Medexus Pharmaceuticals Inc. (OTCQX:MEDXF) Q1 2023 Earnings Conference Call August 8, 2022 8:00 AM ET
Company Participants
Victoria Rutherford – IR, Adelaide Capital
Ken d’Entremont – CEO
Marcel Konrad – CFO
Conference Call Participants
Justin Keywood – Stifel
Rahul Sarugaser – Raymond James
Andre Uddin – Research Capital
Scott Henry – ROTH Capital
Prasath Pandurangan – Bloom Burton
Tania Armstrong-Whitworth – Canaccord Genuity
Operator
Good day, ladies and gentlemen, and welcome to the Medexus Pharmaceuticals’ First Quarter 2023 Earnings Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host, Victoria Rutherford, Investor Relations at Medexus Pharmaceuticals. Ma’am, the floor is yours.
Victoria Rutherford
Thank you, and good morning, everyone. Welcome to the Medexus Pharmaceuticals first fiscal quarter 2023 earnings call. On the call this morning are Ken d’Entremont, Chief Executive Officer; and Marcel Konrad, Chief Financial Officer. If you have any questions after the conference call or would like further information about the company, please contact Adelaide Capital at 480-625-5772.
I would like to remind everyone that this discussion will include forward-looking information as defined in securities laws. Actual results may differ materially from historical results or results anticipated by the forward-looking information. In addition, this discussion will also include non-GAAP measures. such as adjusted net loss and adjusted EBITDA, which do not have any standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other companies.
For more information about forward-looking information, and non-GAAP measures, including a reconciliation of each of adjusted net loss and adjusted EBITDA to net loss, please refer to the company’s Management Discussion and Analysis, which along with the financial statements are available on the company’s website at www.medexus.com and on SEDAR at www.sedar.com.
I would now like to turn the call over to Ken d’Entremont.
Ken d’Entremont
Thank you, Victoria, and thanks everybody for joining us on the call this morning. We are proud to announce a record first quarter for Medexus. Our base business continues to perform strongly and was complemented by recognition of a portion of revenue from Gleolan sales in the United States following our recent acquisition of Gleolan commercialization rights.
During the first quarter ended June 30, 2022, we achieved revenue of $23 million compared to $17.3 million in the same period last year, or 33% growth year-over-year. The $5.7 million increase is primarily attributable to an increase in the net sales of IXINITY and recognition of a portion of revenue from Gleolan sales in the United States, plus a 22% growth in Rupall year-over-year.
First quarter adjusted EBITDA increased to $1.9 million compared to negative $4.9 million for the same period last year. The $6.8 million increase in — it was primarily attributable to increase in sales, as well as an expected reduction in research and development costs. We are pleased to achieve this adjusted EBITDA, while continuing to maintain appropriate investments in our preparations for the U.S. commercial launch of treosulfan.
We produced a net loss of $1.4 million for Q1 compared to a net loss of $6.6 million for the same period last year. Our adjusted net loss which adjusts for unrealized losses or gains related to our convertible debentures included in net loss was negative $3.6 million compared to negative $9.8 million for the same period last year. At June 30, 2022 we had $7.3 million in cash and cash equivalents with $8.7 million of total available liquidity.
Turning to our specific product lines. Our core business is performing well and we are excited about new and potential additions to our product portfolio, which we believe will generate growth momentum over the coming years. We are pleased to say that we have corrected the IXINITY channel, pharmacy and wholesale customers have now returned to normal buying patterns that are better aligned with patient unit demand.
We are continuing to invest in our manufacturing improvement initiative and we expect the resulting operational efficiencies to improve the gross margins for IXINITY over the coming quarters. The clinical phase of our phase 4 pediatric study for IXINITY is now complete and we are now preparing the analysis and clinical study report which we expect to be completed in the first quarter of calendar 2023. Our successful study could support a significant expansion of the indicated patient population for IXINITY to hemophilia B patients under 12 years of age and we are exploring approaches to address this potential expanded market.
Rupall continue to see strong unit demand growth achieving 22% growth for the trailing 12 months ended June 30, 2022, continuing its trend as one of the fastest growing antihistamines in the Canadian prescription market. Again, this growth reflects a severe allergy season across Canada and successful sustained execution of our sales and marketing initiatives as physicians continue switching patients to Rupall from either generic prescription antihistamines or over the counter products.
