11 April 2011. Moscow, Russia. The Medsi Group of Companies and its subsidiaries (“Medsi” or “the Group”), a leading national provider of medical and healthcare services in Moscow and other regions, has today published its unaudited consolidated US GAAP financial results for the year ended December 31, 2010.

Financial highlights

Revenues totaled US$156.5 million, up 24.3% year-on-year

OIBDA equaled US$17.1 million, up 174.7% year-on-year

The OIBDA margin was 11%, up 6 percentage points year-on-year

The net loss fell to US$2.5 million, compared with US$7.3 million in 2009

Operational highlights

The second section of the clinical and diagnostic center at Belorusskaya in Moscow and the clinic at Shchyolkovo were opened

The overall clinic area equaled 46,914 square meters, up 18.3% year-on-year

The number of visits totaled 3,436,000 up 10.6% year-on-year

The number of services provided came to 6,011,000 up 13.1% year-on-year

The average check was US$45.5, up 12.4% year-on-year

The project to certify Medsi’s clinics according to the international JCI standards began

The new President was appointed

Medsi President Galina Talanova said:

“I am pleased to have joined the Medsi team and to be able to contribute to the Group’s future business growth. Overall, 2010 was successful for the Group from both a financial and an operating perspective. My task is to build on this success and strengthen our leading positions on the private medical services market. Medsi has a unique combination of competitive advantages. By using them carefully and developing further in a rapidly expanding market, we are creating vast potential for intensive and extensive growth for clients and shareholders alike.”

Overview of the results for 2010

In 2010 we saw a recovery in the market of private healthcare following the crisis. Amid favorable macroeconomic conditions, a rise in real personal income and improved consumer sentiment, there was a significant inflow of new clients and greater use of medical services. According to BusinesStat, the Russian private healthcare industry in 2010 expanded by 15% year-on-year to RUR449 billion.

One of the reasons for the positive market trend was an ongoing rise in prices for medical services. This was caused by not only inflation, but also the rapid development of high-tech services and a shortfall in qualified specialists.

Meanwhile, government bodies took further steps to make the private healthcare sector more attractive. In 2010 legal entities received the opportunity to reduce their profit tax by deducting spending on medical services for employees by up to 6% from wages. This regulatory change stimulated corporate interest in private medical services. In addition, at the end of 2010 amendments were made to the Tax Code that set the profit tax rate at 0% for companies whose revenues from medical services account for over 90% of their overall top line. This will further encourage development of the market.

Medsi continued developing rapidly in the reporting period. Its main efforts were focused on ensuring organic business growth by opening new clinics, broadening the range of medical services, increasing operating efficiency, and actively promoting the brand on the market.

In the first quarter the second section of the Medsi clinical and diagnostic center at Belorusskaya in Moscow was opened. The addition of 5,900 square meters meant a major increase in the range of diagnostic services offered to patients. The new section features a women’s health center, an extracorporeal treatment center, an express diagnostic laboratory, an in-patient department, a modern operating block, an endocrinology department, and a radiology department (including X-ray, CAT and MRI equipment).

In December a new Medsi family clinic opened in Shchyolkovo, Moscow Region, to cater to the residents of nearby towns. The clinic is the only multipurpose one for children and adults in the town and has its own laboratory and diagnostic equipment. The facilities are expected to attract at least 40,000 new visits in 2011.

Last year a project was started to create a center for the prevention and innovative treatment of cardiovascular illnesses at the Belorusskaya clinic in Moscow. Another project was launched to create a low-invasive surgery division at the American Medical Center.

Alongside the work to open new clinics and expand existing ones, Medsi closely monitored the efficiency of its facilities. In the second quarter the clinic at Plyushchikha in Moscow was closed.

Throughout 2010 the Group worked intensively to develop a system for managing its clinics in Moscow and the surrounding region on a network basis. Unified standards for medical services were introduced, a system for evaluating doctors’ efficiency was devised, and a methodology for managing patient flows was established. All of these measures had a positive effect on both the level of client service and operating efficiency.

The Group also continued its work to improve the professionalism of its medical personnel. Over the year practical conferences were held on dentistry and urogynecology, run by specialists from Germany and the Netherlands. To enhance surgeons’ skills, the Medsi-Tsentrosoyuz in-patient department was equipped with a state-of-the-art Olympus endoscopy unit and equipment, while the study center received training equipment to develop practical skills in endo-surgery and a video system to follow operations.

