Georgia Healthcare Group PLC Annual Report 2018 Strategic Report Chief Executive Officer’s Statement 2018 was a significant year of investment and progress for Georgia Healthcare Group, as the Group has now completed its substantial three-year investment programme and business roll-out in all key areas of the healthcare system of Georgia To support the further diversification of revenues and close medical service gaps in the country, we continue to grow our presence in the elective services market – which tends to be higher margin. In 2018, we continued launching new medical services in our referral hospitals, with 26 new services introduced during the year, including a home care service. This also includes opening the country’s strongest ophthalmology and cardiology departments by contracting the best team of doctors in their respective fields. Within six months of the new ophthalmology department launch, we had gained approximately 15% market share in these services, compared to the previously held share of less than 3%. We see medical tourism as a significant opportunity for growth over the next few years. Until recently, Georgia has been mainly a source of medical tourism outflow, but the significant recent investments in upgrading our hospital infrastructure and building our clinical and customer service quality have enabled the Group to make progress in recapturing the business of domestic patients that would historically have travelled abroad for treatment. We are now focused on developing medical tourism into Georgia. Our initial priority will be post-Soviet neighbouring countries and we have already started to raise awareness In 2018, the Group delivered mid-teens revenue growth in both the of our medical facilities throughout the region. We captured healthcare services and the pharmacy and distribution businesses, GEL 3.4 million of revenues from international visitors during 2018 and demonstrated significant progress in the medical insurance and will continue to invest in an area that we are confident will become business by its recent turnaround and a good profit performance. an important source of growth for the healthcare services business. We continued to make significant progress inour two new showcase Polyclinic network. Our polyclinic network has continued to expand hospitals and have completed our Mega Laboratory project, an (revenue up 33% y-o-y). These polyclinics now clearly stand out from important new business and revenue opportunity for the Group. their competition as new, modern facilities that provide a diverse We have also recently introduced dental services into the polyclinic range of high-quality services in one location. The number of registered network and started developing medical tourism, both supporting patients in GHG’s Tbilisi polyclinics has now reached c.150,000, the development of new and more diverse revenue streams. compared to c.93,000 at the end of 2017. Below I’ll highlight each of these in more detail. In December 2018, we also entered into the Georgian dental services Group performance. The Group’s 2018 results reflect delivery market by launching dental clinics within a number of our key polyclinics. on a number of these recent initiatives. EBITDA of GEL 132 million Five polyclinics have already been equipped with modern dental represented a 22% increase y-o-y, net profit increased by 16% equipment and cover a wide range of dental services. We plan to add over the same period and EBITDA to cash conversion grew from several dental clinics in existing polyclinics in coming months and expect 54% to 75%. It has been pleasing to see robust results in each of this to be another strong area of revenue growth over the next few years. the businesses. Following the recent launch of our two new flagship hospitals, results in the healthcare services business are now showing Mega Laboratory. The construction of our Mega Lab, the largest consistent and sustained improvements as we continue to increase laboratory in Georgia and the entire Caucasus region, was one of the the utilisation of our new state-of-the-art hospital facilities. The key projects remaining in our investment programme. It was very pharmacy and distribution business has exceeded expectations, with pleasing to complete construction and open the lab in December 2018, strong revenue growth, further expansion of its nationwide network, and GHG now provides a full set of clinical and pathology tests, some and an EBITDA margin in excess of 10% for the year, comfortably of which are being introduced in the region for the first time. ahead of our initially targeted “more than 8%”. Our medical insurance business has continued its expansion and successful turnaround The project is supported by our colleagues from Jordan, Biolab, a from being loss-making to being a contributor to the Group profit. subsidiary of IDH Group, who have many years of experience in this Healthcare services. In 2018, healthcare services revenue grew field. Biolab will support Mega Lab in obtaining the highest international 15% to GEL 306 million. EBITDA increased 9% y-o-y to GEL 76 healthcare accreditation over the next few years. In addition to providing million, and the EBITDA margin was 24.9% (the EBITDA margin for significant synergies, this is an important new business that will be referral hospitals and community clinics, excluding the roll-out impact, the clear leader in Georgia and the Caucasus region. Mega Lab plans to stood at 28.7%). In the two new showcase facilities of our healthcare develop a retail network, with around 50 blood collection points across services business, Regional Hospital and Tbilisi Referral Hospital, major regional cities in coming years, and to work on additional external we are seeing strong improvements in utilisation as the facilities are contracts, contracting and serving healthcare facilities outside the now both fully launched. Despite having only opened in March 2018, Group, further diversifying the Group’s revenue streams. occupancy at our 306-bed Regional Hospital increased to 32.7% and the hospital started to generate a double-digit EBITDA margin Pharmacy and distribution. Our pharmacy and distribution business in the fourth quarter of 2018 – a substantial achievement for posted record revenues of GEL 519 million, with over 15% y-o-y a newly-launched hospital. The occupancy rate at Tbilisi Referral revenue growth supported by active marketing campaigns and sales Hospital (fully opened in December 2017) was in excess of 46% in the fourth quarter. initiatives implemented across our two combined pharmacy chains that has delivered 8.5% same-store growth during 2018. 8