Turning to Rasuvo. On a unit sold basis, Rasuvo continued to maintain its strong market position and in fact increased its market share in the United States in the trailing 12 months ended June 30, 2022. However, increasing competition in U.S. branded methotrexate market continued to negatively affect Rasuvo product level revenue. We implemented effective unit level price reductions to defend our product’s strong market position.
On Metoject, even with a generic entry to the Canadian methotrexate market in calendar 2020, Metoject saw unit demand increase in the trailing 12 month period ending June 30, 2022. Again, product revenue was negatively impacted by a similarly motivated decrease in effective unit level prices. We continue to work towards conclusion of the litigation against the generic competitor and a trial date has been set for calendar Q1 2023. We will continue to update shareholders on material developments in this matter.
These existing products have primarily driven our performance to-date. We are also actively pursue opportunities to complement our existing product portfolio by licensing and acquiring new products. For example, in March of 2022, Medexus acquired the exclusive right to commercialize Gleolan in the United States. As I mentioned, we recognized some Gleolan revenue this past quarter, representing a portion of the quarter’s product mix — portion of the product’s net sales, as per terms of the license agreement.
We anticipate completing our agreed transition process in full within the current quarter. This will result in Medexus having full responsibility for commercialization of Gleolan in the United States, which will allow us to begin fully recognizing product revenue within the three month period ending September 30, 2022. Our U.S. relaunch of Gleolan will complement our existing commercialization rights to Gleolan in Canada where we executed a full commercial launch of Gleolan in February of 2021.
As we have discussed in the past, we continue to be excited about treosulfan. We expect that it will become a leading agent for use in conditioning regimens as part of allogeneic, hematopoietic stem cell transplantation protocols or ALLO HSCP, which is a therapeutic area of interest for Medexus.
In June 2021, we received a notice of compliance from Health Canada to commercialize treosulfan, which we currently marketed in Canada under the trade name Trecondyv. We’ve now fully launched in the Canadian market and expect that the commercial experience we’re gaining in Canada will serve us well if and when the FDA approves treosulfan in the United States. Our partners at medac recently resubmitted updates to data files and supporting information to the FDA to complete the resubmission of their new drug application for treosulfan.
The review clock for the FDA’s review of the NDA resubmission will then start if and when the response is considered complete by the FDA with final FDA decision expected two months to six months thereafter. An FDA approval would allow for commercial launch of treosulfan in the United States in the first half of calendar 2023. If the FDA approves treosulfan, we will then be obliged to pay a milestone payment to medac that would range anywhere between $15 million and $45 million depending on the terms of the FDA’s approval.
Last week, we signed an amendment to our license agreement with medac. The amendment extended the date by which we would be obliged to pay this milestone amount to October 2023. This means that at the time of FDA approval, we would only need to pay immediately $2.5 million credit against our milestones that medac had provided us in September of 2021. This will allow us to launch and begin commercialization well before these license payments must be paid.
During the extended registration period, we have continued to work diligently with medac to prepare for the launch. If approved by the FDA, we expect that commercialization of treosulfan would have a material positive impact on the company’s total revenue as we estimate that the current market leading product in the United States generated $126 million at peak annual revenue before genericization. We also continue to regularly explore additional complementary product opportunities in both current and planned therapeutic areas and in both the United States and Canada and regularly evaluate various other transaction opportunities based on our strategic plan.
A key component of this growth strategy will be to continue to leverage our infrastructure through new product acquisitions and partnerships. We will continue to look at optimizing our portfolio and leveraging our resources with the goal of executing near term accretive transactions to achieve our sales growth targets over the coming years. In the meantime, we continue working to increase revenue develop and leverage our commercialization infrastructure across products and maintain a strict financial discipline.
I will now turn the call over to Marcel, who will discuss our financial results in more detail.
Marcel Konrad
Thank you, Ken. Total revenue for the first quarter ended June 30, 2022 was $23 million, which compares to revenue of $17.3 million for the three months ended June 30, 2021 and almost a $3 million increase versus prior quarter. The year-over-year increase of $5.7 million was primarily attributable to an increase in net sales of IXINITY and the addition of a portion of net sales of clearance sold in the U. S. Even without that additional net sales of Gleolan, the base business demonstrated a very strong performance this quarter.
