAR at their website, sedar.com. Our second quarter was one of transformational growth in establishing ourselves as a true pharmaceutical company with expertise in cannabis. Today, I will speak to the advancements made in Q2, which were achieved in the context of ongoing Canadian domestic challenges, offset by international growth. Greg will then discuss Q2 results, including areas where we saw growth, segments where we have opportunity to improve and continued progress with rightsizing our inventory. We will then introduce our new Board Chair, Chris Taves. And I will close with final observations on executing on our business strategy. To start, I would like to provide more in-depth detail on our recent pharmaceutical licensing achievement, the way it grows our business and our plan to capitalize on its unique status in the industry. From the outset, MediPharm's objective was to become a leading pharmaceutical company specializing in cannabis, taking charge in an emerging multibillion-dollar global pharmaceutical and medical cannabis market by providing multiple products and turnkey solutions to a broad customer base across multiple jurisdictions. A key part in becoming a pharmaceutical company is pharmaceutical licensing, and in Canada, that means a drug establishment license. A drug establishment license is a certification issued by Health Canada that a manufacturer maintains pharmaceutical, good manufacturing practices, commonly referred to as GMP. It is done through an extensive review of the company's quality management system over several months and then an in-person or virtual inspection spanning multiple weeks, a massive undertaking in comparison to our cannabis processing license issued in 2018. This license is awarded by the Health Canada Pharmaceutical branch and is the exact same license as the one held by Fortune 500 multinational drug companies with operations in Canada, pharmaceutical leaders like Eli Lilly, AbbVie and Merck, just to name a few. Our drug establishment license allows MediPharm to manufacture any non-sterile drug in finished good or active pharmaceutical ingredient, API, ], leaving many options as we start to see more complex formulas in drugs where cannabinoids are the API. We are the first and only company in North America to receive a pharmaceutical GMP certification, which includes commercial scale extraction of natural cannabinoids. Other pharma companies working with cannabis with GMP licenses from Health Canada or the U.S. FDA are only held by those doing final product formulation or working with synthetic cannabinoids. Based on the current therapeutic evidence in natural cannabinoids in products such as FDA approved, Epidiolex, there is a large demand for naturally derived and pharmaceutical-approved cannabis API and finished goods. So what does this drug establishment license mean for MediPharm and its shareholders? To summarize, with this unique license, we can now access more markets globally or special access or OTC policies for cannabis are in place. We can now distribute cannabis API to pharmaceutical companies around the world, including the U.S., for use in both branded and generic drugs with marketing authorizations. We can now provide finished dose manufacturing to pharmaceutical companies seeking to outsource their production of their cannabis-based drugs. We can now be a service provider to other large cannabis companies with aspirations to enter the pharmaceutical cannabis space or expand their international reach. And we can now support new clinical trials with GMP clinical trial material to further advance research of the benefits of cannabinoids and give MediPharm future manufacturing rights. These drug establishment license business attributes create near-term opportunity, while also preparing for the long-term opportunity to produce future cannabis space, clinical-proven, FDA register and approved drugs. This is a great development for MediPharm and our shareholders, and it means our outlook for growth as a specialist pharma company is bullish. Now turning to our second quarter results. Beyond the great advancements in our pharmaceutical strategy, Q2 saw growth in other areas, the most promising being international distribution. As a testament to the execution on our international contracts, we saw quarter-over-quarter growth of 24% in our international revenue. Now with regulatory channels open, we expect to continue to be the leading private label medical cannabis concentrate provider in new global markets. Like our industry unique supply agreement with STADA, one of the EU's largest generic drug companies, MediPharm has many contracts and a full pipeline of future contracts for private label medical cannabis products around the globe. Many of these being concentrated in the EU and LatAm. There is no shortage of demand for quality medical cannabis products from established companies with no interest in doing manufacturing themselves. The difficulty comes in the regulatory execution of delivering on these contracts. For example, in Brazil, you must register your product with ANVISA, the Brazilian FDA, for sanitary authorization. This process can only be done with a lengthy product dossier to show quality, safety and stability of the product. This process can take up to 3 months for approval, following their manufacturing of pilot batches and 6 months for stability testing. Narcotic registration in places by Germany