Mr. Roland Boivin reports

PEDIAPHARM ANNOUNCES Q2 RECORD REVENUE AND FIRST-EVER ADJUSTED EBITDA POSITIVE QUARTER

Pediapharm Inc. has filed its second quarter financial results ended Sept. 30, 2017. All dollar amounts are expressed in Canadian currency and results are reported in accordance with IFRS (international financial reporting standards) accounting principles.

Key highlights -- period ended Sept. 30, 2017

In the three-month period ended Sept. 30, 2017, the company achieved record quarterly revenue of $3,083,397 (three-month period ended Sept. 30, 2016 -- $1,882,147), representing an increase of 64 per cent including:

• 3-per-cent increase from NYDA;
• 32-per-cent increase from naproxen suspension;
• Revenue from Relaxa, which was in line with management's estimate of approximately $3.1-million on an annual basis;
• Revenue from Rupall, launched in late January, 2017, which has significantly exceeded management's original estimate by 60 per cent;
• Revenue from Otixal, launched in May, 2017, which were in line with management's estimate.

In the three-month period ended Sept. 30, 2017, the company achieved positive adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $87,578 versus ($328,282) in the three-month period ended Sept. 30, 2016. This is the company's first quarter with positive adjusted EBITDA.

In the six-month period ended Sept. 30, 2017, the company achieved record revenue of $5,548,945 (six-month period ended Sept. 30, 2016 -- $2,775,308), representing an increase of 100 per cent including:

• 9-per-cent increase from NYDA;
• 20-per-cent increase from naproxen suspension;
• Revenue from Relaxa, which was in line with management's estimate of approximately $3.1-million on an annual basis;
• Revenue from Rupall, launched in late January, 2017, which has significantly exceeded management's original estimate by 50 per cent;
• Revenue from Otixal, launched in May, 2017, which was in line with management's estimate.

In the six-month period ended Sept. 30, 2017, the company achieved adjusted EBITDA of ($609,519) verus ($1,090,374) in the six-month period ended Sept. 30, 2016.

The second quarter revenue growth of 64 per cent was achieved with a 1-per-cent reduction in selling and administrative expenses. In the first quarter, due to Rupall and Otixal initial launch expenses, selling and administrative expenses had increased significantly as compared with last year. However, as mentioned in the company's latest management's discussion and analysis (dated Aug. 24, 2017), management stated that upcoming quarterly increases in selling and administrative expenses are expected to be minimal when compared with last year. Management expects this trend to continue, unless it sees specific opportunities where additional expenses would generate significant incremental revenue. The company's plan remains to bring the company into a positive operating cash flow situation in the next fiscal year.

The company has net working capital of over $7.2-million as of Sept. 30, 2017, which is almost identical to the net working capital of the company as of June 30, 2017.

On Nov. 1, 2017, Pediapharm announced Health Canada's notice of compliance (approval) for Cuvposa (glycopyrrolate oral solution one milligram per five millilitres) which is indicated to reduce chronic severe drooling in patients aged three to 18 years with neurologic conditions associated with problem drooling (for example, cerebral palsy (CP)). The company expects to commercially launch Cuvposa in the quarter ending March 31, 2018, using its current infrastructure.

"We are extremely pleased with the 64-per-cent increase in revenue and our first-ever quarter with positive EBITDA/adjusted EBITDA," stated Sylvain Chretien, president and chief executive officer of Pediapharm. "Every product contributed to the growth, including our established brands such as NYDA and Relaxa, as well as newly launched Rupall and Otixal. This, combined with a disciplined approach on our selling and administrative expenses, has led to this important milestone for Pediapharm. In addition to our current innovative products that are expected to grow for years to come, we will be launching Cuvposa in the next few months with our existing infrastructure. We now have a very exciting portfolio of products and while seasonality still has an impact on quarterly results, this bodes very well for the company and for all of our shareholders."

Future outlook

The company has recently launched two new products: Rupall and Otixal. While Rupall has only been launched in late January, 2017, management is closely monitoring key performance indicators (KPIs) such as number of physicians prescribing Rupall, and is very pleased with the results so far. These early results, combined with the continuing positive feedback from key opinion leaders in allergy, confirm management's estimate that Rupall has an annual peak sale potential of $10-million to $12-million. Regarding Otixal, which was launched in mid-May, 2017, the company estimates an annual peak sale potential of $4-million.

