ER CC transcript - MediPharm Labs Corp. (MEDIF) CEO Pat McCutcheon on Q3 2019 Results - Earnings Call Transcript
Nov. 12, 2019 12:13 PM ET
I am a bit crushed for time, but wanted to put this out there for all to read. I will read it and comment later.
MediPharm Labs Corp. (OTCQX:MEDIF) Q3 2019 Earnings Conference Call November 12, 2019 8:30 AM ET
Company Participants
Laura Lepore - Vice President, Investor Relations & Communications
Pat McCutcheon - Chief Executive Officer
Chris Hobbs - Chief Financial Officer
Keith Strachan - President
Conference Call Participants
Scott Fortune - Roth Capital Partners
Devin Schilling - PI Financial
Kimberly Hedlin - Canaccord Genuity
David Kideckel - AltaCorp Capital
Adam Buckham - Scotiabank
James Gellman - Richardson GMP
Operator
Good morning, ladies and gentlemen. Thank you for standing by. Welcome everyone to MediPharm Labs Third Quarter 2019 Conference Call and Webcast. Following the presentation, we will conduct the question-and-answer session. Instructions will be provided at that time for you to queue for questions. [Operator Instructions]
I would now like to turn the call over to Laura Lepore, Vice President, Investor Relations and Communications.
Laura Lepore
Thank you, Jessa, and good morning, everyone. We're pleased to have you join us on MediPharm Labs Third Quarter Earnings Conference Call. Joining me for today's call are Pat McCutcheon, Chief Executive Officer; Chris Hobbs, Chief Financial Officer; and Keith Strachan, President.
Before we begin, please note that the cautions regarding forward-looking statements, which is made on behalf of MediPharm Labs and all of its representatives on the call. The statements made on this call may contain forward-looking information. The actual results could differ materially from its conclusion, forecasts, 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 a conclusion, forecast, or projection in the forward-looking information, and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projections, as reflected in the forward looking information are contained in MediPharm Labs filings with the Canadian provincial securities regulators, which are available on SEDAR at www.sedar.com.
Before turning the call to Pat, I'd like to take a brief moment to acknowledge and congratulate both Pat and Keith on being nominated as finalist in The EY Entrepreneur of the Year for 2019. A truly remarkable achievement and another huge milestone for MediPharm Labs, while there are many success stories in the cannabis industry, getting here have not been without its hurdles, their ambition, commitment, drive and genuine desire to improve and transform the world by harnessing the power of cannabis has been an inspiration to all. Once again, congratulations from all of us at MediPharm Labs.
Now, it's my pleasure to turn the call over to Pat.
Pat McCutcheon
Thanks, Laura, and good morning, everyone. Last quarter, we stated with great clarity that MediPharm Labs for producing tangible value of using high integrity growth strategies in a risk-managed business model. Today, we delivered a fourth core consecutive quarter of strong growth in revenue, adjusted EBITDA and profitability. This on top of winning a number of exciting new international and domestic contracts, and securing an Upsized Credit Facility with Scotiabank.
I'm pleased to say, our company is now more than industry standout. It's a sector benchmark for profitability and progress. We've built a global Tier 1 cannabis company to sustain our advantage, and seize the significant opportunity from the evolving global medical market for cannabis.
This morning, I'll talk about catalysts, for international expansion and diversification, as well as our strategic priorities that position MediPharm Labs well for future growth.
Starting with an exciting summary of Q3 highlights. Our quarterly performance was ahead of plans for the fourth quarter in a row, excellence. Revenue grew 38% since Q2 quarter – quarterly revenue of $43.4 million was over four times higher than in Q4 last year and twice that generated in Q1. This performance reflect the tremendous strides our team has made establishing MediPharm Labs as a Tier 1 global cannabis company in line with our global industry peers.
Adjusted EBITDA was 31% higher than Q1 – sorry, Q2, and has grown from $2.1 million in Q4 last year to $10.1 million this quarter. And when you look at year-to-date, we delivered an impressive $97 million in revenue and $22 million adjusted EBITDA. These results validates how powerful our model really is, and it's only that we’re giving everyone.
To sustain our advantage as global leader, we continue to invest heavily in our resources. We're building a more robust platform to position us for increasing global growth opportunities.
A key differentiator for us is substantial reference made from investments making to create and sustain purpose-built operations that will be European GMP, or Good Manufacturing Practices certified.
GMP is not a nice to have. For a global cannabis company, it's a mandatory, precondition to gain acceptance and trust, into pharmaceutical and medicinal product markets.