and New Zealand follow similar processes, with each country being unique. This is on top of the country-specific import and export process, which, in the past 1.5 years, has been subject to longer than normal processing times as global health regulators focused efforts on their COVID-19 pandemic response. In 2021, we have seen Health Canada export permits take anywhere from 30 to 60 calendar days after the receiving country issues an import permit. MediPharm masters this regulatory process with our staff who come with decades of experience in the international registration of pharmaceuticals. Now having worked with international partners for over 18 months, MediPharm's hard work is starting to result in steady growth of material international revenue. We are also establishing a cadence in permits ahead of international customer forecast so that as we go into the back half of 2021 and beyond, we can have more repeatable monthly international revenue. A great example of these advancements is in Germany. In March, we made our first delivery to 2 extract customers in the region, STADA and Pharma. In Q2, not only did we deliver to those customers again, but we also delivered to 2 new customers in and DanCann. Of course, our reach goes beyond Germany, having already delivered to Peru in March and we expect to deliver to Denmark, Brazil and New Zealand before the end of the year. However, I do want to highlight that Germany alone is an extremely attractive market. It stands as the world's leading country for medical cannabis. With more than 320,000 cannabis prescriptions approved in 2020, this is a more advanced medical market than any other and is said to be growing at around 30% annually according to Forbes. Our strategy of targeted international expansion to medical and wellness customers is gaining traction, and that will lead to higher sales in the back half of this year. Our strategy is clearly global in nature, but we are also committed to driving growth in Canada's medical and adult-use markets as part of our priority of building a profitable and sustainable business. In Canada, we continued to launch new and innovative products. Our oil portfolio continues to grow and it is stable for many adult-use consumers looking for cannabis wellness options. On the innovation front, in early Q2, we launched a vapable CBN product, which is the only product of its kind in the market and gives users the ability to inhale CBN for faster onset, which is easier to titrate. In late Q2, we released available CBD product where we saw a gap in the market, as other CBD names were either heavily diluted or subject to user difficulty as CBD crystalized in the competitor's purchase. These quality and innovative products will be accessed by more consumers as MediPharm officially launched in Quebec in May. Quebec is one of the leading provinces in cannabis sales. And with a more complex listing process, the product categories are not crowded as we sometimes see in other provinces. The growth in Quebec should be better reflected in Q3 and onwards as we add more SKUs and fulfill weekly shipments. We continue to see opportunity to utilize capacity as our CMO partners grow their brands, such as the expansion of [ Abicon ] gels and topicals and the growth in Ace Valley baked products, which we now produce for Canopy Growth, following the successful acquisition of that brand. Our sales in the domestic market are not where we want them to be. In Q2, we continued to be strained by COVID-19 restrictions at the retail level, which resulted in provincial distributors lowering inventory on hand. For the majority of Q2, the province of Ontario, which is our biggest domestic customer, still had significant COVID-19 restriction placed on retail stores. As MediPharm is still less than 12 months into domestic retail sales, I see some immediate improvements we can make in managing provincial listings and fulfillment. This, coupled with our high-quality products and relaxed COVID-19 restrictions, can result in near-term improvements in this sizable market. I will touch on our strategy to increase sales later in the call. Finally, we continued to add to innovation in both products and manufacturing automation. Our team of research experts have developed other rare cannabinoid formulations beyond our recently launched CBN, and have innovated consumer delivery methods, such as tasteless and odorless water-soluble drops. We will work with provincial distributors to sell these new products as the various provincial listing schedules permit. In automation, our engineers continued to deploy equipment already purchased to reduce the direct cost of our manufacturing. This will help improve the gross margin on our high-volume SKUs, such as our cannabis oils. Currently, MediPharm-branded oil ranks fourth in cannabis oil sales in Ontario. This is with double the retail price of the average oil SKU. This proves cannabis consumers are starting to recognize and are willing to pay more for high-quality products. It also presents a great margin opportunity as we implement our fully funded automation. Overall, our domestic presence is still growing in revenue, but it serves as a proof of concept for our ability to provide end-to-end development, manufacturing and distribution solutions for multinational, pharma, CPG, and innovative health and wellness brand companies. I will now turn the call over to Greg to discuss our financial.

