MediPharm Labs Corp. (LABS) Earnings Call Transcript

Thank you for standing by, and welcome to the MediPharm Labs conference call to discuss the company's 2026 Q3 results. Our speaker on today's call is Greg Hunter, CEO and CFO. [Operator Instructions] The information during this call should be considered together with the more detailed information, disclosure financial data and statements available on the company's website and on its SEDAR profile at sedar.ca. As set out on the webcast slide, I would like to note that remarks during this earnings call 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, operations, levels of activity, performance, goals or achievements and other future events, trends, profitability, business growth or development. All statements other than statements of historical fact are forward-looking statements. The statements made are based on the company's current expectations, estimates and beliefs as of today's date. The company's remarks may also contain references to certain non-IFRS financial measures, including adjusted EBITDA. These measures do not have any standardized meeting according to the International Financial Reporting Standards or IFRS and therefore, may not be comparable to similar measures presented by other companies. Please review the company's most recent disclosure materials filed on SEDAR + for the risks associated with forward-looking information and the use of non-IFRS financial measures including the section titled Reconciliation of non-IFRS measures in the company's most recent MD&A available on SEDAR. Please note that all dollar amounts mentioned on today's call are in Canadian dollars unless otherwise noted. And now I would like to turn the call over to Mr. Greg Hunter. Please go ahead.

