Mr. Sylvain Chretien reports

PEDIAPHARM ANNOUNCES FIRST QUARTER FINANCIAL RESULTS-INCREASE OF 47% IN REVENUE AND OPERATING PROFIT OF $1.7 MILLION

Pediapharm Inc. has filed its first quarter financial results ended June 30, 2016.

Key highlights -- period ended June 30, 2016

• In the three-month period ended June 30, 2016, total revenue reached $893,161 (three months ended June 30, 2015 -- $605,642), representing an increase of 47 per cent, including:
  • 57-per-cent increase from NYDA, following the 55-per-cent growth from last fiscal year;
  • 110-per-cent increase from Naproxen Suspension after one year of detailing to physicians.
• In the three-month period ended June 30, 2016, the company achieved an operating income of $1,691,784 compared with an operating loss of $1,396,963 in the three-month period ended June 30, 2015.
• In the three-month period ended June 30, 2016, the company's selling and administrative expenses were reduced by $275,500, representing a reduction of 15.5 per cent compared with the three months ended June 30, 2015.
• The company has $6,499,670 of cash and cash equivalents as of June 30, 2016.
• On May 11, 2016, the company received Food and Drug Administration approval regarding the manufacturing site transfer of Naproxen Suspension for the U.S. market. This approval triggered the second and final payment of $2-million (U.S.) in cash included in the transaction valued at $4.25-million (U.S.) regarding the U.S. rights to Naproxen Suspension.

Recent highlights

On July 21, 2016, the company announced Health Canada's approval of rupatadine (tablet 10 milligrams and oral solution one mg per millilitre) for the relief of the symptoms associated with seasonal allergic rhinitis (SAR), perennial allergic rhinitis (PAR) and chronic spontaneous urticaria (CSU) in patients two years of age and older. Rupatadine is the first prescription (Rx) antihistamine being launched over the past decade with all three indications (SAR, PAR and CSU), including a formulation for children over two years of age. It will be launched in the Canadian antihistamine market estimated at $130-million (IMS data). Moreover, it will benefit from 8.5 years of market exclusivity (for instance, no possibility of generics) granted by Health Canada's Office of Patented Medicines and Liaison under Section C.08.004.1 of the food and drug regulations.

On Aug. 3, 2016, the company submitted to the Canadian health authorities its regulatory dossier of Cuvposa (glycopyrrolate) oral solution intended for pediatric chronic severe drooling (sialorrhea) associated with neurologic conditions such as cerebral palsy.

"We are very pleased with the financial results of this quarter, with 47-per-cent increase in revenue and 15-per-cent reduction in selling and administrative expenses," stated Sylvain Chretien, president and chief executive officer of Pediapharm. He added: "With the seasonality associated with head lice treatments, revenue from NYDA, which represents roughly 80 per cent of our total current revenue, has historically been lower in the first two quarters of the calendar year. NYDA's revenue is expected to grow significantly in the upcoming quarters, which will continue to have a positive impact on our bottom line. With our strong cash position and the recent approval of rupatadine, a great innovation to treat the symptoms of allergy and urticaria, our future looks very promising. Moreover, we have two other products which we hope will receive Health Canada approval and we continuously assess new business opportunities while remaining disciplined."

Future outlook

The company's focus remains to execute its commercial plan with existing products, such as NYDA, a revolutionary treatment indicated for eradication of head lice and its eggs. NYDA reached over $3.2-million in revenue in fiscal 2016, is expected to reach $4.4-million in fiscal 2017 and has the potential to achieve annual peak revenues of $6-million to $8-million within the next two years (IMS data and management's estimate).

Pediapharm has a product pipeline of secured exclusive agreements which management believes will enable the company to obtain its corporate annual revenue goal of reaching between $25-million and $30-million within the next five to six years. This projected peak sales forecast is based on using IMS data and the management's estimate in the market share to be captured for each of the product. Projected annual peak sales to be generated from existing licences/products that have not yet been launched and/or require Health Canada approval are estimated at $15-million (IMS data and management's estimate).

The associated table contains information on the secured exclusive agreements that are expected to be launched in the next year. This chart has been updated since the last management's discussion and analysis dated June 27, 2016, to reflect Health Canada's approval of rupatadine received on July 21, 2016.

