Medipharm Labs Corp

TSX:LABS

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the MediPharm Labs 2023 Third 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 securities 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, profitability, business growth or development. 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.Additional information is 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 non-IFRS financial measures, including EBITDA, adjusted EBITDA, gross profit and adjusted gross profit. These measures do not have any standardized meaning according to the 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.I will now pass the call to David Pidduck, CEO of MediPharm. Please go ahead, sir.

[David Pidduck, executive]

Thank you, Operator, and good morning, everyone. We appreciate you joining us for MediPharm Labs third 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. This is our second full quarter conference call following the VIVO acquisition. As an overview, we are very happy with our margin, OpEx and EBITDA results. Our balance sheet is the best shape it has ever been. Now with our house largely in order, we can turn our focus to investments to drive profitable growth. In the near term, with the cash flow and funding challenges faced by many of our peers, we look to leverage our stability and our cash position to consider M&A investments for growth.The company has been focusing on improving gross profit, reducing OpEx and delivering significant improvement on adjusted EBITDA.  All of these initiatives combined to positively impact our quarterly cash burn rate as we work on getting to a position of generating positive cash flow. We are very satisfied with the gross margin results and the continued improvement in EBITDA. Q3 adjusted EBITDA for the quarter improved to negative $2.4 million despite the softness in quarterly revenues. As we have focused on improving margins, we have been diligent in our pursuit of higher-margin business and in exiting or managing lower margin or negative margin business. While this approach has had notable positive impact on profit and cash flow, it has also negatively impacted our quarterly revenues.MediPharm has remained focused on the integration of VIVO Cannabis and delivering on the synergy targets we have previously shared. I am pleased to report that all VIVO-related cost synergy targets have been met, and Greg will share details on the associated positive results in gross profit, OpEx and EBITDA. A further round of restructuring was implemented in Q3 that will provide an additional $3 million in cost improvements starting in Q4.The acquisition of VIVO was a transformative transaction for MediPharm Labs and has allowed us to deliver 45% year-to-date revenue growth over prior year and an almost 50% improvement in adjusted EBITDA year-to-date. Our combined adjusted gross profit was approximately 32% for the quarter versus a minus 10.5% in the prior year quarter. Year-to-date adjusted gross profit has improved by $6.7 million and OpEx has been substantially reduced as well. Greg will discuss our cash position in more detail, but we are very happy to report a cash balance today of approximately $19 million. The previously announced legal settlement has added significantly to our cash position with our Q3 adjusted EBITDA of minus $2.4 million, a strong balance sheet, including full unencumbered ownership of our key assets and minimal debt of less than $3 million. Our improved cash position allows us to look for strategic investments that will drive revenue from both an organic and M&A perspective.To summarize, revenue, gross profit and adjusted EBITDA improved versus prior year and versus trailing 12 months, largely driven by our profitability focus, the successful VIVO integration and cost reduction initiatives. With our profitability initiatives showing good results, we can further increase our focus on profitable revenue growth. Our experience with the VIVO integration has shown that we can quickly and profitably integrate and drive synergies with like-sized organizations, and we are confident that this approach can be repeated.As we head into 2024, we continue to focus on reducing costs, driving revenue growth in selected profitable segments, progressing our longer-term pharmaceutical milestones and pursuing synergistic M&A with our cost position now well established and a very favorable cash and debt position relative to some of our peers, we believe that there may be several synergistic M&A opportunities available for consideration in the near term. I will now pass the call over to Keith.

[Keith Strachan, executive]