The Group also closely monitored the quality of medical services. Last year, with this in mind, Medsi began preparing to certify its clinics according to JCI (Joint Commission International) standards, which set strict requirements regarding the presence and quality of procedures to protect patients and employees during the provision of medical services. JCI accreditation represents objective recognition that clinics meet the strictest international standards. As soon as 2011 the Group plans to receive accreditation for the American Medical Center on Grokholsky Pereulok in Moscow.

To create a solid competitive advantage, in 2010 the Group paid particular attention to the efficiency of its medical services. A Chief Specialists department was set up to introduce new treatment methods and algorhythms, monitor unified standards of service quality, and ensure optimal coordination of the treatment process among doctors at the various clinics. In addition, evaluations of medical personnel were conducted, a key part of the program to improve efficiency.

In 2010, the work to develop a multi-channel sales system continued. The system for working with insurance companies, Medsi’s key clients, was modernized, while the Group began to create its own agent network to sell medical services to individuals. At the end of the year Medsi began cross-selling medical and fitness services and launched numerous customer loyalty programs with partners.

One major driver of sales was the advertising campaign on radio, television, outdoors and on the internet between September and December. This was built around the updated Medsi brand and the high professional and ethical standards of the Group’s leading medical specialists. The campaign was received positively by its target audience, and according to IMA-consulting, spontaneous awareness of the brand in Moscow quadrupled to 24%.

Medsi’s major efforts to develop its business had a positive effect on the operating and financial results.

Financial results

Revenues

Group revenues for 2010 came to US$156.5 million, up 24.3% year-on-year. The growth was mainly driven by an increase of 13.1% in services provided, 12.4% in the average check and 10.6% in visits.

Medsi took full advantage of the recovery in the private healthcare market following the 2009 crisis, attracting new clients and broadening the range of services for existing patients by conducting an active marketing campaign and expanding its product range to include new services.

Cost of sales

Last year the cost of services provided totaled US$100.9 million, up 16.4% year-on-year, but slower than the top-line growth. As a result, the cost of sales/revenues ratio fell to 64.5%, down by 4.4 percentage points from the 68.9% for 2009. Throughout last year Medsi introduced a range of measures aimed at reducing cost of sales as a proportion of revenues. In particular, it switched to a centralized purchasing system, enabling it to secure better terms with suppliers, make inventory management more effective, and lower the cost of supplying and servicing clinics. The drop in the share in revenues also enabled numerous clinics to be brought to design capacity.

Sales, general and administrative expenses

Last year sales, general and administrative expenses (SG&A) totaled US$34.4 million, up 21.2% year-on-year. Most of the increase was due to spending on the marketing campaign in the second half, as well as consulting expenses linked to business development and the preparations to certify clinics according to the international JCI standards.

The comparable rise in SG&A and revenues reflects the Group’s ability to manage operating costs effectively while expanding its business rapidly. The SG&A/revenues ratio was 22%, 0.6 percentage points lower than in 2009.

OIBDA

For 2010 OIBDA (operating profit before the amortization of main and non-material assets) came to US$17.1 million, up more than 2.7 times year-on-year. The main drivers of the rise were the higher revenues, which outstripped the growth in costs, and the fall in the operating loss on investment projects.

The OIBDA margin more than doubled to 11%. Most of the rise stemmed from a major increase in the profitability of the Group’s operations in Moscow and the surrounding region, as well as the regional division becoming OIBDA-positive for the first time.

Net interest expenses

Net interest expenses (the difference between the interest on funds borrowed and placed) came to US$7.1 million, up 46.7% from the US$4.9 million in 2009. The rise was due to the amount of funds borrowed being accounted for, whereas part of it had been partly capitalized earlier, before buildings were commissioned

Profit tax

The Group’s profit tax came to US$2 million in 2010, compared with US$1.3 million in 2009.

Net loss

The Group ended last year with a net loss of US$2.5 million, 66.3% less than the US$7.3 million in 2009.

CAPEX²

CAPEX for 2010 totaled US$4.8 million, less than one fifth of the figure in 2009, as the major investment in building and equipping clinics was completed. Most of 2010 CAPEX went on modernizing equipment in existing clinics. While the initial plan envisaged investing in numerous new projects in 2010, they were rescheduled for later due to the need to prepare more detailed business models.

Debt

As of December 31, 2010 Medsi’s overall debt stood at US$77.3 million, compared with US$74.3 million a year earlier. The increase was due to the funds secured to finance the expansion of the Group’s clinic network. At the same time, net debt (the sum of short-term and long-term loans, excluding cash and equivalents) stood at US$66.3 million, up 2.5% year-on-year. The net debt/OIBDA ratio was 3.9, compared with 10.4 a year earlier.

