Earnings Call Transcript--->>>MediPharm Labs (MEDIF) CEO, Pat McCutcheon on Q1 2021 Results - Earnings Call Transcript
May 17, 2021 1:54 PM ET
MediPharm Labs Corp. (MEDIF)
MediPharm Labs (OTCQX:MEDIF) Q1 2021 Earnings Conference Call May 17, 2021 8:30 AM ET
Company Participants
Keith Strachan - Interim Chief Executive Officer & Director
Greg Hunter - Chief Financial Officer
Laura Lepore - Vice President, Investor Relations
Conference Call Participants
Aaron Grey - Alliance Global Partners
Frederico Yokota Choucair Gomes - ATB Capital Markets
Tamy Chen - BMO Capital Markets
Operator
Good day. Thank you for standing by and welcome to the MediPharm Labs First Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today’s conference is being recorded.
I would now like to hand the conference over to your speaker today, Laura Lepore, Vice President of Investor Relations. Please go ahead.
Laura Lepore
Thank you, operator and good morning, everyone. With me on the call today are Keith Strachan, President and Interim Chief Executive Officer; and Greg Hunter, Chief Financial Officer.
Before we begin, please note the following caution respecting forward-looking statements which is made of behalf of MediPharm Labs and all of its representatives on this call. The statements made on this call will contain forward-looking information that involves risks and uncertainties, including those introduced by the COVID-19 pandemic. Actual results could differ materially from a conclusion, forecast or projection in the forward-looking information. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information.
Additional information about the material factors that could cause actual results to differ materially from the conclusions, forecasts or projections in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information are contained in MediPharm Labs’ filings with the Canadian and Provincial Securities Regulators, which are available on the SEDAR website at SEDAR.com.
With that, I would now like to turn the call over to Keith Strachan.
Keith Strachan
Thanks Laura, and good morning, everyone. Our first quarter included several important business developments that set the stage for a very productive future. Today I will speak to the advancements made in Q1, which were achieved in the context of ongoing industry challenges related to COVID-19. Greg will then discuss Q1 results, including continued progress with cost containment that narrowed our operating loss. And then I will close with final observations on our business agenda and outlook.
First, since we operate MediPharm to create long lasting shareholder value, I would like to take a few additional minutes to remind you of our objective and strategic priorities, how we performed against those priorities, how we expect our accomplishments to translate into longer term financial results, why we are fundamentally different than others in the industry, and why that is good for our shareholders.
From the outset, MediPharm's objective was to become a leading pharmaceutical company specializing in cannabis, taking charge in an emerging multibillion dollar global pharmaceutical, medical and wellness cannabis market by providing multiple products and turnkey solutions to a broad customer base across multiple jurisdictions. To achieve this objective, we have focused on delivering against our top priorities.
One, execute on a global platform purpose built to pharmaceutical specifications or good manufacturing practices, to establish ourselves as a go-to provider for pharmaceutical companies. Two, secure pharmaceutical licenses globally to pioneer multiple regulatory pathways and access new markets, including the U.S. Three, develop an international presence as a manufacturer of innovative formulations, turnkey brands and distribution solutions for multiple customers globally; and four, build a profitable sustainable business here domestically in Canada to drive our innovation and R&D support our longer term objective.
So how have we performed? To begin, our accomplishments are many. I'm very pleased to say we are in a fundamentally different place than when we were first licensed in 2018. And we're in a better position today compared to others in the industry. First, we have created a unique platform and achieved GMP certification in both Canada and Australia.
That qualifies us to work with Big Pharma and other companies in over 50 countries around the world. This is a significant achievement. It puts us in a best-in-class position with pharma companies now expanding into the medical cannabis space.
While some of the capital markets continue to assess MediPharm as if it is a traditional extraction only company, I want to be clear that we are inherently and fundamentally different than all others in the cannabis space. This is by design.
The depth and breadth of our team, technology, expertise and licenses and global reach have not been replicated. And for shareholders, this is a very good thing as the still to come pharmaceutical opportunity is significant and wide open to us.
Second, we have established a portfolio of pharmaceutical licenses, that again has not been replicated. Critically important, we continue to expand our license portfolio to become even more specialized in producing pharmaceutical cannabis products and participating in cannabis drug discovery clinical trials. This expansion will further strengthen our competitive advantage and make us a natural partner for pharmaceutical companies and clinical trial groups entering into the space.