[Greg Hunter, Chief Financial Officer]

Thanks, Keith, and good morning, everyone. I'm pleased to report we continued to make progress with our international expansion, with international revenues increasing 24% sequentially in Q2 versus Q1. This is the second consecutive quarter with double-digit international revenue growth. In addition, we added 2 new customers in Germany, bringing our customer count with successful German deliveries to 4. Germany is the largest international medical market, with a market value estimated to be EUR 7.7 billion by 2028 according to Forbes and continues to be a strategic priority for MediPharm. As Keith mentioned, in Q2, we continued to experience headwinds in our domestic business, driven by restricted COVID-19 lockdowns and further channel inventory reductions with provincial distributors, which caused our Canadian and overall revenue to decline sequentially. Despite COVID-19 making the first half of 2021 challenging, we continue to make progress and are optimistic that revenue will rebound post-COVID-19 lockdowns, with our recent expansion into Quebec and the launch of new innovative products, such as CBN Oil and CBD and CBN Vapes. As I said last quarter, as a management team, we are committed to growing our top line and adjusting our cost structure to return MediPharm to profitability. While we made progress in the first half of 2021, there is still work to be done. Turning to the P&L performance for the second quarter. Q2 revenues decreased 7.7% sequentially from $5.5 million in Q1 to $5.1 million in Q2. International revenues increased 24% sequentially to $2.5 million, with German revenues increasing 24% sequentially to $1.5 million and Australian revenues increasing 30% sequentially to $0.9 million. Domestic Canadian revenues decreased 26% sequentially to $2.6 million, largely as a result of restricted COVID-19 lockdown and further channel inventory reductions with provincial distributors, as mentioned previously. Gross profit for the quarter of negative $7.7 million was impacted by a $5.7 million inventory write-down and $0.6 million of accelerated depreciation for assets no longer in use. Adjusted for these items, gross profit of negative $1.4 million declined sequentially from negative $0.7 million in Q1. Q2 gross profit was negative and declined sequentially due to unabsorbed overhead with lower production volumes and product mix with more flower being sold to German customers with lower margins. General and administrative expenses in the quarter increased sequentially from $4.0 million in Q1 to $5.2 million in Q2, largely driven by bad debt expense for one customer, higher insurance costs and higher freight expense for our international customers. Marketing and selling expenses in the quarter decreased sequentially from $1.3 million in Q1 to $1.1 million in Q2, driven by lower promotional activity. R&D expense has decreased sequentially from $350,000 in Q1 to $140,000 in Q2. These expenses will vary as we selectively invest to advance our capabilities and product portfolio. Other operating income increased sequentially from a $0.7 million expense in Q1 to income of $3.2 million. Q2 included $3.7 million of income from the Canadian emergency wage and rent subsidy, while Q1 did not. Finance expense decreased sequentially from $9.7 million in Q1 to $0.6 million in Q2 as a result of accelerated conversions on the convertible debenture. Adjusted EBITDA for Q2 was negative $3.7 million and improved sequentially from negative $6.2 million in Q2, primarily driven by income from the Canadian emergency wage and rent subsidy. Moving to a few notable items on the balance sheet. Inventory decreased from $24.2 million in Q1 to $13.7 million in Q2. This includes the inventory write-down of $5.7 million mentioned earlier. Trade and other receivables increased from $27.8 million in Q1 to $32.6 million in Q2, largely driven by the Canadian emergency wage and rent subsidy. As discussed in previous quarters, there are 2 customers owning a total of approximately $19 million, including $8.5 million, which is subject to legal proceedings that we have previously disclosed and remain confident in its collection. The remainder of the $19 million is due from a second customer, and we are confident in its collectibility. Adjusting for these 2 customers and the wage and rent subsidy, trade and other receivables is $10.2 million. The current tax receivable of $4.3 million is a refund from 2020 that we expect to collect in Q3 and will further improve our cash position. Finally, our cash balance at June 30 was $38.9 million, which decreased from $42.1 million at March 31. The cash balance decreased $3.2 million, largely driven by operating activities. Capital expenditures were modest at approximately $180,000 for the quarter. Year-to-date, capital expenditures are $460,000 as we continue to manage and prioritize select capital investments to expand the business. The cash balance owing on the convertible debentures stood at approximately $2 million at the end of June, which is due to be repaid in September and October. While we made progress in the quarter by expanding our international presence and revenue and managing our cash consumption, we still have work to do to return the business to profitability and drive positive cash flow. With that, I'll turn it back to Keith.

[Keith Strachan, Co]

Thanks, Greg. This morning, we were also very excited to announce the appointment of Chris Taves as Chair of our Board, effective immediately. Chris joined our Board in July 2020 and has applied his leadership in many areas, including as chair of our Audit Committee and providing guidance to our successful March 2021 financing. Chris is a financial industry expert, serving as Chief Operating Officer of BMO Capital Markets, one of the largest banks in North America. He also serves as a Board member of BMO China Co. and First Mortgage General Partnership. I would like to pass the call to Chris to introduce himself and discuss our Board priorities.