By definition, GMP has set rigorous system that assure proper design, monitoring, and control of all manufacturing processes and facilities. It is a management philosophy to drive performance which has been in the design engineering phase from our company's inception, nearly five years ago, in fact.
In an industry where quality drive consumer trust, GMP will demonstrate the MediPharm Labs set the standard for consistent, predicable, precision-dosable products that are fully traceable.
Both major and minor cannabinoid content -- concentrates without traceability are not considered pharma-like in that nature or quality. Simply, they're not accepted by the customers we seek to serve, such as clinical researchers and large consumer companies around the world.
Proving and earning GMP status and keeping it current will be the next game-changer for Medipharm Labs. It will unlock opportunities for high margin sales across certain legal global markets, including in Asia and larger consumer jurisdictions in Europe.
We have a growing portfolio of licenses, which already imposed strict requirements on our manufacturing process. Now, GMP will be the most that will keep Medipharm structurally advantaged.
We are well-positioned to attain numerous certifications due to the fact our operations are built to GMP requirements, not retrofitted. That's not diminish the heavy-lifting underway to secure o certifications continuing as we speak, each and every day.
Several jurisdictions are engaged in auditing our platform, including Germany, which qualifies Europe and Australia. We've employed a highly capable GMP specialist to drive these priority efforts.
Our success to-date has attracted the best and brightest talent from traditional Pharma to the MediPharm team, adding deep expertise and enhancing our competitive advantage.
In terms of timing, as it is dependent on foreign regulators, final GMP certification will take as long as it takes. We're optimistic and expecting good news on this product as early as H1 2020.
Our recent wins, our first ever in Europe, with ADREXpharma, a German Pharma company was a direct result of moving forward on our GMP quest. Under this agreement, we will export formulated cannabis oil to Germany that ADREX can then distribute to up to 20,000 pharmacies, once you receive all applicable regulatory approvals and GMP certification. This is a great win. One of many that will stand on the shoulders of our GMP status, over the coming quarters and beyond.
Simultaneously, we're investing and implementing a Tier 1 globally recognized GMP Compliance Enterprise Resource Planning system, SAP. Every goal manufacturing company operates with a robust ERP system and MediPharm once again remains ahead of the curve with this initiative.
We're undertaking a multi-continent implementation of our ERP system that will be the foundation to streamlining business processes, optimizing our supply chain, and providing real-time decision-making capabilities across all functional areas of our business.
This multi-million dollar investment is required to scale our operations globally. It's also a core competency required to work with the major pharmaceutical companies that we're starting to see enter the industry.
GMP and ERP advancements are adding to our overall cost base. It's a differentiating and significant spend we have not seen among other industry peers. We've also added scale for our workforce and production capacity in advance of realizing the benefits. MediPharm now numbers over 220 employees here in Australia. In the third quarter, these strategic costs slightly compressed gross margins.
We care deeply about generating all parts of possible margin on our revenue, but not at the expense of our future. We are committed to making the investment necessary to create a global platform that drives revenue and earning performance well beyond 2019.
Miriam stated we will incur extra costs for GMP certification and ERP activation until these processes are completed. This is similar to the maturation cycle of other junior pharma companies, as they progress to becoming major global players. That said, what I think is truly impressive of Q3 is that MediPharm generate benchmark setting performance and maintained a strong cash balance, by concurrently executing on these key investments.
Of course, the biggest highlight of this year has been a conversion of opportunities into our sales pipeline and to committed long-term agreements. We now have numerous agreements cross white label, private label and contract manufacturing. These deals vary in duration, scope and price variety and illustrate the quick start MediPharm Labs has made since Canadian legalization late last year's plans.
Thinking about these on September 24, we secured a long-term bulk extract agreement with TerrAscend Canada to support their launch of 2.0 products. The contract has an initial 24 month value for $27 million, potentially growing to about $192 million over 36 months.
Also is September, Cronos subsidized for a two-year white label in contract manufacturing assignment for filling and packaging of vaporizer devices. This incremental agreement expands our valued relationship that began earlier in May this year.
I'd like to take a quick moment to share some thoughts on recent Vape news and what this means for MediPharm Labs, as Canada begins to roll-over the advisors, in addition to new cannabis concentrated products such as edibles, beverages and topicals.
Although, Vapes are not permitted for commercial production until only last month, our pharmaceutical trained quality team has been performing extensive R&D and very rigorous testing of per gram formulation for Vapes for more than a year now.
