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Strategic Report:

Divisional Review
United Arab Emirates

CEO’s statement

“The performance this year at Mediclinic Middle East demonstrates that the division has entered a new growth phase. The highlight this year was the opening in September of the 182-bed Mediclinic Parkview Hospital in Dubai, both ahead of schedule and below budget. Our future growth will be underpinned by the performance in the established Dubai business, continued improvement in the Abu Dhabi business, ramp up of new facilities, successful integration of new investments and benefits from expansion and upgrades to existing facilities.”

David Hadley
Chief Executive Officer: Mediclinic Middle East

 

7

NUMBER OF HOSPITALS

2

NUMBER OF DAY CASE CLINICS

18

NUMBER OF OUTPATIENT CLINICS

926

NUMBER OF BEDS

37

NUMBER OF THEATRES

+7%

REVENUE AED3 262M (FY18: AED3 050M)

+7%

ADJUSTED EBITDA AED425M

+5%

NUMBER OF INPATIENT ADMISSIONS

85.6%

INPATIENT EXPERIENCE INDEX

6 152

NUMBER OF EMPLOYEES

4.02

EMPLOYMENT ENGAGEMENT

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

+2.7%

AVERAGE REVENUE PER ADMISSION

49.8%

BED OCCUPANCY

financial REVIEW

Mediclinic Middle East, as at the end of the reporting period, operated seven hospitals, two day case clinics and 18 outpatient clinics with a total of 926 beds and 6 152 employees (6 152 full-time equivalents). Mediclinic Middle East is one of the leading private healthcare providers in the UAE with the majority of its operations in Dubai and Abu Dhabi (including Al Ain). Mediclinic Middle East accounted for 23% of the Group’s revenue (FY18: 22%) and 18% of its adjusted EBITDA (FY18: 16%).

The Middle East remains a long-term growth market for the provision of high-quality private healthcare services, driven by the expatriate market and ageing local population facing an increased incidence of lifestyle-related medical conditions. The regulatory environment is maturing with an increasing focus on quality and clinical outcomes measures. Mediclinic has confidence in its Middle East growth strategy, which includes the ramp-up of new hospitals; the integration of new investments; and expansion and upgrades to existing facilities.

In FY19, revenue was up 7% to AED3 262m (FY18: AED3 050m after adjusting for the impact of IFRS 15), despite a lack of tariff increases. Inpatient and outpatient volumes were up 5.2% and 2.0% respectively. In Abu Dhabi, Thiqa and Enhanced insurance volumes combined increased during the year by 14% and 10% for inpatients and outpatients respectively, while Basic insurance volumes continued to reduce consistently with expectations.

Mediclinic Parkview Hospital in Dubai was successfully opened in September 2018 and has performed well. Despite the hospital being in the early ramp-up stage, revenue in FY19 was AED88m.

Including the loss associated with the start-up of the Mediclinic Parkview Hospital, adjusted EBITDA increased by 7% to AED425m (FY18: AED397m), with the adjusted EBITDA margin flat at 13.0% (FY18: 13.0% after adjusting for the impact of IFRS 15). Excluding the loss associated with the start-up of Mediclinic Parkview Hospital, adjusted EBITDA increased by 13% to AED447m (FY18: AED398m), with the adjusted EBITDA margin increasing to 14.1%.

Adjusted depreciation and amortisation increased by 15% to AED171m (FY18: AED149m), mainly due to Mediclinic Parkview Hospital and the acquisition of the Majid Al Futtaim clinics.

Net finance costs decreased by 11% to AED31m (FY18: AED34m), supported by the successful refinance in September 2018. The division contributed £46m to the Group’s adjusted earnings (representing 23%) compared to £44m (representing 20%) in the prior year.

The division converted 70% (FY18: 74%) of adjusted EBITDA into cash generated from operations. This was impacted by the late receipt from one major insurer and the increase in VAT receivable.

