GHG.L Regulatory News (GHG)

2nd quarter and half-year 2019

 Results

www.ghg.com.ge

Name of authorised official of issuer responsible for making notification:

Ketevan Kalandarishvili, Head of Investor Relations

An investor/analyst conference call, organised by GHG, will be held on Wednesday, 14 August 2019, at 15:00 UK / 16:00 CET / 10:00 U.S Eastern Time. The duration of the call will be 60 minutes and will consist of a 15-minute update and a 45-minute Q&A session.

TABLE OF CONTENTS

2Q 2019 PERFORMANCE highlights.

CEO Statement

Discussion of Group Results

Income statement

balance sheet

Cash flow

Discussion of SeGMENT ResulTS

Discussion of Hospitals BUSINESS RESULTS

Discussion of Clinics BUSINESS RESULTS

Discussion of pharmacy and distribution bUSINESS RESULTS

Discussion of MEDICAL INSURANCE BUSINESS RESULTS

Discussion of Diagnostics BUSINESS RESULTS

selected financial information..

PRINCIPAL RISKS & UNCERTANTIES

Statement of Directors' Responsibilities

CONSOLIDATED FINANCIAL STATEMENTS

INDEPENDENT REVIEW REPORT ON REVIEW OF INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF GEORGIA HEALTHCARE GROUP PLC

INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SELECTED EXPLANATORY NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Annex

COMPANY INFORMATION

Forward looking statements

This announcement contains forward-looking statements, including, but not limited to, statements concerning expectations, projections, objectives, targets, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, competitive strengths and weaknesses, plans or goals relating to financial position and future operations and development. Although Georgia Healthcare Group PLC believes that the expectations and opinions reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations and opinions will prove to have been correct. By their nature, these forward-looking statements are subject to a number of known and unknown risks, uncertainties and contingencies, and actual results and events could differ materially from those currently being anticipated as reflected in such statements. Important factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements, certain of which are beyond our control, include, among other things: business integration risk; compliance risk; recruitment and retention of skilled medical practitioners risk: clinical risk; concentration of revenue and the Universal Healthcare Programme; currency and macroeconomic; information technology and operational risk; regional tensions and political risk; and other key factors that we have indicated could adversely affect our business and financial performance, which are contained elsewhere in this document and in our past and future filings and reports, including the "Principal Risks and Uncertainties" included in Georgia Healthcare Group PLC's Annual Report and Accounts 2018 and in this announcement. No part of these results constitutes, or shall be taken to constitute, an invitation or inducement to invest in Georgia Healthcare Group PLC or any other entity, and must not be relied upon in any way in connection with any investment decision. Georgia Healthcare Group PLC undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent legally required. Nothing in this document should be construed as a profit forecast.

Georgia Healthcare Group PLC ("GHG" or the "Group" - LSE: GHG LN), announces the Group's second quarter and half-year 2019 consolidated financial results. Unless otherwise mentioned, comparatives are for the second quarter of 2018. The results are based on International Financial Reporting Standards ("IFRS") as adopted in the European Union ("EU"), are unaudited and extracted from management accounts.

FINANCIAL PERFORMANCE HIGHLIGHTS

GHG announces today the Group's 2Q19 and 1H19 consolidated results, reporting 12.7% y-o-y growth in half-year revenues to GEL 472.9 million (US$164.8 million/GBP 130.0 million) and a 70 basis point improvement in adjusted ROIC1. The Group posted half-year profit of GEL 31.3 million (US$10.9 million/GBP 8.6 million) and earnings per share ("EPS") of GEL 0.15 (US$0.05 per share/GBP 0.04 per share), both excluding IFRS 16 lease accounting impact.

In order to permit meaningful comparisons between reporting periods, in the table below Net Profit, EBITDA, EBITDA margin and EPS data, for GHG as well as for each segment, exclude IFRS 16 financial impact. For the same reason, the discussions throughout this report of 2019 quarterly and half-year results for the Group and each business line also focus on the numbers excluding the IFRS 16 impact. Each financial table, on the other hand, shows both - the results with and without IFRS 16 impact. We are adopting this convention for 2019 only because 2018 figures have not been restated on an IFRS 16 basis.

GHG - the market leader in Georgia's healthcare ecosystem

1 Adjusted for non-recurring items and foreign currency losses

2 Return on invested capital ("ROIC") adjusted to exclude newly launched hospitals and polyclinics that are in roll-out phase

 CHIEF EXECUTIVE OFFICER'S STATEMENT

During the first half of 2019, the Group continued to deliver strong core earnings momentum, improved cash generation and a significant improvement in the Group's return on capital invested. Each of its businesses made important progress on their strategic goals. Our first half performance demonstrates the value we have begun to capture from our investment in the business over the last few years, with double-digit revenue growth in each business. Going forward, we expect to continue this double-digit growth throughout the business by leveraging the strength of our existing franchises without having to make significant further investment capital expenditure. We are actively building out a number of growth opportunities, such as in medical tourism, retail laboratory diagnostic services, outpatient clinics and dental service expansion, new pharmacies and new products such as private label personal care products. As a result, we are well positioned to grow the business over the medium-term, improve our operating cash flows, reduce debt and balance sheet leverage and continue to improve returns on invested capital.

With effect from 1 January 2019, the Group adopted IFRS 16 "Leases". For comparison purposes, the commentaries in this report and statement exclude the impact of IFRS 16, however the financial statements (pages 32-63) show the full statutory reporting position.

The Group. In the first half of 2019, Group revenue increased by double digits (13%) to GEL 473 million on the back of strong organic growth. EBITDA grew 19% to GEL 75 million reflecting both the revenue growth and effective cost management, which led to positive operating leverage despite the impact of new pension system (that became mandatory in Georgia from January 2019, explained in detail below on page 8), which increased our salary expense in 1H19 by more than GEL 2 million.