Gleolan sales during the ongoing transition period including fiscal Q1 2023, has been in line with expectations and Medexus recognized a portion of net sales in its revenue accordingly. We expect to continue that strong performance following our U.S. launch of this product over the coming months.
Gross profit was $12.9 million for the three months period ended June 30, 2022 compared to gross profit of $6.9 million for the same period last year. The gross margin was 56.2% for the three months period ended June 30, 2022 compared to 40.1% for the three month period ended June 30, 2021. The $6 million increase in gross profit is attributable to the increase in net sales as well as the impact of the sales purchase of IXINITY during the three months period ended June 30, 2021.
Sales, selling and administrative expenses were $12.1 million for the three months period ended June 30, 2022, compared to $11.7 million for the three months period ended June 30, 2021. Research and development was $0.7 million for the three months period ended June 30, 2022. This compares to $2.2 million for the three months period ended June 30, 2021. The $1.5 million decrease was primarily attributable to a reduction in investments in the IXINITY phase 4 clinical trial as it approaches its analysis and clinical study report stage. We also continue to invest a moderate amount of additional capital in the IXINITY manufacturing process improvement initiatives.
As a result, adjusted EBITDA for the three months period ended June 30, 2022 was positive $1.9 million compared to negative $4.9 million for the three months period ended June 30, 2021. The net loss for the three months period ended June 30, 2022 was $1.4 million compared to a net loss of $6.6 million for the same period last year. Also included in net income or loss is a non-cash unrealized gain or loss on fair value of the embedded derivatives in our convertible debentures, which is sensitive to amongst other things fluctuations in our share price.
We believe that adjusted net income or loss provides a better representation of performance of our operations because it excludes non-cash fair value adjustments and liabilities, which may be settled for shares. Our adjusted net loss for the three months ended June 30, 2022, was $3.6 million compared to $9.8 million for the three months period ended June 30, 2021.
Cash and cash equivalents was $7.3 million at June 30, 2022, reflecting a decrease of $2.7 million during the first quarter of fiscal year 2023. The reduction is due to anticipated working capital fluctuations. Our available liquidity was $8.7 million at June 30, 2022, which consisted of $7.3 million in cash and cash equivalents and an ongoing credit of $1.4 million available under our ABL facility.
We are excited about our quarterly performance and continue to explore various financing strategies to enhance our liquidity to support our business plan, which includes an eventual launch of treosulfan in the United States. We have been consistent in executing our plan quarter-after-quarter with sequential revenue growth and increasing profitability. We’re looking forward to building that momentum towards an eventual launch of treosulfan and beyond.
Victoria Rutherford
Operator, we will now open the call up to questions.
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] And the first question is coming from Justin Keywood from Stifel. Justin, your line is live.
Justin Keywood
Hi. Good morning. Thanks for taking my call and nice to see the profit improve in the quarter. Just on the treosulfan resubmission, If I understand correctly, the FDA will communicate if the submission is considered complete, at which point there would be communicated timeline, if I’m interpreting this correctly. I guess I have two questions around this. One, when the FDA will communicate that it considers the application complete and what determines the review to be a two month versus six month time period? Thanks.
Ken d’Entremont
Thanks for your questions, Justin. So first, typically the guideline is that they would — they have 30 days to communicate whether or not they believe the application or the resubmission is complete. The company filed and I think we stated July 22. So a couple of more weeks ago before we would expect to hear from the agency. Secondly, the timeline and what determines the two or six months, that’s up to the agency. Its dependent on how much data they need to review and the timeline that they feel they need to do that. For our planning purposes, we’re assuming the worst case scenario, which is the up to six months. And remember, it is up to six months, so it could be shorter than [indiscernible].
Justin Keywood
Okay. Thanks. That’s clear. And then just on the Gleolan sales in the U.S., there is some language in the press release that helped the growth in the quarter. Are you able just to detail what exactly those sales were within the quarter?