[Christopher David Taves, Independent Director]

Thanks, Keith. I appreciate the Board's confidence in me to oversea the leadership of MediPharm as it executes on its strategy to be a leader in supply of cannabis-based drugs and API to pharmaceutical companies around the world. In my career at BMO Capital Markets and prior, I have worked with many public companies, including those with cannabis and pharma specialties. With MediPharm, I see an incredible growth opportunity, as the pharmaceutical industry is just scratching the surface when it comes to accessing the therapeutic benefits of cannabinoids in drugs with marketing authorization. MediPharm's recent drug establishment license is a huge endorsement that it will be a go-to supplier for big pharma cannabis market entrants. One of the Board's current initiatives is the appointment of a permanent CEO. To date, we have had significant interest from candidates across North America and have been interviewing strong candidates. Meeting with these individuals has assisted us in perfectly defining the right person for the job. Since we started this task, MediPharm has made great progress in international sales and specialized pharmaceutical licensing. Developments like these in a fast-moving industry has helped us refine the experience and expertise in the criteria for our permanent CEO. Our selection process continues to progress. And we are confident we will appoint a perfect candidate for this role and the exciting future of MediPharm. And in the interim, the current management team has the full confidence of the Board to execute on the company vision and to drive growth. Keith, back to you.

[Keith Strachan, Co]

Thanks, Chris. I want to thank you for taking on this role and providing your experienced leadership at such a pivotal point in our business. I will now provide some final thoughts on our outlook and strategic plan to increase revenue. There's a lot of opportunity for increased sales in Canada and internationally. Based on our fully built and funded manufacturing platform, we can increase revenue significantly without further capital investments. Activities are already underway to achieve this goal. These strategic revenue goals have 3 main focuses. One, investment into more sales resources. Domestically, we have increased our sales team by almost doubling our sales reps subsequent to quarter close. With more ongoing ramp-up of the innovative products we offer to the market, we can make great use of this newly scaled sales force. Internationally, we are putting more boots on the ground in growing markets. In August, we had one of our top international business development associates relocate to Frankfurt, Germany. And in September, we have our first personnel in Mexico starting with us to extend our reach in LatAm. As our area of highest growth so far this year, having in-country sales and business development representation will add to our growing international revenue opportunity. Two, expanding contract manufacturing, providing partners with access to the highest quality cannabis manufacturing platform to deliver them cost savings and international reach. For example, here in Canada, just last week, we started a GMP tolling contract for one of the world's biggest cannabis companies. On the international front, we have continued to add to the private label services provided out of MediPharm Labs Australia. Three, continued innovation. Internationally, there is a lot of white space when it comes to innovation. Just like in the established adult-use markets such as Canada or legal U.S. states, many international patients are seeking new formulations and delivery methods. The barrier is usually making one of these popular formats in a GMP-compliant way. MediPharm has just the expert team to best and meet that challenge. Domestically, as cannabis categories become crowded and distributor scale backed product listings, innovation is the sure way to get product on the shelf and increase sales. We saw this recently with vapable CBN and CBD products, and we'll use the same approach going forward to get more products on the shelf with retailers. In the pharmaceutical space, our R&D is more complex as pharma customers will seek API suppliers who have filed for active ingredients with the FDA. These filings take in-depth characterization of substances with very tight specifications. This is an area where we will increase efforts to remain ahead of the competition. Overall, Q2 was a productive quarter, with the accomplishment of our drug establishment license and further global market penetration for our products. 2021 is a year where progress will occur as we gain traction with our priorities and create a MediPharm that I know will deliver tangible value for customers and shareholders. In my opinion, our current market cap does not reflect the value of our very unique pharmaceutical licenses and strategies, making MediPharm a great investment opportunity. As one of the founders of MediPharm, I can tell you that since Day 1, we had a vision to be a pharmaceutical company specialized in cannabis, providing companies and patients with API and drugs through traditional marketing authorization as opposed to being just another cannabis company who distributes to non-federally regulated or special access medical programs. Having achieved our drug establishment license in Q2, I could confidently say we have reached that goal. This will result in many positive business outcomes for MediPharm and its shareholders. I cannot wait to show you what we will do next. Now operator, can you please open the lines for questions from our callers?