The company has recently received Health Canada's notice of compliance (approval) for Cuvposa (glycopyrrolate oral solution one mg/five ml) which is indicated to reduce chronic severe drooling in patients aged three to 18 years with neurologic conditions associated with problem drooling (for example, cerebral palsy (CP)). The company expects to commercially launch Cuvposa in the quarter ending March 31, 2018, using its current infrastructure.

At the same time, the company continues to execute its commercial plan with existing products, such as NYDA, a revolutionary treatment indicated for eradication of head lice and its eggs, and Relaxa, an osmotic laxative used to treat constipation. NYDA reached approximately $4.2-million in revenue in fiscal 2017, is expected to reach approximately $5-million in fiscal 2018 and has the potential to achieve annual peak revenues of $6-million to $8-million (IMS data and management's estimate). Relaxa is on pace to reach approximately $3.1-million of revenue on an annual basis.

With the company's established brands, NYDA, naproxen suspension and Relaxa alone, the company is confident to generate approximately $8.5-million of revenue in fiscal 2018 (year ended March 31, 2018). This does not include revenue from Rupall, Otixal and Cuvposa.

With its existing solid infrastructure in place, management estimates that increases in selling and administrative expenses will be minimal even with its projected substantial revenue growth in quarters and years to come. Management therefore estimates that the company will be in a positive operating cash flow situation in the next fiscal year.

Pediapharm has a portfolio of products which management believes will enable the company to reach annual peak revenue of $30-million to $35-million along with projected EBITDA of approximately 30 per cent to revenue. The projected peak sales forecast is based in using IMS data and the management's estimate in the market share to be captured for each of the product. The attached table represents projected peak sales for the main products.

                                                                      Est. annual                 Launch date 
Product               Indication                                      peak sales (Cdn$)   or est. launch date

NYDA                  Head lice treatment                             $6-8M               2012

Relaxa                Occasional constipation                         4-6M                Acquired by Pediapharm 
                                                                                          in September, 2016

Naproxen suspension   Juvenile arthritis -- medical pain conditions   1-2M                Relaunched by Pediapharm
                                                                                          in March, 2015

Rupall                Symptoms of allergy -- Urticaria                10M-12M             January, 2017

Otixal                Ear infection                                   4M                  May, 2017

Cuvposa               Severe drooling -- cerebral palsy               4-5M                Approved in October, 2017

Total                                                                 30-35M                                         

Now that Pediapharm has positioned itself with a strong portfolio of products as shown in the table, for which all of the regulatory investments are behind, the company's core strategy regarding business development has recently evolved to focus more on acquisitions of products with existing sales and on co-promotion for products already approved in Canada. In parallel, Pediapharm still assesses additional exclusive licensing agreements (commonly known as in-licensing) as well as potential product acquisitions. The key objective is to generate profitability in a timely fashion.

In summary, the company has a solid cash position to execute its business plan, including the recent launches of Rupall in January, 2017, and Otixal in May, 2017, as well as the upcoming launch of Cuvposa. Furthermore, Pediapharm expects continuous revenue growth from Pediapharm's established brands such as NYDA, naproxen suspension and Relaxa. Management estimates that the upcoming expected revenue growth and stable operational expenses will bring the company into a positive operating cash flow situation in the next fiscal year. In parallel, the company is in the process of assessing potential product acquisitions with the key objective to accelerate its strategy to generate positive cash flow over a short period of time.

Pediapharm is a growth company in the high-margin specialty pharmaceutical industry, and when opportunities arise to feed that growth, it may raise incremental capital to provide for necessary financing and flexibility.

Review of operating results for the period ended Sept. 30, 2017

Revenue

For the three months ended Sept. 30, 2017, total revenue reached $3,083,397 compared with revenue of $1,882,147 in the three months ended Sept. 30, 2016, representing a 64-per-cent increase. Revenue from NYDA increased by 3 per cent. Management also closely monitors data from IMS Health, an audited third party provider of sales data, which show an increase of 11 per cent for that same period. Revenue from Pediapharm naproxen suspension increased by 32 per cent. Management is very pleased with the results of Rupall and Otixal, which were both recently launched. This quarter also included revenue generated from Relaxa as a result of the Sept. 19, 2016, transaction, which is line to achieve $3.1-million on an annual basis.

For the six months ended Sept. 30, 2017, total revenue reached $5,548,945 compared with revenue of $2,775,308 in the six months ended Sept. 30, 2016, representing a 100-per-cent increase. Revenue from NYDA increased by 9 per cent. Management also closely monitors data from IMS Health, an audited third party provider of sales data, which show an increase of 14 per cent for that same period. Revenue from Pediapharm naproxen suspension increased by 20 per cent. Management is very pleased with the results of Rupall and Otixal which were both recently launched. This quarter also included revenue generated from Relaxa as a result of the Sept. 19, 2016, transaction, which is line to achieve $3.1-million on an annual basis.