Ken d’Entremont
Yes, I’ll turn it over to Marcel for the number, but obviously, we’re trying to communicate that. We’re not yet selling product labeled with the Medexus packaging. So we’re not booking revenue. So what you’re seeing so far is only a portion of that. We’ll start to book full revenue we think during this quarter probably towards the end of this quarter that we’re working in. So it’s not until really next quarter that you’ll see the full impact of Gleolan, but we’re pleased that it is making impact already. Marcel?
Marcel Konrad
Yeah. Sure. So we’ve said that historically, this product had generated about $3 million to $4 million per quarter. So we’re recognizing about half of that end. And as Ken mentioned, next quarter will be — we’ll be heading into a more meaningful quarter and then, Ken, as of Q3 then recognize Rasuvo (ph) revenue. So we’ll give more details on this product But the first quarter has been really encouraging already for Rasuvo. So we’re setting the stage for good growth going forward and we’ll provide more information as we go along with this product launch.
Justin Keywood
Thanks. Can you remind us what the peak sales estimates are for Gleolan in both Canada and the U.S?
Marcel Konrad
‘m not sure we really stated them, but we did guide that the historical levels are 12 million to 16 million current sales and we think we could probably double that. There’s a lot more potential the penetration of this drug in other developed markets is about double, what it currently is in the U.S. So we think there’s a good sales lift possible, plus there is a new indication that they’re working on meningioma, which is a non-cancerous brain tumor, if successful in the clinical program would significantly increase the potential of the drug.
Justin Keywood
Thanks for taking my questions.
Operator
Thank you. The next question is coming from Rahul Sarugaser from Raymond James. Rahul, your line is live.
Rahul Sarugaser
Good morning, Ken and Marcel. Thanks so much for taking our questions and congrats on the strong quarter. So my first question is on Gleo. Gleolan, clearly its contribution helped to drive your cash burn to a much more modest number than it’s been in previous quarters. So getting pretty close to being cash flow positive. So I guess my question is that next quarter once we see a full contribution of Gleo, are we looking at company getting even closer potentially right into cash flow positive territory and/or are there any other factors that you’re looking at in order to drive towards cash flow positive?
Ken d’Entremont
Yeah. Thanks, Rahul. Great question. So I’ll start and then let to Marcel for fill in any gaps. So clearly, the strategy behind the Gleolan was to help us apply the infrastructure that we already built for treosulfan against a currently marketable product and so that’s been successful. And we think Gleolan will continue to grow, one, as we book full revenue and get full economics of the drug and then two, organically grow it. Plus IXINITY continues to grow, the channel has been reset. Patient demand is growing. So that will help. So we do believe that we’re going to see sequential quarter-to-quarter growth as we move forward and that’s really what we’ve been doing for the past several quarters.
Marcel Konrad
Yeah. Maybe just to add, we talk about the cash for Gleolan versus our overall cash, cash situation strategy. Obviously, Gleolan, as I mentioned, as a reminder, we had a very, very low upfront for this product. We expect this product to be — as we start selling it accretive quite tuned. So it’s going to be a contributor very early on. Of course, in the overall picture and also related to Gleolan, we have — where we’re seeing purchases in inventory, for example, that now as part of the reason why our cash slightly declined.
We’ve got some working capital fluctuations that were expected for this quarter end and we’ve been carrying a $10 million cash balance more or less over the quarters and continues to work diligently on the next six months towards each year solve (ph) from decision which will be fundamentally changing the company’s financials at this point. So we’re very mindful about that. And then we’re planning the long term post-securitization as well. So we’re looking at various financing options to bolster our cash and make sure that this period on towards the launch we’re heading towards is going to be effective positively launch treosulfan, of course, that is a very important element next six months in a from a planning standpoint, yeah.
Rahul Sarugaser
Great. That’s very helpful. Thanks. Thanks, Ken. Thanks, Marcel. So that’s a really good segue to my follow on question, which is, as you mentioned, Kent, you’ve build out already a lot of the foundational structure for launching of Trio, assuming it is approved. And so given that you already are absorbing these costs, that baseline cost is relatively well set, once Trio does start to hit the market, what would be a reasonable estimate of the proportion of those sales contributing to the bottom line for Medexus?