The Group incurred a significant foreign currency exchange loss in the second quarter, mainly due to the revaluation of foreign currency denominated payable balances of pharmacy and distribution business, after more than 6% devaluation of the Georgian Lari against both the US dollar and the Euro, driven by spillovers from regional tensions including the Russian government decision to cancel all air connections with Georgia which had a negative effect on tourism and fed depreciation expectations.

The Group delivered a profit of GEL 31 million in the first half of 2019, an increase of 10% compared to the first half of last year. We made strong progress in both revenues and bed utilisation in our two flagship hospitals, as they execute their utilisation programmes. The roll-out and patient number growth in our polyclinic network also continues to deliver a strong revenue uplift. Further sales growth in pharmacy business drove continued EBITDA margin expansion and earnings growth. The medical insurance business continues to improve profitability.

The Group's robust balance sheet strengthened further during the half year, with borrowings declining by GEL 21 million from their December 2018 level. Earnings per share, excluding the FX loss and non-recurring expenses increased by more than 33%. The Group improved its adjusted return on invested capital, from 13.7% to 14.4%, and posted improved operating cash in 1H19, translating into a 74% EBITDA to cash conversion ratio. On top of improved operating cash, being up 25% in 1H19 y-o-y, the cash used in investing activities more than halved during the same period, another significant achievement for the year. Operating cash net of outflows from investing activities swung from negative GEL 11.2 million in 1H18 to positive GEL 32.0 million in 1H19.

Hospitals business. Our hospitals business delivered GEL 149 million revenue in 1H19, an increase of 13% y-o-y. This growth was driven by both the continuing ramp-up of our newly launched hospitals, and good momentum in our existing facilities where occupancy rates increased by 250 basis points from 63.1% in 1H18 to 65.6% in 1H19. At Regional Hospital, our early recruitment of a number of specialist elective care medical teams has ensured that initial utilisation rates have been very strong, and the occupancy rate was nearly 40% in the quarter. The bed occupancy rate of Tbilisi Referral Hospital stood at 47% in the same period. Both Regional Hospital and Tbilisi Referral Hospital are now delivering EBITDA margins in excess of 17%, and we expect these to continuing increasing as we work over the rest of the year to build both hospitals towards maturity. EBITDA margin of the overall hospitals business remained strong and stood at 25.5% in 1H19 (27.7% excluding the roll-out impact).

Clinics business. Our polyclinic network continues to grow. These polyclinics clearly stand out from their competition as new, modern facilities that provide a diverse range of high-quality services in one location. We continue to improve the overall patient experience, and the number of registered patients in Tbilisi has grown to c.172,000, up c.55,000 patients since June 2018. In December last year, we entered the Georgian dental market and we now have dental clinics in eight polyclinics in Tbilisi and other large cities in the regions. In 1H19 clinics overall (which also includes community clinics) posted a 13% growth in revenues (with the polyclinics part growing by 20%), EBITDA grew by 45% and EBITDA margin increased by 390 basis points y-o-y, up to 18.1%.

Pharmacy and Distribution business. Our pharmacy chain and distribution business posted record half-yearly revenues of GEL 295 million, with 16% year-on-year growth supported by strong organic growth, the transfer of our hospitals' centralised medicine procurement entity to the distribution part of the business and the further expansion in the number of pharmacies - which now total 279 in major cities. Excluding newly transferred entity, the business y-o-y revenue growth was at 10%. The first private label para-pharmacy products were introduced in our pharmacies in March, under the brand name "Attirance", to supplement the 37 private label medicines already sold through our pharmacies. The growth in the business's EBITDA reached 26% driven by the revenue growth and cost discipline maintained, notwithstanding the increased costs following the Georgian pension system reforms, and this supported positive operating leverage of 490 basis points. The business EBITDA margin continues to exceed our expectations, increasing by 80 basis points year-on-year to 10.5%. This is an extremely strong performance and 150 bps in excess of our targeted "more than 9%" margin.

Medical insurance business. Our medical insurance business has made substantial progress over the last 12 months and continues to increase its client base and is now contributing to the profitability of the Group. Net insurance premiums earned increased by 35% in 1H19, supported by the acquisition of a single large client in the first quarter, and the combined ratio improved by 270 basis points to 96.1%. More importantly, we continue to improve the level of medical insurance claims retained within the Group and, in the first half of 2019, 41% of medical expense claims were retained within the Group. We expect this ratio to continue to increase further over the next few years.

Diagnostics business. In December 2018, we completed the construction of and opened Mega Lab, the largest diagnostics laboratory in Georgia and the Caucasus region. The diagnostics business has already delivered break-even EBITDA, with costs of our lab services at Group's healthcare facilities having been maintained at the same level. Over 350,000 tests were performed in the first half - a significant achievement.

We have already started to develop a retail network for the lab by capitalising on the scale of our pharmacy and distribution business. We launched the first blood collection point in one of GHG pharmacies in June and currently have three such points, with the plan to increase that number to around 50 in coming years. The business will also work on additional external contracts, serving healthcare facilities outside the Group.

****

I am pleased with the Group's progress made during the first half, and the Group also marked a significant milestone in July with the payment of our first shareholder dividend. Each business continues to achieve strong operational performance, and the Group overall is delivering excellent momentum in its earnings growth, internal cash generation, balance sheet deleveraging, and improving return on invested capital priorities. As our business matures, our focus is not only on growth. We are also steadily improving our management of risk.

Another key milestone for the Group is the launch of electronic medical record (EMR) in all our Tbilisi polyclinics, that will help us manage our customers more efficiently and deliver a better care to them, and electronic medical ordering system in most of our referral hospitals. GHG is the first healthcare company in the country implementing fully integrated health information system. To improve the quality management process, in 2019 we have established clinical boards which endorse standards of practice at hospitals level by measuring clinical quality with a recently implemented key performance indicator monitoring system, further contributing to quality enhancement in our healthcare facilities.