Thanks, David. Q3 was a great quarter for MediPharm as we continued our strategic focus on a profit-first model. With a deep understanding of our costs and the business acquired from VIVO Cannabis in April, we were able to laser focus on where to reduce investment and where to invest on areas prime for growth. The record gross profit margin and drastically reduced EBITDA loss in the quarter speak to the success of this focus.I would like to take a few minutes to outline some of the examples of how we got here and what work is being done to expand revenue in the future. I will start with the Canadian adult news and wellness category. In this market, we saw Q3 net revenue decline. However, there are good reasons for this. One, we grew cannabis oil market share, which is our highest margin adult-use product. Two, we pulled back on nonprofitable vapes, dry flower and pre-roll SKUs. And three, we stopped retail partnership programs where we would not see return on investment.In Q3, we laid a foundation to grow the top line in this category with the same guardrails of profitability. Some good examples include; we negotiated the elimination of the 10% royalty on the Wildlife brand, making new dry flower and pre-roll launches more profitable; we invested in new sales reps in Western Canada and subsequent to the quarter, launched 2 new oil products and 2 additional capsule SKUs, all high-margin products for us.Looking at the Canadian medical category, we maintained sales while targeting profit by rationalizing SKUs on the Canna Farms direct-to-patient portal. In the process, we removed products that carried a higher manufacturing costs and replaced them with products where we have invested in automation.On the third-party side of medical sales, we increased our listings with MyMedi the former Shoppers Drug Mart platform from 8 to 15. We also grew listings with other major patient platforms such as Aurora and [Indiscernible]. For future growth in the Canadian medical category, we recently entered into an agreement with Tilray to take on specialty MediPharm branded SKUs for their medical channel. Once launched with Tilray, we will have our products on all major Canadian direct-to-patient platforms, making MediPharm a go-to brand choice for patients no matter where they purchase their medical cannabis products from.In Q3, our clinic business, Harvest Medicine published 2 papers in the American Journal of Endocannabinoid medicine, which is also mentioned in the Wall Street Journal. It is published research like this that helps physicians and specialists in making cannabis prescription decisions that will ultimately grow the Medical business.Lastly, in the international medical category, revenue was down on a quarter-over-quarter basis, but this area is where we made the most improvement on gross margin. In previous periods, the international sales included onetime bulk flower sales to some of our existing oil customers. However, many of these sales were done via third-party source flower resulting in low margins. This also came with inventory risk based on tight GMP flower specifications. In Q3, we consciously made decisions to decrease some of the marginally profitable spot business opportunities to refocus on our long-term German partners like STADA. Much of our international focus was growing our Beacon Medical brand. As a top 3 flower brands in Australia, we knew we can grow with a high-margin base with more resources and expanded product portfolio.In Q3, we launched our Beacon Medical GMP vapes and oils. The Australian vape market is poised for significant market growth, given new and more strict Australian GMP standards put in place in July 2023. We are well positioned as a partner of choice when regulations tighten. We also increased our investment in the Australian medical sales team during the quarter.Outside of those highlighted segments, MediPharm remains a leader in pharmaceutical cannabis production. We made additional progress on our U.S. FDA site registration and API filings, while our international pharmaceutical partner navigates the U.S. generic drug application process. We also completed a sizable delivery of clinical trial material to the U.S. in July with new U.S. DEA permits recently received for additional delivery this year.We look forward to translating our leadership in quality pharmaceutical manufacturing into meaningful revenue growth in the future. I am very excited about our position in Canada and internationally and look forward to sharing our progress as more milestones are achieved. 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.During Q3, we settled a long outstanding dispute for $9 million, which included $3 million of cash, which was collected in October, $4.5 million of Tilray shares, which were liquidated in October for net cash proceeds of approximately $4.3 million, $1 million inventory credit from Tilray and a commercial sales agreement with Tilray for $0.5 million of revenue over 4 years. In addition, we sold unused land from the VIVO acquisition for $1.9 million of cash proceeds, which was received in the quarter. This additional $9.2 million of cash further strengthens our balance sheet so we can continue to execute our strategy, including selective M&A. As of today, we have approximately $19 million of cash.Furthermore, in September, we implemented plans to further reduce our workforce as we focus on profitability. This plan will reduce our expenses by approximately $3 million on an annualized basis starting in Q4. This $3 million is in addition to the $7 million of annualized expense synergies from the VIVO acquisition and in addition to the $3 million of annualized savings from the restructuring we completed in late 2022. In total, over the last 12 to 15 