We've been closely monitoring reports on Vape and lung disease stemming mostly in the U.S. We've worked alongside our peers and our science advisory committee to understand the drivers behind it with the Vape products that may have been linked to causing this disease.
Last week, the U.S. Center for Disease Control released the findings of study of 29 patients affected by lung disease, suggesting a thickening agent, Vitamin E acetate was actually found in all cases. We believe these results underscore the critical importance of federally regulated cannabis market to ensure consumer and patient confidence in the production of Vapes. We believe that this should drive consumers into the legal market in fact.
As a Health Canada regulated Cannabis Company, MediPharm Labs strictly adheres to federal standards and regulations related to manufacture, quality testing and labeling of all cannabis products, including Vapes. Outside of Vapes, this quarter end, we continue to see demand grow in Cannabis 2.0 market.
As we announced in October, we signed an 18-month supply deal with Olli Brands, an up and coming Cannabis 2.0 edibles company. Olli is among the first Canadian movers in creation and food grade manufacturing of premium, smoke free, cannabis-infused edibles and teas. With this agreement, MediPharm gained a strong partner with a foothold in the culinary lifestyle market as well.
It's worth noting that we further entrenched our position in this high potential market by earning our cannabis research license under Health Canada's Cannabis Act and Cannabis Regulations on October 31. This very rare license enabled us to perfect Cannabis products through controlled human administration trials in Barrie.
Cannabis companies without this license cannot use sensory experiments to gauge human reactions to stimuli perceived through smell, sights, touch and taste, therefore, limiting their understanding of the profile of the raw material, in-process material and finished products. This is the unique license that gave MediPharm Labs and our customers a distinctive competitive advantage in assessing products.
We see this development as a catalyst for additional sales growth, customer service, particularly when coupled with our recently received organic certification from Pro-Cert, one of North America's leading certifiers of organic products.
Although, we're optimistic that we will start seeing a more steady supply of organic biomass come online, the overall industry supply of dry cannabis inventory has hit record highs. This though is extremely well for MediPharm. At these levels, we've been able to secure significant volumes of high quality and high active component biomass at more attractive pricing, ensuring we can fulfill all of our contacts to-date ability for 2.0.
We expect to see this trend continue, which will only further support our margins moving forward as we acquire only the best yielding dry cannabis, establishing a reliable supply chain for domestic and international products.
From a manufacturing growth perspective, we’ve complete a purpose built 16,000 square foot expansion within our Barrie facility and our waiting room licensing amendments from Health Canada. This expansion includes state-of-the-art rooms for end product production, automated packaging lines and secure storage. When you breathe as much as you can add that, you can never have enough storage.
Looking at TerrAscend Canada, we've already proven our global footprint with accelerated export opportunities versus our peers. We have set December 6th to the ribbon cutting ceremony of our Victoria footprint plants located outside of Melbourne, Australia. This 10,000 square foot production facility will have annual capacity with approximately 75,000 kilograms of dry cannabis. We received our main function license earlier this year and expect to achieve our sales and production license to be fully operational at GMP standards in H1 2020.
Operating a second license production facility and securing customers and export markets are critically important to our international growth ambitions. It's also our risk management strategy to reduce reliance on Canada and the delayed distribution volumes across Ontario and the Canadian market overall. While on topic, you will note, that during the third quarter, the company completed second set of commercial shipments of medical cannabis concentrates to Australia to fuel key chronic pain research, a noteworthy accomplishments, another example of an export market penetration.
Overall, we’re moving forward as plans and in some cases ahead of plan due to great execution of the team. With a proven business model that took the better part of five years to construct MediPharm Labs is not a startup company. We are going to startup market with its share of opportunities and challenges, which I'll elaborate on a comment later when I wrap up.
But first, I'll ask Chris to provide his reports. Over to you, Chris.
Chris Hobbs
Good morning, everyone. This was another productive and profitable period for MediPharm, a $14.7 million gross profit grew 30% over Q2, reflecting gross margin of 34% as compared to 36% in Q2, a slight decrease in gross margin percentage is primarily result of the increased market selling prices and one-time GMP related costs and that is a decrease in the weighted average price of biomass.
While there will always be some variability from quarter-to-quarter, we're certainly of the view that our business model can support very attractive margins over the long haul, especially with decreasing input costs. Some of the investments we're making can be seen in higher G&A, marketing and selling expenses.