Ken d’Entremont
Obviously, it depends greatly on the launch trajectory, so the launch curve. We think that if there’s been any benefit to the CRL over the past year, it’s been that we’ve gotten far better prepared for launch from the timeline when we first license this was extremely short, now it’s more normal. So we do expect a better launch trajectory. We will add 16 people, six of which we’ve already added due to Gleolan. So we’re only adding an additional 10 in that launch. So the increase in spending in stock rate. And the margin on Trio is better than our current margins. So it’s got a really strong gross margin. So it will start to make the contribution pretty early on. So certainly in year two, it makes a lot, it makes a very strong contribution.
Rahul Sarugaser
Great. And if you allow me to just finish one last quick question. Of course, while you and all of us are quite optimistic about a positive result from the FDA on Trio. In the small chance that does not come back positive. What are some of the risk mitigation things under cost mitigation, the things that you’re putting into place should that eventuality come to pass?
Ken d’Entremont
Yeah. That is a great question. So we’re not going all in on approval. We certainly believe it will be approved. There’s no reason to think it won’t, but what if it doesn’t? We do have plans that say, okay, in that scenario. Clearly, there’s lots of strategies to put in place to sell some assets. We obviously will focus down on the business that we have, which if that case will be IXINITY, Gleolan, Canadian business. And so we’ll just get focused in on what we have. You can clearly see that we are — we did $23 million in revenue and didn’t book full Gleolan this quarter. So clearly, we’re over $100 million in revenue now.
And so we’ve got a much bigger business now than when we licensed the treosulfan. So that may not have been obvious to people because we went and reset the channel on IXINITY and took a hit for three quarters, while we were doing that. But clearly, the business is far stronger now than it’s ever been. And we will focus on executing our plan, which is the find other drugs in orphan drug in rare disease space. So our business development work continues. And so, if it’s not Trio, it will be something else.
Rahul Sarugaser
Okay. Great. Thanks, Ken. Thanks Marcel and congratulations again on the quarter.
Ken d’Entremont
Thanks, Rahul.
Operator
Thank you. And the next question is coming from Andre Uddin from Research Capital. Andre, your line is live.
Andre Uddin
Hi, Ken and Marcel. Just wondering if you can just discuss what you’re doing with respect to IXINITY’s manufacturing process in terms of streamlining and also how that would impact margins — gross margins? Thanks.
Ken d’Entremont
Yeah. Thanks, Andre. Great question. I’m highly underqualified to comment on exactly what they’re doing because it’s complicated. It’s a biologic product. There’s a lot of steps in the process. And so we have people who are going through all those steps and making improvements to expand yield and we have seen it working. So we’re part way through that process and we’ve seen substantial improvements in the yield.
So we do expect that to start to work through to our financials, as we start to sell that product that benefited from a higher yields. And as that continues to improve, it should just get better. As you know, when we first licensed IXINITY, its gross margin was lower than the rest of our portfolio, so have been working to bring it up to that level and maybe we’ll get it beyond our average gross margin.
Andre Uddin
That’s great. And so just in terms of — if you look at new product opportunities, what does the landscape actually look like in terms of purchase prices? And what therapeutic areas are you seeing the opportunities primarily in and maybe you could also just talk a little bit about the competitive landscape right now in terms of purchasing products? Are you seeing a process or can you just go a little bit into what you’re seeing right now? That’d be great. Thanks.
Ken d’Entremont
Sure. Clearly, there are a lot of products, development products that companies are struggling for cash and looking for alternatives to bring those things to market. So there’s lots of products available for pretty low prices that could be acquired. That’s not our focus right now. It may be in the future, if we have a successful treosulfan plan approval. So what we are looking for is products near market that won’t require a lot of our cash. I think Gleolan was an excellent example, little upfront, current sales and we can grow it with our infrastructure.
We are seeing other products kind of like that, whereby the developing company will bring its crew to approval and then we would pick up and manage the commercialization. So even without a strong balance sheet like where we are right now. We are seeing opportunities and some things we hope to execute on. But I would also say that we’re pretty much laser focused on getting treosulfan approved and commercialized and that will be a massive improvement in our organization just to the sheer potential that the drug has.
Andre Uddin
That’s great. And what about — if you look at Medexus portfolio, I know you have that option to license different products. Is there anything else that you see that could potentially fit into your basket?
