Medipharm Labs Corp

TSX:LABS

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the MediPharm Labs Fourth Quarter and Full Year 2022 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, level of activity, performance, goals or achievements and other future events, trends or developments. Statements about MediPharm's previously announced plan of arrangement transaction with 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, pro forma and overall financial performance, potential future results and cost synergies resulting from the transaction. And statements about the combined company's profitability and ability to grow the business going forward following completion of the transaction with Vivo. To the extent any forward-looking information contained in these remarks constitutes financial outlook or financial guidance in development of such financial guidance MediPharm in collaboration with management of Vivo made a number of assumptions and relied on a number of factors and considerations, all of which are described in the joint information circular of MediPharm and Vivo dated February 6, 2023, a copy of which is available on our profile on SEDAR.Forward-looking statements are made as of the date hereof based on information currently available to management and on estimates and assumptions made based on factors that we believe 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. Forward-looking statements and financial outlooks are based on assumptions and subject to various risks, which include, among other things, those outlined in the circular and under the heading Risk Factors in our most recently filed MD&A and annual information form, which are available on SEDAR. Our 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 International Financial Reporting Standards, or IFRS, and therefore, are not to 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 entitled 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 statement, whether as a result of new information, future events or otherwise. I will now pass the call over 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 Fourth Quarter and Year-end Financial 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 achievements and growth opportunities and then hand the call over to Keith and Greg to provide more details on the quarterly results. Given the timing of this call, I do want to take some time to discuss our pending transaction to acquire Vivo Cannabis Inc., which we anticipate to close in the coming days. With this transformative transaction, we continue to build on our reputation as a leading pharmaceutical cannabis company. The acquisition of Vivo will add 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 harvest medicine, and they bring to MediPharm a long-standing Canadian medical sales platform with Canna Farms Medical. Finally, with the addition of Vivo's Napanee GMP facility, we are adding a second GMP site in Canada. 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. International revenue of the new combined company will represent about 40% of total revenue. We now participate in over 10 countries globally. There are many potential revenue and cost synergies realizable in the near term, using forecast derived collaboratively by both management teams, along with revenue and cost synergy estimates. The combined company aims to find positive EBITDA synergies from $7 million to $9 million on an annualized basis and could reach positive EBITDA and cash flow in the first half of 2024.Finally, the resulting company will have a strong balance sheet. We continue to enjoy a solid cash position relative to our peers. We will have less than $2.5 million in debt on closing and yet unencumbered ownership of all of our major assets. This strong balance sheet is expected to provide confidence in the combined company's ability to execute on our strategic growth road map despite the current challenging state of capital markets for cannabis. Beyond the Vivo transaction, MediPharm continues to explore additional M&A activity. Given our strong balance sheet with virtually no debt and $24 million in cash at year-end, we are actively positioning MediPharm as an acquirer of choice. We are taking a very focused approach here. There are many opportunities for companies urgently in need of partners, but opportunities need to build on our unique capabilities in the pharma, global and Canadian business segments and help in our modest profitability. We are working with experienced advisers to identify and vet further opportunities in Canada and internationally for follow-on transaction opportunities. MediPharm has a strong foundation, and our team will be very prudent with our cash, our balance sheet and with our equity as we actively look for deals that would further our strength while driving returns for shareholders. Outside of M&A, MediPharm has been busy solidifying our business fundamentals in 2022. In October, we closed a previously announced sale of MediPharm Labs Australia, allowing us to further leverage our GMP facility in Barrie. The sale generated just over CAD 6 million in cash proceeds. We have already begun producing and shipping EU bound volume from our Barrie Ontario facility. I'm happy to share that through the Australian closure and significant Canadian OpEx and headcount reduction, we reduced our quarterly EBITDA burn rate of $6.6 million in Q4 2021 to $3.6 million in Q4 2022.Regarding working capital, the team has done a good