The Council of Joint Stock Company "Olainfarm" (hereinafter - the Company) is acquainted with the consolidated annual report and the group parent company report for the year 2019 prepared by the Board of the Company, together with the conclusion of the sworn auditors PricewaterhouseCoopers (hereinafter referred to as PWC) on this report. The Council has also assessed the financial situation of the Company and the work of the Board during the financial year 2019 and has prepared this report (hereinafter referred to as the Report).

The Council informs that the existing members of the Council were elected to the Council of the company at the shareholders' meeting of the company on April 1, 2019 and thus the Council in such structure in 2019 has been running for nine months. In the light of this, the Council makes its assessment of the first quarter of the financial year 2019 on the basis of the PWC report and information provided by the Company's Board, Audit Committee and other Company`s executives. The information contained in the Report describes the supervisory activities carried out by the Council from April 1, 2019.

In 2019 all performance indicators of the Company, its representative offices and dependent (subsidiary) companies (hereinafter – the Group) were better than in 2018. Total Group`s annual revenues in 2019 amounted to 137 million euros, which is 10 % more than in 2018. In turn, the gross profit was 85 mln. EUR, providing 10 mln. EUR increase. Gross margin profitability increased from 60 % in 2018 to 62 % in 2019. EBITDA figures also improved significantly in 2019 amounted to 33 mln. EUR. Group net profit in 2019 is 24 mln. EUR, that is more than 2 times higher than the annual net profit figures of the Company in 2018.

The overall financial position of the Group is stable. In 2019, the Company`s loan from financial institutions has been reduced by 31%. The ratio of net liabilities to EBITDA at the end of the year was 0,2. Financial stability is evidenced both by the balance of funds at the end of the year, which increased 5,6 times, and the available but unused amount of credit funds.

The performance of the Group in 2019 was significantly influenced by the evaluation and revision of the operational practices of previous periods, introducing additional control mechanisms and revaluation of concluded transactions and usual processes. As a result of such actions, in 2019 accruals in amount of 7 mln. EUR were created for the depreciation of various assets of the Group. Most of the impairment is based on assets that are not related to the production and distribution of pharmaceutical products, which is considered to be the main activity of the Group. In-depth activities carried out in 2019 in the analysis of operational, financial and legal risks are a good basis to move on, implementing a new strategy that defines the planned activities and objectives of the Group until 2025.

With the aim of focusing the activities of the Company to achieve a joint goal, a new corporate mission and vision was created.

Mission: we improve customers` lives and create value for our company by providing sustainable healthcare products and services through our expertise in manufacturing and sales.

Vision: Until 2025, we are among the top 10 largest Central and Eastern European manufacturers, which sustainably supply healthcare products and services in certain therapeutic areas — basically Central and Eastern Europe, CIS, as well as other global markets.

In 2019 the Company actively continued work on the program for renewal of the main product files, clarifying the necessary investments and setting a specific time frame for completing the research program. The investment program for restoring ready-made dosage forms will provide an opportunity to significantly expand operations in new markets, as well as improve sales opportunities in existing markets. The council would like to note that, in view of the pre-planned investments in research under the FARMA2020 program, changes have been made to the classification of the accounting of research costs, further placing the research expenditure as investments in line with the generally accepted practice of accounting for pharmaceutical companies.

Evaluation of activity of the Board

In 2019, significant activities were carried out by the Company’s Board, which ensured an increase in the Group's value. During the reporting period, the Group's operating processes in the main markets were reviewed, new practices were introduced in the implementation of product development, improved financial control and risk management. The activities carried out and the market situation ensure good financial results for the Group, which together with the available amount of funds allows the Board to prepare a dividend payment offer to shareholders in amount of 20% of the profit of the parent company corresponding to dividend policy approved in 2019 and amounts to 4 507 224,96 EUR or 0,32 EUR per share.

Taking into account the good performance, significant contribution to shareholders and Company’s established practice in accordance with which the Council determines to the Board the share of variable remuneration for the performance of the members of the Board, which is in line with the interests of the shareholders of the Company and contributes to the achievement of the Company's business objectives, subject to the principles and criteria set out in the shareholders' meeting regarding the determination of remuneration for Council members in paragraph 8.2 of the regulations No. AOR9.029.010/2 dated by 21.05.2018 “Regulations of procedure of the Board of the Joint Stock Company  “Olainfarm””, which provide that the total remuneration of the members of the Board and its distribution is determined by the Council, as well as the Council decides on the bonuses of the members of the Board, taking indicators of the Company as a basis of the performance; the Council supported the proposal of the Board to pay the bonus to the members of the Board in the amount of nine-month fixed monthly remuneration rate.

The Board, under the supervision of the Council, has actively worked on the development of a number of policies and procedures relevant to the management of the Company, which help to implement the principles of good governance. As one of the main challenges in the work of the Board, it is necessary to highlight the work with the subsidiaries of the Company and increasing the effectiveness of their management and operation. The Board has been active in arranging the financial planning and reporting process in subsidiaries.

