MD Medical Group
Annual Report 2018

Plain-text annual report

MD Medical Group We Grow We Care ANNUAL REPORT 2018 Contents 4 OVERVIEW 4 Multi-Disciplinary Leadership 6 8 Compelling Investment Case Nationwide Footprint 10 CEO Statement 12 STRATEGY 14 Our Strategic Goals 16 Unrivalled Growth 18 Wide Range of Technologically Advanced Medical Services 48 CORPORATE SOCIAL RESPONSIBILITY 50 Our People 52 Corporate Social Responsibility 54 Shareholder Equity 20 INVESTING IN STRATEGIC EXPANSION 22 Building a Leading Nationwide Network 24 Hospitals in Focus 28 Interview with Chief Doctor of Samara Hospital 30 Samara Hospital 32 Tyumen Hospital 34 Lapino-2 Hospital 36 St Petersburg Hospital 38 Market Trends in Russia 56 CORPORATE GOVERNANCE AND RISK MANAGEMENT 58 Corporate Governance Report 60 Risk Management 62 Board of Directors 64 Board of Directors Activity in 2018 66 Senior Management 68 Regional Directors 40 CONTINUED STRONG PERFORMANCE 42 Operational Review 46 Financial Review www.mcclinics.com 69 117 149 168 REPORT AND CONSOLIDATED FINANCIAL STATEMENTS REPORT AND SEPARATE FINANCIAL STATEMENTS SUSTAINABLE DEVELOPMENT CONTACTS AND ADVISERS Overview Multi-Disciplinary Leadership 4 5 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Our operational and financial performance demonstrates the sustainable development of our business with high potential for further growth. We are continuing to ensure strong growth based on high operational performance for the benefit of our shareholders. Dr Mark Kurtser CEO OPERATIONAL KPI’s FINANCIAL KPI’s (RUB MLN) Deliveries IVF Revenue EBITDA and EBITDA margin 6,656 6,808 5,535 4,550 12% CAGR 2014–2018 7,277 16,806 14,004 21% CAGR 2014–2018 16,636 9,289 7,654 13,755 12,179 9,507 7,201 20% CAGR 2014–2018 14,937 29% 28% 2,675 2,083 30% 3,670 30% 4,165 20% CAGR 2014–2018 29% 4,314 ‘14 ‘15 ‘16 ‘17 ‘18 ‘14 ‘15 ‘16 ‘17 ‘18 ‘14 ‘15 ‘16 ‘17 ‘18 ‘14 ‘15 ‘16 ‘17 ‘18 In-patient treatments (days) Out-patient treatments Net Debt and Net debt / EBITDA ratio EPS1 (RUB/GDR)2 19% CAGR 2014–2018 47,917 53,142 61,344 72,371 35,939 1,388,995 1,527,425 1,176,630 877,244 17% CAGR 2014–2018 1,618,149 1.6x 3,230 0.6x 0.4x 1,680 1,640 0.7x 2,950 0.5x 2,065 22% CAGR 2014–2018 36 33 28 21 16 ‘14 ‘15 ‘16 ‘17 ‘18 ‘14 ‘15 ‘16 ‘17 ‘18 ‘14 ‘15 ‘16 ‘17 ‘18 ‘14 ‘15 ‘16 ‘17 ‘18 Key drivers of our growth included further capacity utilisation growth at our hospitals in Novosibirsk and Ufa, as well as the commissioning of the new hospital in Samara. The Company’s financial position remains robust. Despite raising funds for our large-scale investment programme, our net debt to EBITDA ratio remained at a comfortable 0.7х at the end of 2018. The EBITDA margin also remained stable at 29%. 1 EPS change rate calculated by dividing rounded amounts for years 2018 and 2017 2 Basic and fully diluted earnings per share calculated as profit for the year attributable to owners of the Company divided by weighted average number of ordinary shares in issue during the year Overview Compelling Investment Case 6 7 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS #1 healthcare company in Russia Revenue Revenue (RUB mln) EBITDA EBITDA (RUB mln) Deliveries Deliveries 2018 2012 4,061 14,937 CAGR 2012–2018 +24% 2018 2012 4,317 4,314 2018 7,277 1,694 CAGR 2012–2018 2012 +17% 3,253 CAGR 2012–2018 +14% First and only publicly listed healthcare company in Russia – gateway to an attractive market with solid growth potential Consistently one of the highest revenues among Russian healthcare companies Solid sustainable growth of key financial and operational metrics since IPO +9% year-on-year increase in 2018 4,314 EBITDA in 2018 Leader in IVF segment in Russia 16,636 IVF cycles 7,277 deliveries in 2018 69% EV/EBITDA discount to EM peers Best-in-class network across Russia Attractive market fundamentals Clear balanced growth strategy • Deep understanding of the Russian private healthcare market • Low level of consolidation and saturation, specifically • Widespread medical network in Russia with medical centres1 23 regions1 highest number of private multi-functional hospitals in Russia 41 5 1 as of publication date in the regions • Still underdeveloped market with strong potential to grow • Favourable regulatory environment - state support for private healthcare companies including 0% income tax rate (President Putin suggested to make this temporary benefit a perpetual regulation during his address in February 2019), perpetual medical licence, and participation in the Mandatory Health Insurance programme. • High barriers to entry • Proven regional expansion strategy with clear targets and track- record of successful investments • Balanced and diversified service offering – OBGYN and IVF remain the core of our business with expanding other medical services demonstrating strong growth • Combination of major greenfield hospital projects with a wide network of clinics providing core services benefiting from economy of scale • Ready for use blueprint for further expansion based on competence and available resources And yet the stock remains undervalued vs EM peers • Currently MDMG’s GDRs trade on 2018 EV/EBITDA and P/E of 6.2х and 8.4х, respectively • This valuation represents discounts of 69% and 58% to EM peers2 2 Research of Renaissance Capital's dated 30 August 2018 8 9 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Nationwide network of Hi-tech facilities Nationwide Footprint With hospitals and clinics in 23 regions of Russia1, we operate the most widespread private network of healthcare facilities in the country. St Petersburg 1 Дмитров Сергиев Яхрома MOSCOW 9 Солнечногорск Tula 1 Voronezh 1 Yaroslavl 1 1 Kostroma 1 Vladimir 1 1 Ryazan Nizhny Novgorod Красноармейск Kazan 1 1 Perm Зеленоград Volgograd 1 6 Samara 2 Ufa We help our patients in 23regions1 Dr Yulia Kutakova PhD, Medical Director for Organisational and Scientific-Educational Work As of the end of 2018, we were present in 12 out of 15 Russian cities with a population of more than a million as we continue to target attractive locations with strong demand for our high- quality medical services M&С Clinic Savelovskaya M&С Clinic Khodynskoe pole M&С Clinic Kuntsevo MOSCOW M&С Clinic Lefortovo M&С Clinic Novogereevo Lapino Hospital M&C Clinic Odintsovo Perinatal Medical Centre (PMC) M&С Clinic Yugo-Zapad 1 Tyumen 1 Omsk Novokuznetsk Novosibirsk 5 1 2 Barnaul 1 Krasnoyarsk Irkutsk 1 1 As of publication date 1 Vladivostok 1 Overview CEO Statement 10 11 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS 2018 was yet another strong year for our business, as we delivered robust results, while also continuing to invest in expanding our leading network in Russia. In 2018, we continued to improve our financial performance, delivering the sixth consecutive year of growth since our IPO in 2012. We increased our revenue by 9% year-on-year to a record RUB 14,937 mln, while EBITDA grew 4% year-on-year to RUB 4,314 mln. Our net profit for the period totalled RUB 2,831 mln, up 5% year-on-year. Our financial performance was backed by solid operating results. We had a record number of deliveries during the year, representing a 7% year-on-year increase, despite a challenging demographic situation in Russia as a whole. We also increased in- patient and out-patient treatments by 18% and 6% year-on-year, respectively. Another important development of the year was the continued diversification of our medical services. Since our incorporation more than 15 years ago, we have focused on women’s and children’s healthcare. However, we have started to selectively add new medical services for all family members. In particular, our recently opened and built facilities have been multi-disciplinary from the very beginning. This has proven to be a successful strategy as we have seen strong demand for the expanded services range. In particular, in 2018 our revenue from Other Medical Services grew 22% year-on-year and accounted for 28% of the top line for the year, up 3 p.p. year-on-year. At the same time, OBGYN, in particular deliveries and IVF, remain our core focus as we have gained leadership and unique expertise in these areas, and I expect this to continue to be the case in the years to come. Major contributors to the increased volume of other medical services were our regional hospitals and clinics in an ever-expanding network. Indeed, in 2018 we achieved significant progress in strengthening our leading footprint across Russia as part of our investment strategy particularly aimed at regional development. We opened a multi-disciplinary hospital in Samara, which saw high capacity utilisation rates across all key segments and had already reached breakeven within the first 10 months of operations. We also launched the construction of our Lapino-2 and St Petersburg hospitals which we expect to open in 2020 and in 2021, respectively, at which point these will become major drivers of future growth. We also opened six new clinics, including in four new regions – Nizhny Novgorod, Volgograd, Tula, and Tatarstan – and we modernised two existing clinics in Kostroma and Moscow. Already in 2019, we opened our first clinic in Vladivostok – in the Russian Far East. During the year, we continued the construction of our sixth multi-disciplinary hospital, which is scheduled to open in April 2019 in Tyumen, the oil capital of Russia. As of the end of 2018, we had 40 medical facilities – 5 hospitals and 35 clinics – across 22 regions in Russia. We continue to target the most attractive locations where we see the strongest demand for our services and are already present in 12 out of 15 Russian cities with a population of more than a million. We achieved these impressive results in 2018 despite challenging external conditions and we have developed a solid foundation to ensure the future sustainable growth of our business. Revenue in 2018 14,937 RUB mln Dr Mark Kurtser CEO At the same time, I want to address our recent share performance as I believe our shares are significantly undervalued and do not reflect all the great achievements to-date, and strong prospects for further profitable growth. We have demonstrated strong sustainable growth since our IPO in 2012 and have continually delivered on our key plans and targets. We remain the only public company in the lucrative Russian healthcare market with robust growth potential, yet our shares trade at a considerable discount to other leading emerging market peers. While we cannot directly influence the share price and the external conditions affecting it, I can assure you that all of our employees, from the doctors to the management team, are committed to delivering the best performance for patients and shareholders alike. In addition to this, the Group has continued to adhere to its sustainability principles. Given our understanding that sustainability requires a constructive dialogue with our stakeholders, our priority is to create shared value by offering the highest quality of services and continuous innovation. We do our best to create Human and Societal Values through our activities. The Group pays particular attention to the professional development of our people. We constantly interact with stakeholders in order to make timely changes to our activities and, consequently, to increase our effectiveness. We take into account all aspects of sustainable development, namely social, economic, and environmental, both in our day-to-day activities, and in the long-term development of our business. I want to sincerely thank everyone who helped make 2018 another successful year for MDMG, including our shareholders for their continued trust in our business. Onwards and upwards! We have demonstrated strong sustainable growth since our IPO in 2012 Dr Mark Kurtser CEO CONTENTS 14 Our Strategic Goals 16 Unrivalled Growth 18 Wide Range of Technologically Advanced Medical Services Expansion in 2018 4new regions 7new medical centres +13% area increase Strategy In 2018, we took a number of important steps towards implementing our strategy to support the future growth of the Company. Strategy Our Strategic Goals 14 15 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS PROVIDE THE HIGHEST QUALITY OF CARE TO PATIENTS AND ACHIEVE A HIGH LEVEL OF CUSTOMER SATISFACTION ROLL OUT OUR PROVEN BUSINESS MODEL PROVIDE BALANCED SERVICES STRUCTURE INCLUDING CORE AND OTHER MEDICAL SERVICES We are strongly committed to maintaining the highest possible quality of our services and not only meeting but also exceeding our patients’ expectations. We focus on ensuring that all of our facilities – both existing and new ones – adhere to MD Medical Group’s customary high standards of medical care. With our widespread medical network encompassing 41 facilities in 23 regions*, we have a deep understanding of the Russian market and a strong track- record. We have developed a proven regional hospital concept (based on our new Samara hospital) and three clinic concepts of various scale as we continue to implement our successful business model throughout the country. While we initially focused solely on women’s and children’s healthcare, over the years once we were 100% sure we could maintain our customary high level of service, we have been adding other medical services for all family members. Today, MDMG is a diversified healthcare provider with OBGYN remaining our core focus. Our Achievements in 2018 RECRUIT AND RETAIN THE BEST AND MOST WELL-QUALIFIED PERSONNEL DELIVER VALUE TO OUR SHAREHOLDERS INVESTMENT PROGRAMME IN ACTION As one of the largest employers in the sector, we pay specific attention to ensuring optimal working conditions and incentives for our personnel. We are constantly improving the professional skills of all our specialists. We will continue to employ the best professionals in the market by offering competitive salaries as well as exciting opportunities for career advancement. Ultimately, we want to ensure that all our actions and decisions will benefit our shareholders. As the first and only public healthcare company in Russia, we strive to produce the best performance and achieve strong results which translate into high long-term value for our investors. 7 modern medical centres were opened in 2018 3 multi- disciplinary hospitals are under construction In 2018, we opened and modernised a number of medical institutions across Russia, offering a diverse range of high- quality medical services. In particular, our new Samara hospital brought some unique services to the Samara Region, in particular in oncology, obstetrics, urology, traumatology. To allow access to our high-tech services to an even wider clientele, we launched our “Protect Your Future” healthcare insurance programme together with VTB Insurance and also signed a strategic cooperation agreement with Sberbank to develop Russia’s first nationwide healthcare marketplace shop.docdoc.ru. In 2018, we significantly expanded our network in Russia. We opened a multi- disciplinary hospital in Samara and six new clinics, including in four new regions, as well as modernised two existing clinics. Also, we continued work on the construction of our Tyumen hospital and launched the construction of our Lapino-2 and St Petersburg hospitals scheduled for completion in 2020 and in 2021, respectively. While maintaining a sharp focus on our current projects, we will be further expanding our network to reach out to even more patients. In the reporting year, we continued to expand our offering and added new ser- vices at both existing and new medical facilities. As a result of our continued efforts to expand the services offering, in 2018 our revenue from Other Medical Services grew 22% year-on-year and accounted for 28% of the Group’s total revenue. In 2018, we passed the 7,000 mark for staff headcount. In particular, our Samara hospital became a major employer of medical staff in the region and has hired both local professionals and current MDMG employees who were relocated from Moscow. Throughout the year, we continued providing training and other professional growth opportunities for our staff. In 2018, we strengthened our leading medical network in Russia and improved our service offering to become even more appealing to the Russian population. Alongside the current solid performance, we continue to invest in our assets with the aim of ensuring long-term growth in shareholder value. 15,000 sq m area of recently opened hospital in Samara * as of publication date As well as posting strong results in key areas of our business in 2018, we also had a very productive year in terms of the further execution of our investment programme. • Opened the hospital in Samara IN 2018, WE CONTINUED TO ACTIVELY IMPLEMENT OUR INVESTMENT PROGRAMME: • Opened six clinics in: — Vladimir — Nizhny Novgorod — Moscow — Volgograd — Tula — Kazan • Modernised • Launched • Continued and expanded two clinics in: — Moscow — Kostroma the construction of two hospitals in: — St Petersburg — Lapino-2 the construction of our hospital in: — Tyumen Strategy Unrivalled Growth In 2018, we opened and expanded 8 clinics and 1 hospital. This unrivalled growth rate enables us to deliver high-quality medical services to an evergrowing client base. PROJECTS PIPELINE Hospitals Clinic 16 17 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS ‹‹ COMPLETED UNDER CONSTRUCTION ›› Saint Petersburg +22,000 m2 Lapino-2 (Moscow) +18,500 m2 Clinics +2,500 m2 Tyumen +15,000 m2 Clinics +2,500 m2 3,694 RUB mln total investments in new facilities in 2018 Nizhny Novgorod +600 m2 Yugo-Zapad (Moscow) +260 m2 Kostroma +142 m2 Lefortovo (Moscow) +392 m2 Samara +15,000 m2 Vladimir +274 m2 Volgograd +380 m2 Tula +401 m2 Kazan +677 m2 Clinics +2,500 m2 2 m 4 7 9 7 + , , 0 0 0 5 3 1 ~ jan 2018 feb mar apr may jun jul aug sep oct nov dec 2019 2020 2021 , 0 0 0 3 5 1 > 0 0 0 , 1 7 1 ~ , 0 0 0 2 9 1 ~ , 0 0 0 6 1 2 > 2 m 5 1 0 9 3 + , 2 m 0 0 2 2 + , 2 m 7 2 7 3 + , 2 m 2 3 6 6 + , 2 m 1 4 8 7 4 + , 2 m 0 0 6 7 2 , 2006 a e r a l a t o T ‘17‘16‘15‘14‘13‘12 Strategy Wide Range of Technologically Advanced Medical Services 18 19 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Paediatrics Treatment of paediatric diseases (in- and out-patient departments) Immunisation shots Home visits OBGYN (incl. Deliveries) Pregnancy care Maternity services Gynaecology Deliveries Miscarriage treatment 12% IVF Surgery for fertility-related problems Reproductive technology Preimplantation genetic diagnosis 23% Non-medical services 34% 3% Other medical services Laboratory services Stem cell storage Genetic diagnostics Trauma Rehabilitation Urology Endocrinology Surgery Plastic Surgery Oncology Therapy Cardiology Phlebology Haematology Neurology Dentistry MRI, CT Radiology Ultrasound diagnostics Other MDMG focuses on delivering medical assistance to a growing number of families across Russia and catering its services to the needs of diverse patient demographics. Our goal is to make sure every customer gets high-quality personalised care that is as technologically advanced as it is attentive. Delivering high-quality medical services throughout Russia MD Medical Group is a leading private healthcare company in Russia. We started as a specialised healthcare provider for women and children and have become the sector leader, particularly in terms of deliveries and IVF cycles. In response to an increasing demand from our patients for additional medical services outside OBGYN and paediatrics, we started gradually introducing new services in areas where we believed we could deliver in line with our high standards. Today, we have facilities all over Russia and offer the full range of healthcare services that any person may need. Moreover, we cover the full life cycle. We start with pregnancy care (preceded by fertility and IVF treatment if needed), and later provide various delivery options at one of our five hospitals. We can treat babies for various issues, including complex cardiology conditions, from the first minutes of their lives. Our paediatricians, working in dozens of hospitals and clinics, take care of children until they are 18 years old. For adult patients we offer a wide range of services from surgery to cancer treatment. Our key objective is to provide for the patients’ comfort and offer a premium level of service. A hospital and clinics we opened in 2018 focus on providing diverse medical services tailored for the specific demand patterns we see in the respective locations. 28% was a share of Other Medical Services in total revenue for 2018 CONTENTS 22 Building a Leading Nationwide Network 24 Hospitals in Focus 28 Interview with Chief Doctor of Samara Hospital 30 Samara Hospital 32 Tyumen Hospital 34 Lapino-2 Hospital 36 St Petersburg Hospital 38 Market Trends in Russia NATIONWIDE FOOTPRINT 41 clinics and hospitals 23 Russian regions Investing in Strategic Expansion With 41 state-of-the-art facilities across Russia, we are able to offer our high-technology medical services in close proximity to the homes of millions of patients across 26 cities.* 1 As of publication date Investing in Strategic Expansion Building a Leading Nationwide Network In 2018, we continued implementing our development strategy across Russia. Thanks to our efforts and investment, at the end of the year, we were operating 5 hospitals and 35 clinics and we continue to expand our nationwide network of best- in-class healthcare facilities in both new and existing regions. The true highlight of 2018 was the opening of a new multi-disciplinary hospital in Samara, the largest facility of its kind in the Volga region. This greenfield hospital has significantly strengthened our leading position in an important and rapidly growing market in the south-east of the European part of Russia where we already had a strong presence. Throughout the reporting year, we entered four new markets with the opening of our first clinics in such major cities as Nizhny Novgorod, Volgograd, Tula, and Kazan. We also increased our footprint in existing markets by opening new clinics in Vladimir and Moscow (Lefortovo), as well as expanding and modernising our clinics in Kostroma and Moscow (Yugo-Zapad), where we have seen increased demand for our services. 2018 also marked the launch of construction of two new hospitals – in Lapino and St Petersburg – which we plan to commission in 2020 and 2021, respectively. Our investment programme in action, which also includes the ongoing construction of our hospital in Tyumen that is due to open in April 2019 as well as the opening and expanding of new clinics, represents our continued commitment to offer a wide range of world- class medical services in key Russian regions where there is strong demand, high incomes and fundamental support for our business. Novogereevo 397 m2 Ufa 800 m2 Khodynskoe Pole 465 m2 Lefortovo 392 m2 St Petersburg 893 m2 Perm 800 m2 Yugo-Zapad 801 m2 OUR hospitals Owned In progress Savelovskaya 2,048 m2 PMC 27,600 m2 256 beds 41hospitals and clinics in Russia1 Moscow Regions Owned Rented Kuntsevo 770 m2 OUR clinics Odintsovo 142 m2 191 beds 185 beds Lapino 42,000 m2 Ufa 33,000 m2 93 beds Novosibisk (Avicenna hospital) 10,260 m2 Порядок Госпиталей на развороте с ДНК: Новосибирск ПМЦ + Лапино Уфа Самара Тюмень Лапино-2 Питер 22 23 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Tyumen 15,000 m2 164 beds IDK Hospital (Samara) 15,000 m2 164 beds Vladivostok 358 m2 Kazan 677 m2 Tula 401 m2 Lapino-22 18,500 m2 Volgograd 380 m2 88 beds GROUP OF CLINICS Novosibirsk Avicenna clinics 2,755 m2 Krasnoyarsk, Novosibirsk, Omsk, Barnaul ARTMedGroup 2,846 m2 3 clinics Samara IDK Medical Company 5,210 m2 5 clinics 5 clinics 178 beds Nizhny Novgorod 600 m2 St Petersburg3 22,000 m2 Tyumen 350 m2 Voronezh 343 m2 Ryazan 1,400 m2 Kostroma 209 m2 Novokuznetsk 800 m2 Irkutsk 600 m2 Vladimir 354 m2 Yaroslavl 822 m2 We serve patients in 26 cities and 23 regions in Russia* 1 As of publication date 2 Expected opening in 2020 3 Expected opening in 2021 Investing in Strategic Expansion Hospitals in Focus PERINATAL MEDICAL CENTRE (PMC) ANNUAL CAPACITY OF PMC: Since its launch in 2006, PMC – the first private maternity hospital in Russia – has expanded its range of services, implemented innovative technologies, installed new equipment, and delivered over 32,000 babies. In addition to a wide range of in-patient and out-patient services for mothers and children, PMC offers laboratory research, diagnostics and assistance, a stem cell bank and other services. This 256-bed hospital has cutting-edge equipment including the latest MRI and CT technology. In August 2018, MDMG launched reconstruction works at PMC. Following their completion, the hospital will offer expanded services through new surgery, urology, traumatology and orthopaedics, x-ray endovascular diagnostics and treatment, and cardiology departments. CAPEX 2.5 RUB bln Beds FTE1 Deliveries IVF 256 904 3,500 2,000 In-patient days 32,120 Out-patient treatments 283,000 1 FTE – actual full-time equivalent as of December 2018 24 25 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS LAPINO HOSPITAL Lapino, our largest hospital, is located near Moscow. It provides patients with great comfort and high-quality services. Surrounded by green space, this 191-bed hospital is capable of providing 639,540 out-patient treatments and 3,000 deliveries per year. ANNUAL CAPACITY OF LAPINO HOSPITAL: Beds FTE1 Deliveries IVF 191 1,053 3,000 1,000 In-patient days We have invested RUB 5.2 billion in the Lapino hospital, which is one of the largest private investments in healthcare in the history of Russia. obstetrics and gynaecology, IVF, paediatrics, as well as diagnostics, urology, surgery, trauma and rehabilitation not only for mothers and their children but for everyone. 28,470 The 42,000 square-metre hospital offers a wide range of services in the areas of In 2018, a new ophthalmic surgery department opened at Lapino. Out-patient treatments CAPEX 5.2 RUB bln 639,540 1 FTE – actual full-time equivalent as of December 2018 Investing in Strategic Expansion Hospitals in Focus MOTHER&CHILD UFA In 2018, our first regional hospital continued its growth in the capital of Bashkortostan, one of Russia’s leading regions in terms of gross regional product. This 33,000 square-metre hospital was funded mainly by the proceeds of our successful IPO in 2012, the project was completed on time in late 2014 and with an investment of RUB 4.4 billion. Mother&Child Ufa offers services for the whole family, from deliveries, IVF, gynaecology and obstetrics, paediatrics and neonatology to surgery, urology, plastic surgery and diagnostic services. It includes Bashkortostan’s first private maternity hospital and stem-cell bank. CAPEX 4.4 RUB bln ANNUAL CAPACITY OF MOTHER&CHILD UFA: Beds FTE1 Deliveries IVF 185 772 2,000 1,100 In-patient days 30,295 Out-patient treatments 290,800 1 FTE – actual full-time equivalent as of December 2018 26 27 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS MOTHER&CHILD NOVOSIBIRSK Since the acquisition of Avicenna, the largest private healthcare chain in Russia outside Moscow and St Petersburg, in Q4 2014, the Novosibirsk hospital has seen strong demand for its high-quality services from the residents of Novosibirsk and nearby regions. As the existing facility reached maximum capacity, MDMG commissioned a new state-of-the-art wing in February 2017, creating the largest private healthcare facility in Siberia. Core services offered at Mother&Child Novosibirsk are obstetrics and gynaecology, surgery, urology and ophthalmology. The hospital also offers out-patient and diagnostics services in nearly all therapeutic areas. As a result of the expansion, the hospital offers a range of new services, including those not currently available in the city or the region. CAPEX2 1.2 RUB bln ANNUAL CAPACITY OF MOTHER&CHILD NOVOSIBIRSK HOSPITAL: Beds FTE1 Deliveries IVF 93 837 1,000 1,800 In-patient days 22,630 Out-patient treatments 228,900 1 FTE – actual full-time equivalent as of December 2018 2 CAPEX of new wing opened in February 2017 Investing in Strategic Expansion Interview with Chief Doctor of Samara Hospital 28 29 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS able to take into account various factors and ensure effective implementation from the design stage through to commissioning. The hospital was originally created as a multi-disciplinary centre, which is reflected in the well-thought logistics, for example, patient flows do not intersect here. All departments and all kinds of state-of-the- art equipment are concentrated in one building, which is optimal for logistics and efficient use of time. I would also like to stress the importance of the round-the- clock work of diagnostic departments. As a result, the Samara hospital became the first model of the regional Mother&Child hospital. This valuable experience is already being used for a “twin” hospital in Tyumen. We have been constantly in touch with colleagues who are implementing the Tyumen project and have been providing our recommendations on the optimisation of the project on the basis of our experience in Samara. 