Longer term, we believe that traditionally approved pharmaceutical drugs containing cannabis will represent a larger, more sustainable and profitable revenue opportunity in multiple jurisdictions, especially when compared to recreational CBD or hemp segments.
Even in the U.S., we are coming at the market from a position of strength. Although cannabis is not federally legal in the U.S., the pharmaceutical products we expect to produce over time will not be restricted by cannabis regulations. Instead, as a pharmaceutical company, our products will be assessed and then approved by the U.S FDA, and other health regulators in the jurisdictions we choose to work in. This is a significant difference and advantage over the jurisdiction or state specific programs that we see in place today.
Third, we have quickly expanded our international presence and customer base to over 30 partnerships, and 9 countries across four continents. Our customer base has grown rapidly. We expect this baseline of customers to support and add to our performance over the balance of this year and create tangible momentum for 2022.
Many of these agreements are yet to mobilize as we complete international product registrations. As these pathways open, we are confident it will lead to significant revenue opportunities. International sales volumes will also help mitigate the impact of challenging conditions in Canada as a result of COVID-19 restrictions. We have already seen this benefit in Q1.
And delivering against our priority, the breakthrough achievement is our first pharma partnership STADA, a top five European generics pharmaceutical company. This exclusive agreement was a pivotal moment for the industry and a huge validation of our business model. It represents our first entry into a growing European pharma market beginning with Germany.
As early as next year, STADA and MediPharm are committed to entering into additional European jurisdictions, which is a very exciting prospect. However, I do want to emphasize that Germany alone is an extremely attractive market. It stands as the world's leading country for medical cannabis with more than 320,000 cannabis prescriptions approved in 2020. This is more advanced medical market than any other and is said to be growing at around 30% annually. In about two-thirds of medical cases, health care insurance reimburses German patients using cannabis today. With the STADA partnership and others, we expect to dominate this market.
In the 7 months since signing with STADA, there's been a significant ramp up in large pharma companies entering the cannabis industry. Because of our reputation and capabilities, many of these companies are looking to MediPharm to provide a true turnkey solution to launching medical and wellness products. These projects create a near-term opportunity, while also preparing for the long-term opportunity to produce future cannabis based clinically proven FDA registered and approved drugs. This is a great development for shareholders and names our outlook for growth as a specialist pharma company is bullish.
On the product side, we have created an initial suite of brands and formulations in various formats and delivery methods. This diversifies our revenue streams and provides the greatest potential in our domestic Canadian market compared to us selling only bulk formulated oils. Our domestic presence serves as a proof-of-concept for our ability to provide end-to-end development, manufacturing and distribution solutions for multinational pharma CPG and innovative health care and wellness brand companies.
The slow to start Canadian adult use market has proven to be difficult, and we have responded by launching new branded product formulation. We also reduced headcount cost by 30% over the last three quarters, embedding new disciplines into finance and operations and maximizing the management insight available through our SAP system to improve margin, product and contract manufacturing performance. As we discussed last quarter, 2021 is expected to be a crossover year as MediPharm evolves into a multi country operator with a highly diversified, high quality product portfolio and a larger customer base.
Now turning to our first quarter results. At the top of the list of Q1 accomplishments, as our first sales in Germany was added to total international revenue of $2.1 million. This is a great start, but it's only the start. While top line declined slightly from last quarter, revenue from international sales increased over 600%, reflecting initial late quarter exports to only a small number of customers in Germany, Australia and Peru.
An important related development and one that is on our priority list is that the Australian Therapeutic Goods Administration recently approved our application to export GMP certified cannabis oil products to our private-label partners in Germany, including STADA and ADREXpharma. This is another advantage of having GMP certification, which will become increasingly important as medical markets expand worldwide, and regulators insist on quality standardization.
These authorizations and initial deliveries demonstrate that we can leverage our existing infrastructure in Australia and Canada without having to add domestic assets in every region we serve. Our already operating an easily expandable manufacturing platform remains a significant economic advantage for us as we pursue our global ambitions. Scaling up versus scaling out is preferred from efficiency, profitability and regulatory viewpoints.
Recently, I took part in a panel discussion hosted by Alliance Global Partners. And the consensus among panelists and rightfully so is that the entrance of Big Pharma will play an outsized role in encouraging German physicians to prescribe cannabis. As one of the more prominent members of large pharma, we couldn't have selected a better partner than STADA to trailblaze the emerging European pharmaceutical cannabis market.