Investing for future success

Mediclinic Middle East continually reviews investment and expansion opportunities across the continuum of care to support the future success and strength of the division and build on its market-leading clinical expertise and patient experience. At Mediclinic City Hospital in Dubai, Mediclinic opened its first Comprehensive Cancer Centre, with a second planned for the first half of 2020 in Abu Dhabi at Mediclinic Airport Road Hospital. Mediclinic is the only private hospital operator in the UAE to offer gated radiotherapy services. During the year, Mediclinic performed the first robotic knee surgery in the Middle East and was the first private hospital group in the UAE to become an academic training institution.

Supported by continued business and operational improvements in Abu Dhabi and the ramp-up benefits from investments into new facilities, expansions and upgrades, Mediclinic Middle East is expected to deliver an increase in revenue and gradual improvement in EBITDA margins. However, the current macro environment in the UAE and below-inflation regulated tariff increases in 2018 and 2019 are impeding revenue growth and margin expansion.

In Abu Dhabi, the business is benefiting from continued investment in medical practitioners, services and facilities. While the recruitment of medical practitioners continues to support the growing business, vacancies have normalised and the focus has shifted to supporting medical practitioners to grow their practices. At Mediclinic Airport Road Hospital, inpatient and outpatient volumes were down 6% and 4% respectively during the year, but the average revenue per patient was up 11% and 10% respectively due to the improvement in the insurance mix. The divestment of non-core assets continued during the year to optimise the portfolio of assets.

In Dubai, the ongoing performance of the existing business will benefit from significant growth at the new 182-bed Mediclinic Parkview Hospital which opened in September 2018 and performed well in the second half of the year. The hospital, the Group’s largest greenfield construction project by value, was completed in two and a half years, ahead of schedule, and within the AED680m original budget. Initially opened with 100-beds and supported by 80 medical practitioners, the hospital will ramp up to full capacity over the coming years. The hospital is strategically located to serve the population expansion that has occurred to the south of Dubai and provides comprehensive maternity, Level III neonatal intensive care, 24/7 paediatric specialities, and accident and emergency care.

In FY19, Mediclinic Middle East invested AED376m (up 5% on FY18) on expansion and AED76m (up 145% on FY18) on maintenance capex. Expansion capex in the period largely related to the costs associated with Mediclinic Parkview Hospital and the EHR implementation. The EHR is being systematically rolled out across Mediclinic Middle East during FY19 and FY20, and successfully went live during the year at Mediclinic Parkview Hospital and Mediclinic Ibn Battuta, with a further three clinics going live in Dubai in April 2019. Rollout in Abu Dhabi will begin in June 2019 and it is anticipated that the project will be completed across the division by the end of the 2020 calendar year. The EHR is expected to deliver seamless care and improved service quality for patients, as well as improved administration efficiency for the division. Work continued during the year on the ground floor and mezzanine renovations at Mediclinic Al Noor Hospital, which is expected to be completed by the end of the 2019 calendar year, with continued progress on the plans to address the long-term changes required to enhance the hospital. As part of the division’s strategic expansion phase, Mediclinic Airport Road’s 100-bed expansion and cancer centre project is progressing as planned and is scheduled to open in the first half of the 2020 calendar year. Plans to construct a small 40-bed hospital in the Western Region of Abu Dhabi are currently under review. In FY20, having completed the Mediclinic Parkview Hospital project, Mediclinic Middle East expects expansion capex to be materially lower at around AED250m, with maintenance capex at around AED66m.

In May 2018, Mediclinic Middle East completed the acquisition of the Dubai-based City Centre clinics Deira and Me’aisem from Majid Al Futtaim, the leading shopping mall, retail and leisure pioneer across the Middle East and North Africa. Under the terms of the agreement, Mediclinic Middle East has acquired City Centre Clinic Deira, a large day case clinic specialising in 18 medical disciplines with one theatre which opened in 2013 and City Centre Clinic Me’aisem, a smaller community outpatient clinic focusing on a smaller number of core disciplines. The clinics serve strategic geographic locations and offer the opportunity to refer higher acuity inpatient cases to existing hospitals. Significant potential also exists to attract additional medical practitioners and to, over time, grow patient volumes and revenues as well as allow Mediclinic the opportunity to partner with Majid Al Futtaim in the future.