job in bringing the rigor to the cash management cycle. Subsequent to year-end, we also settled a previously written off bad debt with a B2B customer from 2020. This resolution eliminated a potential purchase obligation and resulted in our receipt of $1.7 million worth of cannabis raw materials at no charge that will be used as part of our 2023 production. We will continue to focus on tight cash management and expect further improvements in 2023. With respect to gross profit, we have completed a review of our product portfolio and have been increasing prices, decreasing costs and eliminating or exiting unprofitable product lines. These and other initiatives helped our Q4 results which showed a positive gross profit for the first time in 2 years despite lower revenues due in part to the closure of our Australian facilities. As gross profit improvement initiatives start showing results over the coming quarters, we expect our margins to continue to improve. Turning to growth. I want to again stress the transformation in our business over the last several years. We have transitioned from a largely Canadian B2B oil and extract supplier to a diverse international multisegment business with growing revenues in our pharmaceutical, adult wellness and medical platforms, both domestically and internationally. While our B2B business has decreased from $28 million in 2020 to just $3.7 million in 2022. Our other segments combined have grown from $8 million to $18 million over the same period. Despite year-over-year revenues showing minimal growth, we actually have a strong growth trend very in our results, and Vivo will help us to build on this trend. Our team continues to make progress on all Pharma, international, medical and in the Canadian adult-use market. As a reminder though, our key MediPharm strategy remains to position us as the go-to pharma-grade cannabinoid APR supplier pointed towards the international pharma cannabinoid space where our unique GMP drug establishment license and API capability differentiates us. We recently shared some of our early-stage clinical R&D work with various pharma and academic partners. We all recognize that these are longer-term players, but we continue to make progress. We have provided a detailed response to a recent FDA facility inspection in Barrie, an important milestone for any DMF submission. We are confident that we continue to progress long-term opportunities in the pharma space with partners for both NDAs, new drug applications and ANDAs, Abbreviated New Drug Applications opportunities. In the pharma space, we are creating relationships to provide API and finished dose formats for future marketable drug products. We are becoming the go-to supplier for several academic and pharma partners. A great example of this is the recent U.S. FDA innovative new drug approval of a study, our partner, the University of Southern California is leading using MediPharm Labs products. This U.S. NIH funded RCT study has recruited patients over multiple sites, and we anticipate delivering the clinical trial products soon. As we have shared, we are supplying API to several ongoing drug development and research [ app ]. We have partnered with an international pharmaceutical company to supply API to support an abbreviated new drug application filed with the FDA. Last quarter, we let you know that the ANDA has been filed and now we can update that this has led to the FDA doing an in-depth review of our drug master file, including a site inspection. We have responded to the FDA's inspection report and are providing ongoing information and updates as required. This is representative of the type of partnership we will continue to focus on. Remember, it only takes one of the several longer-term pharma products in development to be successful to completely change the face of this company.While we progress these longer-term opportunities, we will continue to drive growth and profitability through the international medical and Canadian businesses as a solid bridge to the larger opportunities. Turning our attention to possible changes in the Canadian OTC market as patients and consumers turn to cannabinoid as a wellness products. In 2023, we will further prepare to participate in a possibly emerging Canadian OTC, over-the-counter CBD market. With proposed legislation anticipated later this year, this could classify certain CBD products in Canada as natural health products or NHPs, under the current Canadian Food and Drug Act. Our drug establishment license and our NHP-GMP license, combined with our award-winning CBD product portfolio makes us the only purpose-built cannabis facility ready to participate in this market today. Subject to how some of these recommendations are implemented, we believe MediPharm is already uniquely positioned to supply a full portfolio of NHP and GMP-compliant products. Again, our GMP pharma quality approach positions us today to be one of the few ready players to address this potential new market. To summarize, 2022 was a turning point for MediPharm Labs as we successfully transformed the way from a narrow B2B business to a diversified global business. We have focused on reducing costs, driving revenue growth in selected segments, progressing our pharmaceutical milestones and pursuing synergistic M&A. We will remain focused on executing our strategy. And as discussed, we are committed to being EBITDA positive by the first half of 2024. I will now pass the call over to Keith.