With our help, STADA has the means to catalyze the market by expanding available product formats. While they move to educate physicians and pharmacists on the efficacy of cannabis treatments. One of the reasons we are confident 2021 will be a better year is the ramp up of this and other agreements.
As I mentioned, we now have more than 30 committed supply agreements in 9 countries compared to roughly half of that in only 2 countries a year ago. Our strategy of targeted international expansion to medical wellness customers is gaining traction, and that will lead to higher sales this year. We're also very pleased to complete our first shipment of premium high-THC medical cannabis oil to Cann Farm Peru. This was our first sale in Latin America, and more will follow pending final product registrations covering our supply to other customers including XLR8 Brazil.
In Australia, we're actively working with our customers on registrations to launch over-the-counter CBD products. Over-the-counter legislation passed in February and we believe OTC represents a high growth opportunity for us, especially since manufacturers and suppliers of these CBD products must be GMP certified. Prepare for this growth, our Canadian operations recently made deliveries of GMP CBD isolate to MediPharm Labs Australia with more volume to follow in Q2.
Our ambitions are clearly global in nature. But we are also committed to driving growth in Canada's medical wellness and adult use markets as part of our priority of building a profitable sustainable domestic business. As mentioned, the domestic industry has faced certain difficulties, and these continued in January and February as the Province of Ontario reduced inventory in response to pandemic lockdowns affecting retail sales. This did have an impact on our Q1 revenue. However, the good news is we still made progress in launching new branded products in late March with positive initial demand signals.
I'm particularly pleased with consumer response to our first CBN rich formula, one of only two available in Canada, it's sold out at retail within just a few weeks of launch. We immediately use our robust manufacturing platform to respond to this demand and quickly restock in each of our provincial listings. More MediPharm branded offerings will follow as we look to meet consumer wellness needs with innovative products such as THC-free oil, additional minor cannabinoids tinctures and [indiscernible] CBD and CBN.
As an important footnote, we announced a supply agreement in early March with the Province of Quebec, under which we will supply Quebec's growing medical and wellness market this year. I'm happy to report that the first Quebec shipments will leave our facility this week. For the remainder of 2021, expect to see us expand our Canadian B2c business, while also benefiting from expanded growth in consumer volumes for products we produce under white label agreements with some of the country's top licensed producers
Taken together to ramp up the sale to committed customers success with new product launches and the supply agreements secured in Q1, illustrate the advantages of GMP certification, and are focused on supplying medical wellness markets as a global provider of pharmaceutical API and finish those products. We are in a crossover period to our future, a period where the short-term financial results do not reflect the future potential. But they are the yardsticks that we use to measure our progress. Its therefore important to us that we improve earnings even as we pivot to the next stage of our growth.
I'll point out that in Q4 2020, we achieved domestic revenues of $5.7 million. If we see the easing of COVID restrictions, we expect to rebound to those levels. This will be in concert with our established baseline of $2 million in international sales in Q1 2021. - That's still not $10M. - FUNMAN
Together depicting a more attractive revenues in the near-term.
With that, I'll now turn the call over to Greg for his report.
Greg Hunter
Thanks, Keith and good morning, everyone. I'm pleased to report we made progress in Q1 on our goal to return the business to profitability. While we did see incremental improvements in the quarter, we continue to focus on our priorities to drive growth. The cost containment measures put in place last year and in Q1 are working as we realized a $1.5 million sequential reduction in operating expenses on track to achieve the $3.6 million in annual savings we discussed last quarter.
In addition, our focus on expanding our international reach has proven successful with approximately $2 million of international sales in Q1. We also expanded our international revenue beyond Australia to include both Germany and Peru. As Keith mentioned, in Q1 we experienced headwinds in our domestic business driven by COVID lockdowns and channel inventory reductions with provincial distributors, which caused our overall revenue to decline sequentially.
I remain optimistic and excited about our future potential as we continue to focus on expansion in both domestic and international medical and pharmaceutical markets while improving our cost structure and capital deployment. As I said last quarter, as a management team, we are committed to growing our top line and adjusting our cost structure to return MediPharm to profitability.
Turning to the P&L performance for the first quarter. Q1 revenues decreased 9% sequentially from $6.1 million in Q4 to $5.5 million in Q1. This was driven by a 40% reduction in domestic sales from $5.7 million to $3.4 million, largely as a result of COVID lockdowns and channel inventory reductions with provincial distributors as mentioned previously.