We had to absorb the impact of the weakening Lari in 1H19, and in July the national currency depreciated a further 3% against the dollar. On August 1 the National Bank of Georgia, which had accumulated record high reserves at US$3.7 billion as of June 2019, intervened in the market to curb the depreciation expectations, and since August 1 the Lari has gained around 2%. The Georgian macro outlook remains strong with real GDP growth of 4.9% in 1H19, backed by improved net export and fiscal stimulus. Strong external demand and declining pressure on imported goods led current accounts deficit to shrink significantly to 6.2% of GDP in 1Q19 compared to 11.9% of GDP in 1Q18. FX inflows, including from tourism, are expected to remain strong despite the Russian flight cancellation. Barring further negative external factors, we expect the macro-economic fundamentals to support further stabilisation of the national currency in the near to medium term.

Nikoloz Gamkrelidze,

CEO of Georgia Healthcare Group PLC

13 August 2019

DISCUSSION OF GROUP RESULTS

GHG overview

Georgia Healthcare Group is the largest and the only fully integrated healthcare provider in the fast-growing, predominantly privately-owned Georgian healthcare ecosystem with an aggregate annual value of c.GEL 3.8 billion. Georgia Healthcare Group PLC is the UK incorporated holding company of the Group and is listed on the premium segment of the London Stock Exchange.

Starting from 2019 the Group has updated its business structure and the healthcare services business was divided into the following two segments: clinics, which include polyclinics and community clinics, and hospitals, which include referral hospitals. Now GHG comprises five business lines: hospitals, clinics, pharmacy and distribution, medical insurance and diagnostics. Each business line has its own chief operating officer reporting to the Group CEO, pursuing significant growth, profit and ROIC opportunities and concentrating on a clearer strategy. Each business line also has its own finance and back office function overseen by the Group CFO.

GHG is the single largest market participant in the healthcare services industry in Georgia, accounting for more than 23% of the country's total hospital bed capacity, as of 30 June 2019. Our healthcare services business offers the most comprehensive range of inpatient and outpatient services targeting virtually all segments of the Georgian market, through its vertically integrated network of hospitals and clinics. Currently:

·; hospitals business operates 18 referral hospitals with a total of 2,967 beds, providing secondary or tertiary level healthcare services, located in Tbilisi and major regional cities.

·; clinics business operates 34 healthcare facilities, out of which:

- 19 are community clinics with a total of 353 beds, providing outpatient and basic inpatient healthcare services, located in regional towns and municipalities.

- 15 are district polyclinics, providing outpatient diagnostic and treatment services, located in Tbilisi and major regional cities.

GHG is the largest pharmaceuticals retailer and wholesaler in Georgia, with a c.30% market share by revenue. Our pharmacy and distribution business consists of a retail pharmacy chain and a wholesale business, selling pharmaceuticals and medical supplies to hospitals and other pharmacies. The pharmacy chain operates under two separate brand names, Pharmadepot and GPC, with a total of 279 pharmacies, of which 21 are located within our healthcare facilities. The pharmacy and distribution business is the country's largest retailer in terms of both revenue and number of bills issued.

GHG is also the largest provider of medical insurance in Georgia, with a 31.1% market share based on 1Q19 net insurance premiums. Our medical insurance business consists of private medical insurance operations in Georgia. We have a wide distribution network and offer a variety of medical insurance products primarily to the Georgian corporate sector and also to retail clients. We have c.230,000 persons insured as at June 2019. The medical insurance business plays an important role in our business model, as it is a significant feeder for our polyclinics, pharmacies and hospitals.

GHG recently opened the largest diagnostics laboratory in Georgia and the entire Caucasus region. In December 2018, we added diagnostics business under GHG, an important new business line for the Group, by opening Mega Laboratory ("Mega Lab"). The multi-disciplinary laboratory, equipped with latest infrastructure and state-of-the-art equipment, covers 7,500 square metres. High-capacity automated systems enable GHG to provide accurate, high-quality results to the entire population of the country. In addition to basic laboratory tests, the new laboratory allows us to offer complex tests for oncology and a molecular lab. Some of the lab tests offered by Mega Lab have never been available in Georgia - in the past blood samples had to be sent abroad.

Significant external events, accounting change and legislative developments affecting 2019 results

- Lari depreciation. During the second quarter, the Georgian Lari depreciated more than 6% against both the US dollar and the Euro. The Lari depreciation led to a significant foreign currency exchange loss in the second quarter which (excluding the IFRS 16 effect) was mainly due to the revaluation of foreign currency denominated payable balances of pharmacy and distribution business. In July the national currency depreciated a further 3% against the dollar. On August 1 the National Bank of Georgia, which had accumulated record high reserves at US$3.7 billion as of June 2019, intervened in the market to curb the depreciation expectations, and since August 1 the Lari has gained around 2%.

The Lari decline was driven by spillovers from regional tensions including the Russian government decision to cancel all air connections with Georgia, which in turn had a negative effect on tourism and fed depreciation expectations. See page 6 for additional information. Barring further negative external factors, the Group expects the macro-economic fundamentals to support further stabilisation of the national currency in near to medium term. Exchange rate developments depend on many factors and by their nature are very difficult to predict.

- New pension reform. In January 2019, a new pension system became mandatory in Georgia, with participation mandatory for employees under the age of 40, and optional for employees older than 40. Each employee contributes 2% of their income to an individual retirement account, which then benefits from further 2% contributions from both the employer, and (subject to ceilings based on income) the Government. The group participates in this programme, and the total anticipated cost to the Group in 2019 is approximately GEL 4.5 million.