G&A costs were 12.5% from Q2, primarily due to higher full-time employees in Barrie and Australia, as well as consulting and professional fees related to start and grow the sales, new product development and progress with GMP. We make no secret of fact that we are running higher cost base than less capable companies without a realistic GMP aspiration. Frankly speaking, a GMP platform is inherently more costly and complex to operate and sustain. And GMP requires a significant upfront investment in equipment and skilled personnel. This is why it's out of reach for some companies in our sector, namely companies that have not pre-designed the facilities for building it.
For analyst thinking about their models, I would say that some GMP auto related costs will fall away, once we achieve certification. Other GMP costs will also further grow into our cost base over time. Our higher revenue in gross profit and despite higher labor costs, adjusted EBITDA increased 31% to $10.1 million compared to Q2.
At the bottom line, MediPharm Labs delivered net income before tax of $5.4 million. This is our second consecutive quarterly profit measured at an IFRS basis. These results again demonstrate the robust nature of our business model and the superior performance that we can generate using our unique capabilities. We're putting the funds raised from June's bought deals to good use of the $70.6 million available to us we incurred $25.5 million through September 30th.
The largest expenditures from the funds raised included $15.1 million for working capital, primarily for increased inventory purchases, $7.4 million in Canadian facilities of a target total investment of $24 million and $2.5 million for Australian operations out of planned $5.5 million.
Turning to the balance sheet. We're in a very good position to support our growth strategies, not just because of the bought deal, but because we secured an upsize credit facility with Scotiabank in October. It provides us with total availability of $38.7 million and bears interest at the banks prime lending rate, plus a certain percent that is dependent on our debt to EBITDA ratio that can be repaid without penalty. Only $5.7 million of the facility have been utilized to-date and that was to refinance and reduce the interest expense on an existing mortgage.
A final observation at September 30th, we have positive working capital of just over $87 million cash equivalents of $42.1 million at September 30th 2019 as well as unutilized credit under this new upsized credit facility.
Now back to Pat.
Pat McCutcheon
Thanks, Chris. What is amazing is that, a tremendous job you've done as our founding CFO. Our finance and legal teams worked relentlessly over many months to complete deep due diligence process with Scotiabank and close our credit facility, rare for our industry. This is hugely validating and prove that MediPharm meets the high standards of Schedule 1 banks for expected revenue growth, liquidity and regulatory compliance. As you know, this will be Chris's last quarter as CFO. Chris will remain a valued member of our board and a fellow shareholder.
Effective in less than a week's time, Bobby Kwon takes the reins as our new Chief Financial Officer. Bobby brings 25 years of international experience in the consumer-packaged goods retail and pharmaceutical industries. He is a proven leader with expertise in strategic planning, finance, M&A and operations. Most recently, he served as Senior Vice President of George Weston Group, Canada's largest food and drug retail business.
During his tenure at George Weston, he was a key member of the team that has $12 billion acquisition of Shopping Drug Mart. Prior to that he was CFO of Unilever in Canada. And again an integral part of several transactions, including the $4 billion acquisition of Alberto Culver and a partnership agreement with PepsiCo. Bobby holds an MBA, a B.SC in biochemistry and he is a Chartered Professional Accountants. He fits well with MediPharm Labs business culture and unique strategic scientific approach.
We are delighted he has chosen to join our leadership team, particularly as we set out to achieve a NASDAQ listing. A dual listing will give us access to a broader investment pool and increase liquidity. With this, blue chip -- with his blue chip qualifications Bobby will help steer business strategy into the next phase of our exponential growth.
Looking ahead, we have been able to drive great long-term performance. Growth catalysts include; product delivery under new committed sales contacts and white label agreements, converting our sales pipeline into booked orders; our new Research Licence and its application in the development of high quality, branded consumer products by customers; licensing of our newly constructed 16,000 square foot room in Barrie and ongoing production ramp up; completion of construction and equipment installation to enable production in Australia on track for H1 2020; new product development; and finally, and as expected, GMP certification of both Canadian and Australian facilities.
In a very important catalyst, our Cannabis 2.0 legalization, the advancement of the provincially regulated retail distribution model in Canada, very exciting cannabis industry as such. Have you heard me say, MediPharm has already had several new releases of white label of brand new products across various equipment and categories. The challenge is 2.0 is not rolling as quickly as originally thought, various retail distribution models used by Cannabis 2.0 provinces have resulted in backlog orders.
To be clear, we do expect industry retail sales to grow and promising to open additional stores. Of course, however, we expect the cadence will likely not measure up to the initial expectations in the near-term.