Gross profit and margin

When comparing periods, in addition to focusing on gross profit dollars, it is also appropriate to focus on the gross margin as a percentage of revenue. Since there is no cost of sales related to revenue from commissions, the following gross margin percentages are calculated using cost of sales and revenue from products only. In addition to actual cost of goods and royalties paid to partners, gross margins are impacted by amortization of assets generating revenue, allowances for potential product returns as well as warehouse and logistics expenses.

For the three months ended Sept. 30, 2017, gross profit reached $1,715,228, representing an increase of 39 per cent (three months ended Sept. 30, 2016 -- $1,230,678). Gross margin as a percentage of revenue was 56 per cent (three months ended Sept. 30, 2016 -- 64 per cent). The main reason for the lower gross margin percentage is related to Relaxa, which has lower gross margins due to the nature of its product category. Over time, with the expected revenue growth from NYDA, Rupall and Otixal, Relaxa will represent a smaller percentage of revenue and hence, management estimates that total gross margins as a percentage of revenue will improve and ultimately reach 60 to 70 per cent.

For the six months ended Sept. 30, 2017, gross profit reached $3,002,278, representing an increase of 64 per cent (six months ended Sept. 30, 2016 -- $1,830,352). Gross margin as a percentage of revenue was 54 per cent (six months ended Sept. 30, 2016 -- 64 per cent). The main reason for the lower gross margin percentage is related to Relaxa, which has lower gross margins due to the nature of its product category. Over time, with the expected revenue growth from NYDA, Rupall and Otixal, Relaxa will represent a smaller percentage of revenue and hence, management estimates that total gross margins as a percentage of revenue will improve and ultimately reach 60 to 70 per cent.

Selling and administrative expenses

For the three months ended Sept. 30, 2017, selling and administrative expenses reached $1,783,377 (three months ended Sept. 30, 2016 -- $1,797,845). For the six months ended Sept. 30, 2017, selling and administrative expenses reached $3,917,893 (six months ended Sept. 30, 2016 -- $3,281,494). As stated in the company's latest MD&A dated Aug. 24, 2017, while the first quarter included many initial and strategic investments in supporting the commercial launches of Rupall and Otixal, subsequent quarterly selling and administrative expenses were expected to remain close to last year's. Management believes these investments in Rupall and Otixal are key to the overall success of the company.

Other income

In the three and six months ended Sept. 30, 2017, there was nothing to report as other income. In the three months ended June 30, 2016, the company received the second and final payment of $2-million (U.S.) in cash ($2,570,200 (Canadian)) from the sale of the U.S. rights to the drug naproxen suspension in a transaction valued at approximately $4.25-million (U.S.).

Operating profit or loss

The operating loss for the three months ended Sept. 30, 2017, was $52,177 compared with $580,117 in the three months ended Sept. 30, 2016, representing an improvement of $527,940. The main factors explaining this improvement are the significant increases in both revenue and gross profit while keeping selling and administrative expenses at the same level as last year.

The operating loss for the six months ended Sept. 30, 2017, was $889,939 compared with an operating profit of $1,111,667 in the six months ended Sept. 30, 2016. In the six months ended Sept. 30, 2016, the company benefited from the sale of its U.S. rights to the drug naproxen suspension, which had a positive impact of $2,570,200.

Net profit or loss

The net loss for the three months ended Sept. 30, 2017, was $336,631 compared with $838,321 in the three months ended Sept. 30, 2016. In both periods, the difference between operating loss and net loss is mainly due to approximately $270,000 to $295,000 in finance costs. The majority of the aforementioned finance costs is related to the March 31, 2015, private placement of secured, convertible debentures of the company and share purchase warrants of the company for aggregate gross proceeds of $5.5-million.

Adjusted EBITDA (1)

Adjusted EBITDA for the three-month period ended Sept. 30, 2017, was $87,578 compared with ($328,282) for the three-month period ended Sept. 30, 2016. The improvement is mainly due to the increase gross profit driven by a 64-per-cent increase in revenue. Adjusted EBITDA, for the six-month period ended Sept. 30, 2017, was ($609,519) compared with ($1,090,374) for the six-month period ended Sept. 30, 2016. The improvement is mainly due to the increase gross profit driven by a 100-per-cent increase in revenue. This was somewhat offset by an additional approximate $600,000 in initial selling and marketing expenses related to the launches of Rupall and Otixal, which occurred in the three months ended June 30, 2017.