months, we have implemented approximately $13 million of savings on an annualized basis as we focus on profitability.Turning to the P&L performance for the third quarter. Revenue for the third quarter of $8.5 million increased $1.2 million or 17% versus prior year, while year-to-date revenue of $24 million increased $7.4 million or 45% versus prior year. Q3 and year-to-date revenue growth was largely driven by the acquisition of VIVO and partially offset by the divestiture of the Australian subsidiary at the end of Q3 2022.Revenue in the Canadian medical channel of $3.5 million increased exponentially versus $0.2 million in Q3 2022 driven by the VIVO Medical business. Revenue in the international medical channel was $2.6 million versus $2.3 million in Q3 2022, representing a 13% growth rate. The growth of the international medical channel was largely driven by the integration of VIVO's Australian business, Beacon Medical. The international business represented approximately 30% of total revenue in the quarter.Revenue in the Canadian Adult use and Wellness channel was $2.2 million, which declined versus Q3 2022 and Q2 2023 as we selectively increased prices, carefully managed sales and marketing expenses, and exited selected products. Pharmaceutical and B2B revenue in Q3 was $0.2 million and decreased $1.3 million versus Q3 2022 driven by the sale of our Australian subsidiary. As Keith discussed previously, pharmaceutical revenue is a longer-term strategy and will take time to pay off as the market continues to develop.Gross profit for Q3 was positive $2.4 million or approximately 28%, which is the fourth consecutive quarter with positive gross margins. Gross profit in the quarter was impacted by several discrete items, including fair value adjustments for biological assets, incremental cost of cannabis acquired from the VIVO acquisition and severance for restructuring. Adjusting for these items, gross margin was approximately 32%. Year-to-date gross margin is 15%, while the same period prior year was negative 13%.Gross profit continues to improve driven by product mix, production efficiencies, price increases and cost reduction initiatives. Our management team continues to aggressively prioritize driving gross profit improvements.General and administrative expenses in the third quarter of $4.3 million increased versus prior year driven by the integration of VIVO and decreased sequentially driven by cost reductions and acquisition synergies. G&A expense for the quarter was impacted by $0.3 million of severance expense for restructuring. Adjusting for severance, G&A expense was approximately $4 million. Retrospectively, if VIVO were included in our Q3 2022 results, G&A expense in the quarter declined approximately 42%, reflecting our combined cost reduction initiatives.Marketing and selling expense of $1.7 million was consistent with Q3 2022 and Q2 2023 despite the incorporation of VIVO. Total OpEx, which includes G&A, marketing and selling and R&D expense was $6.1 million in the quarter. Adjusting for severance and some other discrete items, normalized OpEx was approximately $5.9 million. Retrospectively, if VIVO were included in our Q3 2022 results, OpEx in Q3 2023 is approximately 37% or $3.6 million lower, reflecting our combined cost reduction initiatives.Adjusted EBITDA for Q3, a negative $2.4 million improved $2.6 million or 53% versus Q3 2022 and year-to-date adjusted EBITDA was negative $8.6 million, which improved $8.3 million or 49% versus prior year. This improvement is driven by both expansion of gross margins and the reduction of operating expenses. Retrospectively, if VIVO were included in our Q3 2022 results, adjusted EBITDA in Q3 2023 has improved approximately $6 million or 72%, reflecting our combined cost reduction and margin improvement initiatives.Said another way, in 2022, MediPharm adjusted EBITDA averaged negative $5 million to $6 million per quarter and VIVO averaged negative $2 million per quarter. Before the acquisition, the 2 companies combined averaged adjusted EBITDA of negative $7 million to $8 million per quarter in 2022. MediPharm's stand-alone Q1 2023 adjusted EBITDA pre acquisition was negative $3.1 million and now Q3 post VIVO acquisition, adjusted EBITDA improved to negative $2.4 million. This means the company was able to incorporate VIVO starting April 1 and improved profitability relative to Q1 2023, largely driven by cost reduction initiatives and synergy achievement.Moving to a few notable items on the balance sheet. Trade and other receivables of $13.9 million includes the receivable from the legal dispute that was settled in the quarter as discussed previously. Excluding this item, trade and other receivables is $6.4 million. Our cash balance at the end of Q3 was $13 million, and the company has less than $3 million of debt. Contrary to many other cannabis companies, MediPharm is also up-to-date on cannabis excise duties, sales taxes and accounts payables.In addition, this $13 million cash balance does not include the $7.3 million collected from the dispute settlement. As of today, MediPharm has approximately $19 million of cash. Although we still have work to do to get to profitability and become cash flow positive, Q3 was another step in the right direction. Gross profit was positive for the fourth consecutive quarter and expanded to 28%. Adjusted EBITDA improved sequentially to negative $2.4 million. We implemented another cost savings program to save $3 million on an annualized basis. And finally, we have a strong balance sheet relative to our peers with $19 million of cash as of today, less than $3 million of debt, and we are up-to-date on our liabilities, including excise taxes.With that, I'll turn it over to the operator to open the line for questions.