[Operator]

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

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

Congratulations on the drug establishment license. So first question for me, I'd like to just kind of talk about the license, and maybe in terms of the timing, where you see the opportunity. So certainly, it seems that you guys have a differentiated strategy there, and then maybe some of the other cannabis plays. But talk a lot about the potential API that it can now allow for you guys in terms of big pharma? Could you maybe elaborate maybe on some of the conversations that you've had with pharmaceutical companies to provide that type of API? Right now, there's such drugs like [ Dialect ] and Marinol out there. So how do you see in terms of the timing of that license eventually translating into revenue? Is it more of a near term or maybe 2, 3 years out there?

[Keith Strachan, Co]

Thanks, Aaron. It's a great question. Our drug establishment license does truly differentiate us in many ways and does bring like both near-term and long-term opportunities. I think on the near term, what we're looking at is more international sales. That's where we saw the 24% growth quarter-over-quarter and -- in international sales, which helps us as part of those complex registration processes, and export processes around special access programs that are opening up. And it seems like every couple of weeks, you see a new country that's going to try something. I think those health authorities are looking for a GMP solution. And sometimes, just didn't have one because they didn't exist. So there's some near-term opportunities there for sure that we'll keep seeing that international growth. I think you nailed it on what the long-term opportunity is, it's really that API provider for drugs that have marketing authorizations. So we've seen the great success of the effects of Epidiolex. If you look at their annual run rate in the U.S. of Epidiolex sales being over USD 600 million a year. You could imagine that most generic companies are looking at that as an opportunity. And with those, they're already starting the development process. So there are multiple generic companies that are looking at it, the development process. But that is long term. So just to kind of create a time line on that. That -- there's a lot of patents on that product. It could take up till 2025, 2026 to really enter the market with the generic. But when they do, generics sometimes make up 30%, 40% of the market share. So there is a massive opportunity. There's other drugs, like, as you mentioned, Marinol. In Germany, it's referred to as dronabinol, which dronabinol is still one of the main concentrates sold in Germany. So we can participate that right away as those products are off patent. Might not be as massive enough API opportunity for some of those generic drug companies, but there is an opportunity there. So yes, to summarize, there's near-term material growth that does make a difference to our revenue today. And then the long term is limitless in where we can go.

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

I appreciate that color. Keith, that's really helpful. Second question for me, turning to the domestic market in Canada. You talk about kind of finding gaps in the marketplace. Certainly being -- some provincial buyers start really taking a focus on that in terms of new products that they'll take in. But just of question in terms of, as you're kind of looking for these gaps in the market, how do you look at potential ROI in terms of the effort and CapEx needed to kind of maybe ramp up production of that product versus how big a market share of maybe that gap in the market might be? How many other entrants might come in? I would just like some further commentary from you guys in terms of the ROI and different things you're looking at as you look to find gaps to market and then decide whether or not you guys would be in an opportune position to try and fill that gap.

[Keith Strachan, Co]

Yes, for sure, Canada continues to be the focus that we're looking to increase in that retail space. As I mentioned, there's a big opportunity there. Any product that we do, we're obviously looking at it from an ROI perspective to make sure that it is accretive to the bottom line. But really, what we're looking at in innovation is, the Canadian space, there are some large players in there that have spent a lot of money on the retail. Whether they have ownership in a retail platform or they have like a massive retail sales group. I don't think that we're looking to go head-to-head with a lot of those and some of the big categories. But what we can do is we can own niches where there is innovation because we have such a strong team. So really for us, it's things like that CBN base, where we're the only ones who make it, or that CBD base that doesn't crystallize. That's where we see that. So in the future, we're looking at other formulations that would be the minor cannabinoid base, something like a CBG, which you can find in the U.S. today, but not yet in Canada. It's probably a good spot where we could be, and then what different formats we could do. So looking at -- there are some water-soluble products in the market today, but most of them are low potency. So how could we make like a higher focus water-soluble product for consumers? So there's a lot of opportunity there, and a lot of ROI, and we're really focused on those niches of innovation. And what that really also helps for us -- that's important is we are using this as a platform from a like a proof of content for our big pharma and CBG customers current and in the future. So as we -- let's say, that I would like to launch like a CDN or CBG, to their massive patient base, we're able to show that not only the reformulate it, model it, and kind of some small-scale response from consumers and patients. So it really gives us the fact that a proof-of-concept platform that really does build into that more future opportunity.