50%share of Other Medical Services Sergey Arabadzhyan Chief Doctor of Samara hospital Could you share the 2018 results for the new hospital? 2018 was a very busy year for us. In March, in line with the announced schedule, we opened a hospital in Samara and immediately began ramping up activity here. We are very pleased with the results of 2018, operational performance exceeded our expectations and we demonstrated the strongest operational results over the first 10 months of operations compared with any other hospital of the Group. In 2018, we already managed to carry out five unique operations in the Samara Region, which simply have no analogues here, in such areas as obstetrics, surgery, orthopaedics, urology, and X-ray endovascular surgery. In addition, we conducted a complex operation at the junction of endovascular surgery and orthopaedics which became the 14th such operation in the world! Why was Samara chosen as the location for the new hospital? The Group’s regional development strategy involves the construction of hospitals in regions where we already gained experience through our clinics. And thanks to the acquisition of the IDK Medical Company in 2013, we had a good understanding of the market in the Samara Region. We already had 5 clinics under our management here, which represented the most large-scale presence of the Group across the regions. In addition, Samara is one of the largest cities in Russia and also among the ten most populated, therefore there is a high demand for medical services. This made it an obvious choice as a location for our fifth hospital. It is another greenfield project for the Group. What are the advantages of this approach? Indeed, the Samara hospital was built 'from scratch’, and owing to the Group's unique experience in the construction of large hospitals in regions of Russia, we were Who are your patients at the Samara hospital? We treat all family members, because our hospital is multi-disciplinary and provides a wide range of medical services. In geographical terms our patients include, not only residents of Samara, Tolyatti and the rest of the region, but also residents of the neighbouring regions and even Kazakhstan. This is because we are relatively close to the state border, we are located closer to those in the Northern part of Kazakhstan than the capital of the country. At the same time, patients appreciate the high standards adopted within the Group – we provide the level of quality found in Mother&Child hospitals in Moscow. We are highly customer- focused and apply our personalised approach to each patient. There is also a wide range in the level of income of our patients. In addition to patients who pay for services themselves, many come to us as part of Mandatory Health Insurance (MHI) and Voluntary Health Insurance (VHI) programmes. The availability of our services is also enhanced as in 2018 we engaged a bank aggregator, through which patients can get interest-free instalments on our medical services, which also contributed to the growth of patient flow. urology, and cardiovascular surgery. I believe that at the moment our range of MHI services is the largest in the Group. This is an extremely important point. For the patients, the MHI programme increases the availability of high- tech medical care. For the hospital, the programme makes it possible to increase occupancy and revenue. As a multi-disciplinary hospital, what combination of the Group’s core services and other medical services for the whole family do you offer? Indeed, we have specifically created a multi-disciplinary hospital, while also paying attention to the MDMG’s core services. Today, OBGYN and IVF account for about 50% of our services and a wide range of other services account for the other 50%. But more importantly, we are able to respond effectively to changes in patients' needs. The hospital was created in such a way that we are able to quickly shift the balance to react to the population's changing needs. The ability to balance the structure of services is an important factor of our success. How do you cooperate with the public sector? We are very selective in our investment targets which means we choose regions for our business according to strict criteria. in particular in oncology, obstetrics, urology, traumatology. From time to time, state medical institutions refer patients with complex medical conditions to us. The hospital is a clinical base for several departments of Samara State Medical University. We hold scientific conferences and master classes for the medical staff of other institutions. Generally, the activities of the hospital are recognised at both local and federal levels on a regular basis. In turn, we benefit from state support. Participation in the MHI programme is particularly important. Moreover, during the construction of the hospital, local authorities built the utilities infrastructure, along with roads to the hospital and helped in every possible way to implement the project. What role does MHI play in the way the hospital operates? It is fair to say that our cooperation with the state is mutually beneficial. How do you interact with other institutions of the Group? We have received extensive quotas for MHI on a wide range of medical services, in particular, in the areas of IVF, oncology, Our hospital fulfils an important social function in the region. Some of our services are unique to the Samara Region, We are constantly in contact with our colleagues on a wide range of issues. BIOGRAPHY 2018 – Present – Chief Doctor of Mother&Child Samara hospital 2017 – 2018 – Deputy CEO for Business Development at MDMG’s IDK Medical Company 2012 – 2018 – Head of Obstetrics Department of Lapino hospital 2012 – 2014 – Commercial Director of Lapino hospital 2010 – 2012 – Obstetrician Gynaecologist at PMC’s Pathologic Pregnancy Department 2006 – 2012 – Paramedic at a first-aid station in Moscow EDUCATION 2008 – Received a degree in General Medicine from Pirogov Medical University 2016 – Received an MBA degree from Stockholm School of Economics Let me start with the fact that we have a unique personnel policy in our hospital, in a number of areas we hired local specialists from Samara, in other areas, we invited employees of the Group from Moscow to move to Samara. We regularly consult on complex medical issues, within the Group we have opinion leaders and unique specialists in different areas. Mark Kurtser regularly gives his advice on OBGYN, our experts in urology are from Novosibirsk, we ourselves in the Samara hospital are a centre with unique competencies in the field of orthopaedics and oncology. Investing in Strategic Expansion Mother&Child Samara Hospital Opened in March 2018, Samara hospital is the largest facility of its kind in the Volga region – an important and growing market. The new hospital provides both our core services for women and children and diverse medical services for all family members. 30 31 The launch of the major Mother&Child Samara hospital demonstrates our ability to execute strategically important projects on time and on budget. Dr Mark Kurtser CEO 2Q 2016 April 2017 February 2018 Start of construction Construction works completed Equipment installed March 2018 OPENING INVESTMENTS 3.2RUB bln Floor plan Floor 1 • Admissions department • Adult’s out-patient department • Children’s out-patient department • Radiology department • Functional diagnostics department • Ultrasound diagnostics department • Small operating theatre (urology/traumatology) • Small operating theatre (ENT) • Treatment room Floor 2 • IVF department • Children’s in-patient department • Women’s centre • Adult’s intensive care unit • Surgery department • Mother’s school Floor 3 • Deliveries department • Surgery department • Pregnancy pathology department • Postnatal department Floor 4 • Neonatal intensive care unit • Second stage developmental care department • Postnatal department Floor 5 • Surgery department • Gynaecology department • Internal medicine department • Small operating theatre (gynaecology) • Cardiology intensive care unit Floor 6 • Diagnostics laboratory • Administration KEY FIGURES AND ANNUAL CAPACITY 15,000 sq m of space 164 beds 2,500 deliveries 1,200 IVF cycles 8,000 surgical operations 220,000 out-patient treatments Investing in Strategic Expansion Mother&Child Tyumen Hospital By opening our sixth hospital In Tyumen, we are expanding out footprint in one of Russia’s most developed regions, where our clinic has operated since 2017. June 2017 February 2019 Start of construction Construction works completed INVESTMENTS 3.2RUB bln 32 33 Our approach to entering a new region – first opening a clinic to build solid experience, strong brand awareness among locals and a wide client base, and then opening a hospital - has proven its efficiency in practice, and we are pleased that Tyumen has become the next location of MDMG’s presence in Russia. Dr Mark Kurtser CEO March 2019 Equipment installed April 2019 OPENING Floor plan Floor 1 • Admissions department • Adult’s out-patient department • Children’s out-patient department • Radiology department • Functional diagnostics department • Ultrasound diagnostics department • Small operating theatre (urology/traumatology) • Small operating theatre ENT • Treatment room • 24/7 emergency room Floor 2 • IVF department • Children’s in-patient department • Women’s centre • Physiotherapy department • Operating and intensive care unit (incl. cardiology intensive care unit) Floor 3 • Deliveries department • Surgery department • Intensive care unit • Pregnancy pathology department • Postnatal department Floor 4 • Neonatal Intensive care unit • Postnatal department • Second stage developmental care department Floor 5 • Surgery department • Gynaecology department • Internal medicine department • Traumatology department • Endovascular surgery department • Small operating theatre (gynaecology) Floor 6 • Diagnostics laboratory • Administration • Mother’s school KEY FIGURES AND ANNUAL CAPACITY 15,000 sq m of space 164 beds 2,500 deliveries 1,200 IVF cycles 8,500 surgical operations 220,000 out-patient treatments Investing in Strategic Expansion Mother&Child Lapino-2 Hospital Upon opening, Lapino-2 will offer the following services which are new for the Group – neurosurgery, cardiovascular surgery, chemotherapy, stomatology and oral and maxillofacial surgery. INVESTMENTS 4.2RUB bln 34 35 We are bringing our Lapino hospital to an entirely new level by expanding its capabilities to offer high-tech medical services in different healthcare areas. We expect that the expanded healthcare facility created in line with the latest technologies and our track-record of launching new hospitals from scratch will significantly contribute to the Group’s performance. Dr Mark Kurtser CEO Summer 2020 OPENING May 2018 Start of construction Floor plan Floor 1 • Admissions department • Radiology department • Functional diagnostics department • Ultrasound diagnostics department • Adult’s out-patient department • Clinical diagnostics laboratory Floor 2 • Adult’s out-patient department • Children’s in-patient department • Endoscopy department • Dentistry, including an operating theatre • Surgery department (6 multi-disciplinary operating theatres) • Intensive care unit • Bacteriological laboratory Floor 3 • In-patient department Floor 4 • In-patient department (traumatology, cardiology, neurology) Floor 5 • In-patient department (internal medicine) Floor 6 • Administration KEY FIGURES AND ANNUAL CAPACITY 18,500 sq. m of space 88 beds 380 FTE1 (in 2021) 27,000 in-patient days 15,000 surgical operations 200,000 out-patient treatments l i t n e a v u q E e m T - i l l u F 1 Investing in Strategic Expansion Mother&Child St Petersburg Hospital We opened our first clinic in St Petersburg in 2011 and significantly expanded it in 2017. Based on our local experience and analysis of our clinic’s performance in St Petersburg we believe there is significant potential demand for high-tech medical services in an expanded format. 3Q 2018 Start of construction INVESTMENTS 5.0RUB bln 36 37 We see the construction of a multi-disciplinary hospital in St Petersburg – a city with strong medical traditions and the second largest healthcare market in Russia – as both a great responsibility and an honour. Dr Mark Kurtser CEO 2021 OPENING Floor plan Building 1 Multi-disciplinary in-patient facility • Admissions department • Radiology and endovascular diagnostics and treatment department • Cardiology department • CT and MRI • Paediatrics department • Diagnostics and treatment centre • Ultrasound diagnostics department • IVF department • Children’s surgery department • Surgery department • Surgery department • Gynaecology department • Intensive care unit • Deliveries department • Pregnancy pathology department • Postnatal department • Children’s intensive care unit • Second stage developmental care department • Administration Building 2 Out-patient facility • Children’s centre • Women’s centre • Radiology department • Clinical diagnostics laboratory • Administration KEY FIGURES AND ANNUAL CAPACITY 22,000 sq. m of space 178 beds 2,500 deliveries 1,200 IVF cycles 35,000 in-patient days 350,000 out-patient treatments 38 39 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Private healthcare sector Investing in Strategic Expansion Market Trends in Russia State economy overview Health spending, % of GDP, 2017 or latest available Government / compulsory Voluntary 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 2.3% 3.0% Indonesia India Turkey China Mexico Israel Korea South Africa Italy Brazil Australia UK Austria Norway Canada Japan Germany France USA Russia • In 2018, the Russian economy expanded at a rate of 1.6%1 in line with the previous year’s positive trend. • Last year, with inflation and interest rates remaining low, wages and pensions continued to grow in real terms, supporting household consumption1. • Meanwhile, the overall business climate in Russia improved in 2018, resulting in the country’s four-position climb2 in the Doing Business rating, annually published by the World Bank. Ranked as #31, Russia received a better score than some other developed economies, such as France, the Netherlands, Switzerland and Japan. • In May 2018, President Putin announced his Decrees that highlighted a roughly RUB 1 trillion ($20.4 billion) increase3 in spending on healthcare, education and infrastructure, as a way to further advance the economy and trigger GDP growth rates in the next year. • The national healthcare project that is based on May Decrees prioritises: — Increasing birth rate from 1.62 births per woman in 2017 to 1.7 by 2024; — Increasing life expectancy from 73 years in 2018 to 78 years by 2024 and to 80 years by 2030; — Lowering the rate of deaths from cardiovascular diseases and oncological conditions. MD Medical Group’s services widely target medical issues associated with the key goals of the project. • Russia’s relatively low level of healthcare • The Russian private healthcare market • Among the reasons why patients prefer expenditure as a share of GDP in comparison to other countries signals that additional investment has a significant potential to advance the country’s healthcare system in the years to come. is developing in the environment of growing popularity of fee-for-service medicine. In 2018, in 56.6% of state healthcare facilities the volume of paid- for medical services increased4. This trend normalises paying for healthcare services, making patients more likely to seek treatment at private clinics. With MDMG’s wide network across key Russian regions, the Group is well- positioned to satisfy the additional demand from patients. • According to the survey conducted by VTsIOM5 in 2016-2017: — 42% of Russians paid for medical services in state clinics; — 32% sought medical assistance in private healthcare centres. private clinics were: — #1 – Quality of medical assistance — #2 – Overall experience — #3 – Service speed — #4 – Lack of alternative • The fee-for-service medical sector is expected to grow by 9.3% in 2018, amounting to RUB 684.6 billion6. However, only 4% of Russians are fully dependent on private clinics7 – a sign of unrealised market potential, favouring MDMG’s further private service expansion. • Factors that can contribute to the development of the private healthcare sector: — MHI tariff increase: 40% of patients are willing to receive medical assistance at private clinics under MHI5 1 “Global Economic Prospects – Darkening Skies” report by World Bank, January 2019 3 “Putin expands on Russia's economic structure”, TASS, 20 December 2018 2 “Doing Business 2019: Training for Reform” report by World Bank, November 2018 Organisation for Economic Cooperation and Development 4 All-Russia People's Front Survey, 2018 5 Health Index Survey, Russian Public Opinion Research Center (VTsIOM), 2017 6 “Russian medical services market analysis in 2014-2018, the forecast for 2019-2023”, BusinesStat, 2018 7 Survey “RBC Market Research", 2017 — Expansion of private clinics around the country: Today, every 5th private clinic chain is located in Moscow — Transition to evidence-based medicine: An increase in quality of services will attract sceptical customers who lack trust in the private sector’s integrity — Technological development: Expanding high- tech medical service offering by employing state-of-the-art equipment and qualified professionals to make care more effective as well as providing such services under the mandatory health insurance (MHI) to make them more accessible — Medical tourism: Export volume of medical services is expected to grow to $1 billion by 2024, attracting 0.5 million foreign patients by 2025. In February 2019, Russia’s Ministry of Health extended the list of high-tech medical services that private providers can be compensated for under the mandatory health insurance (MHI). MDMG has been an active participant of the programme bringing advanced and more affordable care to patients within MHI. MDMG has already seen the share of IVF cycles under state insurance grow. The new list is expected to facilitate an increase in procedures that focus on cardiovascular and internal organs – the segments that the company sees as drivers of its future growth. In March 2019, Russian Government announced the initiative to subsidize high-tech medical services that are not compensated under the mandatory health insurance (MHI). The subsidies will be allocated to medical centres in 2019-2021 with RUB 3.8 billion reserved for 2019 alone. Medical tourism is a part of a revised state "Healthcare Development" programme that aims to uncover Russia’s potential as a major destination for medical treatment for patients from all over the world. According to the World Tourism Organisation, Russia ranks as the 5th most attractive medical and wellness tourism destination in the world, and only the 59th in terms of its ability to utilise such potential. With additional investment and regulatory changes, such as simplifying the process of obtaining a Russian visa for foreign patients, medical tourism can efficiently advance the private healthcare industry. CONTENTS 42 Operational Review 46 Financial Review Medical services for all family members Leader of women’s and children’s healthcare in Russia #1 In IVF in Russia Continued Strong Performance 2018 – was our best year so far in terms of key financial and operational metrics Continued Strong Performance Operational Review DELIVERIES In 2018, the number of deliveries grew 7% year-on-year to 7,277 despite challenging demographics in Russia and 5.4% year-on- year decline in deliveries across the country. WEATHERING THE DEMOGRAPHICS STORM MD Medical Group is well-known for setting a uniquely high standard in Russia for the level of quality, comfort and care in deliveries. This has enabled us to grow the number of deliveries we perform year by year even amid some challenges in the deliveries rate in Russia as a whole. Deliveries volumes at MDMG are also supported by the continued leadership in Russia’s IVF segment – many patients who become pregnant at our numerous IVF facilities in Russia later deliver at one of our hospitals. BRINGING HIGH-QUALITY SERVICES TO THE REGIONS We have continued expanding our best- in-class hospital network, bringing a wide range of our high-quality services, including deliveries, to the Russian regions. • As ramping up continued at the existing regional hospitals in Ufa and Novosibirsk, the number of deliveries at the facilities in 2018 grew 25% and 39% year-on- year, respectively. • In March 2018, we opened our first hospital in Samara, which during the first 10 months of operations already took 411 deliveries. • In September 2018, we launched the construction of our first hospital in St Petersburg. Upon the commissioning in 2021, it will have an annual capacity of approximately 2,500 deliveries. 42 43 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS IVF The number of deliveries in 2018 was 7,277 We grew our deliveries by 7% year-on-year in 2018 in part thanks to the further improvements in the performance of our expanding regional hospital chain. In 2018, the total number of IVF cycles slightly decreased by 1% year-on-year, or by just 170 cycles, to 16,636, amid growing competition as IVF becomes more accessible. Nevertheless, MDMG remains Number 1 IVF player in Russia and covers more regions than any other private healthcare player in the country. Despite the decline in IVF volumes and an increase in the share of cycles carried out under the Mandatory Health Insurance (MHI) programme in 2018, the average check in this segment grew 8% year-on-year, mainly due to the expansion of the range of IVF services on a commercial basis. This contributed to a revenue increase of 7% year-on-year to RUB 3,488 mln. The number of IVF cycles carried out in 2018 was 16,636 HIGH-TECH SERVICES ACROSS RUSSIA We provide our customers with high- quality fertility services including: • Diagnosis of possible causes of infertility within a family. • Preimplantation genetic diagnosis. • Effective treatment for one or both spouses. • Individually tailored programmes. • Achievement and maintenance of pregnancy. • Childbirth assistance. • Post-natal healthcare assistance for the child up to 16 years. • A team of highly qualified experts in areas of reproduction, gynaecology, immunology etc., providing medical expertise for every situation. • A range of alternative fertility services including auxiliary hatching, donor sperm insemination, ovulation stimulation etc. Our facilities use cutting-edge specialised equipment in the provision of IVF services. Our individual approach to each patient ensures a high standard of service, as well as a high probability of success. SETTING A STANDARD IN THE MARKETWe offer a range of unmatched services that set us apart from the market:• We are expanding our regional network of hospitals, bringing a wide range of high-level services, which patients can expect in our Moscow facilities, to the locations across the country.• We were the first in Russia to offer women the opportunity to have the same doctor who supervised their pregnancy go on to conduct the delivery.• We offer unique anaesthesiology resources and optimal pain relief for each period of labour.• We provide a combination of classical obstetrics and advanced medical technologies.• Our patients benefit from individually tailored birthing programmes.• And we offer a unique “home birth in hospital” in our luxury in-hospital apartments.WIDE CHOICE OF DELIVERY OPTIONSWe do everything possible to ensure that our clients can give birth naturally, even following surgery or caesarean section.We offer a wide range of different birth options for future mothers to choose from:• Natural physiological childbirth.• Traditional or horizontal natural child birth.• Vertical birth.• Water birth.• “Home birth” in hospital in one of our luxury apartment rooms, furnished in the style of a home bedroom with an on-hand medical team and equipment.• Partnership birth, allowing for loved ones to be present.• Natural birth after caesarean or previous gynaecological surgery.• Surgical birth via planned or emergency caesarean section.POST-DELIVERY SERVICES• Neonatal intensive care unit.• Neonatal pathology unit.• Premature babies unit.• ER unit with fleet of ambulances.• 24/7 emergency labour service.• Breastfeeding support and assistance for patients suffering from lactostatis or hypogalactia.• Stem cell bank, with international standards in collection, testing, processing and storage of cord blood including transportation services even if the birth is at another centre.• New parents school providing assistance and birth guidance for future parents-to-be. Continued Strong Performance Operational Review 44 45 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS IN-PATIENT TREATMENTS OUT-PATIENT TREATMENTS In 2018, the total number of in-patient treatments increased by 18% year-on-year to 72,371 which made up 17% of the Group’s revenue for the year. In 2018, the total number of out-patient treatments increased by 6% year-on-year to 1,618,149 which made up 31% of the Group’s revenue for the year. OBGYN PAEDIATRICS • Total number of OBGYN in-patient treatments slightly decreased by 3% year-on-year to 24,536. • However, revenue for the division increased by 6% year-on-year. • Total number of paediatrics in-patient treatments increased by 17% year-on- year to 21,757. • Revenue for the division increased by 12% year-on-year. • Division accounted for 7% of the total • Division accounted for 3% of the total revenue for 2018. revenue. • Drivers of growth were hospitals • Drivers of growth were region hospitals. in Ufa and Samara. Other medical services In-patient treatments 17,389 8,901 10,400 3,791 ‘14 ‘15 ‘16 ‘17 ‘18 62% CAGR 2014–2018 26,078 OTHER MEDICAL SERVICES • The total number of other medical in- patient treatments grew significantly by 50% year-on-year to 26,078. • Revenue from other in-patient medical treatments increased by 28% year-on-year. • Division accounted for 7% of the total revenue. • Lapino continued ramping up departments of interventional cardiology and cardiovascular surgery, neurology and therapy. • Further advances in reaching design capacity at our Ufa hospital were driven by improvements in surgery, therapy and oncology. • Novosibirsk hospital saw improvements in cardiology, therapy, urology and oncology. • Samara demonstrated strong performance in oncology, traumatology and cardiology. PAEDIATRICS • Total number of paediatrics out-patient treatments remained roughly the same – 430,086 treatments. • Revenue for the division increased by 1% year-on-year. • Division accounted for 9% of the total revenue. • Key growth triggers were performance of our region hospitals in Ufa, Samara and Novosibirsk. Other medical services Out-patient treatments 570,064 485,631 377,641 224,812 29% CAGR 2014–2018 630,288 ‘14 ‘15 ‘16 ‘17 ‘18 OTHER MEDICAL SERVICES • The total number of other out-patient treatments increased by 11% year-on- year to 630,288. • Revenue for the division increased by 30% year-on-year. • Division accounted for 10% of the total revenue. • The largest share in other medical out-patient growth was related to diagnostic centre as well as a number of trauma treatments. • The increase in the volume of services was supported by the diagnostics departments at our regional hospitals and Lapino. OBGYN• Total number of OBGYN out-patient treatments increased by 6% year-on-year to 557,775.