Ken d’Entremont
Yeah. There’s a few things. There’s nothing as big as Trio. I mean that was the best product in the portfolio. There are a few other things that they may be working on, but we’re not counting on that for our licensing pipeline.
Andre Uddin
Okay. That’s great. Thanks.
Ken d’Entremont
Thanks, Andre.
Operator
Thank you. And the next question is coming from Scott Henry from ROTH Capital. Scott, your line is live.
Scott Henry
Thank you, and good morning, and congratulations on the strong results. I did have a couple of questions. First, on the model, gross margins were a little bit higher than — they’d been trending at least in the last quarter. Do you think this is representative of what we could see for the rest of the year or perhaps was it just a strong quarter?
Ken d’Entremont
Thanks, Scott. I’m going to turn that over to Marcel to reply.
Marcel Konrad
Yeah. Thanks, Scott for the question. And I would say a lot on the gross margin depends on the on the product mix. But as we said, specifically one of the drivers will be, as we come out of the IXINITY production improvement process. So we should see an impact of that. When Gleolan comes online, we’ll see probably a bit counter to that because of the royal (ph) people will have to book. But on an [indiscernible] product basis, we should see an increase quarter-over-quarter and we’ll elaborate that as we go along and explain the dynamics of the gross margin, which generally is positive on the product level.
Scott Henry
Okay. Great. And then similarly on SG&A, the $12.1 million that you did in Q1. I would imagine sequentially we would expect that to go up, certainly as Gleolan fits more into the equation, is that a fair assumption that we should expect sequential growth in the next, I would say, three or four quarters based on that alone and then treosulfan could add more?
Ken d’Entremont
I would say that’s a fair assumption. We will increase that mindfully moderately obviously according to our cash balances with, as I mentioned before, one of the sort of next few quarters planning will be the treosulfan launch, we will definitely not thinking about that, not impacting that. But again, mindfully spend on that front. The Gleolan side, yes, we’ll be increasing those efforts a little bit. We’ve had embedded a lot already in Q1. We started already obviously that spend. So you should see an increase on the operating side, but as well as we mentioned on the revenue side, sequential growth expected over the next couple of quarters, so we’ll be in line with that.
Scott Henry
Okay. Great. And then as well, I think you talked about potentially sequential growth in 2Q versus Q1. Now if we pull them out Gleolan in the U.S. because obviously that’s acquisitional growth. How is the organic business sequentially? Was Q1 a strong quarter or should we expect I mean it was a strong quarter, but should we expect the base business to continue growing through the year or just trying to get a sense of how to think of the quarterly progression?
Ken d’Entremont
Yeah. So the base business, organic growth is primarily related to IXINITY and then Rupall also in Canada. So IXINITY year-over-year is benefiting very strongly from the correction of the channel, but there is also underlying patient demand growth. I think the sales team in the U.S. and the marketing team is there are doing a very good job getting patient growth for IXINITY. So we’ve got both of those factors that are working in our favor. So I think sequentially, we do expect organic growth in addition to the addition of Gleolan, which is obviously related to licensing.
Scott Henry
Okay, great. Final question on the balance sheet, on the liability side, any — and I know it’s a little confusing with the different debt and business obligations. on that liability side. Any debt due in the next, say, 12 to 18 months?
Ken d’Entremont
Let Marcel handle that.
Marcel Konrad
Yeah. Talking about the debt, it is a bit difficult to read the notes in the financial statements between short and long term. So we have the debentures that will be next year. October, they can be settled in cash or in shares that’s the large part, and then the facility, we have in place the term loan to $10 million term loan, which you started to pay down. And then the ABL will become due in the next 12 months to 18 months. So we will definitely also anticipate that. To address that, we have some time to do so and we’re fully aware of that of these sort of 12 months to 18 month timelines of these loans becoming due then.
Scott Henry
Okay. Great. Thank you for taking the questions.
Ken d’Entremont
Thanks, Scott.
Operator
Thank you. The next question is coming from Prasath Pandurangan from Bloom Burton. Prasath, your line is live.
Prasath Pandurangan
Hi. Good morning. Firstly to follow on the IXINITY manufacturing process improvements. Could you talk about the timelines as to when they’re expected to complete and start impacting margins?