Evaluation of the activities of the Audit committee

In 2019, the Audit Committee regularly informed the Council, submitted its reports on the inspections carried out and the facts, risks and problems identified.

Audit committee during the year 2019 paid attention, carried out visits, requested data on the activities of dependent companies (subsidiaries) and representative offices of the Company abroad, for example, in Ukraine, Uzbekistan, Azerbaijan, etc. Essential information was provided to the Council to improve the functioning and management of representative offices and dependent companies (subsidiaries), in particular in the area of investment, marketing expenditure, administrative expenditure planning, control and effectiveness control. The function of the Audit committee in monitoring the internal control system is highly important, especially in the period before the establishment of a professional internal audit team in the second half of 2019.

Council activities

The existing Council has held 35 meetings for the period from its election on April 1, 2019, and till December 31, 2019. Key tasks for the Council in 2019 was the improvement of the management system, and the strengthening of the internal control system. The Council's work was related to in-depth analysis of the Company's activities, achievement of the set goals, monitoring of the Group's financial results, formation of the Board, development of the new strategy and approval of management policies. From the Council's point of view, the activities carried out during the year 2019, were aimed at increasing the value of the Group, ensuring return to shareholders, as well as reducing the negative consequences caused by several extraordinary meetings of shareholders, with a view to changing the Company's management institutions, which clearly affects the view on the stability of the Company's management.

The Council has carried out a number of activities to create a professional and highly qualified Board of the Company. As the result of the tender, organized in cooperation with the international recruitment company “Amrop”, foreign pharmaceutical specialists Jeroen Hidde Weites and Elena Bushberg was attracted, as well as professionals from Latvia, who provide the necessary competences for the work of the Board. Several members of the Board were suspended as a result of both personal circumstances and deficiencies discovered in the course of their work.

The Council was actively involved in the development of the Company's strategy, which was crowned with the identification of new, focused development directions and development of the strategy, as well as the launch of implementation already in 2020. For the purpose of assessing the place and role of the Company in the global pharmaceutical market, in the summer of 2019, IQVIA, an international pharmaceutical consultant from the USA, was attracted to provide detailed data on the Company's main existing markets, key areas of therapies, competitors, and, crucially, prospective new markets and trends. The work started in 2018 on the restoration of the Company's leading products so-called registration documents, which would ensure their long-term realization in existing, as well as new markets, was evaluated In the strategy development process. The Eurasian Economic Union has decided on a gradual transition to a new common certification of pharmaceutical products throughout the Union, replacing the national certification, which will fully take effect in 2025. The product certification process directly affects the Company's sales in these markets. Renewal of certification is both financially and time-consuming. During the evaluation, a new and promising product portfolio was identified, which will create stable, effective opportunities to improve sales results in the future. In addition, it is positive that the renewed registration would pave the way for the conquest of new export markets also outside the Eurasian Economic Union.

The Council has proposed the development of a number of policies that streamline management processes. One of the most significant results for shareholders can be considered the participation of the Council in the creation and approval of the Dividend policy, which resulted in the dividend payment offer for the results of the year 2019, and determine a sustainable, transparent dividend policy which is understandable for shareholders in the future, as well.

COVID-19 has influenced the work of the Company indirectly. As one of the significant influences, we can characterize the decrease in purchasing power in proportion to the fall in GDP in the main markets of the Company. The influence of COVID-19 has led to fluctuations in demand due to social constraints that have changed the historical conditions for the operation of sales and promotion channels. There is uncertainty, that regulations and restrictions on medical procedures related to COVID-19 implemented in a number of countries, may impede the planning of clinical trials in the future. The Council, in cooperation with the Board, monitors the situation in the main markets so that the spread of COVID-19 does not leave a significant impact in achieving strategic objectives.

Together with the Board, the Council continues to work on improving the financing model of the Company's activities in order to optimize the financing of capital, borrowing, assets and development of the Company and the established strategy. In general, the Company continues to finance a significant part of its activities with capital and operating cash flow, but there are various other options and instruments, such as the issue of bonds, the use of financial instruments offered by the EU, etc.

Shareholders' meetings

Five shareholders' meetings have been convened during the reporting period, including the regular shareholders' meeting, which was held on June 17, 2019; and four extraordinary shareholder’s meetings have been convened – on April 1, June 21 and November 1, 2019, of which extraordinary shareholder meetings on November 1, 2019, have not been held due to lack of quorum.

The Council would like to thank the Board, all employees and partners of the Company for their cooperation in 2019, and wish a successful, stable and opportunities-rich year 2020!

In attachment:

- Annual report of the Audit committee

Respectfully,

Joint Stock Company “Olainfarm”

Chairman of the Council,

Gundars Berzins

Additional information:

Jānis Dubrovskis
Investor Relations Advisor of JSC Olainfarm
Ph.: +371 29178878
janis.dubrovskis@olainfarm.com