[Keith Strachan, executive]

Thanks, David. In 2022, we completed the optimization of sales segments to focus mainly on MediPharm Labs branded finished goods and international medical products, with a step away from unpredictable Canadian B2B sales. We now have a robust presence in pharma, medical and Canadian adult-use markets. All of these diverse segments have been built from a base near [ Europe ] and all are growing today. MediPharm Branded Products net revenue in Canada was $13.3 million in 2022, up 71% from $7.8 million in 2021. Q4 adult-use sales grew 24% from Q3. This is driven by clear leadership in the Canadian cannabis wellness space headlined with our award-winning cannabis oils. MediPharm continues to focus on leading in the Canadian wellness space. According to HiFyre, in 2021, we were the #5 producer in the Canadian cannabis oil market. In Q4 2022 we became the #2 producer in the oil category with 20% market share, a number we continue to see trend upwards. This is clearly an area where we can win within our quality, expertise and differentiated product lines. In 2023, domestic sales and innovation will be focused on new, more dosable, medical and wellness formats like capsules that serve to refresh our current portfolio and improved margins. Internationally, new markets in 2022 included commercial sales of GMP finished goods for Brazil and the U.K. With the sale of our Australian redundant operations, all international GMP product is now being shipped from our Canadian manufacturing site. We anticipate international sales will grow throughout 2023. In Germany, in particular, our main customer, the large pharmaceutical company STADA, continued to grow market share in the medical cannabis oil category, starting the year with 4% market share and ending the year with over 10% market share. We are now second in market share in the German cannabis oil market. In 2022, we also completed R&D and commercial scale development on the pharmaceutical drug Dronabinol, which is a 95% pure THC isolate used as a pharmaceutical API and widely used by compounding pharmacy in Germany. In that market, Dronabinol, is the second highest prescribed drug product behind pharmaceutical drug, Epidiolex. Our unique positioning in the Canadian domestic wellness, international medical and pharmaceutical markets to enable MediPharm to scale rapidly without the need for additional capital, licenses or resources.Before turning to Greg to discuss financials, let me tell you about some of the changes we have made to our revenue segmentation. As you recall, in previous periods, we reported revenue as private label, white label and tolling. We now have 3 new reported segments as follows: Canadian adult-use and wellness, international medical cannabis and pharmaceutical and business to business. Canadian adult use and wellness. This includes cannabis-based products such as cannabis oil, vapes, dry flower, pre-rolls and soft juices. These products are sold to the provincial distributors and domestic medical channels such as Aurora or Canopy medical cannabis platforms. International medical cannabis, which includes GMP tinctures and GMP dry flower to international customers, such as STADA and pharmaceutical and business-to-business, which includes bulk cannabis concentrate-based products such as distillate and isolate to domestic and international customers, Bulk isolate includes pharmaceutical-grade cannabinoid and [ isolate ] form produced using our Canadian drug establishment license and sold to pharmaceutical customers. For our pharma and academic partners, we also provide a range of clinical and R&D capabilities, including clinical trial materials for approved drug trials. Also included in this segment are contract manufacturing revenues. 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, 2022 was a pivotal year for MediPharm as we continue to reshape our business by 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 in Q4 and 2022. Revenue for 2022 of $22.1 million was marginally improved versus 2021 revenue of $21.7 million. However, as Dave and Keith mentioned, as you look deeper into our revenue segments, you will see some very positive trends. Revenue to our provincial distributors increased 71% from $7.8 million in 2021 to $13.3 million in 2022. This was offset by a decline in our business-to-business revenue as we look to transform our business into more profitable end products and increased focus on medical and pharmaceutical segments. Adjusted EBITDA improved from negative $27 million in 2021 to negative $21 million in 2022. Our quarterly adjusted EBITDA was approximately negative $6 million per quarter in 2021 and the early part of 2022. We have been successful in reducing that to negative $3.6 million in Q4, with continued plans to further improve in 2023. As discussed last quarter, at the end of Q3 2022, we completed the execution of our restructuring plan that saw a 30% reduction in the Canadian nonmanufacturing headcount. This initiative will save over $3 million on an annualized basis with Q4 being our first quarter to show the benefits, as I will discuss later. In addition, on October 6, we closed the transaction to sell our Australian facility for AUD 7.25 million or approximately CAD 6.4 