Thank you, operator, and good morning, everyone. Q3 was another significant quarter for MediPharm. We delivered 1 of our strongest revenue quarters in recent years, achieved positive net income for the second consecutive quarter and delivered our third consecutive quarter of positive adjusted EBITDA. Our ability to deliver consistent profitability reflects the disciplined approach we have taken to building a sustainable and leading international medical business. We maintained a strong balance sheet, ending the quarter with over $10 million in cash. Our cash position has remained materially unchanged over the past 12 months while generating approximately $1 million of operating cash flow before working capital. This demonstrates the improving cash generating capability and financial discipline of the business. We have virtually no debt and own 2 GMP production facilities with a combined appraised value in excess of $15 million. Before reviewing the quarter, I would like to briefly remind you of MediPharm's core differentiators and how we're building on that foundation to drive growth. MediPharm is not a single market or a single product company. We provide branded and white label products across 4 distinct revenue channels supported by a regulatory manufacturing and licensing platform that has taken years and significant capital to build. Importantly, more than 80% of our revenue is generated through prescription-based medical channels where products are prescribed to patients by health care practitioners and supplied within regulated medical frameworks, both domestically and internationally. This differentiates MediPharm for many cannabis companies that primarily serve recreational markets and aligns our business with the continued development of regulated cannabinoid-based medicine globally. From a regulatory standpoint, our platform includes a Health Canada drug establishment license multiple EU GMP certifications and Visa GMP certification from Brazil, regulatory capabilities supporting the Australian market and an FDA-registered facility with experience supplying pharmaceutical-grade cannabinoids into the United States. We also maintain licenses and registrations that support natural health product manufacturing and distribution in Canada. These credentials are more than licenses on the wall, enable us to manufacture pharmaceutical grade products, participate in regulated international markets support clinical research and work with sophisticated pharmaceutical and medical partners. As a result, MediPharm is often selected by our customers because we are a trusted, compliant and dependable partner, not simply because we are the lowest cost provider in regulated medical and pharmaceutical markets, that distinction matters and remains central to our strategy. Building on these differentiators, I'd like to turn to our strategy for growth. and how that strategy translated into commercial execution during the third quarter. Our approach is deliberate, diversified and disciplined, spanning both organic growth and selective inorganic opportunities. Organically, our focus is on maximizing the value of our existing regulatory manufacturing and commercial platform by expanding in regulated medical markets, growing differentiated products and pursuing opportunities where we can generate sustainable margins. Q3 demonstrated progress against that strategy with strong sequential revenue growth led by International Medical despite continued pressure from changing pricing, prescribing behavior and reimbursement structures in several of our markets. International Medical remains a key growth driver for MediPharm. Our strategy is focused on expanding our Beacon and Wildlife branded portfolios, developing differentiated pharmaceutical grade formats and selectively entering regulated medical markets where our regulatory and manufacturing capabilities provide a competitive advantage. Germany continues to drive international growth in Q3, with revenue increasing 19% sequentially and 81% year-over-year to $5 million. Growth was supported by strong demand across flower, oil and dronabinol as well as continued expansion of our Beacon and Wildlife branded portfolios. We remain focused on increasing the contribution from branded products, which we believe provides stronger customer relationships more predictable demand and a more sustainable margin profile while continuing to pursue attractive white label opportunities where the economics and partner quality meet our standards. While Germany remains an important growth market for MediPharm, we continue to monitor evolving reimbursement, pricing and regulatory requirements and are actively managing our product mix and supply chain in response. Australia remained challenging in Q3 as regulatory scrutiny, changing prescribing behavior, price compression and channel inventory reductions continued to weigh on revenue. In response, we have adjusted pricing, refreshed the Beacon portfolio, expanded Wildlife into the value segment and are pursuing a more diversified distribution strategy. While the recovery will take time, we believe these actions better align our portfolio with evolving patient demand and position the business for improved performance over time. Beyond our established markets, we continue to expand our presence across regulated medical markets. In France, we continued supplying GMP medical cannabis oil and advanced regulatory dossiers with our local partner. In Brazil, our products launched through national pharmacy channels. In New Zealand, we continued to build on the introduction of Beacon Medical while in the U.K., we expanded our business with established partners. These markets remain at different stages of development, but collectively demonstrate our ability to leverage MediPharm's regulatory credentials and pharmaceutical manufacturing capabilities to create additional avenues for growth. We also achieved an important regulatory milestone for our metered dose inhaler, receiving a notified body opinion that supports the pathway towards future commercialization in the U.K. and European Union. Shortly after quarter end, we entered Panama with our first commercial shipment of CBD metered dose inhalers, these precisely dosed smoke-free formats are central to our longer-term strategy of differentiating MediPharm from commodity suppliers and expanding in more pharmaceutical-oriented medical markets. In domestic Medical, our focus remains on protecting and optimizing a high-value regulated patient base while navigating the impact of the Veteran Affairs Canada reimbursement changes implemented earlier this year. During Q3, Canadian medical revenue remained stable at $2.3 million, reflecting stabilization following the reimbursement reduction in Q2. We remain focused on patient retention, service quality and product availability, particularly for veteran patients where trust and consistency matter most. At the same time, we continue to implement cost and procurement initiatives to help mitigate the financial impact of the reimbursement changes. We also continued to strengthen our broader medical platform. Harvest Medicine reached a new high in active veteran patients during the quarter, while third-party medical partnerships continued to expand the availability of MediPharm