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

Okay. Great. And then just last one for me, if I could. Just for Germany then, right? So as we look to potentially see a bigger ramp in the overall market on some of these COVID bottlenecks ease. Could you talk about whether or not on your guys end there's any types of bottlenecks in terms of getting supply or getting the product out there for STADA and any other of your partners? Or if it's more of just like a demand and current COVID dynamics there, right? So if the demand kind of comes up and you see more prescriptions being issued in Germany, do you guys have all the capabilities to fulfill that demand in the back half or through 2022?

[Keith Strachan, Co]

Yes. Thanks, Aaron. No bottlenecks on our side on, let's say, the delivery and fulfillment. We have no problem making those products. And really now that we have this drug establishment license, it does help with the process as far as -- even the supply chain, whether we make it in Canada or we make it in Australia, it certainly give us a long option. Where is the bottleneck? We saw in Q1, we had 2 customers. In Q2, we had 4 customers. And then we'll see that grow at that kind of rate. Where the bottleneck is, is more on the registration side. So as I mentioned in the call, when there's a new narcotic products only on board like a German customer, they have to go to BfArM, which is like the FDA of Germany. And then they register that product through, our product submission with BfArM. That process could take anywhere from 3 to 6 months. And then once it's registered, we're able to apply for import and export authorization. So there is kind of the bottleneck on new products. But once the channel is open, we're able to get a good cadence. I don't think that we have any problem with demand. The demand keeps going up. And really right now, we're the only really private label option in a place like Germany. So where we see our competitors in Germany is with their own-branded products, like let's say, Tilray. Tilray would have Tilray Oil in Germany. So as we see more and more entrants like STADA and our partners at Adrex or even in Canada, then where they're looking to outsource it, we're really one of the only options. And now we're probably the best as far as quality, license and experience of getting to the market. So I think we'll continue to see demand, and MediPharma's prepared and well-capitalized and well-resourced pipes to meet that demand.

[Operator]

Your next question will come from the line of Scott Fortune with ROTH Capital Partners.

[Scott Thomas Fortune, MD & Senior Research Analyst]

Real quick housekeeping call. Where is the inventory sitting out now at $13.7 million, after kind of the inventory write-off? And at what type of cost does this inventory included? I just want to get a sense as we look at gross margins going forward from this point as far as that's concerned.

[Keith Strachan, Co]

Yes. Thanks for the question. So yes, the inventory being more rightsized now with some of the adjustments that we've made, sitting at $13 million. There's a $5 million-ish in, as we've said, in raw material, which is primarily flower that we use for extraction. And then the bulk of the rest is in finished or semifinished product, which, again, some of that -- what's in there, which is new in the last couple of quarters, is finished goods flower that we sell for sale purposes or end consumption within Germany. Obviously, this is inventory we're tracking very closely. And as you can see, we're trying to manage it down as we improve our cash position and get better cadence here with demand, both from the provinces and internationally. And we'll continue to focus on managing our inventory to help improve cash.

[Scott Thomas Fortune, MD & Senior Research Analyst]

Okay. No. I appreciate the color. And then focusing on kind of the EU or international side. Keith, you called out new product for on the GMP compliant side of things and the timing of maybe new derivative products being approved for use in Germany. And then from your SKUs and product portfolio, what's being in demand and the opportunity to increase different SKUs or products into Germany as we look out to the second half and into 2022 here?

[Keith Strachan, Co]

Yes. It's a great question. I think as we look at like U.S. states and Canada, popular format, things like a base in Canada, other format, things like a vape pen or like a water-soluble that you could put into a drink, it's easier or something like that, as far as like a patient-use goes for patients, is really a great opportunity. Even well-developed medical programs, such as the one in Australia, right now, really dry flower. Oil is the only choices for them. The reason why this has happened to date is you need to do it as a GMP product. So doing like an oral solution as a GMP product is something that -- there's some systems already in place because there's oral solutions for other drugs. When you look at something like a vape pen, GMP, a vape pen becomes very complex as you have to take into consideration the hardware and the stability of something, innovate them. Like nothing -- and we've got these new recreational markets that are so nascent. I don't think a lot of those settings have been done. So we're doing those now. That registration process will probably take another 3 to 6 months. So it's probably more of a 2022 opportunity as far as, let's say, something like a GMP vape pen, but we might be able to achieve that late this year, early next year. But the development is starting today. And we've just in the first part of this year kind of gauging customer interest and kind of the ability to source all of those GMP suppliers for that supply chain.

