Mr. Sylvain Chretien reports

PEDIAPHARM ANNOUNCES THIRD QUARTER FINANCIAL RESULTS - 73% INCREASE IN REVENUE

Pediapharm Inc. has filed its third quarter financial results ended Dec. 31, 2016. All dollar amounts are expressed in Canadian currency unless otherwise indicated and results are reported in accordance with international financial reporting standard accounting principles.

Key highlights -- period ended Dec. 31, 2016

In the three-month period ended Dec. 31, 2016, total revenue reached $1,773,044 (three-month period ended Dec. 31, 2015 -- $1,022,539), representing an increase of 73 per cent, including:

• 12-per-cent increase from NYDA, and based on the most recent IMS data (MAT -- December, 2016), it is growing by 35 per cent. Management is still confident with its projection of $4.2-million to $4.4-million for the current fiscal year;
• 92-per-cent increase from Naproxen suspension;
• Revenue from Relaxa on pace to reach $3-million on an annual basis.

In the nine-month period ended Dec. 31, 2016, total revenue reached $4,548,351 (nine months ended Dec. 31, 2015 -- $3,099,916), representing an increase of 47 per cent. In the case of Relaxa, only revenue generated after the Sept. 19, 2016, transaction are included:

• 25-per-cent increase from NYDA;
• 86-per-cent increase from Naproxen suspension;
• Revenue from Relaxa on pace to reach $3-million on an annual basis.

The recent addition of Relaxa brings the company into a positive operating cash flow situation based on a rolling 12-month time frame. This does not include the investments (prelaunch and postlaunch) on the upcoming product launches (Rupall in January, 2017, and Otixal in April, 2017).

On Dec. 12, 2016, the company announced Health Canada's approval of Otixal (ciprofloxacin 0.3 per cent and fluocinolone acetonide 0.025 per cent) otic solution for the treatment of acute otitis media with tympanostomy tubes (AOMT) in pediatric patients (aged six months and older). Otixal is the first and only antibiotic and steroid combination eardrop available in single, sterile, preservative-free and unit-dose packaging. Many precommercial launch activities have already taken place in advance of the commercial launch in April, 2017, when the product is expected to be available to the Canadian market.

While there are differences in the net working capital components, such as a significant increase in inventory due to the recent addition of Relaxa, the company has net working capital of over $5-million as of Dec. 31, 2016, which is slightly higher than the net working capital as of March 31, 2016.

Recent highlights

On Jan. 25, 2017, the company announced the commercial launch of Rupall (rupatadine) in Canada. This innovative allergy medication is now available to patients suffering from allergy and urticaria through physician prescriptions. Rupall is currently being distributed within the various wholesalers and pharmacy channels. The company's national sales force has been trained and is communicating with health care providers on this new and unique allergy medication. Rupall (rupatadine) comes in two dosage forms: the tablet 10 milligrams and oral solution one milligram per millilitre, and is indicated 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. Rupall (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 granted by Health Canada's Office of Patented Medicines and Liaison under Section C.08.004.1 of the Food and Drug Regulations.

In February, 2017, the company introduced two new stock-keeping units (SLUs) of Relaxa. Management believes that this addition to the existing line of Relaxa products will help increase revenue and improve gross margins beginning in the latter part of fiscal year 2018.

In January, 2017, Mackie Research Capital Corp. initiated coverage of Pediapharm.

"We are very excited about the 73-per-cent revenue growth versus the same quarter last year," stated Sylvain Chretien, president and chief executive officer of Pediapharm. He added: "We have successfully integrated Relaxa in Pediapharm's structure and are on track to reach $3-million annually in revenue from Relaxa. Furthermore, we have recently launched Rupall, a new allergy medication, and early signs are very promising. We will also be launching Otixal in April. Pediapharm is definitely entering a new exciting phase with tremendous revenue growth in quarters and years to come."

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 their eggs. NYDA reached over $3.2-million in revenue in fiscal 2016, is expected to reach $4.2-million to $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).

With NYDA, Naproxen suspension and Relaxa alone, the company is confident to generate over $8.5-million of revenue in fiscal year 2018 (year ended March 31, 2018). This does not include revenue from new products launches. Management's objective in the next few quarters is to optimize the Rupall and Otixal launch investments while keeping a solid balance sheet. The continuing positive feedback from key opinion leaders in allergy confirms management's estimate that Rupall has an annual peak sale potential of $8-million to $10-million within five to six years. Regarding Otixal, the company estimates an annual peak sale potential of $4-million within five to six years.

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 years to come.

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 in using IMS data and 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.

                                                                       Estimated             
                                                                     annual peak                        Launch
Product                Indication                                   sales (2) (3)    date 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
Rupatadine (Rupall)    Symptoms of allergy -- urticaria                   8M-10M                 January, 2017
Cetraxal-Plus (Otixal) Ear infection                                          4M                   April, 2017
Cuvposa (1)            Severe drooling -- cerebral palsy                      5M             December, 2017 (4)
Total                                                                     28-35M

(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 market data (IMS) and management's estimates.

(4) Based on Health Canada's timelines regarding approval of submitted files.

Now that Pediapharm has positioned itself with a strong portfolio of products as shown in the table, 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 for Cuvposa, which was submitted to Health Canada in August, 2016. In parallel, Pediapharm will still assess additional exclusive licensing agreements (commonly known as in licensing) as well as potential product acquisitions.