million. As a reminder, this transaction has several key benefits.One, it will reduce our annual operating expense by $4 million. Two, we will consolidate our global supply chain and production capabilities into our GMP facility in Barrie to drive further efficiencies. And three, it strengthened our balance sheet with the additional $6.4 million of cash received in Q4. Together, the Canadian restructuring and the sale of our Australian facility will save $7 million on an annualized basis with these savings showing benefit in our Q4 financials, which I will discuss shortly. Finally, in Q4, we signed a transformational agreement to acquire Vivo Cannabis, which will see our revenue more than double and expect to achieve synergies between $7 million to $9 million on an annualized basis starting in Q2 2023. Turning to the P&L performance for the fourth quarter. Revenue for the fourth quarter decreased sequentially as expected from $7.3 million in Q3 to $5.6 million in Q4, largely driven by the sale of our Australian subsidiaries. Revenue in the Canadian adult-use and wellness segment grew 24% on a sequential basis and 71% on a year-to-date basis as sales increased to $4.5 million in Q4 and $13.3 million year-to-date. This growth is driven by our new and innovative products, the launch of our shelter Wildlife brand in May 2022 and select investments in sales and marketing. Revenue in the International Medical segment decreased on a sequential and year-to-date basis to $0.7 million in Q4 and $5.1 million year-to-date. This decrease is driven by several factors, including the sale of our Australian subsidiary and eliminating products with low or negative gross margins. As we have said in prior quarters, this segment will fluctuate as the market matures. Revenue in the pharmaceutical and B2B segment decreased on a sequential and year-to-date basis to $0.5 million in Q4 and $3.7 million year-to-date. This shift is in line with our strategy as we are decreasing our reliance on the less stable and less profitable B2B market segment and increasing focus on the more sticky and profitable Canadian adult-use and wellness, international medical and pharmaceutical markets. As the pharmaceutical market continues to develop and mature, this segment will begin to grow. In 2022, we had approximately $300,000 in revenue with both pharmaceutical companies and academic clinical trial partners. Gross profit for Q4 was $0.2 million compared to Q3 gross profit of negative $1.2 million.This improvement was driven by the sale of our Australian subsidiary, the full implementation of our Canadian restructuring plan at the end of Q3, the elimination of unprofitable products and improved utilization of our Barrie production facility. General and administrative expenses in the fourth quarter decreased sequentially from $3.5 million in Q3 to $3.4 million in Q4. Excluding transaction fees, general and administrative expenses decreased from $3.3 million in Q3 to $2.6 million in Q4 due to the sale of our Australian subsidiary and the full implementation of our Canadian restructuring plan. Marketing and selling and R&D expenses of $1.6 million and $140,000 respectively, in Q4 were consistent with Q3. These investments will vary as we selectively allocate resources to advance our capabilities and product portfolio with a vision to become one of the most sophisticated cannabinoid producers in the world and capture a sustainable portion of the global cannabinoid medical and pharmaceutical markets. Adjusted EBITDA for Q4 improved $1.4 million from negative $5 million in Q3 to negative $3.6 million. Moving to a few notable items on the balance sheet. Trade and other receivables declined from $13.7 million at Q3 to $12.9 million at Q4 with a continued focus on collections. As discussed in previous quarters, there is one large customer owing a total of approximately $8.5 million at the end of Q4, 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 this summary judgment, the customer appealed the decision and a court date has been scheduled for May 23, 2023. Adjusting for this one customer trade and other receivables is $4.4 million. Our focus on cash and working capital is continuing to pay off as our cash balance on December 31 was $24 million, which increased $4.6 million from September 30, largely driven by the sales and collection of proceeds from our Australian subsidiary. Although we still have work to do to get to profitability and become cash flow positive, 2022 was another step in the right direction. Sales and adjusted EBITDA improved relative to 2021. $7 million of annualized savings was realized with the implementation of our restructuring plan and the sale of our Australian subsidiary. Cash burn reduced relative to prior quarters with continued improvements on working capital and expense reductions. At year-end, we had $24 million of cash, full ownership of assets and virtually no debt. Finally, given the strength of our balance sheet relative to our peers, we are very well positioned as we look to integrate Vivo, drive $7 million to $9 million in annualized synergies and continue to look at the M&A landscape for additional transformational opportunities. With that, I'll turn it over to the operator to open the line for questions.