[Operator]

Thank you. [Operator Instructions]. And we will take our first question from Aaron Grey with Alliance Global Partners.

[Aaron Grey, analyst]

So first one from me, right? So a nice job there on some of the cost saving initiatives to narrow that EBITDA loss that you guys have done. But going forward, right, just kind of getting to that profitability inevitably, it seems like you have to get to that top line growth as you look to 2024. Just be kind of high level to maybe where you see those growth drivers being, should we look at it more from Canada and some of the initiatives you have going there, maybe Germany with the removal from the narcotics list hopefully coming in March and opening up the medical market. You also have [Indiscernible] Australia as well. Where do you think will be the primary lever for that driver for growth to ultimately lead you guys to profitability there?

[David Pidduck, executive]

Aaron, it's Dave. Thanks for the question. You actually touched on a lot of the places that we can be looking for growth. I'll turn it over to Keith. We are bullish on Australia and the opportunities in Australia with the brand that we have established and the product launches that we mentioned. And I think we touched on some of the other pieces. I'll turn it over to Keith, and he can give a little more color.

[Keith Strachan, executive]

Dave. Yes, I think there's a lot of opportunity for growth for us as we kind of pulled back in places where we saw that there wasn't a great gross margin and a good opportunity for profitability. We've got to start expanding in places where we see it. I think for Germany, specifically, we are really focused on the extract market there as well as other some novel deliveries in places we weren't before, like tenapanor or CBD isolate that pharmacists is used for compounding. Some of that takes time as far as registrations as we switch to that. And we have a lot of plans there for 2024. As Dave mentioned, the Beacon Medical brand, which was a VIVO brand was something that something that we had when we acquired VIVO, and they do -- it is a really strong one. I mentioned it's top 3 in flower sales. And before this year, they never did have an extract product such as oil or vapes. We launched those really late Q3. So September when they're first available to customers. And the pull-through has been good, and we expect that to grow replenishment orders scheduled for January. So we'll see those products grow in 2024.And then finally, Brazil, which we like is a really good opportunity in earlier periods when we were on the call, that was a bit of a slower start with one of our partners being acquired by a multinational pharmaceutical company. We do have a new partner, as we mentioned in July. They're going through the registration process and how we expect that to be approved in December. That partner is a large generic company, one of the biggest in Brazil. So we expect them to have like a satellite movement of product in that country. Obviously, with a lot of cannabis users there today medically and see that expand. So a lot of places, I think internationally is the place where we're going to see most of that growth as far as what's going to drive the bottom line for profitability. We continue to be gain market share in Canada. And the struggle with Canada, as you're hearing everywhere, is as different companies go through things like insolvency. -- they're selling things just don't make sense, the price -- so we'll see price of a pen or a pre-roll is not a price that we can make money on. So we're not going to participate there if we can't make money. So we'll keep our high-value, high-quality products there for our consumers who are looking for those. But when it comes to seeing massive growth there, we still need to see a little bit of a washout of some of those companies that are signed below cost.

[David Pidduck, executive]

Maybe the only other thing I'll add to that, Keith, is in the medical channel, we've been pretty successful building up our relationships with almost all of the providers in the medical space. Our own medical channels are doing okay, although that market is declining. I think our presence on all the platforms is getting stronger. So we're feeling pretty good about that segment as well.

[Aaron Grey, analyst]

Second question for me. A lot in the U.S. around potential rescheduling of cannabis from Schedule 1 to Schedule III with the AXS recommendation and awaiting natural billing from the DEA. From your perspective, in early days and still today, right, being an API provider for pharmaceuticals and others, could the rescheduling the Schedule III and really open up that opportunity on your end as well? I know a lot of folks here talking more about it from the [ 2 API ] side from the operators here in the U.S. But from your side, thinking about from a little bit different perspective, could a reschedule into 3 potentially open opportunities for you more so on the API side? Or would that not make as much of a difference maybe?

[David Pidduck, executive]

Thanks, Aaron. It's actually a massive opportunity for MediPharm that I think is a little bit overlooked as far as how big it is. Right now, with the scheduling of cannabis in the U.S., it is the most strict narcotic. And what that does is a few things. One, on our clinical trial material business right now, we sell clinical trial material. We have an FDA-approved trial that's happening with the University of Southern California, and we deliver product to the U.S. We already have and we will again this year, and that has to be approved by the DEA. And because of the scheduling of it now, it's actually governed under quota system. So if our partner can't get the quota, then it would slow down and throttle how much product we can send as well as their clinical research partner has to obviously have special arrangements in place to receive and handle and distribute that product based on the scheduling today. So the rescheduling of cannabis would loosen those and allow programs like that to grow. It would also open up new clinical trial opportunities at a bigger scale. So right now, if you're at a university and you go to the university administration to ask to run a trial and they look at the scheduling of cannabis, it would be something that would be commonly benign. As that's rescheduled, that's something that would open up some more opportunities.Obviously, there's a lot of researchers that are really eager to continue to do research. And when it comes to doing research to that scale with a proper FDA IND you do need to use FDA-approved product. So there's not many folks within the U.S. that have that. So here at MediPharm in Canada, we've actually had an FDA inspection to reinspection and a lot of back and forth with the FDA we are foreign site license. So our quality products and API actually meet those standards as those gates open up for more clinical trials within the U.S. And a lot of U.S. operators today don't meet that because they are governed under those state-by-state laws. That's a one big piece of it. The second big piece of it is on the API, as you mentioned. If and when our pharmaceutical partner is successful in their generic application to produce a generic Epidiolex and distribute it. Under the current schedule, they are -- they do have some hurdles under the same quota system. So with the rescheduling comes, the quotas will be bigger, and that will allow our international partner when they're making that generic drug to import more API from MediPharm to finish that product in the U.S. and get it out to U.S. patients. So it is very significant for us, not as you mentioned, not the same an MSO with the 280, but on the regulation side, it really does open it up given our FDA approval and FDA status.