• Revenue for the division increased by 3% year-on-year.• Division accounted for 12% of the total revenue .• Drivers of growth were region hospitals.Continued Strong Performance Financial Review In 2018, we continued to improve our financial performance and achieved another set of record- breaking results. This was made possible due to our strong operating performance and continued efficient implementation of our development strategy across Russia. 46 47 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS REVENUE EBITDA CAPEX DEBT Revenue grew by 9% year-on- year to RUB 14,937 mln compared to RUB 13,755 mln in 2017 due to the following factors: • Continued capacity utilisation growth at the hospitals in Lapino, Ufa and Novosibirsk. • Opening of a hospital in Samara. • Improved performance of the Siberian clinics acquired in 2016. In 2018, the contribution of regional clinics and hospitals to overall revenue continued to grow and amounted to 41%, mainly due to increased revenue from the hospitals in Ufa, Novosibirsk and Samara, as well as from the Siberian clinics. EBITDA for the year amounted to RUB 4,314 mln, up 4% year-on-year due to: • Continued capacity utilisation growth at the hospitals in Lapino, Ufa, Novosibirsk. • Opening of a hospital in Samara. • Improved performance of the Siberian clinics acquired in 2016. • Strict cost management. EBITDA MARGIN EBITDA margin for the year amounted to 29% Key major investments in 2018 included: • Construction of a new hospital in Tyumen Debt as of the end of 2018 amounted to RUB 5,665 mln. (RUB 1,733 mln). • Construction of a hospital in Samara (RUB 676 mln). • Start of construction of a new hospital Lapino-2. • Start of construction of a new hospital in St Petersburg. • Reconstruction work in PMC. • Repairs and small projects. Net debt was RUB 2,950 mln, up 43% compared to 31 December 2017. This increase was mainly due to the construction of new hospitals in Samara, Tyumen and start of construction new hospital Lapino-2 and hospital in St Petersburg. Despite higher net debt, net debt-to- EBITDA ratio for 2018 was at comfortable level of 0.7x, slightly up from 0.5x a year before. REVENUE, RUB mln EBITDA, RUB mln EBITDA margin EPS, RUB +9% 14,937 +4% 4,314 29% 36 Recently opened and acquired medical facilities play a significant role in our overall performance. This demonstrates that we are carefully taking the right steps as part of our strategic development. Revenue, RUB mln 24% CAGR 2012-2018 EBITDA 42% 13,755 14,937 12,179 9,507 7,201 5,673 4,061 2,675 2,083 1,694 1,586 28% 29% 28% 30% 30% 4,165 3,670 17% CAGR 2012-2018 29% 4,314 '12 '13 '14 '15 '16 '17 '18 '12 '13 '14 '15 '16 '17 '18 CONTENTS 50 Our People 52 Corporate Social Responsibility 54 Shareholder Equity CSR_shmutz Doctors 2,746 Other medical staff 2,448 Other staff 2,155 7,349 total number of our employees Corporate Social Responsibility Our contribution to our people and our local communities stretches far beyond health Corporate Social Responsibility Our People At the centre of our continued growth and strengthening of our market leadership are people. 24/7, our highly qualified and talented personnel, from doctors to the management team, work hard to ensure the long-term success of our business. In return, we provide our staff with a comfortable and supporting working environment, competitive wages and social packages, as well as broad possibilities for further professional growth. PERSONNEL We never stop raising the already high level of expertise that our doctors and other employees have. We primarily accomplish this thanks to our personnel training and development structure. Our HR policy is aimed at the following: • Retention of existing staff and continuous search for highly skilled employees. • Development of the personnel management system. • Selection of the most talented students for education in residence at our facilities. For this purpose, since 2015 we have implemented a special project. In 2018, 8 people completed their studies in residency within the framework of the project; 17 current participants will finish their studies in 2019. • Opportunities for personal and career growth. • Constant monitoring and adoption of the best available technologies. • Provision of the state-of-the-art equipment via regular upgrades. • Placing the best staff in leading positions at the right time to maximise potential and encourage internal growth. • Provision of better working conditions to maintain low staff turnover. • Incentive programmes for employees. • Training programmes across various fields as part of our corporate education system. AMONG OUR TRAINING PROGRAMMES WE HAVE PROVIDED STAFF WITH: • Webinars, featuring online training – in 2018, MDMG doctors carried out 25 webinars for their colleagues focusing on relevant topics within OBGYN and prenatal diagnosis, urology and IVF. • Career enhancement courses. • Short-term thematic advanced training. • Business trips for specialists from Moscow to help specialists in the regions take over the leadership of regional hospitals. • Participation in international exhibitions, conferences, and symposiums. • Training centre, a system of improving soft skills and knowledge acquisition across different areas. COMPLETION OF LONG- TERM MANAGEMENT INCENTIVE PROGRAMME In 2018, we successfully completed our long-term share incentive programme aimed at senior management and key personnel on achieving all KPIs set out in it. The programme was aimed at achieving closer alignment of interests between management and shareholders and increasing management’s motivation to build sustainable shareholder value over the long term. In total, the programme had 40 participants. 50 51 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS PERSONNEL FIGURES (AS OF DECEMBER 2018) Total number of employees Total number of employees Total number of doctors Total number of doctors FTE Headcount 5,045 4,651 5,673 5,254 6,346 6,302 5,807 6,801 7,349 6,842 FTE Headcount 1,924 2,062 1,405 1,575 2,378 2,521 1,792 1,897 2,746 2,092 '14 '15 '16 '17 '18 '14 '15 '16 '17 '18 Employees Employees Full-timer Part-timer 5,543 1,806 Personnel structure Personnel structure Doctors 2,746 Other medical staff 2,448 Other staff 2,155 Payroll structure Payroll structure Doctors Other medical staff Other staff 25% 29% 25% 26% Doctors by speciality Doctors by speciality 16% Obstetricians Reproductologists Pediatricians Other doctors 340 253 241 1,258 60% 2,092 12% 12% Doctors qualifications Doctors qualifications 5% PhD Professors 607 29 636 95% 75% 37% 7,349 7,349 33% MDMG's success in the market is the result of a high level of professionalism of our employees. By continuously improving their expertise, MDMG employees are driving the company forward day after day. 49% Corporate Social Responsibility Corporate Social Responsibility 52 53 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Our role as a responsible corporate citizen is important to us and is something we discuss regularly at Board and management meetings. Our contribution to our people and our local communities stretches far beyond health. KEY CSR ACTIVITIES IN 2018 OUR MISSION OUR TECHNOLOGY OUR PROFESSION Our deep commitment to CSR is not just a requirement for a major listed company and employer. Rather, it reflects our strong belief that creating value for our stakeholders is critical for the long-term sustainable growth of MDMG. OUR PEOPLE We invest heavily in training and educating our staff, creating opportunities for them to learn from the best medical practitioners in the world. Many of them have worked with the Group since its foundation, and we recognise and reward this dedication by creating an environment that encourages professional and personal growth. We aim to maximise efficiency and minimise patient stress by constantly updating our technology and using the most innovative procedures. Examples include foetal surgeries to correct spina bifida during pregnancy while the baby is inside the womb. We also use endovascular methods to correct congenital heart defects of newborns. OUR COMMUNITIES As we continuously expand our network throughout Russia and bring often unique services to new regions, we not only provide people with high-quality services near their homes but also encourage every employee to be helpful in their own communities. Above all, we recognise that one of the most important roles we can play as a leading healthcare company in Russia is to contribute our resources, time, expertise and know-how to raise the overall standard of the healthcare profession in Russia. We regularly hold open-access webinars for doctors and patients across the country where we address key issues in women’s and children’s health, thereby helping to raise the quality of medical services provided to patients all over the country. PMC DONOR'S DAY • MD Medical Group’s PMC hosted two Donor Days in 2018. 40 people participated in the donor event on 30 May by each donating 400 grams of blood. On 17 December, 31 donors contributed 12.4 litres. LAPINO DONOR’S DAY • In 2018, Lapino hospital hosted two donor events attended by over 100 donors. On 22 May, 56 people donated 22.4 litres of blood. Additional 57 participants each donated 400 grams of blood on 30 November. “WISH TREE” CHARITY EVENT • In December 2018, employees of IDK Samara, PMC and Lapino hospital participated in a charity event “Wish tree” by purchasing gifts for orphaned children. • Children of Zaprudnenskaya boarding school, Municipal Budget Institution “Leisure centre “Mir” and Dmitrov technical school wrote their wishes on cards used to decorate Christmas trees at MDMG’s facilities. Every hospital employee could choose a card with a wish and buy a gift for a child in need. • MDMG employees collected 200 gifts that were delivered by employee volunteers who travelled to the Moscow Region to present the gifts right on time for New Year. OTHER SOCIAL PROJECTS • MDMG organised educational events for children, helping them develop health-conscious habits and learn about future employment opportunities in the healthcare sector. • MDMG held a series of lectures and workshops for students of Samara State Medical University. In the course of these lectures our employees shared their knowledge and expertise with students specialising in paediatrics, obstetrics and gynaecology, as well as neonatology and therapy. • As part of our partnership with Irkutsk State Medical University, MDMG has been hosting a series of workshops for Irkutsk students and students from the University of Grenoble (France) led by senior lecturer Mikhail Chertovskikh, an expert in IVF and endoscopy in gynaecology. • MDMG supports a number of charity funds – beneficiaries of “HESED-LEYA“, “Izgelk“, “Markhamat“, “Save Me“, and “Our Children“ receive free services at our Ufa hospital. Corporate Social Responsibility Shareholder Equity 54 55 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Since October 2012, MD Medical Group’s shares have been listed on the London Stock Exchange under the ticker MDMG in the form of Global Depositary Receipts (GDRs). Each GDR represents an interest in one ordinary share. MD Medical Group has a free float of approximately 32.1%, with the remaining 67.9% owned by MD Medical Holding Limited, which is beneficially owned by Dr Mark Kurtser. The investor portfolio is represented by a number of global institutional investors. 75,125,010 The total number of shares outstanding ANALYST COVERAGE DIVIDEND TAXATION As of 31 December 2018, MDMG was covered by equity research analysts representing leading banks such as Bank of America Merrill Lynch, Goldman Sachs, HSBC, JP Morgan, Renaissance Capital, and VTB Capital. DIVIDENDS MD Medical Group has been adhering to its unofficial dividend policy to pay out at least 25% of a year’s net profit as dividends. Since 1 January 2015, MD Medical Group has been a Russian tax resident and pays dividends in line with the Russian Tax Code, according to which dividends paid by Russian companies are generally subject to a tax rate of 15%. A reduced rate may be applied in the case of Russian tax residents and residents of foreign jurisdictions whose Governments have signed a double tax- ation treaty (“DTT”) with the Government of Russia. MD Medical Group acts as a tax agent and withholds tax in order to transfer it to the Russian tax authorities when paying dividends. For a list of countries that have signed a DTT with Russia and terms for applying a reduced tax rate, please see the Company’s corporate website at http:// www. mcclinics.com/media/news/112.html 28.3% of net profit declared as dividends for 2018 KEY SHAREHOLDER MD MEDICAL GROUP’S DIVIDEND HISTORY NUMBER OF SHARES AS OF 31.12.2017 SHARE OF SHARES OUTSTANDING NUMBER OF SHARES AS OF 31.12.2018 SHARE OF SHARES OUTSTANDING Dividend approval 05.06.2015 15.04.2016 02.09.2016 21.04.2017 08.09.2017 17.04.2018 23.04.2019 2014 2015 H1 2016 2016 H1 2017 2017 2018 SHAREHOLDER NAME Russian Direct Investment Fund1 Russia Partners J.P. Morgan Asset Management (UK), LTD Prosperity Massachusetts Mutual M&G Investment Management, LTD Comgest S.A. Standard Life Aberdeen 4,166,667 3,235,000 3,094,536 1,105,659 948,211 903,724 764,600 689,243 5.5% 4.3% 4.1% 1.5% 1.3% 1.2% 1.0% 0.9% 4,166,667 3,235,000 2,585,693 1,917,175 948,211 849,622 764,600 724,855 5.5% 4.3% 3.4% 2.6% 1.3% 1.1% 1.0% 1.0% OUR INVESTORS REPRESENT VARIOUS GEOGRAPHIES 2 UK Russia Scandinavia Continental Europe 3% 8% 15% 52% Other countries 21% 32.1% free float Record date Payout date Total dividends paid (net of tax), ths USD Dividends per share, USD3 05.06.2015 22.04.2016 09.09.2016 28.04.2017 19.09.2017 25.04.2018 24.05.2019 03.07.2015 20.05.2016 18.10.2016 23.05.2017 24.10.2017 22.05.2018 25.06.2019 5,455 0.07 7,310 0.10 4,325 0.06 5,060 0.08 5,311 0.08 6,838 0.09 10,858 0.14 INVESTOR RELATIONS meetings decisions, as well as other important corporate developments. We see our investor relations as an important priority and have focused on maintaining a continued active dialogue with the investment community since our successful listing on the London Stock Exchange in 2012. Our goal is to rigorously adhere to the best practices in terms of transparency and information disclosure to our investors and analysts. We regularly provide updates on operational (every quarter) and financial performance (every six months), new openings and acquisitions, key Board of Directors and shareholder Through our investor relations function we are committed to ensuring that the investment community has a good understanding of our story and promptly receives all relevant information. We do that by making ourselves, including senior management, available for productive dialogue. During 2018, we held more than 110 meetings with investors, attended 5 investor conferences in Russia and the UK. In our dialogue with the investment community, we aim to provide objective, trasnparent, and reliable information about our business in line with high disclosure standards. 1 Shares managed by RDIF Managing company Llc., including co-investors’ shares managed by RDIF Managing company Llc 2 Source: Bloomberg as of January 2019 3 at the exchange rate as of the date of the Annual General Meeting of Shareholders or Board meeting CONTENTS 58 Corporate Governance Report 60 Risk Management 62 Board of Directors 64 Board of Directors Activity in 2018 66 Senior Management 68 Regional Directors CG_shmutz General Meeting of Shareholders Board of Directors Board Committees Audit (Internal auditor) Nomination Remuneration CORPORATE GOVERNANCE AND CONTROL STRUCTURE CEO Corporate Governance and Risk Management Our contribution to our people and our local communities stretches far beyond health General Meeting of Shareholders Board of Directors Board Committees Audit (Internal auditor) Nomination Remuneration CEO Corporate Governance and Risk Management Corporate Governance Report At MD Medical Group, we appreciate that good corporate governance and effective management are essential to our overall success. The Board of Directors aims to uphold the highest standards in its interaction with all stakeholders. We are firmly committed to maintaining the highest corporate governance standards Mr Vladimir Mekler Chairman of the Board of Directors CORPORATE GOVERNANCE AND CONTROL STRUCTURE General Meeting of Shareholders Board of Directors Board Committees CEO Audit (Internal auditor) Nomination Remuneration 58 59 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Since its London IPO, the Company has maintained full compliance with the UK Corporate Governance Code. It has established a remuneration committee, an audit committee and a nomination committee with formally delegated duties and responsibilities and written terms of reference. All of the committees perform their duties on behalf of the Board of Directors, which is responsible for constituting, assigning, co-opting and fixing the terms of service for the committee members. AUDIT COMMITTEE The Audit Committee comprises three non-executive directors, two of whom are independent. The Audit Committee is chaired by independent non-executive director Liubov Malyarevskaya since 19 February 2015, Mr Kirill Dmitriev and Mr Simon Rowlands are the other members. The Audit Committee meets at least four times each year and is responsible for considering: • The reliability and appropriateness of disclosures in the financial statements and external financial communication. • The maintenance of an effective system of internal controls including financial, operational and compliance controls and risk management system. • Preparation of recommendations to the shareholders for approval in General Meetings in relation to the appointment, reappointment and removal of the external auditors. • Approval of the remuneration and terms of engagement of the external auditors in respect of audit services provided. • The audit process, including monitoring and review of the external auditors’ performance, independence and objectivity. • Development and implementation of the policy on non-audit services provided by the external auditors. And • Monitoring compliance with laws and regulations and standard of corporate governance. The Audit Committee assists the Board of Directors in its oversight of the performance and leadership of the internal audit activity. REMUNERATION COMMITTEE Where the Audit Committee’s monitoring and review activities reveal cause for concern or scope for improvement, it shall make recommendation to the Board of Directors on actions needed to address the issues or to make improvements. NOMINATION COMMITTEE The Nomination Committee one executive and two non-executive directors, one of whom is independent. The Nomination Committee is chaired by non-executive director Mr Vladimir Mekler (since June 2016); non-executive director Mr Simon Rowlands and executive director Dr Mark Kurtser are other members since September 2015. The Nomination Committee meets at least once a year and is responsible for assisting the Board of Directors in discharging its corporate governance responsibilities in relation to appointment of all executive and non-executive directors, as well as the CEO and CFO of the Company. The main objective of the Nomination Committee is to lead the process for the Board of Directors’ appointments and make respective recommendation to the Board of Directors, ensuring proper balance of the Board of Directors and qualification of its members. The Nomination Committee also considers the composition of the Audit and Remuneration Committees. The Remuneration Committee comprises two non-executive directors and one executive director. The Remuneration Committee is chaired by an independent non-executive director Mr Simon Rowlands. The two other members are Dr Mark Kurtser and Mr Vladimir Mekler. The Remuneration Committee meets at least once a year and is responsible for assisting the Board of Directors in discharging its corporate governance responsibilities in relation to remuneration of all executive directors and the Chairman of the Board of Directors. The main objective of the Remuneration Committee is to determine the framework and policy for the remuneration of the executive directors, the Chairman of the Board of Directors and senior executives, and the specific remuneration of each executive director and the Chairman of the Board of Directors and any compensation payments. INTERNAL AUDITOR The Audit Committee is responsible for monitoring and reviewing the effectiveness of the Company’s internal audit service. In this respect, the Audit Committee may require investigations by, or under the authority of, the head of Internal Audit Service into any activities of the Group which may be of interest or concern to the Audit Committee. The Company’s internal auditor is responsible for recommending an audit plan to the Audit Committee. The internal auditor carries out auditing assignments in accordance with such plan and oversees the Company’s compliance with the plan recommendations. The internal auditor files a quarterly report with his findings to the Audit Committee. Corporate Governance and Risk Management Risk Management 60 61 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS RISK Reputation risk POTENTIAL IMPACT Тhe main danger of this risk is that it can be caused by a number of different factors. In this way it is closely related to other risks mentioned below. We endeavour to maintain a low level of reputation risk by updating information sources and launching new system controls. In 2019, we will provide a range of measures to reduce the level of reputational risk, all based on the Company’s development strategy. MITIGATION In 2018, we strengthened our work on risks, which we did not manage to significantly reduce in 2017. We have a significant effect in terms of control and effectiveness risks, compliance risk and reputation risk. Work was also carried out to further reduce the recruitment risk and the risk to Medical Services. The work with the media was optimised in terms of the correctness of information and its sources, and new measures to protect information were introduced. As a result, this led to a decrease in reputational risk. Medical Service Risk Compliance Risk Macroeconomic Risk Control & Efficiency Risk Investment Project Execution Risk Recruitment Risk Financial Risk Medical risk is one of the main risks affecting the Company's reputation, as well as the achievement of our goals. Our reputation is based on our work, patient satisfaction with our services, and the safety of our customers. Given the development of business and the opening of new activities, this risk requires constant monitoring and the ability to respond as quickly as possible to any event. The political and regulatory environment with respect to the development of private medicine in Russia is currently relatively favourable. However, there is always a risk that governmental attitudes and policies with respect to private medicine could change. That could create difficulties for us in terms of realising our strategic objectives, including the implementation of our investment programme. Macroeconomic risk reflects the possibility of external impact on the business and requires constant monitoring. Regular assessment of this risk allows us to predict the further development of business. To reduce this risk, we need the newest and most advanced equipment, medicines and medical supplies that will allow us to mini mise the likelihood of errors. We continue to place high demands on our medical staff in terms of qualifications and continue to provide them with the opportunity to develop and specialise. The Company’s management personally conducts seminars and scientific conferences for doctors, as well as evaluating the effectiveness of key medical staff within the Company. In 2018, patient complaints led to improvements in work. In medium and complex medical cases, recommendations are carefully analysed, and agreed with all key members of the Company. We have strong relations with the government at both the federal and regional level, and we work continually to make them even stronger. We participate in a variety of public committees on relevant health issues, including the development of the Russian healthcare sector as a whole. We also actively support the authorities and provide expert advice on relevant laws. At times, we actively advocate for laws aimed at supporting the continued development of the medical sector. We also cooperate with the regulatory bodies of Great Britain for the requirements of the London Stock Exchange. We constantly review the updates in the UK and EU legislation and update our internal standards to match. Given the unstable foreign policy situation in 2018, our team paid special attention to monitoring trends in the Russian economy with an assessment of the potential impact on the business. Our strategy has been designed so that we can adapt, as necessary, to changes in the overall economic environment. Our growth depends on acquisitions of existing healthcare facilities as well as the construction of new hospitals and clinics. Our strategy is based on expanding our network throughout the regions of Russia. We are pioneers in the field of regional expansion, particularly where the effectiveness has not been fully measured and proven. It can be challenging to forecast with precision the likely return on investment and the probable payback periods due to a certain lack of reliable information on the potential number of private patients in a given region. If expansion projects are not implemented effectively, projects can either have an extremely long pay- back period or even fail to deliver a profit entirely. The risk arises in the presence of factors leading to the inability to attract or retain highly qualified personnel in the Company. In the regions, this risk is particularly relevant due to the shortage of doctors and medical staff with the necessary qualifications, as well as the presence of competing employers, such as government agencies or other commercial organi sations. The risk is also associated with the possible rotation of qualified medical and managerial personnel between employers. This risk is aggravated by the general standard of medical education in Russia, which often does not meet the standards set by private clinics, whose reputation largely depends on the quality of the services they provide. The risk requires constant activity from the HR service and Company Management. Financial risk includes significant risks such as: • Credit risk - the risk arising from the likelihood that the debtors will not make the promised payments either on time or in full. • Operational risk - conditional losses of the Company due to technical failures, intentional and accidental human errors. • Liquidity risk - the likelihood of loss arising in a situation where (1) there is not enough cash and/or cash equivalents to meet the needs of savers and borrowers, (2) the sale of illiquid assets is lower than their fair value, or (3) illiquid assets will not be sold at the desired time due to the lack of buyers. We have a number of small clinics in regions across Russia. These operations give us an opportunity to understand the local market dynamics, including average ticket size and