While we can influence these roll-outs and their timing, we can look to supplementing our domestic opportunities with global exports. Taken together with new plans sales, we expect export volumes to steadily increase in the future after GMP certifications.
In summary, I'm proud to say MediPharm Labs is well on track to surpass $100 million in sales this year, and we continue to do so profitably. We have substantially enlarged our portfolio of committed agreements. We've achieved an important new license that enhances our capabilities and the services we can provide customers.
We’ve built a global cannabis company with facilities in both hemispheres. We continue to build-out export channels that should be key to unlocking the expanding global medical market opportunity. These channels will enable MediPharm to release the pressure of oversupply in the Canadian industry, key differentiating factor.
With strong revenue today this year and a committed credit facility secure on great terms, we have the financial means to execute on our aggressive plans. I'm especially proud that our company has earned leadership recognition from our industry peers through several awards in the last few months as well.
The extraction facility at the [indiscernible], Manufacturing Business Excellence at the Barrie Chamber Business Awards. And just this past weekend, we were named Entrepreneur of the Year Canadian Cannabis Awards, fantastic for the team.
To close, I want to reiterate that MediPharm Labs is now focused on Cannabis 3.0 and beyond. And we have the ability to see this global medical opportunity due to our distinctive strength; one, we stand out in the cannabis industry for being profitable; two, we're building a global platform; and three, we are poised for growth.
Thank you for your continued support.
With that, we'd like to answer your questions. Operator, could you please open the lines to call our callers.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question comes from the line of Scott Fortune from Roth Capital Partners. Please go ahead.
Scott Fortune
Good morning. Congrats on a great quarter guys.
Pat McCutcheon
Thanks, Scott. How you doing?
Scott Fortune
Thank you. Good. Can you provide a little bit of update of raw material purchase on the quarter and the pricing and what you're seeing from the pricing standpoint on the spot market for purchasing dried flower? And since you've -- prior quarters you've listed out the amount that you've acquired and I don't know if you've done that this quarter?
Pat McCutcheon
Thanks. Thanks for the question, Scott. Yes, we've continued to start purchasing and we have seen a slight reduction in per gram costs. But I'm actually going to pass it over to Keith, just add a little more clarity to that one.
Keith Strachan
Good morning, Scott. Yeah. Thanks for your question. MediPharm remains probably one of the biggest buyers of the wholesale cannabis in Canada. So, we’ve a really good insight on costs overall in that wholesale pricing.
We have seen it increase month-over-month. And so 17 months it takes on the supply. But as a high quality producers, we are focused on high quality flower as well. So that drop would not be as significant as kind of throughout the whole industry.
As far as your question on releasing amounts, in the past we did do press releases indicating some of our bigger purchases and I think that's now become regular course for us. So might not be something that we necessarily do a press release about, but you will see in the inventory numbers of our financials this quarter and going forward, we are keeping a great inventory to make sure we can seize all of our contracts both current and future. Thanks so much Scott.
Scott Fortune
Great. And then real quick, can follow-up on the project, the timing of private label and white label revenue ramps as you see the Canadian 2.0 market starting to come on board here late December. Do we expect kind of first quarter next year to be introduction and then really things start to ramp on the second quarter, could you just kind of follow-up on the timing of that?
Pat McCutcheon
Yeah. For sure. I think that if we look at the historic of the ramp up of cannabis legalization in 2018 and then kind of apply that to the Cannabis 2.0 derivative products, we're going to see a lot of interest from the public, but a bit of a slower ramp up. So we think that was going to make a significant impact on our books probably in the second half of 2020, but we will be launching skews with the rest of the industry in early 2020.
Scott Fortune
Thank you for color. I'll jump back in.
Pat McCutcheon
Thanks so much, Scott.
Operator
Your next question comes from the line of Devin Schilling from PI Financial. Please go ahead.
Devin Schilling
Hi, guys. Nice quarter here.
Pat McCutcheon
Hi, Devin. Thanks so much.
Devin Schilling
Yeah. Hey, can you guys please comment on the growing cannabis oil inventories across the industry, and how you guys expect this to impact MediPharm, I guess, with regards to pricing and demand, I guess, for you guys as oil from I guess existing customers and contracts currently in place?
Pat McCutcheon
Yeah. We're seeing an increase in -- I’m sorry, decrease in pricing in certain areas. Having said that, one of the things that we've really kind of positioned ourselves as one of the highest quality producers in the cannabis industry itself and we feel that with our quality with these certifications that has actually protect our margin and consumers will then really also appreciate this.