Ken d’Entremont
Thanks, Prasath. Yeah. Good question. We’ve been working on this since we acquired the drug. So they’re starting to impact margins now and we’ll continue to do so as we go forward and we do expect continuous improvement. So it’s a longer term project and so we are starting to feel the impact of the work that we’ve done quite a long time ago and we will continue to see improvements as we go forward.
Prasath Pandurangan
Great. And then on the SG&A line item, the jump, is it purely a function of new reps being hired or is wage inflation also a factor?
Ken d’Entremont
I’ll comment and ask Marcel to fill in the gaps. A lot of it’s due to the additional three reps that we took on when we licensed Gleolan. So if you remember, we took on some of their infrastructure, so that’s already built into our results for the full quarter. And then I guess there is some price inflation and wages. Marcel, can you comment on it?
Marcel Konrad
Yeah. Sure. Yeah, I would say this is about three to four different factors here as Ken mentioned. As Ken mentioned, the Gleolan full quarter effects both on the hiring front, but also on the variable spend, we now have in the base. We see a bit of inflation in fact for this Q1 quarter for us that includes some of the increases. We do have also a little bit of seasonality, I would say, Q4 is typically a little bit lower quarter in terms the variable spend. So there are various factors coming together for this jump, which we don’t expect to continue in Q2.
Prasath Pandurangan
Okay. That’s useful. Thank you.
Operator
Thank you. [Operator Instructions] The next question is coming from Tania Armstrong-Whitworth from Canaccord Genuity. Tanya, your line is live.
Tania Armstrong-Whitworth
Good morning, gentlemen. Thanks for taking my questions. Just a couple for me here. On the R&D expense line, so that’s come down meaningfully, which is great to see. Just wondering if you could provide us like a cost estimate of how much is remaining to prepare that clinical reports? And I’m assuming the IXINITY manufacturing process improvement costs are also baked into that line?
Ken d’Entremont
Hi, Tania. Yes, you’re correct. So what’s in that line now is primarily the process improvement. There’s some costs associated with the clinical program, but most of it being process improvement at this stage. Marcel, is there anything you can add there?
Marcel Konrad
Yeah. It’s — the process improvement, which will be a continuous, which will continue moderately as I mentioned, but that makes the bulk of our R&D spend and also going forward.
Tania Armstrong-Whitworth
Okay. Excellent. And then on Gleolan, I think you talked about the potential to double run rate revenue just based on increasing penetration to where we see it in international markets. I guess, what is the timeline do you think you can do that? And if I might be mistaken, but I believe the Orphan Drug designation comes off in June 2024. So we have another year and a half-ish. Is there the potential to extend your exclusivity beyond that?
Ken d’Entremont
So you’re correct that, that is the exclusivity period for Gleolan. We don’t really expect any generic competition, it would be a challenging area and there is none elsewhere in the world even without exclusivity. So we don’t think that’s going to happen. Obviously, there is some work that the licensee partner is doing in meningioma that might afford us some protection going forward.
So back to your original question, which about the growth potential in it, we’ll start relaunching the product in sort of September sort of timeframe with the expanded sales force, we did announce previously that we’re going from three reps to six reps in the U.S. for this drug. And so we think that will start to have an impact pretty quickly. I mean, the time to adoption is fairly short once we convince the hospitals to use ForEx and guided reception.
Tania Armstrong-Whitworth
Okay. Excellent. That’s very helpful. And then I guess to follow on that question a little bit. What I’ve seen in some of your peer companies, we haven’t seen a full normalization of salespeople interacting with physicians face-to-face. I guess with respect to a treosulfan launch brand new drug, you want your salespeople out there selling it. What are you seeing in the market? Have things normalized in physician offices and hospitals, or you’re still people able to get in there talk face-to-face or are they still using alternative means of selling?
Ken d’Entremont
Yeah. It’s a great question and difficult to answer it because it seems to be changing constantly and regionally. It’s gotten way better. I mean, clearly, people want to interact now. And so regardless of the status of the pandemic, it seems like people want to get together. So it creates access for salespeople. I think the IXINITY improvement is partially related to the fact that our sales force can actually get out there for the first time since we’ve had this product. If you remember, we licensed it in February and went into the pandemic the following months.