overall level of demand, before undertaking a major project such as the construction of a new hospital or a sizeable acquisition. We prioritise those regions where we already have out-patient clinics and/or Russia’s largest regions where we can have a higher degree of certainty about the local market. We also benefit from a relative lack of competition in the regions, as currently we are practically the only sizeable provider of high quality private medical services. In 2018, the work of the HR team was aimed at improving the quality of the recruitment process, as well as working conditions and communication within the Company. We continue to actively cooperate with heads of departments of leading universities in search of talented personnel, and also provide serious on-the-job training and continuous medical education, including training programmes for specialists that we conduct in Moscow for new employees in the regions. In 2018, management announced a program for horizontal rotation of personnel within the Company in order to cover the shortage of personnel in the regions. The Company's Management personally controls the cash flow within the Company, as well as the quality of execution of its instructions in relation to any issues related to the Company's finances and assets. In 2018, the number of personnel in the Financial Department increased, which allowed to reduce the Operational risk. Continuous professional development of employees of the Financial Department is one of the priority requirements of Management. The risk is closely related to the size of the business and the coverage area, which was significantly increased in 2018. Dealing with this risk requires significant resources, as well as the competence of the Company’s management. Quality control gives us the opportunity to avoid adverse events and additional costs, and quality management gives us the opportunity to continuously develop. In 2018, we achieved significant success in reducing this risk by introducing new control measures and improving existing ones. Constant business growth requires us to take new decisions and use new control technologies that allow us to control the activities of Company employees at all sites, so we use international practice, constantly developing mechanisms to increase the effectiveness of control over all processes (budgeting, financial control, treasury, accounting, procurement, legal support, personnel management, security and IT). In 2018, to achieve maximum management efficiency, additional managerial positions were introduced with control functions. We carefully interact and listen to the recommendations of world- renowned consultants. Corporate Governance and Risk Management Board of Directors 62 63 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Chairman of the Board of Directors PhD, Member of the Board of Directors Mr Vladimir Mekler became Chairman of the Board of Directors in June 2016. Mr Mekler was appointed as Non-Executive Director in February 2015. Mr Vitaly Ustimenko was the Group’s Chief Financial Officer from 2012–2016. He was elected to the Board of Directors in February 2015. Mr Vladimir Mekler He is a senior and managing partner of Mekler & Partners. Mr Mekler specialises in corporate law, including supporting and structuring complex and cross-border contracts; creating systems of corporate governance; legal structuring development; optimisation of criminal and antitrust legislation; legal support of mergers and acquisitions; settling corporate disputes; and organising and coordinating legal representation and defence in complex economic and property crimes. Mr Mekler has been a member of the Moscow City Bar since 1980 and is listed in the Moscow Bar’s Book of Honours. He also acted as Vice Chairman of the Presidium of the Moscow City Bar Association from 2003 to 2010. He graduated from Lomonosov Moscow State University. Mr Ustimenko has more than 17 years of experience in finance. He was CFO of Solnechnye Produkty Holding Company from 2017–2018. Prior to joining the Group, he was the Head of Strategic and Business Planning at Russian Helicopters, and before that held the position of Senior Manager at Deloitte Touche Tomatsu Ltd. Mr Ustimenko holds a bachelor’s degree from the Finance University under the Government of the Russian Federation and a PhD in Finance from the State University of Management. Mr Vitaly Ustimenko Member of Russian Academy of Sciences, CEO and Member of the Board of Directors PhD, Member of the Board of Directors Dr Mark Kurtser is the founder of MD Medical Group, CEO and Member of the Board of Directors. Dr Alsou Nazyrova joined the Group in 2009 and became a member of the Board in June 2016. Dr Kurtser began his career as a graduate assistant to the associate professor at the Obstetrics and Gynaecology Department of Pirogov Medical University. From 1994 to 2012, he was Head of the Centre for Family Planning and Reproduction, the largest public obstetrics hospital in Moscow. From 2003 to 2013, Dr Kurtser was the Chief Obstetrician and Gynaecologist of the City of Moscow. He holds a degree in medicine from Pirogov Medical University in addition to a postdoctoral degree in medicine. Dr Kurtser remains actively involved in the Group’s healthcare practice and day-to-day operations. In 2016 she was appointed Director of Mother&Child Urals and Head of Regional Projects Department. Dr Nazyrova has held the CEO position at Mother&Child hospital in Ufa since 2014 and the CEO position at Mother&Child clinic in Ufa since 2009.Alsou Nazyrova has more than 15 years of experience in medicine and pharmaceutical business and is the Head of the Reproductive Health Faculty at Bashkir State Medical University. Dr Nazyrova graduated from Bashkir State Medical University and had specialty training in Paediatrics, she also holds a PhD degree. Dr Mark Kurtser Independent Member of the Board of Directors Independent Member of the Board of Directors Mr Simon Rowlands was appointed as an independent non-executive director in September 2012. Mrs Liubov Malyarevskaya was appointed as Independent Non-Executive Director in February 2015. Mr Rowlands was a Co-Founding Partner of the private equity firm Cinven until 2013, establishing and leading its healthcare team, and then served as a Senior Adviser until 2017. Simon founded a new private equity firm in 2016 focused on healthcare and consumer sectors of Sub-Saharan Africa. His other current appointments include non-executive directorship at Spire Healthcare Plc and is Chairman of the Advisory Board of Cranfield School of Management. Prior to Cinven, Mr Rowlands worked with an international consulting firm on multi-disciplinary engineering projects in the UK and Southern Africa. He has an MBA in Business, a BSc in Engineering and is a chartered engineer. Mr Simon Rowlands She has been Deputy CEO for Economics and Finance at the Russia Media Group since 2016. Before that, from 2014 to 2016 she worked as Project Director in Sberbank Russia’s Finance Department. Earlier, from 2011 to 2014, Mrs Malyarevskaya was a partner and head of the Corporate Finance Department of BDO. From 2001 through 2010 she worked at PricewaterhouseCoopers and Deloitte, including as senior manager at Deloitte Touche Tomatsu Ltd. Mrs Malyarevskaya holds a Russian Statutory Accountant Certificate as well as a certificate from the Association of Chartered Certified Accountants (ACCA). Mrs Malyarevskaya graduated from the Plekhanov Russian Academy of Economics (diploma cum laude). Dr Alsou Nazyrova Mrs Liubov Malyarevskaya Member of the Board of Directors Mr Kirill Dmitriev was elected to the Board of Directors in October 2012. He is CEO of the Russian Direct Investment Fund – one of the world's leading sovereign funds with a reserved capital of $10 billion under management. In all transactions, RDIF acts as a co-investor alongside major international investors, playing the role of a catalyst in attracting direct investment into Russia. RDIF has successfully invested with foreign partners in more than 70 projects totalling more than 1.4 trillion roubles and covering 95% of the regions of the Russian Federation. RDIF has established joint strategic partnerships with leading international co-investors from more than 15 countries totalling more than $40 billion. Prior to becoming CEO of RDIF in 2011, Kirill Dmitriev headed a number of large private equity funds and completed a series of landmark transactions for Russia, including the sale of Delta Bank to General Electric, Delta Credit Bank to Société Générale, STS Media to Fidelity Investments, among others. Mr Dmitriev began his career at Goldman Sachs and McKinsey & Company. He holds a BA in Economics with Honours and Distinction from Stanford University and an MBA with High Distinction (Baker Scholar) from the Harvard Business School. Mr Kirill Dmitriev Corporate Governance and Risk Management Board of Directors Activity in 2018 64 65 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS PARTICIPATION OF THE DIRECTORS IN THE BOARD MEETINGS DURING 2018 REMUNERATION PAID TO MEMBERS OF THE BOARD IN 2018 NUMBER OF BOARD MEETINGS ATTENDED IN PERSON OR VIA PHONE NUMBER OF MEETINGS HELD FOR THE PERIOD AS A BOARD MEMBER BOARD MEMBER TOTAL AMOUNT PAID (BEFORE TAXES) Mr Vladimir Mekler 5 Dr Mark Kurtser 5 Mr Simon Rowlands 5 Mr Kirill Dmitriev 4 Mr Vitaly Ustimenko 5 Dr Alsou Nazyrova 5 Mrs Liubov Malyarevskaya 5 Mr Nikolay Ishmetov alternate director for Kirill Dmitriev 5 5 5 5 5 5 5 5 5 RUB 4.5 mln RUB 1.2 mln RUB 782 ths 5 Board meetings held in 2018 39 Agenda items were discussed in 2018 Our Board comprises directors who both know the Company extremely well and have an excellent track record in areas relevant to our business. Corporate Governance and Risk Management Senior Management 66 67 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Member of Russian Academy of Sciences, CEO and Member of the Board of Directors Medical Director of Mother&Child, Head of Hospital Group Dr Mark Kurtser is the founder of MD Medical Group, CEO and Member of the Board of Directors. Dr Kurtser began his career as a graduate assistant to the associate professor at the Obstetrics and Gynaecology Department of Pirogov Medical University. From 1994 to 2012, he was Head of the Centre for Family Planning and Reproduction, the largest public obstetrics hospital in Moscow. From 2003 to 2013, Dr Kurtser was the Chief Obstetrician and Gynaecologist of the City of Moscow. He holds a degree in Medicine from Pirogov Medical University in addition to a postdoctoral degree in Medicine. Dr Kurtser remains actively involved in the Group’s healthcare practice and day-to-day operations. Dr Mark Kurtser Dr Boris Konoplev joined the Group in 2010. In 2017, he was appointed Medical Director and Head of Hospital Group of Mother&Child. Prior to that, in 2014–2017, Dr Konoplev was Chief Doctor of Mother&Child Ufa Hospital. Earlier, from 2012 to 2014, he was Head of Obstetrics Department at Lapino Hospital. In 2010–2012, Dr Konoplev was Obstetric gynaecologist of Maternity Department at the Perinatal Medical Centre. Dr Konoplev graduated from the Paediatric Faculty of Pirogov Medical University. In 2015, he became an assistant at the Department of Reproductive Health, with speciality training in Immunology at Bashkir State Medical University. Dr Konoplev is a practicing obstetrician-gynaecologist and has undertaken a number of trainings in leading European clinics. Dr Boris Konoplev Deputy CEO for Economics and Finance PhD, Medical Director for Organisational and Scientific-Educational Work Mr Andrey Khoperskiy joined the Group as Head of Finance Controlling and Treasury in 2013, he was appointed to the position of Director for Finance of the Group in 2016. Dr Yulia Kutakova joined the Group in 2012. She has over 11 years of practical experience in obstetrics and gynaecology. Previously, Andrey worked for Rusagro Group and Sukhoi Aviation Holding Company as a Finance manager and earlier he was an Auditor in BDO Russia. Mr Khoperskiy graduated from the Moscow State University of Economics, Statistics and Informatics with a degree in Taxes. Holds ACCA Advanced Diploma in Accounting and Business and ACCA Diploma in International Financial Reporting. Prior to joining the Group, Dr Kutakova was Chief of Maternity in the Organisational and Tutorial Department of Public Healthcare of the City of Moscow. She holds a degree in Medicine from Pirogov Medical University, a degree in Management from the Moscow Institute of Management and a PhD in Medical Science. Mr Andrey Khoperskiy Dr Yulia Kutakova Deputy CEO for Operations Mrs Maria Nechaeva joined the Group in 2018. Prior to joining the Group, Maria was Head of Sales at Medipal Onco in 2012–2018. Before that, she held various positions at pharmaceutical companies such as Abbott Laboratories and Pfizer in 2003–2012. Mrs Nechaeva graduated from Pirogov Medical University with a degree in General Medicine and completed residency training in OBGYN at the Centre of Family Planning and Reproduction. Mrs Maria Nechaeva PhD, Deputy CEO, Director of Mother&Child Centre Dr Natalia Yakunina joined the Group in 2011. In 2019, she was appointed Deputy CEO and Director of Mother&Child Centre. From 2016-2018, Dr Yakunina was Deputy CEO for Patient Care and from 2014–2016 she worked as Chief Doctor and CEO of Mother&Child Savelovskaya clinic in Moscow. Before that, from 2012–2014 she was Head of the OBGYN out-patient department at PMC. Natalia joined the Group in 2011 as Chief Doctor at Mother&Child Yugo-Zapad clinic in Moscow. Before joining the Group, Dr Yakunina was Chief Obstetrician and Gynaecologist of the Central District of Moscow. Dr Yakunina has more than 22 years of experience in obstetrics-gynaecology. She graduated from Turkmen State Medical University with a degree in General Medicine and also holds a PhD degree. Dr Natalia Yakunina Corporate Governance and Risk Management Regional Directors PhD, Director of Mother & Child Urals Dr Alsou Nazyrova joined the Group in 2009 and became a member of the Board in June 2016. In 2016 she was appointed Director of Mother&Child Urals and Head of Regional Projects Department. Dr Nazyrova has held the CEO position at Mother&Child hospital in Ufa since 2014 and the CEO position at Mother&Child clinic in Ufa since 2009. Alsou Nazyrova has more than 15 years of experience in medicine and pharmaceutical business and is the Head of the Reproductive Health faculty at Bashkir State Medical University. Dr Nazyrova graduated from Bashkir State Medical University and had specialty training in Paediatrics, she also holds a PhD degree. PhD, Director of Mother&Child Volga Dr Marat Tugushev has been Chief Doctor at five Mother&Child clinics in the Samara Region since 1992. In 2017, he was also appointed as Director of Mother&Child Volga. With more than 27 years of experience in healthcare, he is currently a practicing obstetrician and gynaecologist as well as a surgeon of the highest qualification category. Dr Marat Tugushev is actively engaged in medical research. He is also Head of Reproductive Medicine, Clinical Embryology and Genetics Department at Samara State Medical University. Dr Tugushev graduated from Samara State Medical University with a degree in General Medicine. He holds a PhD in Medical Science. Director of Mother&Child Siberia Mr Andrey Sudarev joined the Group as Director of Mother&Child Siberia in 2018, bringing more than 29 years of experience in the healthcare and medical sector. Prior to joining the Group, Andrey was CEO at Service Pharm from 2016–2017. Earlier he worked at Intermedservice Company, including as the Head of its Western Siberian branch for more than 11 years. Before that, Mr Sudarev was engaged in the medical sector supplying pharmaceuticals, medical equipment and consumables to healthcare facilities. He started his career in 1989 and has a wide range of experience, having worked as a surgeon, oncologist, the head of a surgery department and as a teaching assistant in surgical pathology. Mr Sudarev graduated from Novosibirsk State Medical Institute with a degree in General Medicine. PhD, Deputy CEO, Director of Mother&Child Centre Dr Natalia Yakunina joined the Group in 2011. In 2019, she was appointed Deputy CEO and Director of Mother&Child Centre. From 2016–2018, Dr Yakunina was Deputy CEO for Patient Care and from 2014–2016 she worked as Chief Doctor and CEO of Mother&Child Savelovskaya clinic in Moscow. Before that, from 2012–2014 she was Head of the OBGYN out-patient department at PMC. Natalia joined the Group in 2011 as Chief Doctor at Mother&Child Yugo-Zapad clinic in Moscow. Before joining the Group, Dr Yakunina was Chief Obstetrician and Gynaecologist of the Central District of Moscow. Dr Yakunina has more than 22 years of experience in obstetrics-gynaecology. She graduated from Turkmen State Medical University with a degree in General Medicine and also holds a PhD degree. Dr Alsou Nazyrova Dr Marat Tugushev Dr Andrey Sudarev Dr Natalia Yakunina Report and Consolidated Financial Statements For the year ended 31 December 2018 Contents 70 Officers, Professional Advisors and Registered Office 71 Management Report 76 Directors’ Responsibility Statement 77 Independent Auditors' Report 81 Consolidated Statement of Profit or Loss and Other Comprehensive Income 82 Consolidated Statement of Financial Position 84 Consolidated Statement of Changes In Equity 88 Consolidated Statement of Cash Flows 90 Notes to the Consolidated Financial Statements 70 71 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Officers, Professional Advisors And Registered Office Management Report – Vladimir Mekler – Chairman – Mark Kurtser – Vitaly Ustimenko – Kirill Dmitriev – Nikolay Ishmetov (alternate director to Kirill Dmitriev) – Simon Rowlands – Alsu Nazyrova – Liubov Malyarevskaya Menustrust Limited Darya Alekseeva KPMG Limited 15 Dimitriou Karatasou street, Anastasio Building, 6th floor, office 601, Strovolos, 2024, Nicosia, Cyprus Board of Directors Secretary Secretary assistant Independent Auditors Registered Office The Board of Directors of MD Medical Group Investments Plc (the “Company”) presents to the members its Annual Report together with the audited consolidated financial statements of the Company and its subsidiary companies (the Company and its subsidiaries together referred to as the “Group”) for the year ended 31 December 2018. Profit for the year ended 31 De cem ber 2018 amounted to RUB2,831,043 thousand (2017: RUB2,704,250 thousand). The total assets of the Group as at 31 December 2018 were RUB25,078,137 thousand (31 December 2017: RUB22,271,953 thousand) and the net assets were RUB15,998,948 thousand (31 December 2017: RUB14,567,665 thousand). INCORPORATION MD Medical Group Investments Plc was incorporated in Cyprus on 5 August 2010 as a private limited liability company under the provisions of the Cyprus Companies Law, Cap. 113. On 22 August 2012 following special resolution passed by the shareholder, the name of the Company was changed from “MD Medical Group Investments Ltd” to “MD Medical Group Investments Plc” and the Company was converted into a public limited liability company in accordance with the provisions of the Cyprus Companies Law, Cap. 113. PRINCIPAL ACTIVITY The principal activity of the Company is that of an investment holding company and, for that purpose, to acquire and hold controlling and other interests in the share or loan capital of any company or companies of any nature, but primarily in the healthcare industry. Note 4 to these consolidated financial statements gives more detailed information about the service provided by the Group`s medical centres. FINANCIAL RESULTS The Group’s results of operations are affected by a number of factors, including acquisitions, regulatory conditions, demand for private healthcare services, patient capacity and utilisation rate, pricing and volume, staff costs, capital expenditure programmes and currency exchange fluctuations. The Group’s financial results for the year ended 31 December 2018 and its financial position at that date are set out in the consolidated statement of profit or loss and other comprehensive income on page 81 and in the consolidated statement of financial position on page 82 of these consolidated financial statements. The main reason for the increased profit was the continuing ramp-up of Lapino, Novosibirsk and Ufa hospitals and expansion of services provided by existing facilities, as clinics in Moscow (M&C Khodynskoe pole and LLC Clinica Zdorovia). The main reason for increase in total assets was the equipment purchased for the new opened hospital in Samara and the construction of multifunctional hospital in Tyumen, realisation of the project Lapino-2 and renovation of PMC. DIVIDENDS In accordance with the Company’s Articles of Association dividends may be paid out of its profits. To the extent that the Company declares and pays dividends, owners of GDRs on the relevant record date will be entitled to receive dividends in respect of ordinary shares underlying the GDRs. The Company is a holding company and thus its ability to pay dividends depends on the ability of its subsidiaries to pay dividends to the Company in accordance with relevant legislation in the country of their incorporation and any contractual restrictions. The payment of such dividends by its subsidiaries is contingent upon the sufficiency of their earnings, cash flows and distributable reserves. On 16 March 2018 the Board of Directors declared final dividends for the year 2017 attributable to the owners of the Company amounting to RUB450,750 thousand (USD7,905 thousand), which corresponds to RUB6.0 (USD0.11) per share. The dividend distribution was approved by the Annual General Meeting of the shareholders on 17 April 2018. The dividends were paid on 22 May 2018. On 17 March 2017 the Board of Directors declared final dividends for the year 2016 attributable to the owners of the Company amounting to RUB338,063 thousand (USD5,804 thousand), which corresponds to RUB4.5 (USD0.08) per share. The dividend distribution was approved by the Annual General Meeting of the shareholders on 21 April 2017. The dividends were paid on 23 May 2017. Audited Financial StatementsOn 8 September 2017 the Board of Directors declared interim dividends for the six months ended 30 June 2017 attributable to the owners of the Company amounting to RUB350,833 thousand (USD6,140 thousand), which corresponds to RUB4.67 (USD0.08) per share. The dividends were paid on 24 October 2017. On 22 March 2019 the Board of Directors recommended the payment of RUB800,081 thousand as final dividends for the year 2018 which corresponds to RUB10.65 per share. EXAMINATION OF THE DEVELOPMENT, POSITION AND PERFORMANCE OF THE ACTIVITIES OF THE GROUP The current financial position and performance of the Group as presented in these consolidated financial statements is considered satisfactory. The Group has developed its growth strategy to meet the increasing demand for high-quality private healthcare services in Russia. The Group has grown significantly through strategic acquisitions and expansion through the construction of new facilities. During 2018 the Group has acquired additional 30% share in LLC Mother and Child Ugo-Zapad and LLC FimedLab, 26% share in LLC Velum, 20% share in LLC Clinica Zdorovia and 15% share in LLC Capital Group, LLC Mother and Child Perm, LLC Mother and Child Ufa, LLC Mother and Child Saint-Petersburg for RUB790,231 thousand (USD12,335 thousand). The Group has one of the largest nationwide private healthcare regional networks for its core services and is expanding into new services. It has significant experience in the provision of full-service private maternity healthcare services. The Group has secured leading positions in the Russian private healthcare market across a range of services including obstetrics and gynaecology, fertility and IVF treatments, and paediatrics. It has also been diversifying its offering by adding other medical services for all family members, such as surgery, urology, traumatology, cardiology, and oncology, etc. The recently opened facilities have been multi-disciplinary from the very beginning. The Group’s principal objective is to use its strong existing platform and experience in the regions to create a scalable concept of establishing new regional hospitals and other medical facilities, utilising rigorous investment decision-making process and targeting the most attractive regions and ensuring seamless execution. The Group believes the experience, depth and diversity of its management team to be a distinct competitive advantage in the complex and rapidly growing healthcare industry in which it operates. PRINCIPAL RISKS AND UNCERTAINTIES The Group operates in a highly regulated industry and is subject to supervision by federal and local authorities. As a result, the Group would be significantly affected by material changes to the existing, or implementation of additional, government regulations in Russia. The Board of Directors has the overall responsibility for the establishment and supervision of the Company’s risk management framework. Details in relation to principal risks and uncertainties and steps taken to manage these risks and uncertainties are presented in Notes 23 and 25 of these consolidated financial statements. The reputation, expertise and professionalism of the Group’s medical personnel are instrumental to the Group’s ability to attract new and repeat patients. The Group’s operating success depends on its medical personnel providing high-quality healthcare services throughout the Group’s medical network. DIRECTORS’ INTEREST The direct and indirect interests of the members of the Board in titles of the Company as at 31 December 2018, 31 December 2017 and as at the date of signing these consolidated financial statements are as follows: NAME TYPE OF INTEREST EFFECTIVE INTEREST % Mark Kurtser Kirill Dmitriev Simon Rowlands Indirect ownership of shares Indirect interest in shares Direct ownership of shares 67.90 5.55 0.33 Indirect interest in shares by Kirill Dmitriev arises through his capacity as key management personnel of indirect shareholder. The calculation of effective interest is based on the total amount of issued and fully paid shares, including treasury shares acquired by the Company. FUTURE DEVELOPMENTS The Group’s goal is to continually diversify its medical services by expanding its range of services, maintaining its leading position 72 73 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS in the field of high-quality women’s health and paediatrics, as well as addressing the increasing demand for private healthcare services in Russia and beyond. The Audit Committee meets at least four times each year and is re- sponsible for considering: • the reliability and appropriateness of disclosures in the financial As the Group will be growing it intends to expand its portfolio of hospital and outpatient facilities, broaden its service offerings by providing patients with the most up-to-date treatment procedures and medical technology available on the market, expand its services in Moscow and other regions, exploit the value of its integrated healthcare network by making effective use of services across its facilities, optimising the benefits for patients and the Group as a whole. SHARE CAPITAL There were no changes in the share capital of the Company during the year. BOARD OF DIRECTORS The Board of Directors leads the process in making new Board member appointments and makes recommendations on appointments to shareholders. In accordance with the Appointment Policy for the Board of Directors and Committees, all directors are subject to appointment or approval of appointment by shareholders at the first Annual General Meeting after their appointment, and to re-appointment at intervals of no more than three years. Any term beyond six years (e.g. two three-year terms) for a