- IFRS 16 impact. The Group adopted IFRS 16 "Leases" from 1 January 2019. The key change arising from IFRS 16 is that rent expense is reclassified from operating expense to interest and depreciation expense. IFRS 16 impact on Group's EBITDA was GEL 5.3 million in 2Q19 and GEL 10.4 million in HY19, out of which the pharmacy and distribution business accounted for GEL 4.7 million and GEL 9.1 million, respectively. The negative impact on the Group's net profit was GEL 5.2 million in 2Q19 and GEL 6.2 million in HY19, out of which GEL 4.5 million and GEL 4.8 million respectively, resulted from foreign exchange loss on the revaluation of the finance lease liabilities balance. About 85% of the finance lease liabilities balance represents foreign currency denominated leases the value of which increased in line with the depreciation of the national currency at the end

- of second quarter. As this negative impact is solely the result of the accounting change, we do not comment on it further in this report although the full effects are reflected in the accounts.

According to the Group's preliminary calculation, IFRS 16 annual positive impact on the Group's 2019 EBITDA will be around GEL 20 million, of which the pharmacy and distribution business will account for c.GEL 18 million. The negative impact on the Group's 2019 net profit is estimated around GEL 2.5 million (excluding FX movement); however, this negative impact on net profit is just a timing difference that decreases over time and eventually reaches net effect of zero. Assets and liabilities also increased by the amount of discounted cash flows of future rent payments. Below in this report, to allow for comparisons, the numbers are disclosed with and excluding IFRS 16.

Income statement, GHG consolidated

Gross Revenue. We delivered double digit revenue growth in both reporting periods, driven by the double-digit revenue growth across almost all GHG segments.

In HY19, the Group's revenue diversification across its segments was: 58% from pharmacy and distribution, 29% from the hospitals, 8% from medical insurance, 4% from clinics, and the remaining 1% from the newly added diagnostics business. By payor mix, 53% of the Group's total revenue was from out-of-pocket payments4; 25% from UHC payments; and 22% from other sources.

Gross Profit. The Group continued to deliver increasing gross profit and improved its gross margin by 100 bps y-o-y, reaching 31.7% in HY19. Quarterly gross margin was also up 40 bps y-o-y, to 31.1%. The pharmacy and distribution business, excluding the effect of intercompany sales which are eliminated upon consolidation, contributed a major part of the growth. The next largest contributor to the Group margin improvement was our hospitals business, despite the impact of the mandatory pension reform (effective from January 2019), which increased cost of salaries and other employee benefits by c.2%.

In total, the pension reform increased the Group's salary expenses by GEL c.1.1 million in 2Q19 and by c.2.1 million in HY19. Despite this, as a result of well-managed efficiency and cost control measures, the cost base on a gross profit as well as on the operating expenses level were well controlled and the Group delivered positive operating leverage in both reporting periods of 5.6 ppts and 2.7 ppts in 2Q19 and HY19, respectively.

EBITDA excluding IFRS 16. The Group delivered strong quarterly and half year EBITDA growth, up 19.6% and 19.4% y-o-y, respectively. The hospitals business was the main contributor to the Group's 1H19 EBITDA, contributing 51% in total, with a 25.5% EBITDA margin. The next largest contributor was the pharmacy and distribution business, with a 41% share, posting a strong double-digit EBITDA margin of 10.5%. Our clinics and medical insurance businesses contributed 5% and 3% to the Group's half year EBITDA respectively.

Depreciation and amortisation excluding IFRS 16. After completing a number of sizeable development projects, Group depreciation expense stabilised. Slight y-o-y and q-o-q movements mainly relate to small investments by all segments in different capital expenditure projects.

Net interest expense excluding IFRS 16. The y-o-y increase in net interest expense was in line with the increased balance of borrowed funds to finance planned capital expenditure. As the Group is now out of heavy capex mode, its leverage started to decrease gradually in line with the debt principal repayment schedule. Our q-o-q borrowings balance is down 1.3% translating in slight reduction in corresponding interest expense, down 20 bps.

Loss from foreign currencies excluding IFRS 16. The loss from foreign currency is mainly attributable to the pharmacy and distribution business. About 70% of inventory purchases in the pharmacy and distribution business are denominated in foreign currency: c.40% in EUR and c.30% in USD. In 2Q19, local currency devalued by more than 6% against USD and EUR, which resulted in an increased quarterly FX loss from revaluation of accounts payable balances (as discussed on page 8 above, the loss including IFRS 16 is also attributable mainly to pharma).

Profit excluding IFRS 16. The result of all of the above was a meaningful increase in Group profit - up 5.2% and 10.2% in 2Q19 and 1H19, respectively - even in the face of the FX loss. The pharmacy and distribution business continues to be the main driver of 2Q19 and 1H19 Group profit, contributing 63% and 65% in total respectively, followed by the hospitals business, contributing 32% in both periods.

3 Represents IFRS 16 impact on General and administrative expenses

4 Includes: hospitals and clinics out-of-pocket revenue, pharmacy and distribution, medical insurance and diagnostics businesses' revenue from retail

Selected balance sheet items, GHG consolidated

§ The increase in receivables from healthcare services corresponds increased revenues from hospitals and clinics business.

§ The majority of medical insurance contracts mature and renew in January every year, causing the insurance premium receivable as well as insurance contract liabilities balances to increase in 1Q19 and reduce gradually in line with contract amortisation terms.

§ The q-o-q increase in accounts payable is attributable to pharmacy and distribution business, mainly due to increased stock (inventory balance increased by GEL 10.6 million, up 7.3% q-o-q) to support sales growth and due to revaluation of foreign currency denominated accounts payable balances, explained above.