The fact of the matter is with the GMP certifications in our ability to start exporting oil gives us this pressure release out to the Canadian market and the challenges that we've seen with the delayed roll-out. So we feel comfortable that this will also give us an advantage over some of our competitive peers in this space without such GMP compliance or certifications.
Devin Schilling
Okay. And just as a follow-up here. You guys mentioned this new 200,000 kilogram extraction line that, I guess ready to be commissioned here. Is that -- do you have any estimated timing on that? Is that waiting for a new room to be licensed? And I guess, are there any kind of capacity bottlenecks right now where this machine will alleviate?
Chris Hobbs
Yes, thanks, Devin. I think with the new extraction lines coming on; some of it is dependent on new room amendments. As we mentioned, we have completed a large expansion that we're just waiting on Health Canada approval. But today, right now, we don't have any bottlenecks to appease our current contacts and some of the future contracts that recording at the moment.
We do have enough capacity to suit our need. We’ll more bring those lines on to help with additional capacity as Pat mentioned with international distribution coming online and kind of just being in the very beginnings of CPG companies coming into cannabis. We want to be prepared. So, we’re looking at commissioning those machines to be prepared for that.
Devin Schilling
Okay. Perfect. I'll jump back in the queue. Thank you.
Operator
Your next question comes from the line of Kimberly Hedlin from Canaccord Genuity. Please go ahead.
Kimberly Hedlin
Hi, guys. Thanks and great quarter. Just a quick question. You mentioned, you are targeting some new products. Could you provide any details on those?
Pat McCutcheon
Hi, Kim, thanks so much. Yes, we were focused on a number of different Cannabis 2.0 products and supporting our white label partners. In Barrie particular, we'll be focused on our Gel Cap expansion and distribution and a higher quality formulated tincture bottle product as well as a number of different APIs that will be certified for our export into international markets. So, we are referring to these different certified APIs as a differentiated product versus the products that we distributed within Canada and domestic platform.
Kimberly Hedlin
Okay, got you. And then maybe just to kind of elaborate on the other questions and sort of looking at the fourth quarter, so we get into a little bit of guidance there. How should we look at that relative to the third quarter? I know, it's early days, but if there's any color you can provide that would be appreciated.
Pat McCutcheon
Yes, thanks. I will mention Kim that we're not in a position to give any guidance at this point. But I will actually pass it over to Keith to actually give a little bit more clarity on exactly how Q4 is going to rollouts falling this quarter.
Keith Strachan
Thanks, Kim and as we mentioned, we're about halfway into Q4 here, so we can provide a little bit of insight without providing guidance is basically a lot of interest still in our business. I know a lot of our revenue is contracted, so it is fixed. So, not seeing any worries on the fixed contract side of things. And we are still getting a lot of inbound calls for interest and a lot of one-time deals.
As you mentioned and kind of the overall sentiment of the industry as far as retail rollout goes, we might not see that 20% quarter-over-quarter increase again. But we are very confident in our business going forward, maintaining where we're at.
Kimberly Hedlin
Okay, that's really helpful. Thank you, guys.
Pat McCutcheon
Thanks a lot Kim.
Operator
[Operator Instructions] Your next question comes from the line of David Kideckel from AltaCorp Capital. Please go ahead.
Pat McCutcheon
David, how are you? It looks like we might have lost David.
Operator
David, your line is open.
David Kideckel
Hi. Sorry. Good morning, everybody. Hi, Pat, hi team. Congrats on the quarter and also on all of the awards you've put up over the last little bit. I have some questions. I think, Pat, you made a comment earlier around GMP facilities being purpose-built versus retrofitted, and how that provides MediPharm Labs with a competitive mote?
I'm just wondering as we're seeing, you know, some of the other players in this space -- getting into the GMP space. How purpose-built will continue to be on a long term basis -- will provide you with a mote as compared to retrofitted GMP purpose -- or GMP-based facilities?
Pat McCutcheon
Yeah. Thanks a lot, David. We feel this is a major differentiating factor for MediPharm, it's really given us an opportunity to explore and now execute on these audits for internationals GMP certifications.
Retrofitting really, really is a challenge due to the fact that when it comes to environmental control systems, monitoring systems, and the different methodology that you need to actually execute on a GMP platform, make it very difficult and expensive to actually change such equipment or update it, so that you could have the traceability required for validation of such equipment either in a control or during process.
