CEO’s statement

“The Middle East platform faced significant challenges during the period under review due to unexpected regulatory changes in Abu Dhabi, increased competition, and the process of aligning the Al Noor business with the operational and commercial practices of the overall Mediclinic Group following the Combination in February 2016. This has impacted our financial performance and, together with the forecast continued lower economic growth in the UAE, our short-term growth expectations in the region. During the year, however, we implemented various initiatives to effectively deal with these challenges which, combined with the decision of the Abu Dhabi Government to reverse co-payments by Thiqa members, the introduction of new facilities and services and the ongoing upgrade of existing units, places Mediclinic Middle East on a more sustainable and long-term growth path.”

KEY STATISTICS

6

NUMBER OF
HOSPITALS

31

Number of
clinics

714

Number of
beds

30

Number of
theatres

6 375

Number of
employees

Key financial and operational highlights

Mediclinic Middle East accounted for 24% of the Group’s revenues (2016: 16%) and 15% of its underlying EBITDA (2016: 16%).

In the Middle East, as at the end of the reporting period, the combined business operated 6 hospitals and 31 clinics with a total of 714 beds and 6 375 employees. The platform is one of the largest private healthcare providers in the UAE with the majority of its operations in Dubai and Abu Dhabi (including Al Ain).

The Mediclinic Middle East financial results represent the combined business for FY17. In FY16, Al Noor’s results were only consolidated from 15 February 2016.

During the period under review, revenue increased by 72% to AED3 109m (2016: AED1 802m). The existing Dubai business increased revenue by 5% including the related ramp up benefit from the new Mediclinic City Hospital North Wing. However, the Abu Dhabi business underperformed, down 19% compared to the prior year pro forma revenue. On a pro forma basis, inpatient admissions and day cases declined by 4.8% and outpatient attendance decreased by 9.7%. Bed days sold decreased by 6.2%. Abu Dhabi inpatient and outpatient volumes were down 12% and 14% respectively versus the prior year due to the unforeseen changes in the regulatory environment with the introduction of a co-payment on local Thiqa insurance card holders, a need to align Al Noor with the sustainable business and operational practices of the Group, doctor vacancies, increased competition and the sale of several non-core assets. Thiqa patient volume declines were greater than other insurance categories in Abu Dhabi with inpatients down 33% and outpatients down 31%.

Underlying EBITDA decreased by 5% to AED364m (2016: AED384m) and the underlying EBITDA margin decreased to 11.7% from 21.3%. Despite good progress made in respect of the integration benefits from the combination, this was more than offset by the revenue shortfall. Operating profit decreased by 58% to AED134m (2016: AED321m). Mediclinic Middle East contributed £33m to the Group’s underlying earnings compared to £57m in the comparative period.

In early June 2016, the platform amended and increased the existing debt facilities to AED1 012bn (of which AED220m remains undrawn) from AED282m in the prior year, to refinance the bridge loan facility, as well as to continue to fund existing expansion projects across the UAE.

The provision for impairment of receivables increased by AED113m (AED89m relating to Abu Dhabi receivables) and was charged to the income statement. In FY16, AED25m (AED9m relating to Abu Dhabi receivables) was charged to the income statement. Furthermore, an opening balance sheet adjustment of AED73m was made to the Al Noor receivables to finalise the Al Noor purchase price allocation.

AED3 109m

+72%

Revenue

AED364m

-5%

UNDERLYING EBITDA

-6.2%

Bed days sold

-2.3%

Average revenue per bed day

82.4%

Patient Experience Index

3.92

Employee Engagement

(grand mean score based on a 1 to 5 rating scale)

Mediclinic Middle East invested AED188m on expansion capital projects and new equipment and AED57m on the replacement of existing equipment and upgrade projects. The major components of the expansion capital expenditure were the Mediclinic City Hospital North Wing and Mediclinic Parkview Hospital projects in Dubai. The former was successfully opened in September 2016 and houses, amongst other disciplines, the Comprehensive Cancer Centre, Dubai’s most advanced facility for the diagnosis and treatment of cancer, built in association with Hirslanden in Switzerland. Patient volumes since opening the North Wing have been encouraging. Construction of the Parkview Hospital, the seventh hospital of the platform, is progressing well and is on track to be completed in the fourth quarter of the financial year ending 31 March 2019.

As part of the ongoing investment in the region, a partner was selected for an Electronic Health Record system which will be implemented over the coming years. By creating unified records for patients, regardless of which facility they receive treatment at, the system will enable the business to deliver improved service quality and seamless care for patients.