5Out of which GEL 77.2 million accounts for IFRS 16 impact

Statements of cash flows, GHG consolidated5

Cash flows from operating activities. Net cash flows from operating activities increased in 1H19 on the back of stronger EBITDA and an improved EBITDA to cash conversion ratio (up 3.2% to 73.8%). As the newly opened facilities and services progress towards their run rate the benefits of these projects have begun to materialise, including the gradual reduction in working capital needs. Going forward we expect further improvement of the cash conversion ratio.

Cash flows from investing activities. Net cash used in investing activities continues to decline and more than halved in 1H19. 2018 was the final year of our major investment programme and investment volume slowed further in 2019 (outflow for purchase of PPE and intangibles down 52.9% y-o-y) as the projects completed. In 1H19, net cash used in investing activities also includes GEL 5.2 million (GEL 12.9 million in 1H18) payment of holdback for the pharmacy and distribution business acquisition.

Cash flows from financing activities. With our improved operational cash flow and lower capital investment requirements, the Group has stabilised needs for borrowings and started to repay its loans in line with the debt repayment schedules. Net outflow from financing activities reflects reduction of borrowings balance by c.GEL 21.5 million since 31 December 2018 (down 5.5%), interest payments and the dividend paid to non-controlling interest shareholders of GEL 5 million.

The overall effect resulted in cash and bank deposits at 30 June 2019 of GEL 27.2 million.

Going forward a continuing increase in operating cash flow, an improved EBITDA to cash conversion ratio and substantially reduced investment programme should allow us to both further reduce debt and increase cash year on year.

6 Statement of cash flows is presented excluding IFRS 16 impact. Refer to back section of the release (page 38) to see the full statement of cash flows (including IFRS 16 impact).

DISCUSSION OF SEGMENT RESULTS

The segment results discussion is presented for hospitals, clinics, pharmacy and distribution, medical insurance and diagnostics businesses.

Discussion of Hospitals Business Results

Operational highlights:

§ Following the split of our healthcare services business (described on page 7), our management has revised the classification of our hospitals and clinics. Three of our clinics have become sufficiently large to merit hospitals classification and one of our hospitals was classified as a clinic due to the nature of services offered. For comparison purposes, we will discuss our hospitals and clinics results for both, 2019 and 2018 reporting periods according to the new structure.

§ Our adjusted hospital bed occupancy rate6 was at 64.1% in 2Q19 and at 65.6% 1H19 (61.2% and 63.1% in 2Q18 and 1H18, respectively).

§ The average length of stay at hospitals7 was at 5.4 days in 2Q19 as well as in 1H19 (5.4 days in 2Q18 and 5.5 days in 1H18).

Income Statement, Hospitals business

Revenue, hospitals

Our hospitals business y-o-y revenue growth in both reporting periods was mainly driven by the continuing ramp-up of our newly launched hospitals. Our existing facilities also contributed to the overall growth, where the y-o-y occupancy rates were also up 290 bps and 250 bps in 2Q19 and 1H19 respectively.

Progress of our newly opened hospitals

Regional Hospital (fully opened in March 2018) continues its progress and in 2Q19 the hospital posted record high revenue of GEL 9.5 million, up 6.0% q-o-q with the occupancy rate being also up 3.0% for the same period, reaching 38.6%. Positioned as hospital of choice, the Regional Hospital is already in the country's top five largest hospitals by revenue. As planned, the hospital is generating around 60% of its revenue from elective care services, which is reflected in the lower occupancy rates and mostly out--of-pocket source of payment (41.6% of total revenue). The hospital's EBITDA margin reached 17.6% in 2Q19.

Tbilisi Referral Hospital (fully opened in December 2017) posted GEL 5.9 million revenue in 2Q19 (up 43.8% y-o-y; down 7.7% q-o-q) with a 46.9% occupancy rate, and GEL 12.3 million in 1H19 (up 57.4% y-o-y). The quarterly revenue decline is attributable to the temporary discontinuation of several medical services due to technical reasons in 2Q19, out of which most have been already reinstated. The hospital is still in its ramp up phase and over the next few quarters we expect that, by renewing the medical services temporarily discontinued in 2Q19 and adding some new ones, revenue will increase gradually as planned. The hospital posted strong quarterly EBITDA margin of 17.1%, up 110 bps q-o-q.

Revenue by sources of payment

All payment sources contributed to our revenue growth, while the Government-funded healthcare programme remains the main contributor, accounting 69.3%9 in total revenue from hospitals business.

Gross profit, hospitals

Despite our two flagships remaining in their roll-out phase, which naturally increases our cost base, in 2Q19 costs were almost in line with net revenue growth rates. Despite the new pension reform (described on page 8 above in more detail) which increased our cost of salaries and other employee benefits by c.2%, as a result of focused efficiency initiatives the direct salary rate was down in 2Q19 and HY19. The increase in the materials rate reflects the roll-out of the new hospitals. Excluding the effect of newly launched hospitals, the materials rate remained well-controlled and stood at 14.9% in 2Q19 (down 60 bps y-o-y) and 15.3% in 1H19 (down 60 bps y-o-y).

As a result, y-o-y the hospitals quarterly gross margin improved by 40 bps y-o-y and remained flat in 1H19, at 41.8%.

Operating expenses, hospitals

On the back of business expansion and the new mandatory pension reform the salaries and other employee benefits increased y-o-y. General and administrative expenses were maintained (excluding IFRS 16 impact) at a favourable level, showing modest y-o-y growth of below 3% in 2Q19 as well as 1H19. 

The decrease in other operating income reflects the transfer of hospitals centralised medicine procurement entity to the GHG pharmacy and distribution business in 2019. In 2Q18 and 1H18 the business also generated higher gain from the sale of PPE than respective periods in 2019.