[Scott Thomas Fortune, MD & Senior Research Analyst]

Okay. Appreciate. And then focusing back on Canada, kinda of the growth in the second half year as you reopened a little bit. Are you seeing consolidation, more consolidation here? Or where is the growth going to come from? More pickup in the 2.0 expansion in that category. And then what are you seeing from some of the LP front side of things? Are they looking to outsource now more potentially kind of in this environment? And just thoughts on how the second -- stronger second half growth in Canada for you guys?

[Keith Strachan, Co]

Yes, for sure. I think we'll continue to sell our quality and innovative products, branded products at the store level. And I think, as I mentioned, we've just -- subsequent to quarter close, we've increased our sales team there and some of our resources on the retail efforts. So we could see some incremental growth there. But since we do participate in some of the more smaller categories, we're that more of an incremental growth point in the back year -- back half of this year. I think where you mentioned where we see also a lot of opportunity is kind of this B2B services coming back. So 2019, 2020, a lot of our business was B2B. And now we're seeing some of that come back as far as some of the big licensed producers that have great brands, great marketing, really need some help there. And then what's really great is now that we have this drug establishment license and it's -- we're the only ones in North America who had this drug established license for the extraction of cannabinoids. Large license producers are coming to us to do GMP-type services, whether that's tolling or using material that we source. We can do -- we can make them like a GMP API or GMP concentrate so that they can put that into their pipeline internationally. And we've already started doing some of those activities just as recently as August. So we'll see a good pickup in some of our B2B tolling services with that.

[Operator]

Your next question will come from the line of [ Natalia Cochran ] with Scotiabank.

[Unknown Analyst]

And I have some questions on the Canadian side. So from the perspective of the provinces, can you give some color what you're seeing now? Are things improving compared to the restrictions that we've had so far? Are things opening up and some provinces are ordering more? And the second part of the question is the margin side. So can you give some color on, are the margins expected to improve? Or at what sales velocity will you like breakeven on the profit and gross margins? So if you can give some color on that.

[Keith Strachan, Co]

Sure. Thanks, Natalia. Thanks for joining us this morning. I'll provide a little bit of color on the provinces. And I'll hand it over to Greg to talk about the plans for their margin improvement. So on the provincial side, we are seeing some encouraging demand signals. The province of Ontario being our biggest domestic buyer continues to open more retail stores. With the restrictions being lifted in June, July, as far as people being able to shop in stores again because we do have that high-quality in this brand. It is something that helps for sales in brick-and-mortar as someone might go in for a flower, and then see a CBD or CBN oil that they want to try. So that does really help us as far as the demand signals go. Where we're waiting to see is if provinces will pick up inventory again. Like this year, we'll pick up inventory like we saw in the last bit of 2020. So what we've seen to date of 2021 is distributors lower their inventory on hand to more of like a just in time ordering to get it out to retailers, probably because of the uncertainty around COVID-19. Now that uncertainty is a way, we hope to see them pick up that inventory again, which will add for smoother and more deliveries on our end. But we're still waiting to see how that plays out. And I think that the provinces have done a good job now of kind of looking at consumer demand. I think in Ontario specifically, they're changing the product call system, and how they work with licensed producers on what products they take in and what products they list and when they list them. And I think given our longer relationship with the provinces, that will bode well for MediPharm as well. So I'll hand over to Greg to also talk about the margin.

[Greg Hunter, Chief Financial Officer]

Yes. Thanks, Keith. So yes, on the gross margin, as I said in prior quarters, we do see a path back here to not only just profitable on the gross margin side, but EBITDA profitability. And there's a couple of different aspects where we're focused that are going to drive that. One, as Keith mentioned in his prepared remarks, is around automation, which we continue to bring into our production facilities, which will, obviously, enhance our cost position. The other one, with the international expansion, which is why we're so pleased to see the sequential growth. There's obviously higher pricing and better profitability in the international market so that will continue. The other one, as I mentioned, with some of our flower sales into the international market where we did have some lower margin this quarter impacting us. The team is actively working on improving that margin, and we expect to see some improvement there in the future. And then as well as the international market with some mix changes that moves into different products and potentially away from flower into oil should help. And then the last 2 I would mention is, one, the volume, as I said in my remarks, was challenging in the domestic market within Canada. So as Keith talked about, as we expect to see that improve and volume goes up, that helps us significantly in our manufacturing. And then finally, with some of the new products that Keith has talked about, with some of the new innovative products where we can get higher margin on loads as well. So those are all the different factors that are going to contribute in the future that we see getting back to a positive gross margin.