The regulatory environment in the Middle East had a significant impact on the platform’s performance this year. On 30 June 2016, the Health Authority Abu Dhabi (“HAAD”) announced a number of amendments to Abu Dhabi’s health insurance programmes with immediate effect as of 1 July 2016. Changes to the Thiqa plan (health insurance for UAE Nationals or others of similar status in Abu Dhabi) stipulated that patients receive 80% coverage of the fees for outpatient and inpatient services provided by private healthcare facilities in Abu Dhabi (previously 100% for most services). It was mandatory for private healthcare providers to collect the full co-payment from patients, which Mediclinic adhered to with immediate effect. A further change saw the Thiqa plan cover only 50% of the cost if patients sought medical services outside Abu Dhabi (including Dubai and the Northern Emirates). In Dubai, UAE nationals are covered under the ENAYA and SAADA health insurance programme, under the supervision of the Dubai Health Authority, with a 10% co-payment for inpatient and outpatient services in public and private sector. As mentioned, these changes had a significant impact on the Thiqa patient volumes in the Abu Dhabi business. However, on 26 April 2017, following a period of engagement with various authorities and stakeholders, His Highness Sheikh Mohammed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces, ordered the waiving of the 20% Thiqa co-payment when receiving treatment at private healthcare facilities in Abu Dhabi, with immediate effect. It was also confirmed that the co-payment for services provided to Thiqa patients outside of Abu Dhabi would be reduced from 50% to 10%. Preparations are ongoing for the introduction of diagnosis-related groups in Dubai expected to be implemented in April 2018. The platform continues to maintain an active dialogue with government authorities on regulatory changes within the UAE healthcare sector.

A key focus during the year has been integrating the Abu Dhabi-based Al Noor Hospitals Group with the established Mediclinic Middle East business in Dubai. The regional management team successfully addressed a number of key issues including the establishment of a clear operational and clinical strategy in Abu Dhabi, doctor vacancies, integrating the functional departments of the two businesses, conforming revenue cycle management with the Middle East business, identifying synergies in procurement and headcount and consolidating the two corporate offices and executive management teams. The Group remains on track to generate annualised synergies of AED75m from the combined Middle East business. Some 136 new doctor appointments were made in the Middle East during FY17 and a further 52 doctors are currently in the process of recruitment helping to fill the vacant positions that resulted from the departure of doctors in the 12 months leading up to the Al Noor combination and at the start of FY17.

As part of an extensive review of the Abu Dhabi business, certain units, non-core to the central strategy of the platform, were identified for divestment. The Group has classified AED42m assets and AED9m liabilities as held for sale in relation to these units. The platform completed the sale of Rochester Wellness, consisting of two clinics in Dubai and Oman, to Emirates Health during the year. In November 2016, the platform completed the sale of Gulf International Cancer Centre to Proton Partners International. The construction of a new hospital in the Western Region was postponed.

Several new facilities were opened in Abu Dhabi during the year. These included the Mediclinic Al Jowhara Hospital (formerly Al Noor Hospital – Al Jowhara), a 51-bed multi-disciplinary hospital in Al Ain that was delayed by several months, clinics in Ghayathi (Western Region) and Al Yahar (Al Ain), as well as the Aspetar Clinic (Al Ain). The Khalifa City A Clinic was opened in April 2017. Areas of opportunity were identified in Abu Dhabi, including the expansion and redevelopment of Mediclinic Al Noor Hospital (formerly Al Noor Hospital – Khalifa Street) and the creation of a new Comprehensive Cancer Centre at Mediclinic Airport Road Hospital (formerly Al Noor Hospital – Airport Road). In September 2016, the platform completed the purchase of the remaining 25% interest in the Al Madar group of clinics, based in Abu Dhabi. The important strategic decision to rebrand Al Noor facilities to Mediclinic was taken in February 2017 reflecting the ongoing and future investment in the Abu Dhabi business. The project commenced in April 2017 and due to regulatory requirements, is expected to take approximately one year to complete. As a result of the rebranding decision, an accelerated amortisation charge of AED36m in connection with the acquired Al Noor trade name asset has been recognised during the period under review. The remaining balance of the trade name will be fully amortised in FY18. The accelerated amortisation charge has been excluded in determining underlying earnings.

Market overview

The region continues to witness economic uncertainty owing to influences such as the strength of the United States dollar which is affecting the tourism and property market in particular, rising interest rates, weakened consumer sentiment, and the continuing low oil price which, although stabilising in recent months at around USD55 per barrel, still remains well below the levels seen in the UAE’s more prosperous periods. Despite this, population growth is expected to drive domestic demand in the next year, albeit at a reduced rate. Growth rates are expected to accelerate slightly in Dubai as Expo 2020 draws closer but not to the levels experienced in 2012 to 2014.

Within the region’s healthcare market, the increased involvement of government authorities in the private sector and its introduction of stricter regulatory controls, continue to affect the market. This remains a significant challenge to Mediclinic Middle East, along with persisting economic uncertainty, rising costs and increased competition. The true impact of the proposed introduction of value-added tax in January 2018 also needs to be assessed, as well as the effects of a possible introduction of corporate tax in the medium term.

Opportunities for the business lie within Mediclinic Middle East’s own areas of development, including bringing newly-opened facilities to capacity, ensuring timely delivery of its projects under construction and identifying areas that will add further value to its patients and stakeholders.

Outlook

The economic outlook for the UAE is mixed, with its fortunes linked fundamentally to issues such as oil price and US economic policy which affects the strength of the US dollar, to which the UAE dirham is pegged as well as inflation. We are, however, confident that our strategy to reduce reliance on the low-priced insurance sector, and to further increase the levels of services available to our patients, will enable us to build on our newly defined base. Other key focus areas are to continue to implement an effective business and clinical strategy for the combined business including further divestments where appropriate, continual improvement of the patient experience, bringing all new facilities to capacity, the identification of further growth opportunities and the delivery of new projects already underway.

Preparations for the introduction of diagnosis-related groups in Dubai are ongoing. The platform continues to maintain an active dialogue with government authorities on regulatory changes within the UAE healthcare sector.