EBITDA excluding IFRS 16, hospitals

The healthy increase in our quarterly and half year EBITDA reflects the contributions of our two new flagship hospitals, increased demand for current services at our existing facilities and recently implemented efficiency initiatives. Y-o-y EBITDA margins, however, were slightly down, 30 bps in 2Q19 and 60 bps 1H19, and stood at 25.4% and 25.5% respectively. The reduction was mainly due to the new pension reform, that added GEL 0.7 million and GEL 1.4 million in quarterly and half year salary expense and translated in 90 bps reductions in respective EBITDA margins, and the decrease in other operating income explained above. Excluding the dilutive effect of roll-outs, despite the new pension reform, the hospitals business posted strong EBITDA margin of 27.5% in 2Q19 and 27.7% in 1H19.

Profit, hospitals

As the business completed its intensive capital expenditure phase, the depreciation and amortisation expense started to stabilise. On the back of almost flat q-o-q borrowed funds balance the interest expense also remained flat, which is expected to decline over the next periods, as we continue to reduce our debt balance. Foreign currency loss recorded in 2Q19 is the result of a foreign currency exposure, arising from small unhedged portion of USD denominated borrowing from a DFI.

Other highlights:

·; In 2Q19 hospitals business signed a cooperation agreement (the "transaction") with JSC David Davarashvili Clinic, which provides maternity and gynaecology services and is one of the country's leading maternity houses (the "Maternity Clinic"). Under the transaction, the Maternity Clinic will lease an unused 2,400 sq.m space at GHG's referral hospital, Iashvili Tertiary Referral Hospital ("Iashvili Hospital"). Iashvili Hospital is the cornerstone of GHG's neonatal and paediatric services and offers the most comprehensive portfolio of such services in Georgia. The collaboration of these two leading healthcare facilities will form the country's strongest location for all types of neonatal and maternal services, further increasing Iashvili Hospital's patient footprint and occupancy rates. It will also help to strengthen our position in the maternity business where we have low market share. The transaction also represents strong progress towards hospitals business' strategy, to optimise its unused assets and increase the utilisation of its healthcare facilities, further improving the Hospital's return on invested capital. 

7 Adjusted to exclude the Tbilisi Referral Hospital and Regional Hospital; the calculation also excludes emergency beds

8 The calculation excludes emergency beds

9 Represents IFRS 16 impact on General and administrative expenses

10 Government funded healthcare programmes revenue share in total revenues from hospitals is higher compared to the same share in revenues from healthcare services that we used to report (which now, due to the split of hospitals and clinics results, are reported separately). This is because UHC mostly covers inpatient services, while the revenue share from government in our clinics business is lower, at 55.1%, due to the limited coverage of outpatient services from UHC that our polyclinics provide

Discussion of Clinics Business Results11

Operational highlights:

§ In December 2018 we entered into the Georgian dental market by launching dental clinics in the Group's polyclinics. Currently eight of our polyclinics, located in Tbilisi and in other large cities, house dental offices.

§ The number of registered patients in Tbilisi polyclinics has now reached c.172,000 (compared to c.157,000 in March 2019). We aim to further grow our polyclinic business both organically and through further acquisitions.

Income Statement, Clinics Business

Revenue, clinics

Our clinics business also posted strong revenue growth driven by both, the polyclinics double-digit revenue growth as well as community clinics.

Revenue by types of clinics

In 1H19, 52% of the clinics' revenue came from polyclinics and 48% from community clinics.

The growth in revenue from polyclinics was fully organic, driven by new service initiatives and increased number of registered patients in Tbilisi, up c.55,000 patients y-o-y in 2Q19, reaching c.172,000 patients as of now. The growth in our polyclinics is also supported by dental clinics - we have opened dental offices in eight different polyclinics since December 2018. We will continue to pursue our polyclinics expansion strategy: to consolidate our position as the largest player in the highly fragmented outpatient market in Georgia through organic growth and further acquisitions.

The y-o-y increase in revenue from community clinics, which play a feeder role for the referral hospitals, was fully organic.

Revenue by sources of payment in clinics

The main contributor to clinics revenue growth was Government-funded healthcare programmes, accounting for a c.55% share in total revenue from clinics in both periods. The slight decline in out-of-pocket payments is attributable to community clinics where the main part of the revenue is generated from UHC, while in our polyclinics revenue the same source of payment was up 2.4% in 2Q19 and up 7.9% 1H19 y-o-y. The strong growth in clinics revenue from private insurance companies is mainly supported by the increased number of GHG insured clients, who prefer to use our polyclinics, due to the different incentives such as direct settlement of claims, and quality of care.

Gross profit, clinics

Despite the new pension reform, as a result of efficiency and cost control measures the direct salary rate significantly improved y-o-y. The y-o-y decrease in cost of materials rate is partially attributable to redirecting the laboratory tests to Mega Lab, eliminating cost of reagents while increasing the cost of medical service providers for the same period. As the polyclinics progress during their ramp-up phase, the cost of utilities increased y-o-y in both reporting periods. All this translated in slight reduction in quarterly gross margin, while the half year gross margin was up 60 bps, reaching 42.5%.

Operating expenses, clinics

Our focus on efficiency initiatives resulted in only moderate growth in salaries and other employee benefits and in general and administrative expenses (excluding IFRS 16 impact), both favourably lagging respective revenue growth. Other operating income derives mainly from renting the spaces to pharmacies and other minor retailers in our polyclinics. As a result, the clinics business posted strong y-o-y positive operating leverage of 14.5 ppts and 15.3 ppts in 2Q19 and 1H19.

EBITDA excluding IFRS 16, clinics

Increased revenue and the well-controlled cost base translated into strong EBITDA growth for both periods. Clinics business has also significantly improved its EBITDA margin, which was supported by EBITDA margin improvement in polyclinics as a number of them are making progress towards their run rate potential and the base of registered patients continues to increase. The polyclinics' EBITDA margin rose to 16.3% in 2Q19 (up 70 bps y-o-y) and to 15.6% in 1H19 (up 80 bps y-o-y).