So this is the first time that we’ve had our sales force really out there interacting in a more normal fashion. Hospitals continue to be an issue because obviously there’s a lot of patients going and acquiring ICU beds and other specialized care as a result of the pandemic. The access to those physicians is okay. So it’s more a question of getting patients in to see those physicians so they can get care. I will remind you that stem cell transplantation, although it sounds like a very serious procedure and is, is actually administered in a chair.
It doesn’t take an OR, it’s really just an infusing blood cells back into the patient through an apheresis procedure. So it’s not like you need highly, highly specialized care. After the transplant, obviously, the patient needs to be isolated, but it doesn’t require an OR space, which should help. And clearly, we’re projecting what this might look like in the first half of ‘23 when we do plan to launch and we hope that there’ll be at least access like there is today and perhaps it will get a little bit better.
Tania Armstrong-Whitworth
That’s really great color. Thank you so much, Ken. That’s all for me.
Ken d’Entremont
Thanks, Tania.
Operator
Thank you. And the next question is coming from Russell Pearson (ph). Russell is a private investor. Russell, your line is live.
Unidentified Participant
Hi, Ken and Marcel. Congratulations on the quarter. My question is you’ve got $15 million to $45 million in milestone payments coming up in October ‘23 and you’re expecting treosulfan and if approved, which I believe it will be too. The selling will start in the first half of ’23. So with that large milestone payment potentially the $45 million let’s look at it that way, plus the debentures and whatever other debt there is. How are you going to meet this? Like, well, you’re selling enough of the treosulfan and the other products to meet all this debt or what is your overall plan?
Ken d’Entremont
Thanks, Russell. It’s a great question. So clearly, there’s a lot of balls in the air. We think that as we move towards a treosulfan approval and the eventual decision that various forms of capital will become available to us in the last iteration prior to the CRL. There were significant debt providers that are interested in supporting the launch of a pretty significant drug. So that would be one avenue we would go, who knows what the equity markets will look like at that time. There’s always the option of selling non-core assets. And so there’s various strategies, all of which we’re considering to make sure that we meet our obligations as they come due.
Unidentified Participant
Okay. Great. So it’s manageable then, it’s just a matter of which direction you decide to go to make that happen?
Ken d’Entremont
Yeah. We’re working on it now. So clearly, the deferral of the milestone with medac was a significant step in that direction and that it takes the pressure off of us and allows us to focus on the execution of the launch rather than worrying about raising capital to pay the partner, both ourselves and medac are very focused on achieving peak net sales. And so clearly, we all walked the same thing. We want to see this drug successful in the marketplace. And so deferring the milestone payments, I think was with a nice gesture for medac to allow us to focus on the launch, which will benefit them as well.
Unidentified Participant
Yes. And that is great, that is really good. And then one other smaller question, but how is Q2 looking so far? Like it sounded like Marcel was saying that gross margin will improve as the quarters go on here. How’s the first month of Q2 looking?
Ken d’Entremont
We’re not typically giving any guidance. So — and one month is not significant, I think that as we go through the quarter, we’ll see another strong quarter where we’ve been talking about this sequential improvement for a while and we’ve been executing on that. So we do expect that to continue as we go forward.
Unidentified Participant
Okay. Great. Sounds really good. Thank you, Ken.
Ken d’Entremont
Thanks, Russell.
Operator
Thank you. And there were no other questions in queue at this time. I would now like to hand the call back to Ken d’Entremont for closing remarks.
Ken d’Entremont
Well, I want to thank everybody for tuning into the call today and thank you for all the great questions. Very happy to interact with our shareholder base. Our core base business has demonstrated incredible strength with IXINITY sales now normalized and the strong performance out of Rasuvo and cloud sales are benefiting from another severe allergy season. So our core business is doing really well. We’re thrilled with the fact that Gleolan is now generating revenue in U.S. and it will continue to do that as we assume that full commercial responsibility for the product this quarter and begin to recognize net sales in full.
Our partner medac has submitted that additional data and supporting files to the FDA and we look forward to an FDA decision once that submission is considered complete. So we think we’re going to have a really strong fiscal 2023 and we look forward to updating shareholders as news comes in. Thanks for tuning in.
Operator
Thank you, ladies and gentlemen. This does conclude today’s conference. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.
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