We -- as I mentioned in the call script, this was something that we took to heart very early on and store five years ago our -- at that point, our consultants before they became internal quality players and regulatory employees, really put to heart the designs and execution of a GMP platform prior to being built. And this went into a really extensive due diligence with regards to how we've contracted all the equipments have been used for our facility, in fact.
So, companies now that are looking to change pivot and then retrofit their facilities to be able to be GMP-compliant is literally a significant increase in expenditure and costs and a significant increase in timelines to be able to execute on those GMP platforms.
David Kideckel
Got it. That's very helpful. Thank you. Moving on another question here. So, if I'm understanding the way MediPharm now is pivoting slightly just due to the uncertainty in the Canadian market, potentially oversupply, not enough dispensaries, et cetera. I just want to confirm just for kind of housekeeping here, so it seems like the pivot is being made from the international medical market. Did I hear that right?
Pat McCutcheon
It maybe towards international market, absolutely. I think the comment we actually made was that, we're position now to be a pressure release down for the oversupply in the Canadian market.
David Kideckel
Got it. Okay. One last question, and then, I'll hop back in the queue. I know, MediPharm Labs positioning their selves to be able to provide -- API provider to global pharmaceuticals. Can you maybe provide some color with respect to your overall pharmaceutical strategy and timing to the global pharmaceutical? I guess, clinical trial phase or R&D?
And also whether or not, you plan to pursue beyond say CBD and THC? I know you're in with Mount Sinai School of Medicine in New York, but any other cannabinoids of interest to MediPharm Labs?
Pat McCutcheon
Yeah. A couple things, I went to Mount Sinai, probably -- in particular we're very excited how should we be supporting CBD through our GMP platform. They'll give the opportunity of the researcher groups who look at anti-opioid using -- anti-opioid products using a CBD based formulation.
We feel it's very important to position and do this in a stepwise fashion. We've done a number of isolation of spark cannabinoids at this point. And we're excited to continue to work with a number of major pharmaceutical companies that are slowly tapping into this space.
In a number of these relationships, we are donating cannabinoids to work with such pharmaceutical companies. But overall, we think there is going to be a little more time, and 2020 will be a slower year with regards to research and development relationships going forward. Mount Sinai being one of our major first forays into this new environment relationships with big pharma opportunities.
David Kideckel
Okay. Thanks very much, Pat, and again congrats on the quarter guys.
Pat McCutcheon
Thanks so much.
Operator
Your next question comes from the line of Adam Buckham from Scotiabank. Please go ahead.
Adam Buckham
Good morning. Thanks for taking my question and congrats on a good quarter. So I was wondering if you guys could provide some color on the overall supply at extraction services for the Canadian market, and additionally how negotiations have been trending for your services in Canada.
Keith Strachan
Thanks and that’s great question. Its Keith, again here. I think on the extraction as a service, it's not really much of our market. And why? If you can see, from our financials goal, it represents a very small percentage of actually this large revenue.
So insights on the actual competitiveness of that, I don't have full insight onto it. But it is part of the reason why we never really got into that fee for service business, because looking at other jurisdictions that are more mature, like Colorado or California we have seen price compression for extraction as a service. So it’s something that it’s not a race that we really want to get into.
But as far as ongoing wholesale Costco, we are seeing a lot of that maintains, so we're not seeing as much price compression on the wholesale, let's say, resin as you would on the wholesale flower.
And then more importantly, what MediPharm is doing, we're focusing on wholesale, what wholesale of some more high quality products. So things like our distillate platform being one of the biggest in Canada and being able to provide that distillate at math in a quality really helps protect us move from price compression.
Adam Buckingham
That's great. I guess just secondly, I'll take another stab at the gross margin question that's come up a couple of times. Given that, there's been some price compression in wholesale flower. Do you kind of see these offsetting some of the GMP certification costs as we look at Q4 and Q1 like what is the wash there on a gross margin basis?
Chris Hobbs
Hi. It's Chris here. We do see -- as we mentioned, our gross margin fell slightly as the prices come down a bit on our sales and we have the increased GMP cost and we won't see the benefit of those increased GMP costs until certification. So, even though we've got some compression from the GMP costs now that will provide a significant future benefit to us when we do get the certification.
Fortunately with the decreasing selling prices, we do see a decrease in the costs of the flower input. And we do anticipate those to keep somewhat in line. But as Keith noted on the sales of concentrate, it's probably in the long run, a little less sensitive to those decreases as the actual flower will be and not affect on gross margin will be a little bit less. It won't quite be dollar-to-dollar as we move forward.