[Operator]

At this time, I would like to remind everyone in order to ask a question press star... Your first question comes from the line of Scott Fortune from Roth MKM.

[Scott Fortune, analyst]

Thank you for the questions here. Are you evaluating the consolidated business now with a closing that shortly, obviously, [ conversations ]. How are you looking at from the full product portfolio suite now that you have an area of focus? Are there under a representative or missing categories of .. I just focus on kind of the emphasis of different categories potentially going forward from that standpoint?

[David Pidduck, executive]

So I'll start that and then turn it over to Keith. Thanks for the question, Scott, it's Dave. So first of all, on the portfolio tweeters a skew rationalization sort of a line-by-line code-by-code exercise that we've gone through on our side, which is sort of leading out of making sure that everything we sell is profitable. And so that has either resulted in increasing prices, exiting certain product lines or looking at the cost structure. So we've kind of done that line-by-line thing on our side. We started that on the Vivo side, but obviously, that is earning on in our early on and taking over. We're going to do this sort of saying line-by-line review. And the beauty of -- One of the beauties of this of this deal is that our product portfolios don't really overlap either geographically or on a product line basis, obviously, their main focus being they grow [ flowers ] and repurchase that externally. There's no obvious 2 different product lines and we pick one. It's more a case of making sure every line is profitable. And then the great thing is we have channels and they have channels that we can put our respective products through. So they have a much bigger presence in Australia, and we can push some of our products through their channel. They have a medical channel we can push some of our products to the medical channel, and we probably have a stronger Canadian adult-use presence that we can put some of their products through. So it's very -- There's a good opportunity and a whole bunch of fronts there, but certainly, the line-by-line code by [ cold ] review is a critical thing for all companies to do and some of our value that seen hopefully, these results are starting to come from that. And I don't know, Keith, if you want to add to that.

[Keith Strachan, executive]

Yes. Thanks, Dave. It's Scott. Just the only thing I would add is all great points. I think what's really clear with the combination acquisition of Vivo is our further access to direct citation or direct-to-consumer. So, as you could see from our 2012 results, we've really turned the business to kind of own that customer. And when we look at their international business, they have a great brand called Beacon Health, the Beacon Medical. And so in Australia, that's one of the top brands, Beacon Health has been in the top 5 of [ medical pharma ] there. It allows us to get direct to patient or direct to consumer, and then we'll expand the portfolio under the Beacon Health name internationally where they sell [inaudible] today. We can also add in things like oil or even things like GMP, the [inaudible]. So, a lot of opportunity there as we get closer to the patient and closer to the consumer to really own that customer.

[Scott Fortune, analyst]

I appreciate the color. And just a follow-on on that. Kind of you mentioned M&A and then potential opportunities there. Obviously, there's a lot of distress consolidation going on in the cannabis industry, but first, just a little bit of highlight of potential opportunity for the different segments that you're seeing? And what type of -- Are you seeing valuations come significantly off yet? Or are you still being kind of patient and looking for something that's going to be really accretive and [inaudible] to bolster each of the segments -- just kind of a little more color on the outlook and thoughts around that...

[David Pidduck, executive]

Yes, I'll take a cut at that and then Gregor or Keith can jump in. So first of all, I'll just say we're going to be very cautious. We have to first do an excellent job of consolidating Vivo and prove that we can be very effective in that. We're going to make sure that, that goes really well. I think you mentioned that there's lots of [ distressed ] properties on the market now. And we have -- as everyone does, all the vote on our desk, like everyone else's. I think the trick is making sure that it's not just you said are we waiting for the valuations to go lower. The valuations are extremely low right now, and it's more a question of when is the right time for assets that you value. And so just the fact that you can get a really good deal in buying a company that's not enough for us to be an interest, it has to have like Vivo has. Some strategic interest at either further our sort of pharmaceutical platform or it furthers 40% of our revenues now are global. And so we're also looking on the international front, and those assets are not as distressed. But we're being very thoughtful in what we will pursue. Certainly accretive is critical. There are some assets that are on the market now that are close to accretive or while they're out of cash and they have to do a transaction, they actually are generating or close to generating positive EBITDA, and those are obviously more interest. We are not interested in picking and won't pick up highly indebted companies. We are very proud, and I think it has made it very strong to have a balance sheet that includes not very much debt. And even after the Vivo transaction, we'll have less than $2.5 million in debt. And that gives us along with cash that's given us great flexibility. So I'd say we're going to be really thoughtful about what we do. It's going to be strategic. We're not going to buy a [ fire sales perspetive ] and [ fire sales getting bigger ]. And having said that, we are very actively looking at everything that's on the on the market today.