The reduction in domestic revenues was partially offset by international revenues as they increase sequentially from $0.3 million in Q4 to $2.1 million in Q1. The increase was driven by $1.3 million from customers in Germany, $0.4 million incremental revenue from Australia and a smaller amount from our first shipment to Peru.
Gross profit for the quarter was negative $0.7 million versus Q4 gross profit of negative $24.7 million. Q1 gross profit was negative due to the unabsorbed overhead with lower production volumes and because the inventory sold in Q1 was held at net realizable value as a result of our Q4 revaluation.
General and administrative expenses in the quarter decreased sequentially from $5.2 million in Q4 to $4.0 million in Q1, largely driven by restructuring that was completed in Q4. Marketing and selling expenses of $1.3 million in Q1 remained consistent with Q4 as we continue to focus our sales efforts on both the domestic and international markets.
R&D expenses decreased sequentially from $0.6 million in Q4 to $0.4 million in Q1. These expenses will vary as we selectively invest to advance our capabilities and product portfolio. Finance expense increased sequentially from $4.7 million in Q4 to $9.7 million in Q1 as a result of accelerated conversions on the convertible debenture.
Adjusted EBITDA for Q1 was negative $6.2 million, largely driven by negative gross margins of $0.7 million and operating expenses of $5.6 million. Adjusted EBITDA improved sequentially from negative $8.8 million in Q4, driven by improved gross margins and reduced expenses.
Moving to a few notable items on the balance sheet. Inventory increased from $22.1 million in Q4 to $24.2 million in Q1, primarily driven by inventory additions in Germany to support our German customers, including STADA. Trade and other receivables declined from $29.6 million in Q4 to $27.8 million in Q1, largely driven by collection of the Canadian emergency wage subsidy.
As discussed last quarter, there are two customers owing a total of approximately $19 million, including $8.5 million, which is subject to legal proceedings that we have previously disclosed and remain confident in its collection. The remainder of the $19 million is due from a second customer and we are confident in its collectability. Adjusting for these two customers trade and other receivables is $8.8 million, which is more in line with our revenue performance.
The current tax receivable of $4.5 million is a refund from 2020 that we expect to collect in or before Q3 and will further improve our cash position. Finally, our cash balance on March 31 was $42.1 million, which increased from $19.9 million at December 31. The Cash Balance increased by $22.2 million driven by net proceeds of $31.1 million for the previously disclosed bought deal, and was partially offset by $2.6 million payments on our convertible debenture and $6.0 million usage from operating activities.
Capital expenditures were modest at approximately $0.3 million as we continue to manage and prioritize select capital investments to expand the business. The cash balance owing on the convertible debentures stood at approximately $3.9 million at the end of March, which is largely to be repaid in Q3. While we made progress in the quarter by expanding our international presence and revenue, reducing our cost base and managing our capital expenditures, we still have work to return the business to profitability and drive cash flow.
With that, I'll turn it back to Keith.
Keith Strachan
Thanks, Greg. Some final thoughts on our outlook and business agenda. At the top of the list is executing efficiently and effectively as we ramp up sales and make better use of our well established manufacturing capability. The success we saw in international sales in Q1, particularly in Germany, will pave the way to a very exciting future across Europe and keep us top of mind of multiple global pharmaceutical companies entering the market.
Activity in Asia Pacific and Latin America markets will complement our sales potential and make further use of our existing GMP production capacity. We also have a more constructive outlook of the Canadian market due to the broader distribution, diversified sales and increasing revenue from finished formulated product. This is a result of strong progress made on building a presence in core wellness in pharmaceutical markets. As an example of this growth, our biggest distributor, the Ontario Cannabis Store has expanded their operating retail footprint to 700 stores adding 150 stores since mid March.
A Q1 development that was discussed in our last call, but it's worth repeating is the receipt of our cannabis drug license from Health Canada in February 2021. This enables us to manufacture and supply pharmaceutical prescription drugs that have been classified with a din and in turn creates opportunity for us to supply cannabis based pharmaceutical drugs in APIs for clinical research trials aimed at abbreviated drug applications and novel drug discovery.
Later this quarter, we will share an update on exciting progress within our clinical trial portfolio, which we believe will fully establish MediPharm Labs as a pharmaceutical company and open long-term growth opportunities. Notwithstanding near-term challenges related to the ongoing pandemic, which I know we all hope will be behind us by Q3 as more Canadians are vaccinated, we do expect to see a stronger back half of 2021. And we will further make adjustments to our cost base as required.