products beyond our own platform. These efforts are helping diversify our domestic medical business while maintaining the patient relationships and service levels that remain central to our strategy. Canada use in wellness, our strategy remains focused selective and margin-driven. We continue to defend our #2 leadership position in premium oils where MediPharm has built brand recognition and product credibility. During Q3, we launched pocket drops in Ontario and Alberta, which gained encouraging early traction and helped support our oil market share despite continued contraction in the overall category. Rather than chasing volume through aggressive pricing, our focus remains on product innovation, disciplined pricing and listings that can generate sustainable returns. In Pharma and B2B, revenue increased during Q3 to $1.2 million, reflecting higher volumes from existing customers and new business wins. We continue to leverage our drug establishment license clinical research experience and pharmaceutical manufacturing capabilities to grow contract manufacturing, while building longer-term opportunities in the cannabinoid-based pharmaceutical development. Across all organic initiatives, the consistent theme is regulatory alignment, margin quality and repeatability, not short-term volume. In addition to organic growth, we continue to evaluate selective M&A opportunities where there is a clear strategic and financial fit. Our focus is on businesses that strengthen our position in regulated medical markets expand our capabilities or market access and improve the quality and sustainability of earnings. Since the success of the Vivo transaction, we have evaluated a number of opportunities, but have remained disciplined on valuation, strategic fit, integration risk and the use of capital. We do not view M&A as an objective in itself and are prepared to walk away when the economics do not meet our return thresholds. As industry consolidation continues, our strong balance sheet and minimal debt provide us with the flexibility to act when the right opportunity emerges without compromising financial discipline. Taken together, our strategy is focused on building a larger and more profitable MediPharm. We are leveraging the regulatory, manufacturing and commercial platform we have built to grow in regulated medical and pharmaceutical markets, while remaining disciplined on margins, costs and capital allocation. Whether growth comes organically or through acquisition, our priorities remain the same: sustainable revenue quality of earnings and long-term shareholder value. We believe the progress we delivered in Q3 demonstrates that this strategy is working and provides a strong foundation for continued growth. Turning to the P&L performance for the third quarter. Net revenue was $11.8 million and increased 18% sequentially from Q2, largely driven by our German and U.K. business, which grew 19% and 220%, respectively. International medical cannabis revenue was $6.9 million, representing approximately 59% of total revenue for the quarter and grew 20% sequentially from Q2. Canadian medical cannabis revenue was $2.3 million in Q3, which was consistent with Q2. As a reminder, the decline versus prior year was driven by the reimbursement changes with Veteran Affairs Canada. Canadian adult use and wellness revenue was $1.4 million compared with $1.5 million in Q2. Gross profit was $3.8 million or 32% and grew 27% versus prior year. While gross margin improved materially year-over-year, it declined sequentially due to product mix. Gross margin performance reflects disciplined product mix management, branded international sales and continued cost control. We remain focused on optimizing product mix and production efficiency, supported by differentiated pharmaceutical grade formats such as our extracts and meter-dose inhaler. Total operating expenses, including G&A, marketing and selling and R&D were $3.6 million, declining 25% year-over-year and 11% sequentially. This reflects our continued focus on reducing our cost base, including our Q1 restructuring initiatives that are expected to generate more than $1 million in annualized savings. Adjusted EBITDA was positive $0.4 million and is the third consecutive quarter of positive adjusted EBITDA. This performance reflects the improved margin quality and lower operating expenses and demonstrates the ability of the business to offset near-term revenue pressure through disciplined execution. Net income was positive for the quarter, representing our second profitable quarter driven by revenue growth and the reduction in expenses as noted above. On a year-to-date basis, revenue remains below the prior year, primarily due to the Australian market contraction and VAC reimbursement changes. Importantly, despite those revenue headwinds, we have materially improved gross margin, reduced operating expenses and generated $1.4 million of positive adjusted EBITDA. We I want to briefly summarize the key takeaways for the third quarter. From a commercial standpoint, we continued to execute against our strategy with particular strength across our regulated international medical markets. Despite regulatory and reimbursement headwinds in several markets, we delivered revenue of $11.8 million, representing 18% sequential growth, largely driven by our international medical business in Germany and the U.K. We achieved a 32% gross margin, reflecting disciplined product mix management, branded international sales and our continued focus on cost efficiency. We also continued to demonstrate improved profitability, achieving positive net income for the second consecutive quarter and positive adjusted EBITDA for the third consecutive quarter. We exited the quarter with a strong balance sheet, including more than $10 million in cash, virtually no debt and outright ownership of our 2 licensed production facilities with an appraised value of more than $15 million. We also remain current on excise taxes, sales taxes and trade payables. Our balance sheet strength and continued operating discipline give us the flexibility to fund organic growth while selectively pursuing inorganic opportunities that can strengthen our platform and enhance long-term earnings. Taken together, our Q3 results reflect a business that is growing, improving profitability, protecting margin and liquidity and continuing to build a stronger MediPharm. In closing, Q3 demonstrated that MediPharm can consistently deliver profitable growth through international growth, disciplined product mix management and continued cost control, we delivered positive adjusted EBITDA and and importantly, positive net income for the second consecutive quarter. We remain focused on building from this momentum, strengthening our position in regulated medical markets, maintaining financial discipline and pursuing growth opportunities where we believe we can generate attractive long-term returns. I would like to thank our employees for their dedication, agility and focus on execution, our customers and suppliers for their continued trust and partnership and our shareholders for their ongoing support and confidence in MediPharm. I believe we are well positioned to continue building a stronger and more profitable MediPharm Labs. Operator, we'll now open the line for questions.