non-executive director is subject to particularly rigorous review, and takes into account the need for progressive refreshing of the Board of Directors. The members of the Board of Directors who served as at the date of signing of these consolidated financial statements, are presented on page 70. Refer to Note 22 of these consolidated financial statements for the remuneration of the directors and other key management personnel. THE BOARD COMMITTEES Since September 2012, the Board of Directors established the operation of the following three committees: the Audit Committee, the Nomination Committee and the Remuneration Committee. AUDIT COMMITTEE The Audit Committee comprises of three non-executive directors, two of whom are independent. The Audit Committee is chaired by independent non-executive director Liubov Malyarevskaya since 19 February 2015, Mr. Kirill Dmitriev and Mr. Simon Rowlands are the other members. statements and external financial communication; • the maintenance of an effective system of internal controls including financial, operational and compliance controls and risk management system; • preparation of recommendations to the shareholders for approval in General Meetings in relation to the appointment, reappointment and removal of the external auditors; • approval of the remuneration and terms of engagement of the external auditors in respect of audit services provided; • the audit process, including monitoring and review of the external auditors’ performance, independence and objectivity; • development and implementation of the policy on non- audit services provided by the external auditors; and • monitoring compliance with laws and regulations and standard of corporate governance. The Audit Committee assists the Board of Directors in its oversight of the performance and leadership of the internal audit activity. Where the Audit Committee’s monitoring and review activities reveal cause for concern or scope for improvement, it shall make recommendation to the Board of Directors on actions needed to address the issues or to make improvements. INTERNAL AUDIT The Audit Committee is responsible for monitoring and review the effectiveness of the Company’s internal audit function. In this respect, the Audit Committee may require investigations by, or under the authority of, the head of Internal Audit into any activities of the Group which may be of interest or concern to the Audit Committee. The Company ` s internal auditor is responsible for the recommendation of an audit plan to the Audit Committee. The internal auditor carries out auditing assignments in accordance with such plan and oversees the Company ` s compliance with the plan ` s recommendations. The internal auditor files a quarterly report with his findings to the Audit Committee. NOMINATION COMMITTEE The Nomination Committee comprises of one executive and two non-executive directors, one of whom is independent. The Nomination Committee is chaired by non-executive director Mr. Vladimir Mekler (since June 2016); non-executive director Mr. Simon Rowlands and executive director Dr. Mark Kurtser are other members since September 2015. The Nomination Committee meets at least once a year and is responsible for assisting the Board of Directors in discharging its corporate governance responsibilities in relation to appointment of all executive and non-executive directors, as well as the CEO and CFO of the Company. The main objective of the Nomination Committee is to lead the process for the Board Audited Financial Statements74 75 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS • • in the case of a meeting called as the annual general meeting, by all the shareholders entitled to attend and vote; and in the case of any other meeting, by a majority in number of the members having a right to attend and vote at the meeting, being a majority together holding not less than 95 per cent in nominal value of the shares giving that right. EVENTS AFTER THE REPORTING PERIOD In March 2019 the Group opened a new clinic in Vladivostok. A notice convening a general meeting must be sent to each of the shareholders. INDEPENDENT AUDITORS All shareholders are entitled to attend the general meeting or be represented by a proxy authorised in writing. In the general meeting, on a poll, every share gives the holder the right to cast one vote, whereas, on a show of hands, each member has one vote. A corporate member may, by resolution of its directors or other governing body, authorise a person to act as its representative at any meeting of the Company. BRANCHES MD Medical Group Investments Plc has a branch in Moscow. The independent auditors of the Company Messrs. KPMG Limited have expressed their willingness to continue in office. A resolution giving authority to the Board of Directors to fix their remuneration will be submitted to the Annual General Meeting. TREASURY SHARES During the year ended 31 December 2018, the Company distributed the GDRs earlier acquired by the Company to the participants of Long-term Management Incentive Plan (LTIP) signed in 2014. No additional treasury shares were acquired. By order of the Board of Directors, Mark Kurtser Managing Director, member of the Board of Directors Moscow, 22 March 2019 of Directors’ appointments and make respective recommendation to the Board of Directors, ensuring proper balance of the Board of Directors and qualification of its members. The Nomination Committee also considers the composition of the Audit and Remuneration Committees. its responsibilities to the shareholders. The Company’s corporate governance policies and practices include, inter alia: • Appointment policy for the Board of Directors and Committees; • Terms of reference of the Audit Committee, Nomination Committee and Remuneration Committee; REMUNERATION COMMITTEE The Remuneration Committee comprises of two non-executive directors and one executive director. The Remuneration Committee is chaired by an independent non-executive director Mr. Simon Rowlands. The two other members are Dr. Mark Kurtser and Mr. Vladimir Mekler. The Remuneration Committee meets at least once a year and is responsible for assisting the Board of Directors in discharging its corporate governance responsibilities in relation to remuneration of all executive directors and the chairman of the Board of Directors. The main objective of the Remuneration Committee is to determine the framework and policy for the remuneration of the executive directors, the chairman of the Board of Directors and senior executives, and the specific remuneration of each executive director and the chairman of the Board of Directors and any compensation payments. CORPORATE GOVERNANCE Since 2012, the Company has maintained full compliance with the UK Corporate Governance Code. The Company is committed to the highest standards of corporate governance and transparency. The Board of Directors recognises that good governance is a strategic asset that helps it to deliver consistent long term value to its shareholders. By running the Company in an open way, the Board of Directors enables shareholders to understand how it has been able to deliver consistently strong results. The Board of Directors believes that corporate responsibility is an essential part of good governance and makes sound business sense, as well as being crucial to the appropriate management of risk within the Company. Improving its corporate governance structure in accordance with the internationally recognised best practices the Company adopted important policies and procedures. The Company’s corporate governance policies and practices are designed to ensure that the Company is focused on upholding • Code of Ethics and Conduct; • Business Continuity Policy; • Disclosure Policy; • Regulations on Insider Information; • Risk Management Policy; and • Anti-Fraud Policy. INTERNAL CONTROL IN RELATION TO THE FINANCIAL REPORTING PROCESS The Group has set formal policies and written term of reference in relation to the financial reporting process that include: • Corporate Accounting policy Guidelines; • Methodology for the Transformation of Financial Statements from RAS to IFRS; • Methodology for the Consolidation of IFRS Financial Statements; • Financial Reporting Preparation Procedure; and • The Group’s structure. The objective of this policу is to establish uniform procedures and to implement requirements for the preparation of the consolidated financial statements of the Group. The procedure should be reviewed for compliance with International Financial Reporting Standards as well as current conditions and planned changes in the Group’s business activities at least once a year. When necessary, amendments and additions to this Procedure should be adopted. MEETINGS OF SHAREHOLDERS The Company shall in each year hold a general meeting as its annual general meeting in addition to any other meetings in that year. An annual general meeting and any other shareholders’ meeting called to pass a special resolution can be convened by the Board of Directors by a notice, specifying the matters to be discussed, issued at least 21 days before the meeting. Any other meetings shall be convened by the Board of Directors by a notice, specifying the matters to be discussed, issued at least 14 days before the meeting. If the notice period is less than 21 days or 14 days as applicable, the meeting will be deemed to have been duly called if it is so agreed: Audited Financial StatementsDirectors’ Responsibility Statement Each of the directors, whose names are listed below, confirms that, to the best of their knowledge: • these consolidated financial statements, prepared in accordance with IFRS as adopted by the EU and the requirements of the Cyprus Companies Law, Cap.113, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; • the adoption of the going concern basis for the preparation of the financial statements continues to be appropriate based on the foregoing and having reviewed the forecast financial position of the Group; and • the Management report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. The Directors of the Company responsible for reporting as at the date of this announcement are set out below: Vladimir Mekler Mark Kurtser Vitaly Ustimenko Alsu Nazyrova Kirill Dmitriev Simon Rowlands Liubov Malyarevskaya Chairman, non-executive director Executive director Non-executive director Executive director Non-executive director Non-executive independent director Non-executive independent director 76 77 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Independent Auditors’ Report to the Members of MD Medical Group Investments plc REPORT ON THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS OPINION We have audited the consolidated financial statements of MD Medical Group Investments Plc (the “Company’’) and its subsidiar- ies (together with the Company, referred to as “the Group”) which are presented on pages 81 to 116 and comprise the consolidat- ed statement of financial position as at 31 December 2018, and the consolidated statements of profit or loss and other compre- hensive income, changes in equity and cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2018, and of its consolidated financial perfor- mance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRS-EU”) and the requirements of the Cyprus Companies Law, Cap. 113, as amended from time to time (the “Companies Law, Cap. 113”). BASIS FOR OPINION We conducted our audit in accordance with International Stand- ards on Auditing (“ISAs”). Our responsibilities under those stand- ards are further described in the “Auditors’ responsibilities for the audit of the consolidated financial statements” section of our report. We remained independent of the Group in accordance with the Code of Ethics for Professional Accountants of the Interna- tional Ethics Standards Board for Accountants (“IESBA Code”) and the ethical requirements in Cyprus that are relevant to our au- dit of the consolidated financial statements, and we have fulfilled our other ethical responsibilities in accordance with these require- ments and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. KEY AUDIT MATTERS Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidat- ed financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Audited Financial StatementsGOODWILL Please refer to Note 14 of the consolidated financial statements (RUB2,032,320 thousand). The key audit matter How the matter was addressed in our audit As a result of the Group’s expansion, a significant amount of goodwill arising from business combinations has been recognised over the years. The management of the Group reviews goodwill for impairment purposes on an annual basis. Inherent uncertainty and subjectivity is involved in forecasting and discounting future cash flows, which are the basis of the assessment of the recoverability of the goodwill and hence its carrying value recorded in the consolidated financial statements. It is for this reason that this is one of the key judgmental areas that our audit is concentrated on. Our audit procedures included among others the following: Assessing the reasonableness of the assumptions and appropriateness of the methodologies used by the management of the Group based on which the forecasted cash flows were prepared. Particular attention was given to the assumptions relating to terminal growth, after-tax profitability and discount rates. Our own valuation specialists were also utilised within this process. Comparing the Group’s assumptions on revenue growth and after-tax profitability margins with equivalent medical centers of the Group in nearby regions, externally derived data as well as our own assessment in relation to key inputs into the models. Preparing our own sensitivity analysis around the key assumptions. Assessing whether the disclosures in Note 14 of the consolidated financial statements relating to key inputs in the impairment assessment model are consistent with those employed in the model. REVENUE RECOGNITION Please refer to Note 4 of the consolidated financial statements (RUB14,937,366 thousand). The key audit matter How the matter was addressed in our audit The Group has a number of revenue streams with different revenue recognition policies. The majority of the revenue is generated from individual patients who receive medical care either based on concluded contracts or based on daily tickets for one-off visits. Contracts may last for longer periods. Generally, patients prepay for the whole amount of the contracts and visit doctors within the period of the contract. The number of visits in all medical centers of the Group is significant. Therefore, the Group relies on automation within the medical IT system for complete and accurate revenue recognition through interface with the accounting system. Given the number of different revenue streams, the volume of transactions and related reliance on the medical IT system, we consider that a risk exists in relation to revenue being recorded in the correct period at the correct amount, including related deferred income in the consolidated statement of financial position. Our audit procedures included among others the following: Testing of general IT controls and IT application controls relevant to revenue recognition, including segregation of duties for inputs and modification of data in the medical IT system, allocation of cash receipts and visits of patients for each individual contract, accuracy of data transfers from cash registers to the medical IT system through to the accounting system. Assessing the design and implementation, and testing of the operating effectiveness of controls over daily cash movements and the completeness of the daily encashment to the bank accounts of the Group. Evaluating controls over approval and authorisation of prices and discounts for individual agreements with patients. Obtaining external confirmations from banks and compared annual cash receipts and cash balances on bank accounts to the data recorded in the accounting systems. As such, revenue recognition is an area that our audit is focused on. Performing substantive analytical procedures to assess deferred revenue recognised in the year (prepayments). 78 79 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS OTHER INFORMATION The Board of Directors is responsible for the other information. The other information comprises the management report, the cor- porate governance statement and the corporate social responsi- bility statement, but does not include the consolidated financial statements and our auditors’ report thereon. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of as- surance conclusion thereon, except as required by the Companies Law, Cap.113. In connection with our audit of the consolidated financial state- ments, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other infor- mation, we are required to report that fact. With regards to the corporate social responsibility statement we have nothing to report. With regards to the management report and the corporate gov- ernance statement, our report is presented in the “Report on other legal and regulatory requirements” section. RESPONSIBILITIES OF THE BOARD OF DIRECTORS AND THOSE CHARGED WITH GOVERNANCE FOR THE CONSOLIDATED FINANCIAL STATEMENTS The Board of Directors is responsible for the preparation of consol- idated financial statements that give a true and fair view in accord- ance with IFRS-EU and the requirements of the Companies Law, Cap. 113, and for such internal controls as the Board of Directors determines are necessary to enable the preparation of consolidat- ed financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the Board of Di- rectors is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless there is an intention to either liquidate the Group or to cease operations, or there is no realistic alternative but to do so. The Board of Directors is responsible for overseeing the Group’s financial reporting process. AUDITORS’ RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an au- dit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggre- gate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise profes- sional judgment and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the con- solidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a ma- terial misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, inten- tional omissions, misrepresentations, or the override of internal controls. • Obtain an understanding of internal controls relevant to the au- dit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal controls. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclo- sures made by the Board of Directors. • Conclude on the appropriateness of the Board of Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ re- port. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclo- sures, and whether the consolidated financial statements rep- resent the underlying transactions and events in a manner that achieves a true and fair view. • Obtain sufficient appropriate audit evidence regarding the fi- nancial information of the entities or the business activities of the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the au- dit and significant audit findings, including any significant deficien- cies in internal controls that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regard- ing independence, and to communicate with them all relationships Audited Financial Statementsand other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with govern- ance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS OTHER REGULATORY REQUIREMENTS Pursuant to the requirements of Article 10(2) of EU Regulation 537/2014 we provide the following information in our Independent Auditors’ Report, which is required in addition to the requirements of ISAs. • Date of our appointment and period of engagement We were first appointed auditors of the Group by the General Meeting of the Company’s members on 10 July 2012. Our ap- pointment has been renewed annually by shareholders’ resolu- tion. Our total uninterrupted period of engagement is 10 years covering the periods ended 31 December 2009 to 31 December 2018. • Consistency of the additional report to the Audit Committee with the Independent Auditors’ Report Our audit opinion is consistent with the additional report pre- sented to the Audit Committee, dated 22 March 2019. • Provision of non-audit services (“NAS”) We have not provided any prohibited NAS referred to in Article 5 of EU Regulation 537/2014 as applied by Section 72 of the Au- ditors Law of 2017, L.53(I)2017, as amended from time to time (“Law L53(I)/2017”). OTHER LEGAL REQUIREMENTS Pursuant to the additional requirements of law L. 53(I)/2017, and based on the work undertaken in the course of our audit, we report the following: • In our opinion, the consolidated management report, the prepa- ration of which is the responsibility of the Board of Directors, has been prepared in accordance with the requirements of the Com- panies Law, Cap. 113, and the information given is consistent with the consolidated financial statements. • In the light of the knowledge and understanding of the Group’s business and its environment obtained in the course of the audit, we have not identified material misstatements in the consolidat- ed management report. • In our opinion, the information included in the corporate govern- ance statement in accordance with the requirements of subpara- graphs (iv) and (v) of paragraph 2(a) of Article 151 of the Com- panies Law, Cap. 113, and which is included as a specific section of the consolidated management report, has been prepared in accordance with the requirements of the Companies Law, Cap, 113, and is consistent with the consolidated financial statements. • In our opinion, the corporate governance statement includes all information referred to in subparagraphs (i), (ii), (iii), (vi) and (vii) of paragraph 2(a) of Article 151 of the Companies Law, Cap. 113. • In light of the knowledge and understanding of the Group and its environment obtained in the course of the audit, we are required to report if we have identified material misstatements in the cor- porate governance statement in relation to the information disclosed for items (iv) and (v) of subparagraph 2(a) of Article 151 of the Cyprus Companies Law, Cap. 113. We have nothing to report in this respect. OTHER MATTER This report, including the opinion, has been prepared for and only for the Company’s members as a body in accordance with Sec- tion 69 of Law L. 53(I)/2017 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whose knowledge this report may come to. The engagement partner on the audit resulting in this independent auditors’ report is Zakis E. Hadjizacharias. Zakis E. Hadjizacharias, CA Certified Public Accountant and Registered Auditor for and on behalf of KPMG Limited Certified Public Accountants and Registered Auditors No. 11, June 16th 1943 Street, 3022 Limassol, Cyprus. 22 March 2019 80 81 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Consolidated statement of profit or loss and other comprehensive income For the year ended 31 December 2018 Revenue Cost of sales Gross profit Other income Administrative expenses Other expenses Operating profit Finance income Finance expenses Net foreign exchange transactions gain / (loss) Net finance expenses Profit before tax Income tax expense Profit for the year TOTAL COMPREHENSIVE INCOME FOR THE YEAR Profit for the year attributable to: Owners of the Company Non-controlling interests TOTAL COMPREHENSIVE INCOME FOR THE YEAR ATTRIBUTABLE TO: Owners of the Company Non-controlling interests NOTE 2018 RUB’000 2017 RUB’000 4 5 8 6 9 9 9 9 10 14,937,366 13,755,167 (9,387,499) (8,358,369) 5,549,867 5,396,798 26,831 104,808 (2,415,615) (2,254,079) (36,895) (21,407) 3,124,188 3,226,120 173,685 (546,514) 105,823 97,321 (492,084) (50,201) (267,006) (444,964) 2,857,182 (26,139) 2,831,043 2,831,043 2,781,156 (76,906) 2,704,250 2,704,250 2,671,350 2,488,812 159,693 215,438 2,831,043 2,704,250 2,671,350 2,488,812 159,693 215,438 2,831,043 2,704,250 EARNINGS PER SHARE (RUB) 11 35.61 33.23 The Notes on pages 90 to 116 are an integral part of these consolidated financial statements. Audited Financial StatementsConsolidated Statement Of Financial Position As at 31 December 2018 ASSETS Property, plant and equipment Intangible assets Trade, other receivables and deferred expenses Deferred tax assets TOTAL NON-CURRENT ASSETS Inventories Trade, other receivables and deferred expenses Other assets Cash and cash equivalents TOTAL CURRENT ASSETS TOTAL ASSETS EQUITY Share capital Share premium Reserves Retained earnings TOTAL EQUITY ATTRIBUTABLE TO THE OWNERS OF THE COMPANY Non-controlling interests TOTAL EQUITY NOTE 31 DECEMBER 2018 RUB’000 31 DECEMBER 2017 RUB’000 13 14 15 10 15 16 17 18 18 18 26 18,157,678 15,323,649 2,258,513 2,335,477 592,416 232,159 889,933 243,165 21,240,766 18,792,224 666,122 455,768 - 525,356 421,203 28,568 2,715,481 2,504,602 3,837,371 3,479,729 25,078,137 22,271,953 180,585 5,243,319 (659,049) 10,932,291 180,585 5,243,319 (659,896) 9,377,710 15,697,146 14,141,718 301,802 425,947 15,998,948 14,567,665 82 83 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS LIABILITIES Loans and borrowings Trade and other payables Deferred tax liabilities Contract liabilities TOTAL NON-CURRENT LIABILITIES Loans and borrowings Trade and other payables Contract liabilities TOTAL CURRENT LIABILITIES TOTAL LIABILITIES TOTAL EQUITY AND LIABILITIES NOTE 31 DECEMBER 2018 RUB’000 31 DECEMBER 2017 RUB’000 19 21 10 20 19 21 20 4,586,532 3,585,213 435,809 272,565 143,773 277,320 250,504 144,860 5,438,679 4,257,897 1,078,743 1,385,628 1,176,139 985,234 1,332,364 1,128,793 3,640,510 3,446,391 9,079,189 7,704,288 25,078,137 22,271,953 On 22 March 2019 the Board of Directors of MD Medical Group Investments Plc approved and authorised these consolidated financial statements for issue. Vladimir Mekler Chairman of the Board of Directors Mark Kurtser Managing Director Andrey Khoperskiy Chief Financial Officer The Notes on pages 90 to 116 are an integral part of these consolidated financial statements. Audited Financial Statements84 85 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Consolidated Statement Of Changes In Equity For the year ended 31 December 2018 ATTRIBUTABLE TO OWNERS OF THE COMPANY ATTRIBUTABLE TO OWNERS OF THE COMPANY BALANCE AT 1 JANUARY 2018 Adjustment on initial application of IFRS 9 (net of tax) 3B NOTE SHARE CAPITAL RUB’000 180,585 - TREASURY SHARES RUB’000 SHARE PREMIUM RUB’000 (4,544) 5,243,319 - - ADJUSTED BALANCE AT 1 JANUARY 2018* 180,585 (4,544) 5,243,319 Profit and other comprehensive income for the year Contributions by and distributions to owners Equity-settled share-based payment Other movements Dividends declared TOTAL TRANSACTIONS WITH OWNERS Changes in ownership interests Acquisition of non-controlling interests without a change in control TOTAL CHANGES IN OWNERSHIP INTERESTS 12 18 - - - - - - - - 847 - - 847 - - - - - - - - - OTHER RESERVES RUB’000 (655,352) - (655,352) - - - - - - - BALANCE AT 31 DECEMBER 2018 180,585 (3,697) 5,243,319 (655,352) Share premium is not available for distribution. RETAINED EARNINGS RUB’000 9,377,710 (30,935) 9,346,775 2,671,350 - (15,545) (450,750) TOTAL RUB’000 14,141,718 (30,935) 14,110,783 2,671,350 847 (15,545) (450,750) (466,295) (465,448) (619,539) (619,539) (619,539) 10,932,291 (619,539) 15,697,146 NON-CONTROLLING INTERESTS RUB’000 TOTAL EQUITY RUB’000 425,947 (2,956) 422,991 159,693 - - (110,190) (110,190) (170,692) (170,692) 301,802 14,567,665 (33,891) 14,533,774 2,831,043 847 (15,545) (560,940) (575,638) (790,231) (790,231) 15,998,948 * The Group has initially applied IFRS 15 and IFRS 9 at 1 January 2018. Under the transition methods chosen, comparative information is not restated. For more details refer to Note 3. The Notes on pages 90 to 116 are an integral part of these consolidated