                                                           Three months                Six months
                                                               Sept. 30,                 Sept. 30,
                                                      2017         2016         2017         2016

Revenue from products                           $3,083,397   $1,803,397   $5,546,240   $2,614,643 
Revenue from commissions                                 -       78,750        2,705      160,665 
Total revenue                                    3,083,397    1,882,147    5,548,945    2,775,308 
Gross profit                                     1,715,228    1,230,678    3,002,278    1,830,352 
Selling and administrative expenses              1,783,377    1,797,845    3,917,893    3,281,494 
Other income                                             -            -            -    2,570,200 
Operating profit (loss)                            (52,177)    (580,117)    (889,939)   1,111,667 
Net profit (loss)                                 (336,631)    (838,321)  (1,454,560)     604,474 
Cash flow from (used in) operating activities     (852,795)  (1,303,782)  (2,927,489)     254,771 
Cash flow from (used in) investing activities         (864)     (85,570)    (299,132)     (85,570)
Cash flow from (used in) financing activities      (26,275)           -    4,956,967         (377)

(1) EBITDA and adjusted EBITDA are non-IFRS (international financial reporting standards) financial measures. The term EBITDA (earnings before interest, taxes, depreciation and amortization) does not have any standardized meaning under IFRS and therefore may not be comparable with similar measures presented by other companies. Rather, these measures are provided as additional information to complement IFRS measures by providing a further understanding of operations from management's perspective. The company defines adjusted EBITDA as earnings before financing costs, interest expenses, income taxes, interest income, depreciation of property and equipment, amortization of intangible assets, non-cash share-based compensation, income from sale of asset, and impairment of intangible assets. The company considers adjusted EBITDA as a key metric in assessing business performance and considers adjusted EBITDA to be an important measure of operating performance and cash flow, providing useful information to investors and analysts. Adjusted EBITDA for the three-month period ended Sept. 30, 2017, was $87,578 compared with ($328,282) for the three-month period ended Sept. 30, 2016. The improvement is mainly due to the increase in gross profit driven by a 64-per-cent increase in revenue. Adjusted EBITDA for the six-month period ended Sept. 30, 2017, was ($609,519) compared with ($1,090,374) for the six-month period ended Sept. 30, 2016. The improvement is mainly due to the increase in gross profit driven by a 100-per-cent increase in revenue. This was somewhat offset by the additional selling and marketing expenses related to the initial launch of Rupall and Otixal.

                                                        Three-month period            Six-month period
                                                            ended Sept. 30,             ended Sept. 30,
                                                         2017         2016           2017         2016

Net income (loss) and comprehensive income (loss)   $(336,631)   $(838,321)   $(1,454,560)    $604,474 
Add back
Depreciation and amort. (property, equipment, 
intangible assets)                                     53,191       31,068         98,103       61,420 
Amortization of financing fees                         43,936       34,475         85,288       66,293 
Interest expenses                                     168,667      170,500        335,500      337,336 
Other non-cash finance costs                           82,214       65,658        159,934      127,727 
Interest income                                       (10,363)     (12,429)       (16,101)     (24,793)
EBITDA                                                  1,014     (549,049)      (791,835)   1,172,457 
Income from sale of assets                                  -            -              -   (2,570,200)
Share-based compensation                               86,564      220,767        182,316      307,369 
Adjusted EBITDA                                        87,578     (328,282)      (609,519)  (1,090,374)

About Pediapharm Inc.

Pediapharm is the only Canadian specialty pharmaceutical company dedicated to serving the needs of the pediatric community. Its mission is to bring to the Canadian market the latest innovative pediatric products with the objective to improve the health and the well-being of children in Canada. Since its debut in 2008, Pediapharm has entered into numerous commercial agreements with partners from Canada and other countries around the world. The company's innovative product portfolio includes NYDA, a breakthrough treatment for head lice; Relaxa, an osmotic laxative used to treat constipation; EpiCeram, a non-steroid emulsion for eczema; naproxen suspension, indicated to treat pain and inflammation due to various conditions, including juvenile idiopathic arthritis; Rupall, an innovative new allergy medication with a unique mode of action; Otixal, the first and only antibiotic and steroid combination ear drop available in single, sterile, preservative-free and unit-dose packaging; and Cuvposa, for chronic severe drooling, a condition affecting a significant proportion of cerebral palsy patients.

We seek Safe Harbor.