[Operator]

Your next question will come from the line of Tamy Chen with BMO Capital Markets.

[Tamy Chen, Analyst]

I wanted to ask about Germany. Can you speak a bit about the evolving competitive landscape there? Because I think I've noticed a couple of the other Canadian license producers that participate in that market have recently mentioned that the competitive level has increased in that market. So if you could talk a bit about that, and how the relationship with STADA has been evolving with respect to your penetration of Germany.

[Keith Strachan, Co]

Yes. All right. Thanks for joining us. I think everyone sees a great opportunity in Germany, and we'll continue to see new entrants into that space. I think to date, we haven't been really hindered by competition, especially on the concentrate side as there's still products to be registered there. So I think that there's still opportunity. I think we hear some more companies going into that space and some more investment into that space. But really, I think it's also being faced with new patients. So every month, if you look at some of the data coming out of Germany as far as coverage by the national insurer, I think we're getting more and more patients that are looking to medical cannabis. So as more people come in, there's also more patients there. So there's nothing there that we really -- that we see as a near-term really competitive. But we continue to work with our partners there, especially STADA, that kind of look at that landscape and look at our pricing to make sure that we don't get priced out of the market and things like that. So it's something that we're looking at. But it's encouraging to see everyone else wanting to come to Germany because, obviously, they see what we see in the great opportunity there. The STADA relationship is progressing nicely. As we've mentioned, we made our second delivery to them on the oil side from Australia in Q2. We continue to provide them with flour as a value-add service. And as Greg mentioned, we think that we can improve our margin on that value-add service. But we've made multiple deliveries from Canada to Germany for that flower supply. So it really is ramping up. I think as a large multinational company, they are pretty cautiously moving forward on product launches. So their trajectory is one that's a bit more conservative as they add in more patients. But what they're adding in on the patient side, it's probably more sticky than you would see in some of their competitors. So they're focused. And I believe it is a great one is that they're going to the patient level for education to make sure that they get those patients. And then they keep the patients no matter what cannabis solution they're looking for, for that therapeutic benefit, whereas some of the other company in Germany are really focused on, let's say, pharmacists that have a high sell-through of cannabis. So then they're loading in those pharmacies. So I think that the STADA approach, while a little bit slower to start has a longer staying power, and we'll see more and more great results, and the ability to put patients into new formulations or product delivery methods in the future as well. So we're really happy with the progress there.

[Tamy Chen, Analyst]

Got it. That's interesting on the -- going to their patient level. Okay. And then last question for me is a bit of a clarification, the drug establishment license. Sorry, did you say that you are working on over the next several months some sort of registrations or filings with the FDA for APIs? And that only once you have that, then the long-term vision of supplying APIs to pharma companies can happen? Like is that the next step that you have to do to kind of finish that path on top of the drug established relations? I wasn't clear. If you could clarify that.

[Keith Strachan, Co]

Yes, for sure. The drug establishment license is very unique in our industry, but not unique in the pharmaceutical industry. And there is a number of other steps that we could take to work with it. So the long-term strategy of working with a major pharmaceutical company on the launch of a new drug containing cannabis or a launch of a generic drug in cannabis is well underway. And there's a lot of steps that we could do today that we are doing today to achieve that. There is a portion of . So if you register a new drug, you go through -- in the United States, you go through a new drug application process. And in that process, you don't need to have the API registered as you're registering the entire drug. So we could provide our customer with the API in that case while currently doing the FDA filing. If you're doing an abbreviated drug application, which is a generic drug application with the FDA, they would be looking for you to be using an API that does have a drug master file already on file with the FDA. So it's an important step for us to do, and it's something that MediPharma is actively working on. So we will go through the process of registering our API. Well, not only the FDA, but out of Canada and the EMA, the European Medicine Agency. So that way, wherever our customers need an API in the pharmaceutical space, they could go to those [ basics ] to validate that those APIs will work in their final drugs.

[Operator]

At this time, there are no further questions. Do you have any closing remarks?

[Keith Strachan, Co]

Yes. Thanks. I really appreciate everyone joining the call. It was great to speak with everyone this morning. As I mentioned, we're really excited about the future, and I appreciate your time. I hope everyone has a great day.

[Operator]

Ladies and gentlemen, thank you for participating. You may now disconnect.