We will now take questions from the webcast. We have received a number of questions on international markets, specifically Australia and Brazil. Greg, I will turn to you to address and expand on those regions.

Yes. Thanks, -- thanks for the questions. Why don't I start with Brazil, which we talked quarter. So Brazil still represents an attractive long-term medical cannabis opportunity for MediPharm and is 1 of the more highly regulated medical markets globally more focused on pharmaceutical dosage forms, including oil and other formulations. And that market is very well aligned with MediPharm's pharmaceutical manufacturing and regulatory capability. So to enter the market, foreign manufacturers like MediPharm required to meet MVs strict visa regulatory GMP requirements supported by extensive documentation covering areas such as product quality, stability, manufacturing and so on, which is write up MediPharm's capabilities. And so we were pleased in Q2. As you may recall, we announced the Visa GMP certification renewal for our Berry manufacturing facility. And during Q3, we also achieved an important commercial milestone with our pharmaceutical partner in Brazil, Alco to Brazil, where we launched our full spectrum CBD oral oil developed and manufactured by MediPharm in our Berry facility. So we're pleased with the progress we're making in Brazil remains an attractive market. and a very interesting longer-term growth opportunity for MediPharm. With respect to Australia, which was another question online, so Australia does remain an important market for MediPharm and is 1 of the larger medical cannabis markets outside of North America. And the market is going through what I would characterize as a period of normalization following increased regulatory scrutiny and enforcement actions that have contributed to lower overall market volumes relative to the elevated growth rates we've seen in recent years. And so we view this more as a market recalibration rather than a fundamental underlying change and patient demand. There continues to be well-established physician prescribing framework and significant demand for medical cannabis. But we are seeing continued pricing pressure, particularly in flower where the competition has increased and the market has significantly shifted more towards value-oriented products. So as I said in the prepared remarks, we did face some challenges in Australia in Q3 with the changes in prescribing behavior, pricing pressure and channel inventory reductions as a result, which led to a softer revenue quarter with Australia. And so we've responded with a number of assets include updates on our product portfolio, updating practices. We talked about it in Q2 with the launch of Wildlife alongside our Beacon medical brand, which now allows us to participate against across different market segments while also protecting Beacon's premium position. So we believe the actions we're taking are positioning the business for improvement, but we do expect the recovery to take some time. The next question online was with respect to our LIVI clinical trial, which as you recall, we talked about in our Q2 earnings call as well. But let me just recap a few items on that. So obviously, we're very excited about the results of the LOVE trials we talked about in Q2. And just a reminder for everyone, it was a randomized double-blind placebo-controlled study that evaluated MediPharm's proprietary cannabinoid formulation for patients with advanced dementia experiencing agitation. And the results of that Phase II study were presented at the Alzheimer's Association International Conference in July, which is 1 of the largest Alzheimer's conferences in the world. And what was presented there was with the -- using our proprietary product, it met its primary and secondary endpoints. And statistically significant improvement for the patients on the product. And obviously, importantly, for MediPharm, the formulation used was specifically developed by MediPharm in conjunction with our academic institution partners that ran the trial. And we have filed 2 U.S. provisional patents on that. So beyond just the clinical trial results themselves, Libby again demonstrates our broader capabilities in our pharmaceutical platform whether it be product formulation, GMP manufacturing, regulatory compliance and our ability to ship product into the U.S. under a strict regulatory framework with that. And so we are continuing to work with the academic institutions and the partners on the Libby study to look at next steps, including potential additional clinical development or regulatory pathways and/or strategic partnerships. So there's still more work to be done on that as we work through and we look forward to keeping our shareholders up to date as we have new information to share on that.

We have reached the end of the question-and-answer session. I will now turn the call back to Greg Hunter for closing remarks.

Great. Thank you, operator, and thanks again for everyone for joining and look forward to talking to you again when we release our Q4 results. So with that, we'll end the call, and thank you. .

This concludes today's call. Thank you for attending. You may now disconnect.