Profit, clinics

As a number of polyclinics still remain in their roll-out phase, the clinics contributed negatively to the Group's profit. Currently the main priority of the clinics business remains the polyclinics chain expansion and increasing the base of registered customers, as our polyclinics represent a first point of customer interaction for our overall business, bringing additional referrals to our hospitals and pharmacies. Combined with the newly launched dental offices, we believe that the polyclinics business will become one of the largest sources of future growth, while we expect only moderate growth from the community clinics.

11 Under the Group's new structure, the clinics business results now includes community clinics and polyclinics, explained in more details on page 7

12 Represents IFRS 16 impact on General and administrative expenses

Discussion of Pharmacy and Distribution Business Results

Operating highlights:

§ 279 pharmacies as of June 2019 (259 as of June 2018)

§ Average retail customer interactions per month was c.2.4 in 2Q19 (c.2.2 in 2Q18) and c.2.4 in 1H19 (c.2.2 in 1H18)

§ Average bill size was GEL 14.2 in 2Q19 (GEL 13.0 in 2Q18) and GEL 13.8 in 1H19 (GEL 13.9 in 1H18)

§ c.0.8 million loyalty card members as at 30 June 2019

Income Statement, pharmacy and distribution business

Revenue, pharmacy and distribution

We enjoyed strong revenue growth in both periods in our retail and distribution businesses as shown in the table below.

Revenue by types, pharmacy and distribution

The increase in y-o-y revenues from retail is attributable to expansion and organic sales growth in the business. Over the last 12 months we have added 20 new pharmacies to our chain. The number of bills issued as well average bill size was up 4.9% and 8.9% in 2Q19, respectively. This translated into a same-store growth rate of 8.0% in 2Q19. The business also posted positive 6.1% same-store growth rate for the half year. The share of para-pharmacy sales in retail revenue further improved to 31.4% in 2Q19 (30.1% in 2Q18) and to 30.3% in 1H19 (29.4% in 1H18).

The pharmacy and distribution business continues to make strong progress in growing wholesale revenue by signing new corporate accounts. Apart from new clients, the distribution revenue growth relates to the transfer of our hospitals' centralised medicine procurement entity ("ELG") to the GHG pharmacy and distribution business wholesale segment in 2019. This resulted increased intercompany sales with GHG hospitals and clinics businesses.

Excluding the ELG sales, y-o-y revenue growth from distribution was 1.8% in 2Q19 and 6.7% in 1H19, translating into pharmacy and distribution business total y-o-y revenue growth of 10.5% and 10.1%, respectively.

Gross profit, pharmacy and distribution

Quarterly gross margin in the pharmacy and distribution business was down 60 bps y-o-y due to the reduced wholesale margin resulting from the increased intercompany sales mentioned above (which is eliminated upon consolidation). Excluding these intercompany sales the quarterly gross margin improved 70 bps. The improvement is partially a result of costs of pharma slightly benefiting from realising previously purchased inventory at a lower foreign currency exchange rate. Though, increased FX rates in 2Q19 increased our payable balances for these inventories, resulting in loss from foreign currencies in the same period.

Apart from the quarterly reasons stated above, half year gross profit margin improvement was driven by the increased margin on non-medication categories (personal care, beauty and other para-pharmacy products), total sales of which were GEL 67.4 million in 1H19 with 30.4% gross profit margin, compared to GEL 57.4 million in 1H18 with 28.7% gross profit margin.

Our gross profit margins also benefited from the increased sales of private label products. Currently, 37 private label medicines are presented in our pharmacies, with annualised revenue contribution of c.GEL 5 million. In May, private label personal care products were also introduced in our pharmacies under the brand name "Attirance", posting around GEL 0.1 million in 2Q19.

Operating expenses, pharmacy and distribution

The business posted y-o-y positive operating leverage of 8.9 ppts in 2Q19 and 4.9 ppts in 1H19. Salaries and other employee benefits, despite the pension reform, favourably lagged behind the same period revenue growth. Apart from business expansion, the y-o-y increase in general and administrative expenses (excluding IFRS 16 impact) is attributable to the marketing activities and promotions to support retail sales growth and increased rent expense of pharmacies (about 85% of rental contracts are denominated in foreign currency) due to the GEL devaluation.

Other operating income at the business increased by GEL 1.7 million, reflecting principally the gain on the sale of unused land and building (see note 26 to the financial statements).

EBITDA and profit, pharmacy and distribution

Our 2Q19 and 1H19 EBITDA margins, at 10.3% and 10.5% respectively, continue to substantially exceed our updated target of 9% (previously 8%+).

Profit, pharmacy and distribution

In 2Q19 interest expense included GEL 0.2 million on the mark to market of the Pharmadepot (the pharmacy and distribution brand acquired in 2017) acquisition holdback (GEL 0.3 million in 2Q18) which is a non-cash expense.

The foreign currency loss reflects the increase in the GEL value of US Dollar and EUR denominated payables to suppliers due to the devaluation of GEL in 2Q19, also explained in more details on page 9, the effect of which is partially mitigated by increased quarterly retail gross margin.

 13Represents IFRS 16 impact on General and administrative expenses 

Discussion of Medical Insurance Business Results

Operating highlights:

§ As at 31 March 2019, business market share based on net insurance premium revenue was 31.1%.

§ In 2019, we became the largest medical insurer in Georgia with c.230,000 insured (c.157,000 in December 2018).

§ Our insurance renewal rate was 81.3% in 2Q19 (70.1% in 2Q18) and 77.5% in 1H19 (71.8% in 1H18).