financial statements. Audited Financial Statements86 87 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Consolidated Statement Of Changes In Equity For the year ended 31 December 2017 BALANCE AT 1 JANUARY 2017 Profit and other comprehensive income for the year Contributions by and distributions to owners Equity-settled share-based payment Closing of motivation program Dividends declared TOTAL TRANSACTIONS WITH OWNERS Changes in ownership interests Acquisition of non-controlling interests without a change in control TOTAL CHANGES IN OWNERSHIP INTERESTS ATTRIBUTABLE TO OWNERS OF THE COMPANY ATTRIBUTABLE TO OWNERS OF THE COMPANY NOTE SHARE CAPITAL RUB’000 180,585 TREASURY SHARES RUB’000 SHARE PREMIUM RUB’000 (18,737) 5,243,319 - - - - - - - - 34,754 (20,561) - 14,193 - - - - - - - - - 12 18 OTHER RESERVES RUB’000 (655,352) - - - - - - - RETAINED EARNINGS RUB’000 7,597,472 2,488,812 - 20,561 (688,896) (668,335) (40,239) (40,239) 9,377,710 TOTAL RUB’000 12,347,287 2,488,812 34,754 - (688,896) (654,142) (40,239) (40,239) 14,141,718 NON-CONTROLLING INTERESTS RUB’000 422,850 215,438 - - (199,580) (199,580) (12,761) (12,761) 425,947 TOTAL EQUITY RUB’000 12,770,137 2,704,250 34,754 - (888,476) (853,722) (53,000) (53,000) 14,567,665 BALANCE AT 31 DECEMBER 2017 180,585 (4,544) 5,243,319 (655,352) Share premium is not available for distribution. The Notes on pages 90 to 116 are an integral part of these consolidated financial statements. Audited Financial Statements 88 89 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Consolidated Statement Of Cash Flows For the year ended 31 December 2018 Cash flows from operating activities Profit for the year Adjustments for: Depreciation of property, plant and equipment Amortisation of intangible assets Equity-settled share-based payment transaction (Gain) / loss from the sale of property, plant and equipment Write-off of property, plant and equipment Gain under Escrow Agreement Write-off of accounts payable Finance income Finance expenses (excluding impairment) Impairment of assets Net foreign exchange transactions (gain) / loss Income tax expense Increase in inventories Increase in trade and other receivables Increase in trade and other payables Increase in contract liabilities CASH FLOWS FROM OPERATIONS Tax paid NET CASH FLOWS FROM OPERATING ACTIVITIES Cash flows from investing activities Payment for acquisition/construction of property, plant and equipment Proceeds from disposal of property, plant and equipment NET CASH FLOWS USED IN INVESTING ACTIVITIES (3,580,999) (3,306,958) NOTE 2018 RUB’000 2017 RUB’000 2,831,043 2,704,250 Proceeds from Escrow Agreement Payment for acquisition of intangible assets 13 14 8 9 9 9 9 10 1,089,720 100,275 847 (152) 5,711 - - (173,685) 524,062 22,452 (105,823) 26,139 938,621 97,219 34,754 418 9,602 (96,592) (3,916) (97,321) 477,732 14,352 50,201 76,906 Short-term deposits Interest received Cash flows from financing activities Proceeds from loans and borrowings Repayment of loans and borrowings Proceeds from the reimbursed VAT Finance expenses paid Increase in ownership in subsidiary Repayment of reimbursed VAT Dividends paid to the owners of the Company Dividends paid to non-controlling interests NET CASH FLOWS (USED IN) / FROM FINANCING ACTIVITIES 4,320,589 4,206,226 NET INCREASE IN CASH AND CASH EQUIVALENTS (140,766) (158,822) 33,501 125,222 (80,173) (118,056) 40,143 141,868 4,179,724 4,190,008 (8,945) (4,138) 4,170,779 4,185,870 (3,669,078) (3,445,028) 36,389 4,136 Cash and cash equivalents as at the beginning of the year Effect of exchange rate changes on cash and cash equivalents CASH AND CASH EQUIVALENTS AS AT THE END OF THE YEAR The Notes on pages 90 to 116 are an integral part of these consolidated financial statements. NOTE 2018 RUB’000 (25,011) - - 76,701 2017 RUB’000 (17,530) 96,592 (2,700) 57,572 2,055,583 2,332,688 (955,202) (1,078,923) 307,043 (479,137) (768,235) (64,338) (494,339) (109,759) (508,384) 81,396 124,246 (353,115) (53,000) (53,205) (680,791) (199,445) 38,455 917,367 2,504,602 1,642,944 129,483 (55,709) 2,715,481 2,504,602 18 16 16 Audited Financial StatementsNotes to the Consolidated Financial Statements For the year ended 31 December 2018 1. INCORPORATION AND PRINCIPAL ACTIVITIES MD Medical Group Investments Plc (the ‘’Company’’) was incorporated in Cyprus on 5 August 2010 as a private limited liability company under the provisions of the Cyprus Companies Law, Cap. 113. In August 2012, following the special resolution passed by the shareholder, the Company was converted into a public limited liability company in accordance with the provisions of the Cyprus Companies Law, Cap. 113. Its Registered Office is at Dimitriou Karatasou 15, Anastasio Building, 6th floor, office 601, Strovolos, 2024, Nicosia, Cyprus. The principal activity of the Company is that of an investment holding company and, for that purpose, to acquire and hold controlling and other interests in the share or loan capital of any company or companies of any nature, but primarily in the healthcare industry. Refer to Note 4 for more detailed information about the services provided by the Group’s medical centres. The details of the directly and indirectly owned subsidiaries are as follows: NAME COUNTRY OF INCORPORATION ACTIVITIES CJSC MD PROJECT 2000 Russian Federation Medical services LLC Khaven LLC Velum LLC Capital Group LLC FimedLab Russian Federation Medical services Russian Federation Medical services Russian Federation Pharmaceutics retail Russian Federation Medical services LLC Clinic Mother and Child Russian Federation Holding of trademarks LLC Clinica Zdorovia Russian Federation Medical services LLC Ivamed LLC Dilamed CJSC Listom LLC Ustic-ECO Russian Federation Medical services Russian Federation Medical services Russian Federation Service company Russian Federation Medical services LLC Mother and Child Perm Russian Federation Medical services LLC Mother and Child Ufa Russian Federation Medical services LLC Mother and Child Saint-Petersburg Russian Federation Medical services LLC MD PROJECT 2010 Russian Federation Medical services LLC Mother and Child Ugo-Zapad Russian Federation Medical services 31 DECEMBER 2018 EFFECTIVE HOLDING % 31 DECEMBER 2017 EFFECTIVE HOLDING % 95 100 90 95 90 100 80 100 100 100 70 95 95 85 100 90 95 100 64 80 60 100 60 100 100 100 70 80 80 70 100 60 90 91 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS NAME COUNTRY OF INCORPORATION ACTIVITIES LLC MD Service Russian Federation Pharmaceutics retail LLC Mother and Child Nizhny Novgorod Russian Federation Medical services LLC Mother and Child Yekaterinburg Russian Federation Medical services LLC Mother and Child Tyumen Russian Federation Medical services CJSC MK IDK LLC Apteka IDK LLC CSR Russian Federation Medical services Russian Federation Pharmaceutics retail Russian Federation Medical services LLC MD Assistance Russian Federation Assistance services LLC Mother and Child Yaroslavl Russian Federation Medical services LLC Mother and Child Kostroma Russian Federation Medical services LLC Mother and Child Vladimir Russian Federation Medical services LLC MD Management Russian Federation Management company LLC Mother and Child Ryazan Russian Federation Medical services LLC Mother and Child Kazan Russian Federation Medical services Ivicend Holding Ltd JSC MC Avicenna Cyprus Holding of investments Russian Federation Medical services LLC H&C Medical Group Russian Federation Medical services LLC Centre of Reproductive Medicine Russian Federation Medical services LLC Medica-2 Russian Federation Medical services LLC Mother and Child Siberia Russian Federation Medical services LLC Krasnoyarskii center of Reproductive Medicine LLC Novosibirskii center of Reproductive Medicine Russian Federation Medical services Russian Federation Medical services LLC Omskii center of Reproductive Medicine Russian Federation Medical services 31 DECEMBER 2018 EFFECTIVE HOLDING % 31 DECEMBER 2017 EFFECTIVE HOLDING % 95 100 100 100 100 100 100 100 80 80 80 100 100 100 100 100 100 100 100 100 100 100 100 95 100 100 100 100 100 100 100 80 80 80 100 100 100 100 100 100 100 100 100 100 100 100 Audited Financial Statements92 93 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS 31 DECEMBER 2018 EFFECTIVE HOLDING % 31 DECEMBER 2017 EFFECTIVE HOLDING % plant and equipment that are acquired through a business combination are initially recorded at fair value at the date of acquisition. Intangible assets with indefinite useful life are reviewed for impairment at least annually. is tested annually for impairment. Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities. NAME COUNTRY OF INCORPORATION ACTIVITIES LLC Barnaulskii center of Reproductive Medicine Russian Federation Medical services LLC Nika Russian Federation Holding of land LLC Stroy Vector Pluss Russian Federation Rental services LLC Mother and Child Vladivostok Russian Federation Medical services LLC Irkutsk Clinical Hospital Russian Federation Medical services LLC Mother and Child Volga Russian Federation Management company LLC Siberia service company Russian Federation Service company LLC TechMedCom Russian Federation Service company LLC Service Hospital Company Russian Federation Service company LLC Elleprof Russian Federation Service company LLC Medtechnoservice Russian Federation Service company 100 100 100 100 100 100 - - - - - 100 100 100 100 100 - - - - - - As at 31 December 2018, 67.9% of the Company’s share capital is owned by MD Medical Holding Limited, a company beneficially owned by Dr. Mark Kurtser. The 32.1% of the Company’s share capital is owned by Guarantee Nominee Limited, who holds the shares on behalf of the GDR holders. Federation. The Company and all its operating subsidiaries have RUB as their functional currency. These consolidated financial statements of the Group are presented in RUB, rounded to the nearest thousand. 2. BASIS OF PREPARATION (A) STATEMENT OF COMPLIANCE These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS – EU) and the requirements of the Cyprus Companies Law, Cap.113. These consolidated financial statements were approved by the Board of Directors and were authorised for issue on 22 March 2019. This is the first set of the Group’s annual financial statements in which IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments have been applied. Changes to significant accounting policies are described in Note 3. (B) BASIS OF MEASUREMENT These consolidated financial statements have been prepared under the historical cost convention. (C) FUNCTIONAL AND PRESENTATION CURRENCY All of the operational Group entities are located in the Russian (D) USE OF ESTIMATES AND JUDGEMENTS Preparing these consolidated financial statements in accordance with IFRSs requires management to exercise their judgement to make estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. The estimates and underlying assumptions are based on historical experience and various other factors that are deemed reasonable based on knowledge available at that time. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed and where necessary revised on an ongoing basis. Revisions to estimates are recognised prospectively. In particular, information about significant areas of estimation, uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amount recognised in the consolidated financial statements are described below: Impairment of intangible assets and property, plant and equipment Intangible assets and property, plant and equipment are initially recorded at acquisition cost and are amortised on a straight line basis over their useful economic life. Intangible assets and property, The impairment test is performed using the discounted cash flows expected to be generated through the use of the intangible assets and property, plant and equipment, using a discount rate that reflects the current market estimations and the risks associated with the asset. When it is impractical to estimate the recoverable amount of an asset, the Group estimates the recoverable amount of the cash generating unit to which the asset belongs. Impairment of goodwill Determining whether goodwill is impaired requires an estimation of the value in use of the cash generating units of the Group to which the goodwill has been allocated. Other Information about judgements, assumptions and estimation uncertainties regarding revenue recognition, deferred taxes assets, provisions, leasses and ECL allowance for trade receivables and contract assets as at 31 December 2018 is described in Note 3. 3. SIGNIFICANT ACCOUNTING POLICIES The accounting policies applied in these consolidated financial statements are consistent with those followed in the Group’s consolidated financial statements as at 31 December 2017 and for the year then ended, except for initial application of IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments. Other new standards and amendments applied for the first time in 2018 did not impact these consolidated financial statements of the Group. BASIS OF CONSOLIDATION These consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases. The financial statements of all the Group companies are prepared using uniform accounting policies. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. Any contingent consideration is measured at fair value at the date of acquisition. If an obligation to pay contingent consideration that meets the definition of a financial instrument is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, other contingent consideration is remeasured at fair value at each reporting date and subsequent changes in the fair value of the contingent consideration are recognised in profit or loss. ACQUISITIONS FROM ENTITIES UNDER COMMON CONTROL Business combinations arising from transfers of interests in entities that are under the control of the shareholder that controls the Group are accounted for as if the acquisition had occurred at the beginning of the earliest comparative period presented or, if later, at the date that common control was established or, if later, at the date the Company was incorporated. The assets and liabilities acquired are recognised at their book values. Any difference between the consideration paid and the book values is recognised directly in equity. NON-CONTROLLING INTERESTS Non-controlling interests are measured at their proportionate share of the acquirer’s identifiable net assets at the date of acquisition. Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. LOSS OF CONTROL When the Group losses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related non- controlling interest and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost. TRANSACTIONS ELIMINATED ON CONSOLIDATION Intra-group balances and transactions and any unrealised income and expenses arising from intra-group transactions are eliminated. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. BUSINESS COMBINATIONS Acquisitions of businesses are accounted for using the acquisition method when control is transferred to the Group. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises REVENUE Revenue is measured based on the consideration specified in a contract with a customer and comprises the invoiced amount for the sale of goods and services net of rebates and discounts. Audited Financial StatementsThe Group recognises revenue when it transfers control over a good or service to a customer. interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The Group has two main types of revenue: rendering of services and sales of goods. The Group has initially applied IFRS 15 from 1 January 2018. Information about the Group’s accounting policies relating to contracts with customers and the effect of initially applying IFRS 15 are provided in Note 3A. FINANCE INCOME Finance income include: • interest income which is recognised as it accrues in profit or loss using the effective interest method; income from initial recognition of other payables to tax authorities at a market interest rate. • FINANCE EXPENSES Finance expenses include interest expense and other borrowing costs and are recognised in profit or loss using the effective interest method. FOREIGN CURRENCY TRANSLATION Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. TAX The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in profit or loss because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting date. Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the statement of financial position liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised. Deferred tax is charged or credited to profit or loss, except when it relates to items charged or credited directly to other comprehensive income or equity, in which case the deferred tax is also dealt with in other comprehensive income or equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. DIVIDENDS DECLARED Dividend distribution to the Company’s shareholders is recognised in the Group’s financial statements when the shareholders’ right to receive the dividends is established, either through Board resolution (for interim dividends) or by the Group’s shareholders in the Annual General Meeting (for final dividends). GOVERNMENT GRANTS Government grants are recognised where there is reasonable assurance that the grant will be received and all attached conditions will be complied with. When the grant relates to an expense item, it is deducted in reporting from the related expense. When the grant relates to an asset, it reduces the carrying amount of the asset. The grant is then recognised in profit or loss over the useful life of the depreciable asset by way of a reduced depreciation charge. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. Properties in the course of construction for production, rental or administrative purposes, or for purposes not yet determined, are carried at cost, less any recognised impairment loss. Cost includes professional fees and, for qualifying assets, borrowing costs capitalised in accordance with the Group’s accounting policy. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use. Depreciation is recognised in profit or loss on the straight line method over the useful lives of each part of an item of property, plant and equipment. The annual depreciation rates for the current and comparative periods are based on the following estimations of useful lives: 94 95 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Freehold buildings Leasehold improvements Plant and equipment No depreciation is provided on land. YEARS 50 10-20 5-10 Assets under construction are not depreciated until they are completed and brought into use. At that moment they are reclassified in the relevant class of property, plant and equipment and depreciated accordingly. Depreciation methods, useful lives and residual values are reassessed at the reporting date. Where the carrying amount of an asset is greater than its estimated recoverable amount, the asset is impaired immediately to its recoverable amount. Expenditure for repairs and maintenance of property, plant and equipment is charged to profit or loss for the year in which it is incurred. The cost of major renovations and other subsequent expenditure is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the Group. Major renovations are depreciated over the remaining useful life of the related asset. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss. INTANGIBLE ASSETS (i) Goodwill Goodwill represents the difference between the cost of an acquisition and the fair value of the Group’s share of the net identifiable assets of the acquired undertaking at the date of acquisition. Positive goodwill on acquisition of subsidiaries is included in intangible assets. The excess of the Group’s interest in the fair value of the new subsidiaries’ net assets over the consideration paid for their acquisition (a bargain purchase gain) is recognised in profit or loss in the year of acquisition of the relevant subsidiary. Positive goodwill is tested annually for impairment and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an undertaking include the carrying amount of goodwill relating to the undertaking sold. For the purpose of impairment testing goodwill is allocated to cash generating units that are expected to benefit from the synergies of the combinations. (ii) Patents and trademarks Patents and trademarks are measured initially at purchase cost and are amortised on a straight line basis over their estimated useful lives. Their estimated useful life is from five to seven years. (iii) Software and web site costs External costs that are directly associated with web site controlled by the Group and that will probably generate economic benefits exceeding costs beyond one year are recognised as intangible assets. Subsequently web site costs are carried at cost less any accumulated amortisation and any accumulated impairment losses. Web site costs are amortised using the straight line method over their useful lives, not exceeding a period of five years. Amortisation commences when the site is available for use and is included within administrative expenses. An intangible asset is derecognised on disposal, or when no future economic benefits are expected from use. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognised in profit or loss when the asset is derecognised. INVENTORIES Inventories include medicines and medical material and are stated at the lower of cost and net realisable value. The cost is determined using the weighted average method. Net realisable value is the estimated selling price in the ordinary course of business, less the costs to completion and selling expenses. PROVISIONS Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. FINANCIAL INSTRUMENTS Recognition The Group recognises financial assets and financial liabilities when, and only when, it becomes a party of the contractual provisions of the financial instrument. Classification The Group classifies financial assets on the basis of both: the Group ` s business model for managing financial assets, as well as the contractual cash flow characteristics of the financial assets. The Group’s financial assets comprise of trade and other receivables and cash and cash equivalents. They are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and for which there is no intention Audited Financial Statementsof trading the receivable. They are classified as current assets unless the Group has an unconditional responsibility to accept deferral of receipt for at least twelve months after the balance sheet date, in which case they are classified as non-current assets. The Group’s financial liabilities comprise of trade and other payables and borrowings. They are non-derivatives that are either designated in this category or not classified in any of the other categories. They are classified as current liabilities unless there is an unconditional right to defer settlement for at least twelve months after the balance sheet date, in which case they are classified as long term liabilities. Derecognition of financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when: • the rights to receive cash flows from the asset have expired; • the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass through” arrangement; or • the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Measurement Financial assets and financial liabilities are initially measured at fair value plus any directly attributable transaction costs. Any interest in such derecognised financial assets that is created or retained by the Group, is recognised as a separate asset or liability. Trade and other receivables are amounts due from customers for services performed in the ordinary course of business and are stated after deducting the appropriate allowances for any impairment. For the purpose of the statement of cash flows, cash and cash equivalents include cash in hand, cash at bank and short term highly liquid investments with maturity of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value and are used by the Group in the management of its short term investments. Impairment of non-derivative financial assets At each balance sheet date the Group recognises a loss allowance for expected credit losses on financial assets measured at amortised cost. The loss allowance for financial assets at amortised cost is recognised in profit or loss in respondance with a balance sheet account reducing the carrying amount of the financial asset. Expected credit losses are determined based on historical data of relevant probability of default. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost the reversal is recognised in profit or loss. The Group has initially applied IFRS 9 from 1 January 2018. Information about the Group’s accounting policies relating to new impairment model applied to financial assets measured at amortised cost and contract assets and the effect of initially applying IFRS 9 are provided in Note 3B. Derecognition of financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in profit or loss. Offsetting financial instruments Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the consolidated statement of financial position. Changes in cash flows on existing financial liabilities are not considered as modification, if they result from existing contractual terms, e.g. changes in fixed interest rates initiated by banks due to changes in the CBR key rate, if the loan contract entitles banks to do so and the Group have an option to either accept the revised rate or redeem the loan at par without penalty. The Group treats the modification of an interest rate to a current market rate using the guidance on floating-rate financial instruments. This means that the effective interest rate is adjusted prospectively. IMPAIRMENT OF NON-FINANCIAL ASSETS Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to depreciation or amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An 96 97 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). Earnings per share The Group presents earnings per share (“EPS”) data for its ordinary shares. EPS is calculated by dividing the profit or loss attributable to the owners of the Company by the weighted average number of ordinary shares in issue during the period, adjusted for own shares held. Share capital Proceeds from the issue of ordinary shares are classified as equity. The difference between the issue price of the shares and their nominal value is taken to the share premium account. Incremental costs directly attributable to the issue of new shares are recognised as a deduction from share premium net of any tax effect. Treasury shares When shares recognised as equity are repurchased, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the treasury share reserve. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity, and the resulting surplus or deficit on the transaction is presented in additional paid-in capital. Equity-settled share-based payment arrangements Fair value of equity-settled share-based payment arrangements with employees is measured at the grant date based on the market price of the shares. Service and non-market vesting conditions are not taken into account when estimating the fair value at the grant date. The grant date is the date on which the Group and its employees agree the terms and conditions of the share-based payment arrangement. Fair value is not remeasured subsequent to the grant date. Annually the number of shares which are expected to vest is true- up for the differences between the number of shares initially expected to vest and the actual number of shares vested, based on the fulfilment of service and non-market conditions. Within the vesting period, fair value of the equity-settled share- based payment arrangement with employees adjusted to reflect the true-up of the instruments which will not vest, is recognised as staff costs with the corresponding increase recognised in equity. ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS NEW CURRENTLY EFFECTIVE REQUIREMENTS The Group has initially applied IFRS 15 (refer to Note 3A) and IFRS 9 (refer to Note 3B) from 1 January 2018. A number of other new pronouncements are also effective from 1 January 2018 but they do not have a material effect on the Group’s financial statements. Due to the transition methods chosen by the Group in applying these standards, comparative information throughout these financial statements has not been restated to reflect the requirements of the new standards, except for separately presenting impairment loss on trade receivables and contract assets (refer to Note 3B). The effect of initially applying these standards is mainly attributed to the following: • allocation of financing component from stem cells contracts • (refer to Note 3A below); increase of impairment losses over financial assets (refer to Note 3B below). A. IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaced IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations. The Group has adopted IFRS 15 using the cumulative effect method (without practical expedients), with the effect of initially applying this standard recognised at the date of initial application (i.e. 1 January 2018). Accordingly, the information presented for 2017 has not been restated – i.e. it is presented, as previously reported, under IAS 18, IAS 11 and related interpretations. Under IFRS 15, revenue is recognised in the moment when the service is provided to the customer. Determining the timing of the services rendering – at a point in time or over time – requires judgement. The details of the new significant accounting policies and the nature of the changes to previous accounting policies in relation to the Group’s services are set out below. Audited Financial Statements98 99 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS TYPE OF PRODUCT/ SERVICE NATURE, TIMING OF SATISFACTION OF PERFORMANCE OBLIGATIONS, SIGNIFICANT PAYMENT TERMS NATURE OF CHANGE IN ACCOUNTING POLICY The details of new significant accounting policies and the nature and effect of the changes to previous accounting policies are set out below. The impact of IFRS 9 on the classification and measurement of financial assets is set out below. Rendering of services (ex- cept storage of stem cells) Sales of services are recognised at point in time in which the services are rendered by reference to completion of the actual service provided. IFRS 15 did not have an impact on the Group’s accounting policies. Sales of goods are recognised when control over the goods have been transferred to the customer, which is usually when the Group has sold or delivered goods to the customer, the customer has accepted the goods and collectability of the related receivable is reasonably assured. Nature of service is long-term safekeeping of biological materials comprising stem cells concentrate. Standard terms of contract include predetermined period of contract from 1 to 30 years paid in advance by the customer in full amount. Revenue from contract consists of two parts – revenue from blood collection and stem cells isolation (charged at the moment of the appropriate services rendered) and revenue from storage of stem cells. Inflated revenue from storage is accrued monthly during the whole period of contract, with recognition of interest expenses and net-off of advances received, receivables from revenue recognised and payables from interest expenses accrual in the moment of the contract expiration. IFRS 15 did not have an impact on the Group’s accounting policies. Previously revenue from stem cells contracts was accrued on straight-line basis. Advances received from customers were recognised as short-term and long-term deferred income, depending of their maturity. With adoption of IFRS 15 approach was amended: advances from customers are inflated to current date using effective interest rate, dividing financing component of contract and recognised as contract liabilities. As a result, at the moment of first application, advances received as at that date divided into contract liabilities to customers and financial liabilities, representing this financing component of the contract. To show effect of time value of money for reporting period revenue following the initial application is inflated to recognise both additional finance expense for active contracts and additional revenue from storage. Sales of goods Storage of stem cells The new standard did not have a material impact on the Group’s consolidated financial position, consolidated financial results and consolidated cash flows as at 1 January 2018. B. IFRS 9 FINANCIAL INSTRUMENTS IFRS 9 sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement. The following table summarises the impact, net of tax, of transition to IFRS 9 on the opening balance of retained earnings and non- controlling interests (for a description of the transition method refer to ((iii)) below). IMPACT OF ADOPTING IFRS 9 AS AT 1 JANUARY 2018 RUB’000 Retained earnings Recognition of expected credit losses under IFRS 9 Related tax IMPACT AT 1 JANUARY 2018 Non-controlling interests Recognition of expected credit losses under IFRS 9 Related tax IMPACT AT 1 JANUARY 2018 (32,436) 1,501 (30,935) (2,956) - (2,956) (i) Classification and measurement of financial assets and financial liabilities IFRS 9 largely retains the existing requirements in IAS 39 for the classification and measurement of financial liabilities. However, it eliminates the previous IAS 39 categories for financial assets of held to maturity, loans and receivables and available for sale. The adoption of IFRS 9 has not had a significant effect on the Group’s accounting policies related to financial liabilities. The effect of adopting IFRS 9 on the carrying amounts of financial assets at 1 January 2018 relates solely to the new impairment requirements, as described further below. The following table and the accompanying notes below explain the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 for each class of the Group’s financial assets as at 1 January 2018: ORIGINAL CLASSIFICATION UNDER IAS 39 NEW CLASSIFICATION UNDER IFRS 9 ORIGINAL CARRYING AMOUNT UNDER IAS 39 NEW CARRYING AMOUNT UNDER IFRS 9 Trade and other receivables Loans and receivables Amortised cost Cash and cash equivalents Loans and receivables Amortised cost TOTAL FINANCIAL ASSETS RUB’000 305,563 2,504,602 2,810,165 RUB’000 270,171 2,504,602 2,774,773 Group classified financial assets as measured at amortised cost, as their contractual cash flows give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding and financial assets are held within a business model whose objective is to hold assets to collect contractual cash flows. (ii) Impairment of financial assets An increase of RUB35,392 thousand in the allowance for impairment over trade and other receivables was recognised in opening retained earnings at 1 January 2018 on transition to IFRS 9. IFRS 9 replaces the “incurred loss” model in IAS 39 with an “expected credit loss” (ECL) model. The new impairment model applies to financial assets measured at amortised cost, contract assets and debt investments at fair value through other comprehensive income, but not to investments in equity instruments. Under IFRS 9, credit losses are recognised earlier than under IAS 39. Trade receivables and contract assets The following analysis provides further detail about the calculation of ECLs related to trade receivables and contract assets on the adoption of IFRS 9. The Group considers the model and some of the assumptions used in calculating these ECLs as key sources of estimation uncertainty. The ECLs were calculated based on actual credit loss experience over the past two years. The Group performed the calculation of ECL rates separately for patients, legal entities and insurance companies, meanwhile ECL rates for the insurance companies were calculated based on their ratings (as presented below). Audited Financial StatementsThe following table provides information about the exposure to credit risk and ECLs for trade receivables for patients as at 1 January 2018: 0-30 days past due 31-60 days past due 61-90 days past due more than 91 days past due TOTAL WEIGHTED- AVERAGE LOSS RATE GROSS CARRYING AMOUNT RUB’000 LOSS ALLOWANCE RUB’000 14% 27% 32% 85% 8,402 2,214 2,153 70,695 83,464 (1,160) (596) (698) (60,331) (62,785) CREDIT- IMPAIRED partly partly partly partly The following table provides information about the exposure to credit risk and ECLs for trade and other receivables for legal entities except insurance companies as at 1 January 2018: 0-30 days past due 31-60 days past due 61-90 days past due more than 91 days past due TOTAL WEIGHTED- AVERAGE LOSS RATE GROSS CARRYING AMOUNT RUB’000 LOSS ALLOWANCE RUB’000 3% 17% 50% 85% 26,058 10,325 3,297 28,481 68,161 (892) (1,774) (1,649) (24,198) (28,513) CREDIT- IMPAIRED partly partly partly partly Based on the analysis of the historical data for accounts receivable from insurance companies no provision was accrued as at 1 January 2018. STANDARDS AND INTERPRETATIONS ADOPTED BY THE EU AS AT 1 ANUARY 2019: • IFRS 16 Leases (effective for annual periods beginning on or after Cash and cash equivalents Based on the analysis of the historical data for cash and cash equivalents in the credit institutions with the rating of Ba3 (per Moody’s Investors Service Ltd.) and more, no provision is accrued. As at 1 January 2018 no impairment provision for cash and cash equivalents was accrued. (iii) Transition The Group has taken an exemption not to restate comparative information for prior periods with respect to classification and measurement (including impairment) requirements. Therefore, comparative periods have not been restated. Differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 are recognised in retained earnings and non-controlling interests as at 1 January 2018. Accordingly, the information presented for 2017 does not generally reflect the requirements of IFRS 9 but rather those of IAS 39. 1 January 2019); • IFRIC 23 Uncertainty over Income Tax Treatments (effective for annual periods beginning on or after 1 January 2019); • Amendments to IFRS 9: Prepayment Features with Negative Compensation (effective for annual periods beginning on or after 1 January 2019); • Amendments to IAS 28: Long-term Interests in Associates and Joint Ventures (effective for annual periods beginning on or after 1 January 2019). STANDARDS AND INTERPRETATIONS NOT ADOPTED BY THE EU AS AT 1 JANUARY 2019: • IFRS 17 Insurance Contracts (effective for annual periods begin- ning on or after 1 January 2021); • Annual Improvements to IFRS Standarts 2015–2017 Cycle (effective for annual periods beginning on or after 1 January 2019); 100 101 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS • Amendments to IAS 19: Plan Amendment, Curtailment or Settlement (effective for annual periods beginning on or after 1 January 2019); • Amendments to References to the Conceptual Framework in IFRS Standards (effective for annual periods beginning on or after 1 January 2020); • Amendments to IFRS 3: Business Combinations (effective for annual periods beginning on or after 1 January 2020); • Amendments to IAS 1 and IAS 8: Definition of Material (effec- tive for annual periods beginning on or after 1 January 2020). Management expects that the adoption of these standards in future periods will not have a material effect on the consolidated financial statements of the Group, except for effect of initial application of IFRS 16 Leases (as disclosed below) and Annual Improvements to IFRS Standarts 2015–2017 Cycle, which might have influence on interest expenses capitalisation in part of IAS 23 Borrowing Costs. The Management of the Group is evaluating the effect on the consolidated financial statements of the Group. IFRS 16 LEASES The Group is required to adopt IFRS 16 Leases from 1 January 2019. The Group has assessed the estimated impact that initial application of IFRS 16 will have on its consolidated financial statements, as described below. The actual impacts of adopting the standard on 1 January 2019 may change because the new accounting policies are subject to change until the Group presents its first consolidated financial statements that include the date of initial application. IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are recognition exemptions for short-term leases and leases of low-value items. Lessor accounting remains similar to the current standard – i.e. lessors continue to classify leases as finance or operating leases. IFRS 16 replaces existing leases guidance, including IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases – Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. Leases in which the Group is a lessee The Group will recognise new assets and liabilities for its operating leases of clinics and land plots. The nature of expenses related to those leases will now change because the Group will recognise a depreciation charge for right-of-use assets and interest expense on lease liabilities. Previously, the Group recognised operating lease expense on a straight-line basis over the term of the lease, and recognised assets and liabilities only to the extent that there was a timing difference between actual lease payments and the expense recognised. In addition, the Group will no longer recognise provisions for operating leases that it assesses to be onerous. Instead, the Group will include the payments due under the lease in its lease liability. No significant impact is expected for the Group’s finance leases. Based on the information currently available, the Group estimates that it will recognise additional lease liabilities of approximately RUB330 million as at 1 January 2019. The Group does not expect the adoption of IFRS 16 to impact its ability to comply with the revised maximum leverage threshold loan covenant. The Group used a recognition examption for leases for which the underlying asset is of low value and didn’t account assets and liabilities for such lease contracts. Leases in which the Group is a lessor No significant impact is expected for other leases in which the Group is a lessor. Transition The Group plans to apply IFRS 16 initially on 1 January 2019, using the modified retrospective approach with the cumulative effect of initially applying the Standard without any effects on retained earnings in accordance with paragraph C5 (b). The Group will recognise a lease liability at the date of initial application for leases previously classified as an operating lease applying IAS 17. The Group will measure that lease liability at the present value of the remaining lease payments, discounted using the lessee`s incremental borrowing rate at the date of initial application. Therefore, the cumulative effect of adopting IFRS 16 will be recognised as an adjustment to the opening balance of assets and liabilities at 1 January 2019, with no restatement of comparative information. Audited Financial Statements4. REVENUE In vitro fertilisation (IVF) Deliveries Obstetrics and gynaecology out-patient treatments Other out-patient medical services Other medical services Paediatrics out-patient treatments Other in-patient medical services Obstetrics and gynaecology in-patient treatments Paediatrics in-patient treatments Sales of goods Storage of stem cells Other income 2018 RUB’000 3,487,749 2,211,035 1,827,137 1,552,796 1,366,391 1,322,959 1,048,047 1,027,306 484,977 290,013 138,240 180,716 2017 RUB’000 3,257,639 2,235,825 1,768,001 1,194,798 1,201,968 1,306,107 818,720 965,261 431,749 302,282 136,845 135,972 14,937,366 13,755,167 DISAGGREGATION OF REVENUE The Group renders the services on the territory of the Russian Federation. The Group’s operations and main revenue streams are those described in the table above. The majority of the Group’s customers are physical persons (87% of total revenue); some services are rendered to the governmental and non-governmental insurance companies and legal entities. All the contracts are fixed- price and short-term except for the contracts for the storage of stem cells. All the Group’s revenue except for the revenue from the storage of stem cells is recognised at the point in time when the services are provided; the revenue from the storage of stem cells is recognised over the time of the contract. The contract liabilities primarily relate to the advance consideration received from customers. The amount of RUB757,285 thousand recognised in short-term contract liabilities at the beginning of the year has been recognised as revenue during the period ended 31 December 2018. The amount of RUB30,210 thousand was returned to the customers and the amount of RUB172,450 was transferred to the other contracts. Other medical services include but are not limited to laboratory examinations, diagnostics, surgery, cardiology and oncology. The increase of other medical services revenue is mainly represented by continuing ramp-up of Lapino, Novosibirsk and Ufa hospitals. 102 103 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS 5. COST OF SALES Payroll and related social taxes Materials and supplies used Depreciation Medical services Energy and utilities Property tax Repair and maintenance Other expenses 6. ADMINISTRATIVE EXPENSES Payroll and related social taxes Utilities and materials Other professional services Depreciation Amortisation Advertising Communication costs Independent auditors’ remuneration Other expenses 2018 RUB’000 5,118,404 2,514,088 946,862 256,301 183,167 129,321 110,491 128,865 2017 RUB’000 4,517,572 2,292,818 803,504 244,461 147,916 129,869 97,733 124,496 9,387,499 8,358,369 2018 RUB’000 1,375,815 269,230 231,253 142,858 100,275 96,256 33,902 21,259 144,767 2017 RUB’000 1,269,232 225,294 238,117 135,117 97,219 128,661 31,112 23,096 106,231 2,415,615 2,254,079 The remuneration of the independent auditors includes an amount of RUB20,522 thousand regarding audit services, RUB375 thousand regarding audit related services and an amount of RUB362 thousand regarding tax services. 7. STAFF COSTS 8. OTHER INCOME 2018 RUB’000 2017 RUB’000 Wages and salaries 5,140,455 4,598,610 Social insurance contributions and other taxes 1,353,764 1,188,194 TOTAL STAFF COSTS 6,494,219 5,786,804 The number of employees as at 31 December 2018 was 7,349 (31 December 2017: 6,801). During 2017 the Group received other income of RUB104,808 thousand. This income arose mostly from the Escrow Deed approved on 26 September 2014, under which the Group received RUB96,592 thousand (USD1,575 thousand) from Escrow Agent in March 2017 as a result of negotiations with the seller of Ivicend Holding Ltd. Audited Financial Statements104 105 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS The Group recognised tax expense of RUB26,139 thousand in the reporting period mostly due to the temporary differences relating to property, plant and equipment (especially differences on the new hospital located in Samara). Deferred tax assets of RUB232,159 thousand as at 31 December 2018 and RUB243,165 thousand as at 31 December 2017 were mostly recognised on tax losses related to LLC MD Project 2010. According to Russian tax rules such tax losses will not expire. Deferred tax liabilities of RUB272,565 thousand as at 31 December 2018 and RUB250,504 thousand as at 31 December 2017 were mostly recognised on temporary differences relating to property, plant and equipment. These temporary differences are expected to be utilised after 1 January 2020 at 20% corporate income tax rate when the currently enacted tax concession with 0% corporate income tax rate will expire. As at 31 December 2018 deferred tax assets relating to tax losses carried forward in the amount of RUB191,428 thousand (31 December 2017: RUB107,560 thousand) have not been recognised. Deferred tax assets have not been recognised in respect of these tax losses because it is not probable that future taxable profit will be available for utilisation against the benefits therefrom. As at 31 December 2018, there were temporary differences (before calculating tax effect) of RUB6,123,534 thousand (31 December 2017: RUB4,921,266 thousand) related to investments in subsidiaries. Deferred tax liabilities related to these temporary differences were not recognised because the Group controls the dividend policy of its subsidiaries and, therefore, controls the timing of reversal of the related taxable temporary differences and management is satisfied that they will not reverse in the foreseeable future. 11. EARNINGS PER SHARE 2018 2017 2,671,350 2,488,812 75,022,526 74,895,010 35.61 33.23 Basic and fully diluted earnings attributable to the owners of the Company (RUB’000) Weighted average number of ordinary shares in issue during the year BASIC AND FULLY DILUTED EARNINGS PER SHARE (RUB) 12. DIVIDENDS On 16 March 2018 the Board of Directors declared final dividends for the year 2017 attributable to the owners of the Company amounting to RUB450,750 thousand (USD7,905 thousand), which corresponds to RUB6.0 (USD0.11) per share. The dividend distribution was approved by the Annual General Meeting of the shareholders on 17 April 2018. The dividends were paid on 22 May 2018. On 17 March 2017 the Board of Directors declared final dividends for the year 2016 attributable to the owners of the Company amounting to RUB338,063 thousand (USD5,804 thousand), which corresponds to RUB4.5 (USD0.08) per share. The dividend distribution was approved by the Annual General Meeting of the shareholders on 21 April 2017. The dividends were paid on 23 May 2017. On 8 September 2017 the Board of Directors declared interim dividends for the six months ended 30 June 2017 attributable to the owners of the Company amounting to RUB350,833 thousand (USD6,140 thousand), which corresponds to RUB4.67 (USD0.08) per share. The dividends were paid on 24 October 2017. On 22 March 2019 the Board of Directors recommended the payment of RUB800,081 thousand as final dividends for the year 2018 which corresponds to RUB10.65 per share. 9. NET FINANCE EXPENSES Interest income Initial recognition of other payables to tax authorities at market rate Bank interest received Interest from loans to third parties Finance income Interest expense Interest on bank loans Unwinding of discount on other payables to tax authorities Other interest expenses Other finance expense Bank charges Other impairment provision Impairment of trade and other receivables Impairment of goodwill FINANCE EXPENSES NET FOREIGN EXCHANGE TRANSACTIONS GAIN / (LOSS) NET FINANCE EXPENSES 10. INCOME TAX NOTE 2018 RUB’000 2017 RUB’000 96,984 76,308 393 173,685 38,656 58,052 613 97,321 (323,586) (261,253) (42,713) (18,484) (29,704) (229) (139,279) (125,301) (11,421) (11,031) - (27,261) (33,984) (14,352) (546,514) (492,084) 105,823 (50,201) (267,006) (444,964) 15 14 Majority of the Group companies, that are offering medical services and are operating in the Russian Federation, apply 0% corporate income tax rate. Other companies apply standard income tax rate of 20% or 15%. Reconciliation between profit before taxation and income tax expense: Profit before taxation Less profit before taxation of non-taxable subsidiaries LOSS BEFORE TAXATION EXCLUDING NOT-TAXABLE SUBSIDIARIES Tax using the Group’s domestic tax rate Effect of subsidiaries taxable at lower tax rates Non-deductible expenses Reversal of tax provision Current-year losses for which no deferred tax asset is recognised Recognised temporary differences mostly relating to property, plant and equipment on non-taxable medical subsidiaries expected to be utilised after 1 January 2020 at 20% corporate income tax rate TOTAL INCOME TAX EXPENSE 2018 RUB’000 2017 RUB’000 2,857,182 2,781,156 (3,221,948) (3,332,468) (364,766) (551,312) 72,953 110,262 717 (6,879) 19,354 455 (4,781) - (83,868) (57,411) (28,416) (125,431) (26,139) (76,906) Audited Financial Statements106 107 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS 13. PROPERTY, PLANT AND EQUIPMENT 14. INTANGIBLE ASSETS Initial cost BALANCE AT 1 JANUARY 2017 Additions Disposals Transfer from construction in progress BALANCE AT 31 DECEMBER 2017 Additions Disposals Impairment loss Transfer from construction in progress BALANCE AT 31 DECEMBER 2018 Depreciation BALANCE AT 1 JANUARY 2017 Depreciation during the year Accumulated depreciation on disposals BALANCE AT 31 DECEMBER 2017 Depreciation during the year Accumulated depreciation on disposals BALANCE AT 31 DECEMBER 2018 Carrying amounts BALANCE AT 1 JANUARY 2017 BALANCE AT 31 DECEMBER 2017 BALANCE AT 31 DECEMBER 2018 FREEHOLD LAND AND BUILDINGS RUB’000 PROPERTY UNDER CONSTRUCTION RUB’000 PLANT AND EQUIPMENT RUB’000 TOTAL RUB’000 10,483,310 395,218 (5,632) 818,299 11,691,195 694,390 (27,357) (3,891) 1,569,305 13,923,642 (949,666) (241,099) 567 (1,190,198) (302,981) 4,567 (1,488,612) 9,533,644 10,500,997 12,435,030 1,367,230 2,046,445 (2,346) (1,117,393) 2,293,936 2,251,427 (454) - (2,177,235) 2,367,674 4,913,780 16,764,320 425,278 (30,733) 299,094 2,866,941 (38,711) - 5,607,419 19,592,550 1,013,072 (45,942) - 607,930 3,958,889 (73,753) (3,891) - 7,182,479 23,473,795 - - - - - - - (2,404,201) (3,353,867) (697,522) 23,020 (938,621) 23,587 (3,078,703) (4,268,901) (786,739) 37,937 (1,089,720) 42,504 (3,827,505) (5,316,117) 1,367,230 2,293,936 2,367,674 2,509,579 2,528,716 3,354,974 13,410,453 15,323,649 18,157,678 GOODWILL RUB’000 PATENTS AND TRADEMARKS RUB’000 SOFTWARE AND WEBSITE RUB’000 TOTAL RUB’000 Initial cost BALANCE AT 1 JANUARY 2017 2,046,672 564,783 66,838 2,678,293 Additions Disposals BALANCE AT 31 DECEMBER 2017 Additions - (14,352) 29 - 2,032,320 564,812 - - 5,851 (1,130) 71,559 23,311 5,880 (15,482) 2,668,691 23,311 BALANCE AT 31 DECEMBER 2018 2,032,320 564,812 94,870 2,692,002 Amortisation BALANCE AT 1 JANUARY 2017 Amortisation during the year Accumulated amortisation on disposals BALANCE AT 31 DECEMBER 2017 Amortisation during the year BALANCE AT 31 DECEMBER 2018 Carrying amounts BALANCE AT 1 JANUARY 2017 BALANCE AT 31 DECEMBER 2017 BALANCE AT 31 DECEMBER 2018 - - - - - - 2,046,672 2,032,320 2,032,320 (209,493) (84,772) - (294,265) (74,675) (368,940) 355,290 270,547 195,872 (27,214) (12,447) 712 (38,949) (25,600) (64,549) 39,624 32,610 30,321 (236,707) (97,219) 712 (333,214) (100,275) (433,489) 2,441,586 2,335,477 2,258,513 Goodwill is allocated to each cash-generating unit (CGU), which is defined as each individual subsidiary or group of subsidiaries acquired operating as one business in one particular location. Goodwill has been allocated for impairment testing purposes to 6 groups of cash generating units. The amount of borrowing costs capitalised during the year ended 31 December 2018 was RUB160,027 thousand (RUB110,009 thousand for the year ended 31 December 2017). Capitalisation rate for loans varied from 8.25% to 10.15% for the year ended 31 December 2018 (from 10.15% to 11.75% for the year ended 31 December 2017). As at 31 December 2018 construction in progress mainly includes construction costs of Tyumen hospital amounted RUB1,713,291 thousand and Lapino hospital amounted RUB382,830 thousand. The total net book value of property, plant and equipment which is held as collateral for the loans and borrowings is RUB8,756,360 thousand as at 31 December 2018 (31 December 2017: RUB8,249,162 thousand). JSC MC Avicenna A group of 4 cash generating units located in Krasnoyarsk, Omsk, Novosibirsk and Barnaul (acquired in January 2016) LLC Medica-2 CJSC MK IDK LLC Centre of Reproductive Medicine Subsidiaries acquired in 2011 31 DECEMBER 2018 RUB’000 31 DECEMBER 2017 RUB’000 1,055,593 1,055,593 360,154 248,250 211,303 142,193 14,827 360,154 248,250 211,303 142,193 14,827 2,032,320 2,032,320 In order to assess any impairment in the value of goodwill, the Group performed a test of the estimated recoverable amount of the CGUs compared to their carrying value. Audited Financial Statements108 109 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS The recoverable amount of each CGU group is based on the sum of the enterprise values of the subsidiaries included in each CGU and is measured at value in use. The calculation of the enterprise values of each subsidiary is based on the current and estimated future after-tax profitability. The management has projected cash flows for the period of the five years based on the approved financial forecasts. The growth rate in terminal period is estimated to be 4%. Discount after-tax rate applied to the cash flow projections is 14%. No impairment of goodwill was recognised in 2018, in 2017 the impairment of goodwill of RUB14,352 thousand was recognised. For all cash generating units management believes that any reasonable possible change in the key assumptions would not cause carrying amounts of these units to exceed their recoverable amounts materially. 