Before opening the line to question, let me update you on the company's current leadership transition. As you know, Greg joined us in February this year, and I took on the role of interim CEO late last year. Over the last 3 months, Greg has focused on bringing in new senior level talent to the finance team to support our growth going forward. In terms of CEO role, the search is well underway with several strong candidates identified. We will keep you up to date on the transition once a candidate has been confirmed.
Overall, Q1 was a productive quarter, marking the startup of sales volumes under important new customer agreements, further global market penetration of our products and improvement in bottom line performance. 2021 is a year where progress will occur as we gain traction with our priorities and create a MediPharm that I know will deliver tangible value for our customers and shareholders. Having been with MediPharm since day one, I can confidently say that today this company is better positioned than ever to dominate the global cannabis market.
Now, operator, can you please open the line to questions from our callers?
Question-and-Answer Session
Operator
[Operator Instructions] Our first question is from Aaron Grey with Alliance Global Partners. Your line is open.
Aaron Grey
Good morning, and thanks for the questions. First one for me is on Germany. Let's see the sales start there. We love to see if you could provide some additional color in terms of maybe the sell-through you’re seeing and maybe some of the progress, from the sales force from STADA is making? I know they've got about 30 people out there in force. So how that's come to help in terms of what position adoption and how you think that might get accelerate even further as COVID restrictions come to an end, and things start to normalize? Thanks.
Keith Strachan
Thanks, Aaron. Good morning. Thanks for joining the call. Yes, I think we're really excited about Germany, as I mentioned on the call already, it was our first quarter where we made deliveries into Germany. And most of those deliveries did go kind of in March and even in towards the end of March. So a little bit early on some of the trends for us as we've been in market for call it 45 to 60 days, depending on the product. But it is pretty encouraging this data team, as you mentioned, over 30 sales people, the cannabis business unit, there's over 45 people, so they've really invested into the program and we will be launching additional SKUs.
So, some of the more anecdotal signals such as launching more SKUs in the coming weeks, obviously, is a good sign, and then investing that much on their side is also a good time, but we've seen flow through in the first four weeks, kind of as expected and better a couple of the SKUs. So really looking forward to shipping them more product in Q2, and that goes for all of our German customers. I mentioned we had two German customers that we delivered to and we have a few more that we'll be delivering to as well in this quarter. So we see a lot of opportunity. Now that we've opened that pathway, and we have the approvals in place, it does make it the follow on orders a lot easier.
Aaron Grey
Okay, great. Appreciate that color. And obviously as we speak domestically on Canada, it looks like there might have been some softness there on the quarter just want to know, if you could give some sort of color on the formulated products Q-over-Q, and then things how I think might have changed, especially with some acquisitions, such as like Ace Valley's be working with [indiscernible] how that might change things on your end, and with your partnerships? And then just any additional color you can provide on some of the kind of sales trends you've seen there? Thank you.
Keith Strachan
Yes, it's a great point. And something that Greg did call out is we did see a soft January, February in relation to events, the pandemic, in talking with provincial distributors, they were looking to bring their inventory down. So, in some cases, it didn't affect like the demand of our products, but the province was not in a position where they want to take on more inventory, so they're actually holding less inventory in their warehouse. So that effect affects our sales.
I think that's what's really encouraging is, a lot of the provinces have been doing a SKU rationalization exercise where they go through, and they're actually consolidating different SKUs they have in different categories. And they're doing a more mature model of doing protocol. In the recent OCS protocol in Q1, we actually added more SKUs, then one that was taken away. So I think that is a good sign of our product having a strong demand.
And as I mentioned, launching CBN and the CBD 100 were really unique products for us and sold out quickly and we're able to restock quickly. So I think we'll really see the performance of those in this quarter like Q2 that we're in today, with those -- again, those deliveries kind of going into March timeframe. And some of those retailers not even having that product at the brick-and-mortar store until April. So I think that's good.
On the consolidation, I think it's a reoccurring theme that we're going to see all to the rest of this year, and even into next year in the Canadian space. Obviously, there's some replication of different assets in our space and there's a lot of room for that. It's really encouraging for us to see that. You mentioned Ace Valley, we launched Ace Valley vape pens, and they were really popular. We did full turnkey solution for them. So help them with the selection of their hardware, we formulated and own their actual formulations of which go into those vape pens.