[Keith Strachan, executive]

That's great. The only thing I would add to just our general philosophy as issue the iron is not everything will consolidate. So unfortunately, some of the businesses, especially within North America, just won't survive through this next kind of segment of the business and timeline of the business. So not every single thing will consolidate. I think that we won't be doing acquisitions with like a large amount of [ vessels ] we expect to see less companies in the field going forward, which creates opportunity as well. Which is probably good for the industry that the oversupply gets dealt with by some of this capacity actually completely going away. Maybe the only other comment is for entities that are already in bankruptcy or close, then that changes the dynamic in terms of not taking up the debt. But it is a damaged brand. And so we're also following the story of many companies that are either closer to [ wire and have always gone over into it ]. I hope that gives some clarity.

[Operator]

Your next question comes from the line of Aaron Grey from AGP.

[Aaron Grey, analyst]

And I'll add in being good so of capital is definitely helped you guys traverse this current environment. So, I just want to touch a bit on international. Looks like it was down quarter-over-quarter. Australia and Germany, we won't want to talk about 2023. So if you look at it on a pro forma basis, obviously Australia is going to grow because you're going to bring on the Beacon with fuel and otherwise. But that on a pro forma basis, how do you think about the growth ops internationally, [ Amit's ] going to present the most growth opportunities? And maybe any specific catalysts you're going to be looking towards as well.

[David Pidduck, executive]

So I'll have a high-level comment, and then I'll pass it over to the other. There's a great opportunity in Australia, essentially. The Beacon brand is extremely strong on the [ flower ] front. And the market is very ripe for GMP products to be entered into the market. As you're probably aware, the regulations changed in July oversimplifying say they're tightening up, and that's going to make -- that's very helpful for us that already has TGA approval. Probably the biggest growth opportunity and it's really immediate is getting some of our other non-power products through the Beacon brand into Australia, and that's a significant growth driver and part of the revenue synergies that we see and probably the easiest. It's probably the fastest, most obvious and clearly doable opportunity. I'll turn it over to the other guys for some of the insights on the [ adults ].

[Greg Hunter, executive]

Thanks for the questions. So yes, from an international growth pro forma. Obviously, Australia is one, as Dave talked about, as we bring on the Beacon brand and look to continue with that one. In addition, as we've talked about with expansion into markets like Brazil, we do expect to see some nice growth in the Brazilian market with oil as we ship there. And as well, one of our bigger markets existing in Europe, although the Beacon brand is there and smaller, combined with MediPharm, we do expect to see some nice growth in Europe, particularly in Germany and then as new markets that we entered into in 2022 as well with the U.K.

[Keith Strachan, executive]

Yes. I think, Aaron, just to address this is Keith. Just also just the Q4 of the international. So that different sales could be attributed to 2 things. We closed our Australian facility through a sale to one life. So with that, we did some customer load-ins in Q3 to make sure that the transition was smooth for those patients internationally that were being supplied from Australia and now get supplied from Canada. So we saw a small dip there. And then traditionally for us, December has been a slow month as regulators in [inaudible] Germany, not as much import-export action going on. So we continue to see strong demand signals at the end user point is the pharmacist, and that's continued into Q1 of this year. We're seeing growth in that category. So we're still very bullish on the international.

[Aaron Grey, analyst]

Okay. Great. And then just on the merger there, the $7 million to $9 million in savings starting in 2Q. Can you just give us a reminder, again, the split between gross margin and SG&A and how you expect the timing of those savings to be realized? And what's one of the low-hanging fruit we can expect sooner? And in some of those savings that might take a little more time to be realized.