In November 2018, Mediclinic announced the acquisition of a minority stake in Bourn Hall International, the holding company for the Bourn Hall Fertility Centre in the UAE, a pioneering fertility centre established in the Middle East in 2010 and currently the only fertility centre in the Middle East to be accredited by the JCI. The acquisition lays the foundation for a partnership focused on a long-term MENA-focused expansion in the field of assisted reproduction. As part of the initial stage, Bourn Hall Fertility Centre has taken over operations of Mediclinic’s existing IVF clinic located at Mediclinic Al Ain Hospital and is operating it under the Bourn Hall brand. Bourn Hall will continue to operate and manage its IVF business independently and under its existing brand. The small investment was made from Mediclinic Middle East’s available cash and debt and is not expected to have a material impact on the earnings of the division in the short term.

Regulatory update

The division continues to maintain an active dialogue with government authorities on regulatory changes within the UAE healthcare sector. Preparations are ongoing for the implementation of DRGs for inpatient procedures in Dubai which are now expected to be implemented in September 2019. Mediclinic continues to test the systems through a shadow billing process which has been operating since July 2018. The Dubai Health Authority is following a collaborative approach in the design and implementation of the DRGs and, in addition to sharing and discussing the test version of the DRG methodology with the market, it also shared hospital level results and impact studies. Currently, it is expected that the DRGs will have a neutral impact on the division’s inpatient revenue, as prescribed by the Dubai Health Authority. Additional qualified medical practitioners have been appointed as case managers to ensure an effective change-over. Training is being carried out in the division’s Abu Dhabi facilities where DRGs have been in operation since 2011.

The Abu Dhabi Department of Health, through industry engagement, has recently introduced the concept of Centres of Excellence to improve the quality of care in the Emirate. Mediclinic Middle East was able to demonstrate its readiness for the initiative through its successful programmes already established in Dubai which include the Comprehensive Cancer Centre and Comprehensive Stroke and Neuroscience Centre at Mediclinic City Hospital. Two key areas of focus for Mediclinic Middle East in the Abu Dubai Emirate will be the establishment of a Comprehensive Cancer Centre and paediatric Centre of Excellence at Mediclinic Airport Road Hospital. The Abu Dhabi Department of Health is also preparing for the implementation of the next phase of the Jawda initiative, being the introduction of a hospital star-rating system based on an extensive list of quality and experience measures with the first reports anticipated to be published in the second half of the 2019 calendar year.

Market overview

The Middle East remains a long-term growth market for the provision of high-quality private healthcare services, driven by the expatriate market and ageing local population facing an increased incidence of lifestyle-related medical conditions. The regulatory environment is maturing with an increasing focus on quality and clinical outcome measures. Mediclinic has confidence in its Middle East growth strategy which includes the opening of new hospitals, integrating new investments and expansion and upgrades to existing facilities.

Within the region’s healthcare market, government authorities remain heavily involved in the private sector and continue to introduce controls in order to reduce levels of over-servicing and utilisation, which are still prevalent in some areas of the market and to focus on quality performance and outcome measures. The senior management of Mediclinic Middle East continues to forge ever deeper relationships with the authorities to ensure Mediclinic remains an integral part of the healthcare delivery system in the region.

Outlook

In 2018, the UAE witnessed sluggish growth with gross domestic product increasing by 1.7% with a marginal improvement expected in 2019 and 2020. This is premised on a stable oil price, increased government expenditure likely as Expo 2020 draws closer, non-oil revenue increasing from new forms of direct and indirect taxation and a predicted rise in foreign trade. Economically, there is still opportunity for greater diversification away from hydrocarbons in Abu Dhabi than in Dubai, which in turn can create new opportunities for the private healthcare industry. Mediclinic’s strategy to reduce reliance on the low-tariff insurance sector in Abu Dhabi has proved successful and will continue to be rolled out. Despite a lack of tariff increases in 2018 and 2019, reflecting the current macro environment, Mediclinic will, through its annual negotiations, seek to justify inflation-related increases in 2020.

With the operational integration following the Al Noor combination now complete, the focus is on supporting medical practitioners to grow their patient volumes, bring newly opened facilities up to capacity, ensuring timely delivery of projects under construction and effectively integrate new investments into the division. Mediclinic Middle East is well positioned, financially and operationally, to consider further investment opportunities across the continuum of care.

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