So I think, Ken [ph] if you recognize, how great of a product that was in conjunction with the great job that the Ace Valley team was doing on marketing and made that acquisition. As far as you know, the ongoing manufacturing goes, we're still manufacturing today for Canopy and we plan on doing that into the foreseeable future. As many know, Canopy was actually our first long-term agreement back in 2019. So we have a long history of working with the Group. And we've seen success in the past and different partnerships we've had with them. So really looking forward to helping them expand that brand.
Aaron Grey
Okay, thanks. Thanks for the color. I'll jump back in the queue.
Operator
Your next question is from David Kideckel from ATB Capital Markets. Your line is open.
Frederico Yokota Choucair Gomes
Hi. Good morning, guys. This is actually Frederico chiming in for David. Thanks for taking my question. So just want -- we know that your strategy is focused on pharmaceuticals. But in light of that, just how should we think about your strategy in the Canadian recreational market? So I mean, is this now like second place to international? Just trying to understand what's the strategy here, given this focus on pharmaceuticals. Thanks.
Keith Strachan
Thanks, Frederico. Good morning. Thanks for joining us. I think really we are a pharmaceutical company that specializes in cannabis. And when you look at that and you look at the pharmaceutical market that you see today, a lot of pharmaceutical people, or large pharmaceutical companies are very much in the wellness space as well, if you look at our partner STADA, and some of their recent acquisitions, a lot of what they're doing today is in consumer wellness products.
So what we like to do is we like to think of the opportunity in Canada as a way of doing a proof-of-concept for our end-to-end manufacturing and development abilities for those pharmaceutical companies. So it's really flexing our muscles to show what we can really do in that space with some of these really unique tinctures that we have. So, obviously, that is what we're showcasing to those future customers. At the same time, we are also taking advantage of the capacity that we have.
We've spent tens of millions of dollars building out these amazing GMP platforms, both in Canada and Australia. And so we want to put those to use as we wait for the entry of additional Big Pharma company. So this wellness market really does give us that opportunity. And then lastly is on our contract manufacturing platform. Again, having that capacity allows us to do just manufacturing for people like a family and canopy. So then that way we can serve them. They take care of everything from marketing and retail of it, but we're able to take care of that, make use of that capital investment we have done.
So, the answer to your question, the number one focus does remain on being a pharmaceutical company and service -- servicing pharmaceutical customers, but that wellness category does leak into that and we are able to take advantage of that as leaders in the space.
Frederico Yokota Choucair Gomes
Okay, thanks. Thanks. That's helpful. And then just we've seen over the last few months, we've seen some M&A activity accelerating in Canada, and also in the U.S., some Canadian companies entering the U.S CBD space. Just wondering how are you guys seeing that environment that -- I mean environment and you have any specific plans or more advanced negotiations maybe to enter the U.S CBD space? Any color there would be helpful. Thanks.
Keith Strachan
Yes, I think, what I -- like I said to Aaron, we are really encouraged to see all the activity in the space. I think it shows how much opportunity there is in cannabis. As a pharmaceutical company, we really are not affected by borders. So as a cannabis company, you have regulations that are governed by jurisdiction to jurisdiction and in the United States, even by state to state. So that forces you to buy different assets. As a pharmaceutical company, we can use our platform both in Canada and Australia to actually register products all around the world. And so we don't need to replicate some of those assets. So I think that that's really important to call out.
I think when you look at the U.S CBD space, although a great category in the U.S., it's not something that we've targeted. I think our opportunity in the U.S is the introduction of more drugs containing cannabis. So you look at this, the success of a drug like EPIDIOLEX, the progress made with Sativex out of GW Pharma and Jazz Pharmaceuticals. I think we're seeing a lot more research in clinical late stage clinical trials as well as super -- our future opportunity for abbreviated drug applications for biosimilars. And what that does is that gives MediPharm the ability to use our very unique certifications to manufacture those drugs. So, we can manufacture that in Canada. If you look at exports of Canadian drugs today, 50% of them go to the U.S. So, we can take part of those traditional channels without having to go around and plant flags into different countries.
Frederico Yokota Choucair Gomes
Thank you. That's helpful. Thanks for clarifying that. I will hop back in the queue. Thanks.
Operator
Your next question is from Tamy Chen with BMO Capital Markets. Your line is open.
Tamy Chen
Good morning. Thanks for the questions. Greg, a question for you first. With respect to the gross margin, so I know this quarter you called out just a lower fixed cost absorption. Aside from that, how should we think about where you are at with respect to working through some of the legacy higher cost flower?