[David Pidduck, executive]

I'll take you kind of that and then give it Greg for the details. The $7 million to $9 million, and Greg will correct me, but around half is on the cost side, on the pure cost synergy side. I would say those are the more obvious, easier and short term and clearly controllable. Obviously, we talked about some of the revenue synergies, and we have very clear plans that we've actually always started working with Vivo on how to get to. So we're feeling reasonably confident but we're feeling very confident on the cost side. We have very clear plans that we will be implementing literally next on day 1 on the cost side and super confident on those, those because they're completely controllable and actually the actions we need on the revenue side have all started also. So yes, I think [ Micropoint ] on 50,000 feet we're very confident in delivering in that range, and maybe I'll turn it over to Greg for some color.

[Greg Hunter, executive]

Yes. Thanks for the question. So the $7 million to $9 million in annualized synergies, we expect, obviously, given the transaction is going to close here shortly. $3 million to $4 million of that to be realized within the calendar 2022 or '23 year. And to your question on the split, OpEx versus gross profit. So we're expecting in the neighborhood of $8 million annualized revenue at a 30% to 40% gross margin. So you can do the math that's somewhere in the $3 million to $5 million. And then on the OpEx side on an annualized basis, somewhere in the $4 million to $5 million annualized synergy of which $2 million to $3 million will be recognized within the calendar 2023 year again, just given transaction timing. And one of the reasons, again, as we get confident, as Dave said, we've already started to recognize on the revenue synergies where MediPharm product is now shipping from [ Mckenna Farms ] medical platform. And we've already had discussions in-depth discussions on MediPharm product within the other channels like Australia as well. So as Dave said, confident in the $7 million to $9 million annualized synergies.

[Operator]

And again, if you would like to ask a question, it's tarred -- and your next question comes from the line of Tamy Chen from BMO Capital Markets.

[Tamy Chen, analyst]

First, I wanted to ask with respect to Germany, specifically STADA. So you mentioned that through 2022, they gained share in the market from -- you said it was 4% beginning of the year to 10%. So my question is, even if I look on an annual basis, your sales to Germany, is it still kind of flat with some volatility quarter-to-quarter. So I'm just wondering -- I guess I would have expected some more consistent growth even on an annual basis on your end, given that they're gaining share.

[Keith Strachan, executive]

I think when you look at some of the sales year-over-year in 2021 and even the beginning of 2022, we would have had more German customers. So just like we saw in other jurisdictions when opportunity came, there was a slot of company that has matured and some of those are no longer in the business or have done some rationalization to sell focused on things like [ powder ] products. So some things where we deliver in the follow-up delivery, but we continue with our consistent customers led by STADA, customers like [ Agax ] continue to deliver to on a regular basis. So we're really encouraged by their market share increase. And then on we specifically spoke to the market share that they have for oil when we also look at campus oil sales because they have great shelf life and stability for a MediPharm product, we do vote in chunks to help with cost as far as freight for leasing products and making new products. So we'll continue to see that to be a little bit lumpy in the future, but a lot more consistent as more and more patients on specific state scripts.

[Tamy Chen, analyst]

Got it. Okay. And next, I want to ask a little bit more about Vivo. So could you just go back and talk a little bit more about the clinic. To clarify, Beacon Health in Australia, is that just a brand of their products? Or is that also -- like do they have clinics in Australia? And can you talk about -- I think they also have this medical platform in Canada to correct? Can you talk a little bit more about that?

[David Pidduck, executive]

Yes, I'll start and then Keith can clarify. So first of all, yes, Beacon is a brand and product, and it's a product business in Australia. So, there's no clinic business in Australia. And then in Canada, I appreciate it's a little bit confusing. Think of it as 2 different business segments in Canada. So one is HMED, and that is their clinic business where they actually have clinics seeing patients and recommending products. So, that's one business segment and then they have a medical business platform selling products through that medical channel just like shoppers or other medical channels. So maybe, Keith, you can build some of that.