                                                                          Est. annual          Est. launch
                             Partner-                     Market size      peak sales                 date
Product                       country         Indication          ($)     ($) (2) (6)  (calendar year) (7)

                                           antihistamine                                          approved
Rupatadine              Uriach, Spain    (RX indication)    $120M (5)     $6M -- $10M        July 21, 2016
Cetraxal-Plus    Salvat Laboratories,     ear infection,
(Otixal) (1)                    Spain      swimmer's ear     $25M (4)             $4M              Q4 2016
                         Merz Pharma,   severe drooling,
Cuvposa (1)                      U.S.     cerebral palsy     $25M (3)             $5M              Q2 2017
Total                                                      $170M plus    $15M -- $19M
                 
Notes
(1) Canadian licence which requires Health Canada approval.
(2) Estimated annual peak sales are usually achieved within approximately five to seven years 
of a product launch.
(3) Based on prevalence of cerebral palsy patients from the Public Health Agency of Canada.
(4) IMS data -- December, 2014.
(5) IMS data -- December, 2013.
(6) Based on market data and management's estimates.
(7) Based on Health Canada's timelines regarding approval of submitted files.

Now that Pediapharm has positioned itself with a strong pipeline, for which most 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. The key objective is to generate profitability in a timely fashion while pursuing the regulatory process of the agreements signed in 2014. In parallel, Pediapharm will still assess additional exclusive licensing agreements.

In summary, with the recent sale of its U.S. rights to Naproxen Suspension, the company has a solid cash position to execute its business plan, including the upcoming launch of rupatadine in the second half of 2016 as well as the potential launch of Otixal, assuming Health Canada's approval. Furthermore, the strong revenue growth from Pediapharm-branded products such as NYDA, combined with the reduction of some of its operating expenses, are important steps toward generating positive cash flows. 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 June 30, 2016

Revenue

For the three months ended June 30, 2016, total revenue reached $893,161 compared with revenue of $605,642 in the three months ended June 30, 2015, representing a 47-per-cent increase. Revenue from NYDA increased by 57 per cent and revenue from Pediapharm naproxen suspension increased by 110 per cent.

Selling and administrative expenses

For the three months ended June 30, 2016, selling and administrative expenses decreased by $275,571 to reach $1,487,524 (three months ended June 30, 2015 -- $1,763,095). The decrease in selling and administrative expenses is mainly due to the fact most of the expenses in business development and medical affairs related to the filing of agreements signed in 2014 occurred in the fiscal year ended March 31, 2016.

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 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 profit for the three months ended June 30, 2016, was $1,691,784 compared with an operating loss of $1,396,963 in the three months ended June 30, 2015. The increase in revenue and gross profit, along with the aforementioned reduction in selling and administrative expenses, helped generate an improvement of $518,547 over the three-month period ended June 30, 2015. Furthermore, the company benefited from the aforementioned sale of its U.S. rights to the drug Naproxen Suspension, which had a positive impact of $2,570,200 in the three months ended June 30, 2016, bringing the total operating profit improvement to $3,088,747 when compared with the three-month period ended June 30, 2015.

Net profit or loss

The net profit for the three months ended June 30, 2016, was $1,442,796 compared with a net loss of $1,594,646 in the three months ended June 30, 2015. In the three months ended June 30, 2016, the difference between operating loss and net loss is mainly due to $261,352 in finance costs. The majority of the aforementioned finance costs are 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.

                                       June 30, 2016             June 30, 2015
                                      (three months)            (three months)

Revenue from products                       $811,246                  $542,168
Revenue from commissions                      81,915                    63,474
Total revenue                                893,161                   605,642
Cost of sales                                289,612                   211,916
Gross profit                                 603,549                   393,726
Selling and administrative                 1,487,524                 1,763,095
Other income                               2,570,200                         -
Operating profit (loss)                    1,691,784                (1,396,963)
Net profit (loss)                          1,442,796                (1,594,646)
Cash flow from (used in)
operating activities                       1,558,550                (1,339,369)
Cash flow from (used in)
investing activities                               -                    (3,840)
Cash flow from (used in)
financing activities                            (374)                   70,965

About Pediapharm

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; EpiCeram, a non-steroid emulsion for eczema; Naproxen Suspension, indicated to treat pain and inflammation due to various conditions, including juvenile idiopathic arthritis; and a broad pipeline of products under registration.

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