Greg Hunter
Yes, thanks. Thanks for the question. So yes, the gross margin, obviously, we're happy with the improvement that we -- we've seen from Q4 even excluding a lot of the one-time items in Q4 we've seen improvement. And as we've talked before, where we're going to see improvement go forward is in a couple areas. One, obviously with improved automation and process efficiencies. Two, as Keith has talked about, we mentioned sales expansion, particularly internationally with improved margins.
And then as you said, obviously with the inventory at net realizable value, we still need to work through that which you can see the amount that we have on the box. So we still need to work through that to get back to a positive gross margin. And as I said last quarter, we do have a view to get back to a positive gross margin in the future here and get back the business back to profitability. It's just going to take some time to work through some of this old inventory and drive the efficiencies that I talked about.
Tamy Chen
Got it. Okay, thanks. And my follow-up is, Keith, I wanted to go back to some of the commentary you made about expecting to see a better half, second half of the year expansion in Canadian B2C and what label for LPs? Can you just dig into that a bit more specifically? I'm wondering, the current environment with respect to contract manufacturing. Are you seeing some of the LPs outsource that more and more? And really, what do you think it'll take for us to really see an acceleration in that? Do we need to see just the 2.0 categories, expand a lot more from here? Do we need to see some more consolidation and so just the larger LPs will start to outsource more? Can you just talk a bit about that more. Thanks.
Keith Strachan
Yes. Thanks, Tamy. It's a great point. I think a lot of what we're doing in the Canadian domestic is gets driven by either box sales or by contract manufacturing. And I think it is really encouraging to see somewhat the other leaders in Canada, and what they're doing. I think, if you look at recent news from people like Tilray or Aurora, where they're looking to actually close, whether it's growing or production facilities in order to meet their targets, they are increasingly looking to outsource that. So I think that that's a big piece of it is as people specialize in what they're the best at, they're looking to people like us to outsource some of those services and some of those turnkey solutions.
So, our ability and our history to execute really allows us to compete on those contracts. I think the second piece of it is also the entrance of more specialty products and more unique products. So what's really encouraging is we're seeing companies pop up that are specializing in a different end product. So let's say they are a beverage formulator and manufacturer, or they're a [indiscernible] formulator and manufacturer. They're really good at making these food or beverage products, but they're not going to put in the investment, or the resources to actually do the extraction themselves.
So a lot of times now they're coming to the market in the B2B space to buy those inputs. And so MediPharm is able to compete in that sector as well. So I think it is two pieces. I think it is the growing consolidation and need for people to outsource what they're not best at. And then I think it's also the increase of those specialty products. I think it's really cool to see every month something new on the B2C side of these retail stores and all of them are usually made -- all those new products are concentrate based.
Tamy Chen
Got it. Thank you.
Operator
[Operator Instructions] Your next question is from Scott Fortune with ROTH Capital. Your line is open.
Unidentified Analyst
Hey, good morning. This is Nick stepping in for Scott. You touched on the SKU rationalization you're seeing in Canada. But on the other side of that, are you seeing kind of more favorable purchasing opportunities? And just looking out if you can just update us on your go-forward purchasing strategy, that'd be great.
Keith Strachan
Yes, I think -- Nick, I think it does keep -- from a purchasing standpoint of raw materials, it does create a great opportunity for us. So, there's been some SKU rationalization. Obviously, the increase of growing in greenhouses or outdoor in Canada has really helped us. So, and as Greg mentioned of working through those, the old inventory or past inventory, as we're replacing that with new inventory, we're seeing buying prices on raw material reduced by up to even 10x in some cases. So that really helps us with our gross margin going forward. So, it definitely helps us we've kind of see that SKU rationalization in turn lead to the ability for us to buy inputs on a lower level.
Unidentified Analyst
Got it. Thanks for the color. And then switching over to Germany, you recently signed a 2-year supply agreement with a subsidiary of IM Cannabis in Germany. I was wondering if you could quantify that opportunity a bit more and just also in terms of timing and revenue recognition? And whether or not you're seeing similar opportunities kind of outside of STADA, given your GMP distribution capabilities there?
Keith Strachan
Yes. We're seeing a ton of opportunity in Europe. So I think STADA has really proven our ability to launch in Europe and move products into Europe. So once they see MediPharm manufactured products, it does increase the inbound business development opportunities. I think as a company, we're even getting to the point where we are having to make sure that we're picking the right partners and the partners that are able to move the volume that we want to create for them.
