Georgia Healthcare Group PLC Annual Report 2018 Strategic Report Our strategy Performance against strategy 2018 Georgia Healthcare Group Growth and return • Double-digit revenue growth – up 13.7% y-o-y. • Double-digit net profit growth – up 15.9% y-o-y. • Increasing operating cash flows – an increase of 71.0% y-o-y with 75% EBITDA to cash conversion ratio, up 21.4 ppts y-o-y. • ROIC up 0.2 ppts to 11.0%; adjusted ROIC (excluding newly-launched hospitals and polyclinics that are in roll-out phase) up 1.1 ppts to 13.9%. Expansion • Successful completion of three-year investment programme. • Opened the country’s largest diagnostic laboratory, which will be the new business line for the Group, covering internal as well as external demand. Software and • Started implementation of ambulatory EMR. digital development • Started implementation of medical ordering system in referral hospitals. • Picture archiving and communication system’s (“PACS”) implementation process in our entire network is almost complete. Healthcare services business Successful roll-out • Regional Hospital – opened in March 2018. of newly-launched • The hospital started to generate positive EBITDA in 3Q18, six months after opening. hospitals • Occupancy rate reached 32.7% in 4Q18. • In line with our initial plan, more than 60% of revenue comes from elective care services and more than 40% is paid out-of-pocket. • Tbilisi Referral Hospital – first phase opened in May 2017, additional capacity added in December 2017. • The hospital has generated positive EBITDA since 1Q18. • Occupancy rate reached 46.5% in 4Q18. Revenue growth • Double-digit net revenue growth – up 14.7% y-o-y. and diversification • Diversified revenue stream – the share of Government financing in the healthcare services business revenue decreased by 80 bps, to 66.6%. The share of the out-of-pocket revenue increased by 140 bps, to 26.0%. • Polyclinics revenue up 33.2% y-o-y, contributing 7% to the total revenue from healthcare services, compared to 6% in the previous year. EBITDA margin • Theadjusted EBITDA margin for referral hospitals and community clinics, excluding the dilutive effect of roll-outs of Regional of c.30% Hospital and Tbilisi Referral Hospital, was in line with our target, at 28.7%. • The EBITDA margin for our polyclinics business was down 20 bps y-o-y, to 13.0%due to the roll-outs. We expect to rebound gradually in the coming years. Footprint and • Opened 306-bed Regional Hospital. capacity expansion • Added a new polyclinic. • Continued the process of launching new services at our referral hospitals. In 2018, we launched 26 new services in 15 different referral hospitals. • Developing medical tourism, revenue of which was up y-o-y by 100% to GEL 3.4 million. • Opened eight dental clinics within the Group’s polyclinics. Pharmacy and distribution Revenue growth and • Added 15 pharmacies to the network. footprint expansion • Double-digit revenue growth – up 15.2% y-o-y, with 8.5% same store growth rate. • Wholesale revenue growth, up 18.0% y-o-y, by signing new corporate accounts and engaging in state programmes. Margin enhancement • The gross margin reached 25.5%, up 100 bps y-o-y, through realised procurement synergies. • EBITDA margin at 10.1%, exceeding our “more than 8%” target, with 7.8% operating leverage. • Added three new private label medicines – the number of which reached 37. Medical insurance Value creation – • After successfullyimplementing the new initiatives, the business started to contribute positively to the turning the corner Group’s performance. in profitability • The business reported positive EBITDA and profit, GEL 4.1 million and GEL 2.9, respectively, compared to the negative contributions in the same period last year. • Loss ratio down 690 bps to 77.3%. • Combined ratio down 850 bps to 94.0%. Increased claims • The total amount of claims retained within the Group increased by 4.7 ppts y-o-y and reached c.40%. retention rates • The total number of claims retained within the polyclinics increased by 4.3 ppts y-o-y. within the Group Expansion • Becoming the largest medical insurer and the largest private player in the healthcare sector of the country by winning two tenders – adding and retaining the country’s largest insurance clients. • The number of insured as of February 2019 reached c.230,000 up from c.155,000 in 2017. 34