Financial results by business division

Moscow and Moscow Region Clinics division

The division’s revenues in the reporting period totaled US$121.3 million, up 25.8% year-on-year. This was due to a rise of 13.9% in the average check, 10.5% in visits and 8.6% in services provided.

The stronger operating results were thanks to the management’s successful efforts to expand the range of services, boost their profitability, and actively promote the brand on the market.

The rise in the division’s OIBDA of 82.0% year-on-year was due to the Group’s work to control costs, to greater profitability, and to previously opened clinics turning a profit. The OIBDA margin equaled 23.2%, up 7.2 percentage points. All of the clinics opened before December now have positive OIBDA.

As of December 31, 2010 the division consisted of 19 clinics (including one in-patient department) and one medical post, with a total area of 34,486.6 square meters. Last year the Group opened the second division of the clinical and diagnostic center at Belorusskaya in Moscow and the clinic in Shchyolkovo.   

Clinics in the regions division

The division’s revenues in 2010 came to US$20.1 million, up 45.0% year-on-year. This was due to a rise of 41.0% in services provided, 21.7% in the average check, and 19.2% in visits.

The stronger operating results were thanks to measures to streamline the sales portfolio and to the clinics in Bryansk and Nizhny Novgorod reaching their visit targets.

The division’s cost of sales climbed by 21.9%, while SG&A fell by 10.1% to US$4.1 million. Thanks to control of operating expenses in the regional clinics, the division ended the year with a positive OIBDA of US$1 million, compared with OIBDA loss of US$2.7 million in 2009.

As of December 31, 2010 the division consisted of 12 clinics and 48 medical posts, with a total area of 12,427.7 square meters. Last year Medsi opened two new clinic divisions aimed at cooperation with legal entities in Raduzhny and Dyatkovo. Alongside the new clinics, the Group has facilities in numerous Russian cities, including Volgograd, Barnaul, Pyatigorsk, Nizhnevartovsk, Nizhny Novgorod, Bryansk, Yuzhno-Sakhalinsk, Ryzan, Perm, Kazan, Nyagyn, Stupino and Krasnogorsk.

Fitness Clubs division

Note: CAPEX is not given for the division as the amount of investment was insignificant

The division’s revenues in 2010 totaled US$15.0 million, up 0.9% year-on-year. The Group successfully maintained revenues at the 2009 level, despite a substantial drop in operating results stemming from the ongoing stagnation in the premium segment of the fitness market. The number of visits fell by 7.4% to 276,900, while services provided dropped by 18.4%.

In 2010, the Group undertook measures to maintain the division’s profitability. The cost of sales was reduced by 6.9% to US$10 million, while, thanks to an optimization of the pricing policy, the average check rose by 8.9% to US$54.3. This kept OIBDA and the margin at the 2009 levels.

As of December 31, 2010 the division consisted of four fitness clubs in Moscow, with a total area of 23,153 square meters.

Events after the reporting period

On January 13, 2011 Galina Talanova was appointed President of Medsi. Previously, Galina worked in the Rosno insurance company, where she rose through the ranks from chief specialist to Deputy Director-General and a member of the Management Board. Galina graduated from the Moscow Institute of Electrical Engineering and holds an MBA.

In February 2011, a strategy to develop the Group’s IT was approved. The aim is to increase operating efficiency, enhance client service and broaden the range of medical services. In particular, the strategy envisages introducing an international-standard unified medical IT system, as well as a whole range of IT business systems to automate the work of the front and back offices.

Forecast for 2011

Medsi Group views the outlook for the private healthcare market in 2011 as positive. The main drivers will be higher real personal income and the ongoing increase in consumer demand and the cost of medical services. In addition, the ‘gray’ segment of the market is expected to shrink due to intensive competition from official players. According to BusinesStat, the private healthcare industry is forecast to expand by 14% to RUR513 billion in 2011.

This year the Group expects to grow faster than the market and strengthen its leading positions by taking advantage of its key competitive advantages: its high-quality medical services and client services, broad product range, and wide network of regional clinics.

Medsi considers opening new clinics in 2011. At the same time it intends to continue upgrading its medical equipment and adding more equipment at existing facilities. In addition, there are plans to complete several investment projects aimed at introducing high-tech medical capabilities. This year work will continue to set up the center for the prevention and treatment of cardiovascular illnesses and low-invasive heart surgery at the Belorusskaya clinic, as well as the center for low-invasive surgery at the American Medical Center.

In 2011 Medsi also plans to introduce unified technology to plan patient flows, with access to all of the network’s resources from any entry point, as well as unified medical service standards. In addition, work will continue to create a single call center and a platform for a unified information space will be chosen.