Income Statement, medical insurance business

Revenue, medical insurance

Our medical insurance business posted strong y-o-y double-digit revenue growth, driven by the increased number of new corporate clients. The business started to benefit from the Group's scale that gives us an advantage to offer more competitive prices on the market. Out of new clients, the largest new contract is with the Ministry of Defence ("MOD"), acquired through tender process starting from February 2019. Apart from business growth, the increased number of insured clients further increases our medical insurance claims retention rate within the Group - which, apart from expansion, is the business' main priority.

Gross profit, medical insurance

Medical insurance claims expenses accounts for almost all of the cost of insurance services. In 1H19, our medical insurance claims expense was GEL 30.5 million, of which GEL 12.8 million (41.9% of the total) was inpatient, GEL 12.4 million (40.8% of total) was outpatient and GEL 5.3 million (17.3% of total) was accounted for by drugs. In 2019 loss ratio was slightly up y-o-y (up 20 bps at 82.6% in 2Q19; up 50 bps at 83.9% at 1H19) due to the addition of big clients, such as MOD, having slightly higher loss ratio compared to small corporate clients.

Claims retention rates

Our insurance business expansion has significantly improved claims retention rates within the Group, as the business plays a feeder role in originating and directing patients to our healthcare facilities, mainly to polyclinics and to pharmacies.

Due to the medical insurance business' increased client base (reaching c.230,000 insured as of June 2019) and new flagship hospital launches in Tbilisi, where our medical insurance business has the highest concentration of its insured clients, more of our medical insurance customers will be utilising our inpatient services. At the same time, with our polyclinics expansion strategy, we expect the retention rate to improve further in the future, on a larger base, providing a significant revenue boost for our clinics and hospitals. Our facilities are increasingly favoured by customers over competitor facilities due to the quality and convenience of our service, access to one-stop-shop style polyclinics and the ease of claim reimbursement procedures.

Operating expenses, medical insurance

Operating expenses growth significantly lagged behind revenue growth, translating into strong positive operating leverage of 36.7 ppts in 2Q19 and 31.8 ppts in 1H19.

Last year, our medical insurance business began participating in the Compulsory Motor Third Party Liability Insurance Programme, effective in the country from 1 March 2018. The profit from this is shown in other operating income. Staring from 2019 the business renegotiated and increased the fee from this service which resulted in y-o-y increase in other operating income.

As a result, y-o-y expense ratio (excluding IFRS 16 impact) was down 330 bps at 11.9% in 2Q19 and down 310 bps at 12.3% in 1H19. Consequently, the combined ratio (excluding IFRS 16 impact) improved by 310 bps to 94.5% in 2Q19 and by 270 bps to 96.1% in 1H19.

14Represents IFRS 16 impact on General and administrative expenses

Discussion of Diagnostics Business Results

Overview, diagnostics

In December 2018, we completed construction and opened Mega Lab, the largest diagnostics laboratory in Georgia and the entire Caucasus region. The multi-disciplinary laboratory is equipped with the most modern infrastructure and state-of-the-art equipment and in addition to basic laboratory tests, the new laboratory allows us to offer complex tests for oncology and molecular lab, some of which have never previously been available in Georgia and for which blood samples used to be sent abroad. The launch is in line with our strategy to invest in and develop new medical services to keep filling existing service gaps in the country, supporting the market's continuing development and our service export strategy.

Mega Lab is an important, separate, business line for the Group, the results of which are shown below in detail. Currently the process of centralising Group's internal lab demand - through collecting samples from the Group's hospitals and polyclinics throughout Georgia - is ongoing and will be completed by September of this year. Test results are distributed electronically to each hospital and polyclinic within the Group through the internal Laboratory Information Management System ("LIMS"), enabling us to be more efficient and provide a reliable service to our patients. Apart from serving the Group facilities, which cover only one-fourth of the laboratory's capacity, Mega Lab started to develop a retail network and capitalise on our pharmacy and distribution business' scale - being the largest retailer in the country. We have already opened a blood collection point in one of our pharmacies in June 2019 and plan to continue the process to arrive at c.50 blood collection points in coming years. The Mega Lab will also work on additional external contracts, serving healthcare facilities outside the Group.

Before opening Mega Lab, most of the Group's healthcare facilities had their own laboratory units and the Group owned one smaller scale lab facility (Patgeo, acquired in 2016). The results below for 2Q18 and 1H18 shows the numbers for Patgeo, which after opening Mega Lab, was fully consolidated into the diagnostics business 2019 results. The Group's healthcare facilities cost base for lab services remained the same with the opening of Mega Lab. Costs previously reflected as salaries and materials (mainly reagents) have simply been shifted to cost of providers.

Operating highlights:

§ Number of patients served in 2Q19 - c.60,000; in 1H19 - c.127,000

§ Number of tests performed in 2Q19 - c.184,000; in 1H19 - c.356,000

§ Average number of tests per patient in 2Q19 - c.3.1; in 1H19 - c.2.8

Income Statement, Diagnostics

Revenue by types, diagnostics

In 2Q19 and 1H19 well over 90% of our diagnostics business revenue came from contracts, as mentioned above mainly from the Group's hospitals and clinics, by consolidating the demand for planned laboratory tests in Mega Lab. The c.5% of revenue from walk-in patients represents retail revenue which we plan to increase as the business continues to develop retail blood collection points as discussed above.

The diagnostics business continued its positive trend and, as in the first quarter, reached break even EBITDA in 2Q19, a significant achievement for a newly launched segment. The cost base for lab tests are the same as it was for our previously operated separate lab units in our healthcare facilities while the newly added diagnostics business already posts a positive margin due to the reduced cost of tests as a result of consolidation.

15 Represents IFRS 16 impact on General and administrative expenses 

SELECTED FINANCIAL INFORMATION