Mr. Sylvain Chretien reports

PEDIAPHARM ANNOUNCES Q1 RECORD REVENUE OF $2.5M (2.8X LAST YEAR)

Pediapharm Inc. has filed the financial results for its first quarter ended June 30, 2017. Results are reported in accordance with IFRS (international financial reporting standards) accounting principles.

Key highlights -- period ended June 30, 2017

In the three-month period ended June 30, 2017, the company achieved record quarterly revenue of $2,465,550 (three-month period ended June 30, 2016: $893,161), representing an increase of 176 per cent, including:

• 24-per-cent increase from NYDA;
• 12-per-cent increase from Naproxen Suspension;
• Revenue from Relaxa, which was in line with management's estimate of approximately $3-million on an annual basis;
• Revenue from Rupal, launched in late January, 2017, which has significantly exceeded management's original estimate by more than 40 per cent; management now estimates the peak sales of Rupall will reach $10-million to $12-million in five to seven years;
• Revenue from Otixal, launched in May, 2017, which was in line with management's estimate.

Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) for the three-month period ended June 30, 2017, was negative $697,096, compared with negative $761,465 for the three-month period ended June 30, 2016. The improvement is mainly due to the increase gross profit driven by a 176-per-cent increase in revenue. This was somewhat offset by the additional $600,455 in selling and marketing expenses related to the initial launches of Rupall and Otixal.

In June, 2017, the company closed a non-brokered private placement of $5-million with a company owned by Gerard Leduc, a globally known pharmaceutical executive.

Net working capital was over $7.3-million.

The Cuvposa dossier is progressing as expected and so, the company still expects a decision from Health Canada before the end of October, 2017.

"The excellent revenue growth was driven by the successful launch of Rupall as well as the continued growth momentum of our established brands such as NYDA, Relaxa and Naproxen Suspension," stated Sylvain Chretien, president and chief executive officer of Pediapharm. "Given our growth momentum with the recently launched products and the fact that most initial launch expenses occurred in Q1, we are seriously approaching positive EBITDA on an annual basis."

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 within five to six years. Regarding Otixal, which was launched in mid-May, 2017, the company estimates an annual peak sale potential of $4-million within five to six years.

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 their 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 over $5-million in fiscal 2018 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). Relaxa is on pace to reach approximately $3-million of revenue on an annual basis.

With 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 and Otixal.

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 for the year ended March 31, 2019.

Pediapharm has a product pipeline of secured exclusive agreements which management believes will enable the company to reach annual revenue of $30-million to $35-million within the next five to six years, 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 shows projected peak sales for the main products.

Product      Indication                  Estimated annual       Launch date or estimated
                                        peak sales (2) (3)      Launch date        

NYDA         Head lice treatment                   $6M-8M       2012

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

Naproxen     Juvenile arthritis --                              Relaunched by Pediapharm 
suspension   medical pain conditions              $1M-$2M       in March, 2015
                                                                
Rupall       Symptoms of allergy                 $10M-12M
             -- urticaria           (revised from $8M-10M)      January, 2017

Otixal       Ear infection                            $4M       May, 2017

Cuvposa (1)  Severe drooling                          $5M       Under HC review -- estimated
             -- cerebral palsy                                  launch: Deccember, 2017 (4)

Total                                            $30M-35M

(1) This is a 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) This is based on market data (IMS) and management's estimates.
(4) This is 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 attached 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. The key objective is to generate profitability in a timely fashion while waiting for Health Canada's decision on Cuvposa, which is expected before October, 2017. 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 launches of Rupall in January, 2017, and Otixal in May, 2017. Furthermore, Pediapharm expects continuous revenue growth from Pediapharm's other branded products such as NYDA, Naproxen Suspension and Relaxa. Management estimates that the coming expected revenue growth and stable operational expenses will bring the company into a positive operating cash flow situation for the year ending March 31, 2019. 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, 2017

Revenue

For the three months ended June 30, 2017, total revenue reached $2,465,550, compared with revenue of $893,161 in the three months ended June 30, 2016, representing a 176-per-cent increase. Revenue from NYDA increased by 24 per cent, while revenue from Naproxen Suspension increased by 12 per cent. This was the first full quarter of Rupall, which was launched in late January, 2017. Management is very pleased with the results, which exceeded its initial expectations. This quarter also included revenue generated from Relaxa as a result of the Sept. 19, 2016, transaction, which was in line with management's estimate.

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 June 30, 2017, gross profit reached $1,287,049, representing an increase of 113 per cent (three months ended June 30, 2016: $603,549). Gross margin as a percentage of revenue was 52 per cent (three months ended June 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 per cent to 70 per cent.

Selling and administrative expenses

For the three months ended June 30, 2017, selling and administrative expenses reached $2,134,515 (three months ended June 30, 2016: $1,487,524). The main reason for the significant increase is related to the initial and strategic investments in supporting the January, 2017, commercial launch of Rupall and the May, 2017, commercial launch of Otixal. Management believes these investments in Rupall and Otixal are key to the overall success of the company. In coming quarters, increases in selling and administrative expenses are expected to be minimal when compared with last year, unless management sees specific opportunities where additional selling and marketing expenses would generate significant incremental revenue.

Other income

In the three months ended June 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.) ($2,570,200) in cash from the sale of the U.S. rights to 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 June 30, 2017, was $837,761, compared with an operating profit of $1,691,784 in the three months ended June 30, 2016. In the three months ended June 30, 2016, the company benefited from the aforementioned sale of its U.S. rights to Naproxen Suspension, which had a positive impact of $2,570,200.

Net profit or loss

The net loss for the three months ended June 30, 2017, was $1,117,928, compared with a net profit of $1,442,796 in the three months ended June 30, 2016. In both periods, the difference between operating loss and net loss is mainly due to approximately $260,000 to $285,000 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.

Adjusted EBITDA

Adjusted EBITDA for the three-month period ended June 30, 2017, was negative $697,096, compared with negative $761,465 for the three-month period ended June 30, 2016. The improvement is mainly due to the increase gross profit driven by a 176-per-cent increase in revenue. This was somewhat offset by the additional $600,455 in selling and marketing expenses related to the initial launches of Rupall and Otixal.

 
                              Three months ended   Three months ended             
                                   June 30, 2017        June 30, 2016
                                 
Revenue from products                $ 2,462,845            $ 811,246 
Revenue from commissions                   2,705               81,915 
Total revenue                          2,465,550              893,161 
Gross profit                           1,287,049              603,549 
Selling and 
administrative expenses                2,134,515            1,487,524 
Other income                                   -            2,570,200 
Operating profit (loss)                 (837,761)           1,691,784 
Net profit (loss)                     (1,117,928)           1,442,796 
Cash flow from (used in)   
operating activities                  (2,074,693)           1,558,550 
Cash flow from (used in) 
investing activities                    (298,268)                   - 
Cash flow from (used in) 
financing activities                   4,983,242                 (374

About Pediapharm Inc.

Pediapharm is the only Canadian specialty pharmaceutical company dedicated to serving the needs of the pediatric community. 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 ear drop 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.