Adam Buckingham
Great. That's super helpful. Thanks.
Operator
[Operator Instructions] Your next question comes from the line of James Gellman from Richardson GMP. Please go ahead.
James Gellman
It's actually Gellman. And good morning gentlemen and a great quarter.
Pat McCutcheon
James, how are you doing?
James Gellman
I'm good. So, a couple of things. I guess the last couple of calls ago, gentleman talked about Mount Sinai. I was wondering if you could just kind of quickly bring us up-to-date on how things are going there and when there might be sort of some catalysts or some news that you could share with the market about it?
Pat McCutcheon
Yeah. Thanks so much for that, Jim. Mount Sinai is one of our major opportunities to be involved in R&D and especially with U.S. based institution. I have to admit that it is their trial. It's not our trial. And so the timing and the execution of the trial itself is up to the Mount Sinai team. We are expecting to bring more clarity in early H1 next year. And we're very excited to bring to the public, the fantastic execution of such trial as appropriate, but it's unfortunately not controlled by the MediPharm timeline.
James Gellman
Okay. And just a question about game changing or differentiating extraction technologies such as enzymes, et cetera. Are you guys experimenting with anything or seeing anything out there that really is maybe game changing that you might want to share with us?
Pat McCutcheon
Yes. Jim, thanks for that question. MediPharm, NASDAQ with our R&D team and our Science Advisory Committee were always looking at new technologies, not only for extraction but for downstream processing as well.
I think what's important for us is, is doing this not only at scale, but doing it in a way that as efficient and cost appropriate. So while we're seeing a lot of really cool new technologies, and maybe some different ways to extract, there's yet to be proven kind of better way to do it at the same efficiencies at such large scale.
So what we've done is we've kind of taken the tried and true methodology that we’ve seen from pharmaceuticals and food and fragrance and applied that too to cannabis to launch such a high revenue platform.
And one thing I’ll add to that Jim, we cleared and there's ton of opportunity for different smaller scale, technologies to be applied to Cannabis 2.0 products for Canadian distribution. As we mentioned number of times on the call, our platform now is fully GMP compliant and that platform in fact that our manufacturing space is crystallized.
So it's challenging and it doesn't make nearly as much sense to change a crystallized GMP platform that is planned and engineered for exports on large scale volume. When we look at primary extraction, it's just one piece of the value chain of the extraction itself. And we're now looking and positioning ourselves in a higher marginalized value chain further downstream, that which will be GMP certified and available for export.
James Gellman
Okay. Thanks a lot, guys.
Pat McCutcheon
Thanks so much, Jim.
Operator
Your next question comes from the line of David Kideckel from AltaCorp Capital. Please go ahead.
David Kideckel
Hi, guys. Thanks for taking my additional questions here. I think Jim just asked one of them. But moving on here, I know you, you've issued a press release, I guess a week or two ago, and you mentioned on the call today, but the new research license that Health Canada has given you that’s really look -- will allow you to conduct human sensory experiments at your Barrie facility. I'm just wondering if you could give us any more color as to why this is important and what specifically you hope will enable you to achieve?
Pat McCutcheon
Yeah. Thanks, Dave. I think, it's really important, pretty crazy to kind of envision an industry where we like the industry has been releasing products to market where there's actually no legal way for it to be any sort of tested or smell, or tested in the facility before being released from a quality standpoint.
So there is that as far as our own internal quality check. And then even more importantly and more excited, now with -- with the cannabis 2.0 and the derivatives added to the cannabis regulation, it really opens up to a whole plethora of new products. And there is a lot of groups not only at MediPharm Labs, but outside of MediPharm Labs, they need a place to test these new products from a user and sensory point of view. So, we provide that.
And I think as new partners, medium and large come online and they're looking for a partner to do their white-label production, I think it gives us an advantage -- a competitive advantage to be selected to do that white-label production to provide that service.
David Kideckel
Okay. Thanks, Keith. That's very helpful. Thanks for the color. That's it for me.
Pat McCutcheon
Thanks so much, David.
Operator
There are no further questions at this time. Mr. McCutcheon, I turn the call back over to you for closing remarks.
Pat McCutcheon
Thanks so much. And as there are no further questions, I will close by saying we look forward to hosting our fourth quarter conference call in March and to keeping incurred in our progress between. Thanks so much for listening and have a great day everybody.
Operator
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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