And IM Cannabis, in particular IMC, is a great company. And we're really happy to sign agreement with their subsidiary, Adjupharm. Adjupharm in Germany, and they have operations for getting product to patients both in flower and extract. So we will be taking care of the extract portion of that a little bit early to tell on volume. So I think that to quantify it today would be a little bit difficult. I think what's really important is opening up that regulatory pathway and getting them product and we expect to do that within the next few quarters. There is a bit of a process, obviously, in Germany as a prescription drug and as [indiscernible] a number of registration. So we're working to those registrations with them today.
Unidentified Analyst
Got it. Appreciate the color.
Operator
Your last question is from Shane Mayer [ph] with Canaccord Genuity. Your line is open.
Unidentified Analyst
Hi, there. Thank you for taking my questions. My first one just to touch on something that you mentioned in your prepared marks that early next year MediPharm and STADA are planning to expand into other international markets. I was wondering if you could provide any details on which markets you're eyeing for entry, and the strategy around entering those new markets, whether it be more broad based across multiple jurisdictions? Or if it'll be on a market-by-market basis? And if I can add on the back of that, how is STADA going to incorporate or evolve its sales force while entering those markets? Is the sales force going to be dedicated -- the same dedicated cannabis distribution from Germany that's going mark the market? Or they're going to expand on that front? Thank you.
Keith Strachan
Thanks. That's a great question. And we are really excited with the progress that we're making with STADA and our ability to expand. I think where we're expanding to, we probably keep that amongst the partnership, just from a competitive advantage, obviously. But I think that we can compensate that it will be in the EU. So having products in the EU with STADA today allows us to move product throughout the EU a little bit easier. So it just makes more sense to start there. STADA operates in over 100 countries worldwide. So the options are really endless in that sense.
But growing outwards from Germany as a base, geographically does make sense from a lot of different angles. I think as far as investing on the sales force, I think that obviously is STADA's decision, but from what I know and working with them over the last 18 months is I would say they will probably invest in additional resources in those new regions. Also keep in mind, in the EU kind of even something as simple as the language. So we have 30 salespeople on the street today talking to physicians and pharmacists in Germany. And German would be their primary language.
So as we go into other countries if they're not German speaking, that we would be probably adding in additional resources there. So I think that as long as the ROI is there, we will continue to invest and definitely STADA is seeing the cannabis opportunity as something that will help their business grow in the future.
Unidentified Analyst
Thank you. The next question, just staying on the topic of the international sales channel. So there was a notable improvement in the quarter on that sales in those international channel. And I'd be expecting just given kind of the 30 agreements that are in the pipeline today for that to ramp up fairly aggressively here. So just wondering from a sales mix perspective, I think international is about 38% this quarter. So from a sales mix perspective, how's MediPharm looking at the cadence for international versus Canadian revenue mix into Q2 and then onwards throughout 2021?
Keith Strachan
Yes, I think that's a good point. We are our ambitions are global. So we are looking as we stand to really look at those medical markets where we don't see as much price compression and where we have more competitive mode, where we can use our certification. So I think that we will see the -- that will become something where we're adding on more and more deliveries, as you mentioned those 30 contracts. It is a little bit of a lumpy process in the way that we register products in each country. So even though we send, let's say, five SKUs to STADA today, as STAD adds SKU number 6 and 7, we actually have to go through the process of registration again. So we're approved as far as a manufacturer and exporter go, but then we would register a new actual like drug serial number that would allow us to do that.
So as we see our partners work on their launch, there's different factors at play as far as them having their license from distribute. And then we know we are working with different regulatory in different countries. So for example, New Zealand, which is a great opportunity for us because so close to Australia, they actually change some of their regulations recently in February, March. So then that allowed us to go back and actually have to rejig our dossier to that regulator. So it does delay that delivery by, call it, another 60 days as we go through that process. So it would be -- I'd be caution to say, it's a straight kind of ramp up from here, but it's definitely the opportunities keep unlocking in a straight ramp, but the revenue will be a bit lumpy as far as process goes.
Unidentified Analyst
Thank you. That's all my questions for today.
Operator
We have no further questions at this time. I turn the call back to Keith Strachan for closing remarks.
Keith Strachan
Great. Well, I'll just close by saying that we look forward to hosting our second quarter conference call and our upcoming annual meeting and keeping everyone abreast of all the progress in between. Thanks for listening and have a great day.
Operator
This concludes today's conference. You may now disconnect.