In summary, the company has a solid cash position to execute its business plan, including the recent launch of Rupall and the upcoming launch of Otixal in April, 2017. Furthermore, Pediapharm expects continuous strong revenue growth from Pediapharm's other branded products such as NYDA, Naproxen suspension and Relaxa. 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 Dec. 31, 2016

Revenue

For the three months ended Dec. 31, 2016, total revenue reached $1,773,044 compared with revenue of $1,022,539 in the three months ended Dec. 31, 2015, representing a 73-per-cent increase. This was the first full quarter or revenue from Relaxa following the Sept. 19, 2016, transaction. Revenue from Relaxa is on pace to reach $3-million on an annual basis. Revenue from NYDA increased by 12 per cent and based on the most recent IMS data (MAT -- December, 2016), it is growing by 35 per cent. Management is still confident with its projection of $4.2-million to $4.4-million for the year ending March 31, 2017. Revenue from Pediapharm Naproxen suspension increased by 92 per cent.

For the nine months ended Dec. 31, 2016, total revenue reached $4,548,351 compared with revenue of $3,099,916 in the nine months ended Dec. 31, 2015, representing a 47-per-cent increase. Revenue from Relaxa is on pace to reach $3-million on an annual basis. Revenue from NYDA increased by 25 per cent and based on the most recent IMS data (MAT -- December, 2016), it is growing by 35 per cent. Management is still confident with its projection of $4.2-million to $4.4-million for the year ending March 31, 2017. Revenue from Pediapharm Naproxen suspension increased by 86 per cent.

Gross margin

When comparing periods, in addition to focusing on gross margin 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.

For the three months ended Dec. 31, 2016, gross margin dollars reached $891,893, representing an increase of 29 per cent (three months ended Dec. 31, 2015 -- $689,358). Gross margin as a percentage of revenue was 48 per cent (three months ended Dec. 31, 2015 -- 64 per cent). In addition to the fact Relaxa has lower gross margins due to nature of its product category, there were also transition expenses due to the transition of Relaxa to Pediapharm. These expenses include stability testing, new inventory components and warehousing set-up fees. In upcoming quarters, 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 Dec. 31, 2016, selling and administrative expenses reached $1,656,245 (three months ended Dec. 31, 2015 -- $1,534,995). While regulatory expenses related to Health Canada dossiers for Rupall and Otixal have significantly decreased when comparing with last year, the company made important investments in supporting and preparing the upcoming commercial launches of Rupall and Otixal. These prelaunch investments include the set-up of an advisory board comprising key opinion leaders across Canada, a medical symposium, in-depth training as well the purchase of external data (IMS) to better understand the market dynamics and ensure a successful launch.

For the nine months ended Dec. 31, 2016, selling and administrative expenses decreased by $55,182 to reach $4,931,854 (nine months ended Dec. 31, 2015 -- $4,987,036).

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 years to come.

Other income

In the three months ended Dec. 31, 2016, there was nothing to report as other income. In the nine months ended Dec. 31, 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 loss for the three months ended Dec. 31, 2016, was $783,507 compared with an operating loss of $1,084,646 in the three months ended Dec. 31, 2015. The increase in revenue is the main reason for that improvement of $301,139 over the three-month period ended Dec. 31, 2015.

The operating profit for the nine months ended Dec. 31, 2016, was $328,161 compared with an operating loss of $3,234,294 in the nine months ended Dec. 31, 2015. The increase in revenue and gross profit helped generate an improvement of $992,255 over the nine-month period ended Dec. 31, 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 nine months ended Dec. 31, 2016, bringing the total operating profit improvement to $3,562,455 when compared with the nine-month period ended Dec. 31, 2015.

Net profit or loss

The net loss for the three months ended Dec. 31, 2016, was $1,047,750 compared with a net loss of $1,288,020 in the three months ended Dec. 31, 2015. In the three months ended Dec. 31, 2016, the difference between operating loss and net loss is mainly due to $272,919 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.

The net loss for the nine months ended Dec. 31, 2016, was $443,274 compared with a net loss of $3,836,677 in the nine months ended Dec. 31, 2015. In the nine months ended Dec. 31, 2016, the difference between operating loss and net loss is mainly due to $804,905 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.

                                                            Three months                Nine months
                                                                 Dec. 31,                   Dec. 31,
                                                      2016          2015         2016          2015

Revenue from products                           $1,694,294      $935,498   $4,308,936    $2,993,126 
Revenue from commissions                            78,750        87,041      239,415       166,790 
Total revenue                                    1,773,044    $1,022,539    4,548,351     3,099,916 
Cost of sales                                      881,151       333,181    1,831,990     1,062,351 
Gross profit                                       891,893       689,358    2,716,361     2,037,565 
Selling and administrative expenses              1,656,245     1,534,995    4,931,854     4,987,036 
Other income                                             -             -    2,570,200             - 
Operating profit (loss)                           (783,507)   (1,084,646)     328,161    (3,234,294)
Net profit (loss)                               (1,047,750)   (1,288,020)    (443,274)   (3,836,677)
Cash flow from (used in) operating activities     (765,653)     (537,603)    (510,882)   (3,002,598)
Cash flow from (used in) investing activities     (229,271)     (246,372)    (314,840)     (534,340)
Cash flow from (used in) financing activities            -        19,368         (378)       89,270 

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; 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 eardrop available in single, sterile, preservative-free and unit-dose packaging; and Cuvposa, for severe drooling, which is under review with Health Canada.

We seek Safe Harbor.