[Aaron Grey, analyst]

Okay. Great.

[Operator]

And we will take our next question from Scott Fortune with Roth MKM.

[Nicholas Hatzi, analyst]

This is Nick on for Scott. First question for me. Just looking for some color on your oil offering in Canada. You called out increasing share despite it being kind of a high price point SKU in the marketplace. Just your sense of the consumer uptake there and the opportunity going forward would be helpful.

[David Pidduck, executive]

Sure, Nick. Yes, we continue to lead in that category in many ways as a high-quality provider. Many folks that are looking for a wellness product via the recreational channel. That oil business for us remains steady even as the category is slightly declining. So we see the category of wellness being put into different subcategories. At first, it was all oil and now you have different formats. And what we've done to meet the customer demand because we actually just recently launched capsules -- so we had some CHC capsules that launched in the summer and just subsequent to the quarter, some CDN and CBD capsules. So we'll hopefully see that grow as far as dollars as well as market share. So as we grow market share, we saw a little bit of decline in month-over-month actual sales on the oil category, but that's why we added those capsules. We are still #2 in dollars spent in oil, but we are closing that gap every month between the #1, which is a ready can product now by Tilray, just low cost. So obviously, just moving volume from a low cost perspective, but we are that kind of #1 quality go-to product, and we'll continue to own that space going forward.

[Nicholas Hatzi, analyst]

No, I appreciate that color. And the second one for me, just on the cash balance. You called out the M&A opportunity. Just your sense of the environment and the multiples you're seeing out there, given the pressure on some of the smaller international companies out there? Just any specific category you're targeting?

[David Pidduck, executive]

Yes, maybe -- thanks, Nick. I'll -- this is Dave. I'll kind of make a comment on that, and then I'll turn it over to Greg, and he can give some more color. I think the short answer is there's lots of opportunities out there now, particularly in the Canadian market and the multiples are very low in terms of some of the opportunities depending on the state of the various players. And so we think it's actually -- the timing is very good, for companies that have a strong balance sheet that have cash, and we don't intend to spend all the cash with any transaction that we do. We intend to invest, look for partners potentially where we can deploy that cash for investments for growth and probably more looking at equity-related transactions. But part of the question was, we are open to opportunities internationally as well for international growth. But the current market right now in Canada, we think we've proven through the VIVO acquisition that our ability to integrate and synergize and really run 2 companies for the cost of one, which is essentially what we've been able to do. We think there's several opportunities to do that again with potential Canadian targets. So maybe as background, I'll turn it over to Greg, and he can give a little more color.

[Greg Hunter, executive]

Yes, sure. Thanks, Dave. Thanks for the question. Yes. So as Dave said, with our cash balance, where it is about $19 million today, that gives us some flexibility. Obviously, as Dave said, we don't want to do a deal all in cash, and we'll use equity. We are seeing -- in the Canadian market, Dave indicated, the multiples are relatively low. So now is a good time. The watchout or the thing that we're being very careful with is to find the right partner like another VIVO that isn't burdened with excessive amount of debt, which we see across the market today. And when we say debt, that includes some folks that have been not paying excise duties, we've seen a lot of that, whether it's a burden on debt and excise duty -- in the international market, where we continue to look for opportunities as well, the valuations are a little bit higher than what we see in Canada. So again, we want to be careful there to make sure we select the right partner, which is what I think we did with VIVO as we've shown on integrating it relatively quickly and realizing some synergies to really help drive that profitability improvement that we've seen over the last couple of quarters.

[Operator]

And there are no further questions at this time. I will now turn the call back to Mr. David Pidduck for closing remarks.

[David Pidduck, executive]

Thank you, operator, and thanks, everyone, for joining us today. We look forward to sharing our year-end results in March. Everybody have themselves a great week.

[Operator]

Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.