[Keith Strachan, executive]

No, I think that's a great explanation that as we think of it as 2 separate businesses. So that's HMED or harvest medicine clinics. They are brick and mortar [ clinics ] where people can go see a mission like a physician or a practitioner or subscription related to cannabis, if they deem that appropriate. Not all of those patients end up within Vivo, what is it called? Canna Farm medical platform. So anywhere between 20% to 25%. And then other patients may get referred to another medical cannabis provider, whatever is best for the patient. And then on the Canna Farm side, those are actually a [ pathetical ] platform where those are registered. A lot of that revenue is driven by veterans that are on the platform as they have well covered with the federal government for [ emitting ] which they deem appropriate. And so that is a great driver. And that gives us an opportunity to sell our wellness products and our pharmaceutical products as well as the existing Vivo products on a platform direct to patients without having to pay the provincial distributors, which can be a large piece of our market in some cases in Canadian domestic [ sales ]. Maybe the only thing I'd add about the medical business is it's a fairly stable business and a fairly sticky business over time. They were one of the -- they were early to the platforms in the Canadian market and have sort of established a lot of long-term patients. I think they've had 60,000 patients since inception. I think that's a good and a somewhat stable business.

[Tamy Chen, analyst]

And the -- when I look at their financials or look in 2022 annual, the majority of their revenues is Canada. So look, I presume or how you're talking about it, the lion's share of that Canada segment revenues would be the 2 medical businesses that they have in Canada? Because you mentioned that in terms of Canadian rec and like their presence there is call it a bit smaller than lower presence in Canadian rec?

[Greg Hunter, executive]

Yes. Thanks, Tamy. It's Greg here. I can clarify that a little bit. Actually, when you look at your 2022 annual revenues, approximately $25 million, the split of that is actually, let's say, between $10 million and $11 million of that is Australia with the Beacon brand. The other $10 million to $11 million is through the medical channel that Keith, and Dave had talked about, and then the HMED clinic is in the range of $3 million annualized and their adult rec and wellness businesses we now term it, is relatively modest, between $1 million to $2 million annually. So that's kind of the revenue breakdown for 2022 that we look to build upon.

[Tamy Chen, analyst]

That's helpful. And if I can one last question here is, I'm not sure what you think with respect to their gross margin because just looking at, once again, their financials 2022, the margins were pretty good, I think, in the mid-teens percentage. I'm talking gross margin before [ bio assets ]. But 2021, it was much lower than that, although the revenue lines were quite similar between the 2 years. And I think at one point to an earlier question, you were talking about $8 million annualized revenue at 30% to 40% gross margin. I wasn't sure what that was in reference to.

[Greg Hunter, executive]

Yes. So on their gross margin, you're right. If you look at their 2022 gross margin, if we're at about 17% full year before biological, as you said, and they have improved relative to prior year. There are a number of initiatives, no different than what we've been doing, whether it's pricing, cost savings initiatives, inventory management resulting in fewer write-offs. That's really the color on that. In terms of the revenue synergies where we see 30% to 40%. A lot of that is, if you think about from a contribution margin perspective, so there's obviously fixed cost in the business to drive it today. And as we add additional capacity, whether it be capacity in sales from the MediPharm perspective or through Vivo, there's no additional fixed costs required to be added because we have capacity. So that's where the 30% to 40% gross margin then comes in.

[David Pidduck, executive]

Yes. So just for clarity, I think the $8 million that Greg was referring to is revenue growth from synergistic revenue growth, incremental and the margin is sort of contribution margin associated with that incremental growth that was in response to the question of how are you growing what are the synergies. So that just to tie that out, if that's clear.

[Tamy Chen, analyst]

But I thought the $7 million to $9 million annualized, it's like half cost has revenues. Did I hear that incorrectly?

[Greg Hunter, executive]

So the $7 million to $9 million ballpark when you take the revenue to gross profit, it's about half from gross profit and then half from OpEx, correct.

[Tamy Chen, analyst]

That's what you're saying. Okay. Understood.

[Greg Hunter, executive]

Yes, it... Yes, the $7 million to $9 million is EBITDA synergy. So gross profit plus OpEx. And again, directionally, it's half those profit half OpEx. Got it. Okay. I understand...

[Operator]

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

[David Pidduck, executive]

Thank you, operator, and thanks for the questions. Thanks for joining the call. We're looking forward to our integration with Vivo, and we look forward to speaking with you again in May at our Q1 call. So everyone, enjoy your weekend.

[Operator]

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