15. TRADE, OTHER RECEIVABLES AND DEFERRED EXPENSES CAPEX prepayments Trade receivables Advances paid to suppliers Deferred expenses Other receivables Non-current portion Current portion 31 DECEMBER 2018 RUB’000 31 DECEMBER 2017 RUB’000 592,416 279,644 99,818 10,777 65,529 1,048,184 592,416 455,768 1,048,184 889,933 287,140 87,311 8,061 38,691 1,311,136 889,933 421,203 1,311,136 The following table provides information about the exposure to credit risk and ECLs for trade and other receivables for legal entities except insurance companies as at 31 December 2018. 0-30 days past due 31-60 days past due 61-90 days past due more than 91 days past due TOTAL WEIGHTED- AVERAGE LOSS RATE GROSS CARRYING AMOUNT RUB’000 LOSS ALLOWANCE RUB’000 2% 11% 12% 86% 21,694 9,898 1,759 25,685 59,036 (473) (1,057) (211) (21,963) (23,704) CREDIT- IMPAIRED partly partly partly partly Based on the analysis of the historical data for accounts receivable from insurance companies no provision is accrued as at 31 December 2018. The exposure of the Group to credit and currency risk in relation to trade, other receivables and deferred expenses is reported in Note 23 of these consolidated financial statements. CAPEX prepayments represent capital expenditure prepayments under contracts for construction works and acquisition of plant and equipment. 16. CASH AND CASH EQUIVALENTS Ageing analysis of trade receivables: Not past due Past due GROSS AMOUNT 31 DECEMBER 2018 RUB’000 IMPAIRMENT 31 DECEMBER 2018 RUB’000 GROSS AMOUNT 31 DECEMBER 2017 RUB’000 IMPAIRMENT 31 DECEMBER 2017 RUB’000 259,657 115,366 375,023 - (95,379) (95,379) 287,140 55,906 343,046 - (55,906) (55,906) In addition to the bad debt provision accrued as at 31 December 2018 the accounts receivable in the amount of RUB5,449 thousand were written off during the year ended 31 December 2018 (year ended 31 December 2017: RUB10,945). The Group performed the calculation of ECL rates separately for patients, legal entities and insurance companies, meanwhile ECL rates for the insurance companies were calculated based on their ratings. The following table provides information about the exposure to credit risk and ECLs for trade receivables for patients as at 31 December 2018. 0-30 days past due 31-60 days past due 61-90 days past due more than 91 days past due TOTAL WEIGHTED- AVERAGE LOSS RATE GROSS CARRYING AMOUNT RUB’000 LOSS ALLOWANCE RUB’000 22% 25% 29% 88% 15,740 3,687 3,251 75,011 97,689 (3,450) (924) (954) (66,347) (71,675) CREDIT- IMPAIRED partly partly partly partly 31 DECEMBER 2018 RUB’000 31 DECEMBER 2017 RUB’000 Cash at bank and in hand 476,530 350,827 Bank deposits with maturity less than 3 months 2,238,951 2,153,775 2,715,481 2,504,602 Currency: RUB USD EUR 31 DECEMBER 2018 RUB’000 31 DECEMBER 2017 RUB’000 2,307,350 1,559,268 406,983 1,148 944,313 1,021 2,715,481 2,504,602 The exposure of the Group to credit risk and currency risk in relation to cash and cash equivalents is reported in Note 23 of these consolidated financial statements. 17. SHARE CAPITAL Authorised Issued and fully paid ordinary shares 1 January / 31 December NUMBER OF SHARES NOMINAL VALUE USD SHARE CAPITAL RUB’000 SHARE CAPITAL USD’000 125,250,000 75,125,010 0.08 0.08 - 10,020 180,585 6,010 Audited Financial Statements18. SHARE PREMIUM, RESERVES AND RETAINED EARNINGS SHARE PREMIUM Share premium includes the total amount received in excess of the total nominal value of the new share capital issued. Incremental costs directly attributable to the issue of new shares are recognised as a deduction from equity (share premium) net of any tax effect. OTHER RESERVES Other reserves include common control transactions reserve, capital contribution reserve and treasury shares. Common control transactions reserve includes differences between the carrying amount of net assets acquired through purchases of subsidiaries from parties under common control and the consideration paid for their acquisition. There were no significant changes during 2018. RETAINED EARNINGS Retained earnings include accumulated profits and losses incurred by the Group. 19. LOANS AND BORROWINGS During 2018 the Group has acquired additional 30% share in LLC Mother and Child Ugo-Zapad and LLC FimedLab, 26% share in LLC Velum, 20% share in LLC Clinica Zdorovia and 15% share in LLC Capital Group, LLC Mother and Child Perm, LLC Mother and Child Ufa, LLC Mother and Child Saint-Petersburg for USD12,335 thousand which corresponds to RUB790,231 thousand as at the date of the transfer of shares and RUB768,235 thousand as at the date of the payment. As a result non-controlling interest in these subsidiaries decreased by RUB170,692 thousand. The difference of RUB619,539 thousand between the value of investments as at the ownership`s transfer date and non-controlling interest acquired was accounted as an equity transaction. In 2017 the Company acquired 15% share in a subsidiary, which it controls, for RUB33,000 thousand. As a result non-controlling interest in this subsidiary decreased by RUB5,433 thousand. The difference of RUB27,567 thousand between consideration paid to a minority shareholder and the amount of non-controlling interest acquired was accounted as an equity transaction. In 2017 the Company acquired 10% share in a subsidiary, which it controls, for RUB20,000 thousand. As a result non-controlling interest in this subsidiary decreased by RUB7,328 thousand. The difference of RUB12,672 thousand between consideration paid to a minority shareholder and the amount of non-controlling interest acquired was accounted as an equity transaction. 31 DECEMBER 2018 RUB’000 31 DECEMBER 2017 RUB’000 Long-term liabilities Bank loans 4,586,532 3,585,213 Short-term liabilities Bank loans 1,078,743 985,234 TOTAL LOANS AND BORROWINGS 5,665,275 4,570,447 Maturity of loans and borrowings: 31 DECEMBER 2018 RUB’000 31 DECEMBER 2017 RUB’000 Within one year 1,078,743 Between one and five years 4,306,546 More than 5 years 279,986 985,234 3,071,796 513,417 5,665,275 4,570,447 The total net book value of property, plant and equipment which is held as collateral for the bank loans is disclosed in Note 13. 110 111 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS The terms and debt repayment schedule of loans are as follows: 31 DECEMBER 2018 31 DECEMBER 2017 EFFECTIVE INTEREST RATE FACE VALUE RUB’000 CARRYING AMOUNT RUB’000 FACE VALUE RUB’000 CARRYING AMOUNT RUB’000 MATURITY CURRENCY RUB RUB RUB RUB RUB RUB RUB RUB 8.45% 9.15% 8.25% 8.25% 9% 8.45% 9.15% 14.20% 2023 2,482,210 2,482,210 2,075,780 2,075,780 2024 1,940,094 1,940,094 351,664 351,664 2022 2026 2018 2019 2020 2019 989,831 989,831 1,050,350 1,050,350 38,954 38,954 - - 189,150 189,150 16,084 8,952 16,084 8,952 - 393,369 658,446 19,980 20,858 - 393,369 658,446 19,980 20,858 5,665,275 5,665,275 4,570,447 4,570,447 Secured bank loan Secured bank loan Secured bank loan Secured bank loan Secured bank loan Unsecured bank loan Unsecured bank loan Unsecured bank loan The contractual cash flows and the exposure of the Group to liquidity risk in relation to loans and borrowings is reported in Note 23 of these consolidated financial statements. 20. CONTRACT LIABILITIES (DEFERRED INCOME) 21. TRADE AND OTHER PAYABLES 31 DECEMBER 2018 RUB’000 31 DECEMBER 2017 RUB’000 1,319,912 1,273,653 Other payables to tax authorities Accruals 143,773 144,860 Payables to employees Patient advances including: Contract liabilities after more than one year Contract liabilities within one year 1,176,139 1,128,793 Contract liabilities that relate to long term client advances represent money received from patients on stem cells storage contracts lasting from 1 to 30 years. Contract liabilities that relate to short term client advances represent money received from patients on stem cells storage contracts, childbirth management contracts lasting from 1 to 9 months, and children care contracts valid up to 1 year. Trade payables Taxes payable CAPEX payables Income tax liability Other payables Non-current portion Current portion 31 DECEMBER 2018 RUB’000 31 DECEMBER 2017 RUB’000 526,548 390,810 320,940 285,042 159,591 101,933 2,191 34,382 336,061 353,487 291,555 318,727 142,301 125,306 21,879 20,368 1,821,437 1,609,684 435,809 1,385,628 277,320 1,332,364 1,821,437 1,609,684 The contractual cash flows (except income tax liability) and the exposure of the Group to liquidity risk in relation to trade and other payables is reported in Note 23 of these consolidated financial statements. Audited Financial Statements22. RELATED PARTY TRANSACTIONS The following transactions were carried out with related parties: 22.3. DIVIDENDS DECLARED TO RELATED PARTIES Dividends declared to the parent company MD Medical Holding Limited amounted to RUB306,140 thousand for the year ended 31 December 2018 (31 December 2017: RUB467,885 thousand). 22.1. OPERATIONS WITH KEY MANAGEMENT PERSONNEL The remuneration of the members of the key management personnel and non-executive directors for the year ended 31 December 2018 was RUB74,416 thousand (31 December 2017: RUB56,791 thousand). The remuneration of the members of the key management personnel which remained unpaid as at 31 December 2018 was RUB16,475 thousand (31 December 2017: RUB15,911 thousand). The Group provided medical informational services to related parties amounted RUB1,345 thousand for the year 31 December 2018 (for the year ended 31 December 2017: nil). The payables for medical informational services which remained unprovided as at 31 December 2018 was RUB939 thousand (31 December 2017: nil). The Group provided advertising services to the key management personnel for the year ended 31 December 2018 amounted to RUB1,329 thousand (for the year ended 31 December 2017: RUB762 thousand). The receivables for advertising services which remained unpaid as at 31 December 2018 was RUB336 thousand (31 December 2017: RUB762 thousand). 22.2. DIRECTORS’ INTERESTS The direct and indirect interests of the members of the Board in titles of the Company as at 31 December 2018, 31 December 2017 and as at the date of signing these consolidated financial statements are as follows: NAME TYPE OF INTEREST EFFECTIVE INTEREST % Mark Kurtser Kirill Dmitriev Simon Rowlands Indirect ownership of shares Indirect interest in shares Direct ownership of shares 67.90 5.55 0.33 Indirect interest in shares by Kirill Dmitriev arises through his capacity as key management personnel of indirect shareholder. The calculation of effective interest is based on the total amount of issued and fully paid shares, including treasury shares acquired by the Company. 23. FINANCIAL RISK MANAGEMENT Financial risk factors The Group is exposed to the following risks from its use of financial instruments: • Credit risk • Liquidity risk • Market risk The Board of Directors has the overall responsibility for the establishment and supervision of the Company’s risk management framework. The Group’s risk management policies are established to identify and analyse the risks faced by the Group to set appropriate risk limits and controls and monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and in the Group’s activities. (i) Credit risk Credit risk arises when a failure by counterparties to discharge their obligations could reduce the amount of future cash inflows from financial assets on hand at the reporting date. The Group has no significant concentration of credit risk. The Group has policies in place to ensure that sales of products and services are made to customers with an appropriate credit history and monitors on a continuous basis the ageing profile of its receivables. Cash balances are held with various financial institutions. Exposure to credit risk The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was: 31 DECEMBER 2018 RUB’000 31 DECEMBER 2017 RUB’000 Trade and other receivables 345,578 Other assets - 326,541 2,700 Cash and cash equivalents excluding cash in hand 2,703,965 2,494,320 3,049,543 2,823,561 Trade and other receivables The Group’s exposure to credit risk is influenced mainly by the indi- vidual characteristics of each customer. The Group has no significant concentration of credit risk regarding trade and other receivables. This fact significantly reduces possible delays and other negative consequences that may potentially affect matching the maturity of assets with liabilities. Furthermore, according to the internal policy, clients usually pay in advance except for some particular cases. 112 113 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Cash and cash equivalents The Group held cash and cash equivalents excluding cash in hand of RUB2,703,965 thousand as at 31 December 2018 (31 December 2017: RUB2,494,320 thousand) which represents its maximum credit exposure on these assets. The cash and cash equivalents are mostly held with bank and financial institution counterparties, which are rated Baa3-A3, based on rating agency Moody’s Investors Service ratings. (ii) Liquidity risk Liquidity risk is the risk that arises when the maturity of assets and liabilities does not match. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The Group has procedures to minimise such losses including maintaining sufficient cash and other highly liquid current assets. The following are the contractual maturities of financial liabilities including estimated interest payments: 31 DECEMBER 2018 NOTE Bank loans CAPEX payables Trade payables Other payables and accrued expenses 19 21 21 CARRYING AMOUNTS RUB’000 CONTRACTUAL CASH FLOWS RUB’000 2 MONTHS OR LESS RUB’000 BETWEEN 2-12 MONTHS RUB’000 BETWEEN 1-2 YEARS RUB’000 BETWEEN 2-5 YEARS RUB’000 MORE THAN 5 YEARS RUB’000 5,665,275 6,996,964 243,630 1,285,544 1,470,690 3,706,346 290,754 101,933 285,042 101,933 67,473 34,460 285,042 285,042 - - - - - - - 1,432,271 1,630,945 644,298 344,702 97,752 341,517 202,676 7,484,521 9,014,884 1,240,443 1,664,706 1,568,442 4,047,863 493,430 31 DECEMBER 2017 NOTE Bank loans CAPEX payables Trade payables Other payables and accrued expenses 19 21 21 CARRYING AMOUNTS RUB’000 CONTRACTUAL CASH FLOWS RUB’000 2 MONTHS OR LESS RUB’000 BETWEEN 2-12 MONTHS RUB’000 BETWEEN 1-2 YEARS RUB’000 BETWEEN 2-5 YEARS RUB’000 MORE THAN 5 YEARS RUB’000 4,570,447 5,803,410 339,332 1,028,436 1,220,585 2,671,631 543,426 125,306 318,727 125,306 118,184 318,727 318,727 7,122 - - - - - - - 1,143,772 1,290,250 513,879 342,708 67,315 201,912 164,436 6,158,252 7,537,693 1,290,122 1,378,266 1,287,900 2,873,543 707,862 The Group has bank loans which contain debt covenants. The breach of covenants may require the Group to repay the loans earlier than indicated in the above table. (iii) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices which affects the Group’s income or the value of its holdings of financial instruments. Interest rate risk Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in market interest rates. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group’s management monitors the interest rate fluctuations on an ongoing basis and acts accordingly. As at the reporting date the interest rate profile of interest bearing financial instruments was as follows: Fixed rate instruments Financial assets Financial liabilities 31 DECEMBER 2018 RUB’000 31 DECEMBER 2017 RUB’000 2,238,951 2,156,475 (5,665,275) (4,570,447) (3,426,324) (2,413,972) Audited Financial Statements114 115 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS 24. FAIR VALUES As at 31 December 2018 and 31 December 2017 the Group had no significant financial assets or liabilities measured at fair value. The financial assets of the Group include cash and cash equivalents and trade and other receivables. The financial liabilities of the Group include loans and borrowings and trade and other payables. The fair value of these financial instruments is classified as Level 3 of fair value class hierarchy and is estimated only for disclosure purposes using discounted cash flows taking interest rates adequate to the relevant risk. The fair values of the Group’s financial assets and liabilities approximate their carrying amounts at the reporting date. 25. CONTINGENT LIABILITIES (A) INSURANCE As per current legislation in Russian Federation medical clinics are not required to insure their activities. There is a draft Law regarding obligatory insurance of medical clinics as from 2013. The Law has not yet been enacted. At present the Group does not insure its operational activities but has obtained insurance cover for some property, plant and equipment. Until the Group obtains adequate insurance coverage there is a risk of material adverse effect on operations and statement of financial position. (B) RUSSIAN BUSINESS ENVIRONMENT The Group’s operations are primarily located in the Russian Federation. Consequently, the Group is exposed to the economic and financial markets of the Russian Federation which display characteristics of an emerging market. The legal, tax and regulatory frameworks continue development but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in the Russian Federation. The conflict in Ukraine and related events has increased the perceived risks of doing business in the Russian Federation. The imposition of economic sanctions on Russian individuals and legal entities by the European Union, the United States of America, Japan, Canada, Australia and others, as well as retaliatory sanctions imposed by the Russian government, has resulted in increased economic uncertainty including more volatile equity markets, a depreciation of the Russian Rouble, a reduction in both local and foreign direct investment inflows and a significant tightening in the availability of credit. In particular, some Russian entities may be experiencing difficulties in accessing international equity and debt markets and may become increasingly dependent on Russian state banks to finance their operations. The longer term effects of recently implemented sanctions, as well as the threat of additional future sanctions, are difficult to determine. The consolidated financial statements reflect management’s assessment of the impact of the Russian business environment on the operations and the financial position of the Group. The future business environment may differ from management’s assessment. (C) RUSSIAN TAX ENVIRONMENT The taxation system in the Russian Federation continues to evolve and is characterised by frequent changes in legislation, official pronouncements and court decisions, which are sometimes contradictory and subject to varying interpretation by different tax authorities. Taxes are subject to review and investigation by a number of authorities, which have the authority to impose severe fines, penalties and interest charges. A tax year generally remains open for review by the tax authorities during the three subsequent calendar years; however, under certain circumstances a tax year may remain open longer. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive and substance-based position in their interpretation and enforcement of tax legislation. These circumstances may create tax risks in the Russian Federation that are substantially more significant than in other countries. Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Russian tax legislation, official pronouncements and court decisions. However, the interpretations of the tax authorities and courts, especially due to reform of the supreme courts that are resolving tax disputes, could differ and the effect on these consolidated financial statements, if the authorities were successful in enforcing their interpretations, could be significant. Currently, the Russian Government focuses on the ways to combat offshore structures which historically were widely used by Russian businesses and tighten the tax anti-avoidance regulations. Recent new Russian legislation is aimed at regulating transactions with offshore companies and their activities, which may potentially impact the Group’s tax position. In particular,fixed-rate financial liabilities include fixed rate bank loans amounted to RUB5,665,275 thousand for which the banks have the option to revise the interest rate following the change of key rate set by the CBR and the Group has an option to either accept the revised rate or redeem the loan at par without penalty. The Group does not account for any fixed rate instruments at fair value through profit or loss and does not have any derivative financial instruments, therefore a change in interest rates at the reporting date would not affect profit or loss or equity. Currency risk Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates. Currency risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the Group’s functional currency. The Group is exposed to foreign exchange risk arising from various currency exposures primarily with respect to the United States Dollar and the Euro. The Group’s management monitors the exchange rate fluctuations on ongoing basis and acts accordingly. The Group’s exposure to foreign currency risk was as follows: Assets Cash in bank Trade and other receivables Liabilities CAPEX payables Trade and other payables and accruals NET EXPOSURE 31 DECEMBER 2018 31 DECEMBER 2017 USD`000 EUR`000 GBP`000 USD`000 EUR`000 GBP`000 406,983 1,904 (1,227) (634) 407,026 1,148 168 (1,080) (2,732) (2,496) - - - (373) (373) 944,313 2,431 (1,899) (91) 944,754 1,021 1,375 - (127) 2,269 - - - - - The following significant exchange rates applied during the year: USD EUR GBP AVERAGE RATE REPORTING DATE SPOT RATE 2018 62.7078 73.9546 83.5756 2017 58.3529 65.9014 75.2379 2018 69.4706 79.4605 88.2832 2017 57.6002 68.8668 77.6739 SENSITIVITY ANALYSIS A 10% weakening of the Russian Ruble against the above currencies will result in the increase in profit and equity of RUB40,416 thousand as at 31 December 2018 (31 December 2017: RUB94,702 thousand). A 10% strengthening of the Russian Ruble would have an opposite impact. The Group monitors capital on the basis of the net debt to equity ratio. This ratio is calculated as net debt divided by total equity. Net debt is calculated as total loans and borrowings less cash and cash equivalents. Total equity is calculated as “equity” shown in the consolidated statement of financial position. CAPITAL MANAGEMENT The Group’s objectives in managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns to owners and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure the Group may adjust the amount of dividends paid to shareholders, return capital to owners or issue of new shares. 31 DECEMBER 2018 RUB’000 31 DECEMBER 2017 RUB’000 NOTE Financial liabilities Less: cash and cash equivalents 19 16 Net debt Total equity NET DEBT TO EQUITY RATIO 5,665,275 4,570,447 (2,715,481) (2,504,602) 2,949,794 2,065,845 15,998,948 14,567,665 18.44% 14.18% Audited Financial StatementsReport and Separate Financial Statements For the year ended 31 December 2018 Contents 118 Officers, Professional Advisors and Registered Office 119 Management Report 123 Directors’ Responsibility Statement 124 Independent Auditors’ Report 128 Statement of Profit or Loss and Other Comprehensive Income 129 Statement Of Financial Position 130 Statement Of Changes In Equity 134 Statement Of Cash Flows 136 Notes to the Financial Statements 26. NON-CONTROLLING INTERESTS The only material non-controlling interest in the Group is related to CJSC MD PROJECT 2000. The information about the subsidiary before any intra-group eliminations is presented below. Most of the turnovers are cash based. Revenue Profit and other comprehensive income Profit and other comprehensive income allocated to non-controlling interests Dividends paid to non-controlling interests NON-CONTROLLING INTERESTS PERCENTAGE Non-current assets Current assets Non-current liabilities Current liabilities NET ASSETS Carrying amount of non-controlling interests Other non-controlling interests 2018 RUB’000 3,082,997 1,218,074 60,904 40,000 5% 2017 RUB’000 3,242,383 1,388,957 69,448 62,500 5% 31 DECEMBER 2018 RUB’000 31 DECEMBER 2017 RUB’000 3,799,467 735,668 (164,094) (667,382) 3,703,659 185,183 116,619 301,802 3,521,804 620,589 (144,860) (674,196) 3,323,337 166,167 259,780 425,947 27. OPERATING LEASES 28. CAPITAL COMMITMENTS Historically, the Group has developed business in own premises. However, in 2018 and 2017 the Group has acquired and incorporated some new entities that lease their premises. Lease agreements are cancellable with notification period of one to six months. Capital commitments mostly comprise of the obligations under construction contracts in the amount of RUB3,808,490 thousand as at 31 December 2018 (31 December 2017: RUB2,020,427 thousand). The future minimum lease payments for premises under lease agreements are payable as follows: 29. SEGMENT REPORTING Within one year Between one and five years More than five years 2018 RUB’000 2017 RUB’000 116,957 172,601 62,033 92,611 135,153 19,642 351,591 247,406 The Group has one primary reporting segment: provision of medical services. The Group evaluates the performance and makes invest- ments and strategic decisions based upon a review of profitability for the Group as a whole and does not group subsidiaries by geog- raphy and service lines during the analysis of their performance. 30. EVENTS AFTER THE REPORTING PERIOD The Group also lease land plots under several hospitals and clinics. Lease agreements maturity for land plots are either 49 years or infinite. In March 2019 the Group opened a new clinic in Vladivostok. Audited Financial Statements118 119 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Officers, Professional Advisors And Registered Office Management Report – Vladimir Mekler – Chairman – Mark Kurtser – Vitaly Ustimenko – Kirill Dmitriev – Nikolay Ishmetov (alternate director to Kirill Dmitriev) – Simon Rowlands – Alsu Nazyrova – Liubov Malyarevskaya Menustrust Limited Darya Alekseeva KPMG Limited 15 Dimitriou Karatasou street, Anastasio Building, 6th floor, office 601, Strovolos, 2024, Nicosia, Cyprus Board of Directors Secretary Secretary assistant Independent Auditors Registered Office The Board of Directors of MD Medical Group Investments Plc (the “Company”) presents to the members its Annual Report together with the audited financial statements of the Company for the year ended 31 December 2018. INCORPORATION MD Medical Group Investments Plc was incorporated in Cyprus on 5 August 2010 as a private limited liability company under the provisions of the Cyprus Companies Law, Cap. 113. On 22 August 2012 following special resolution passed by the shareholder, the name of the Company was changed from “MD Medical Group Investments Ltd” to “MD Medical Group Investments Plc” and the Company was converted into a public limited liability company in accordance with the provisions of the Cyprus Companies Law, Cap. 113. PRINCIPAL ACTIVITY The principal activity of the Company is that of an investment holding company and, for that purpose, to acquire and hold controlling and other interests in the share or loan capital of any company or companies of any nature, but primarily in the healthcare industry. FINANCIAL RESULTS The Company’s financial results for the year ended 31 December 2018 and its financial position as at that date are set out in the statement of profit or loss and other comprehensive income on page 128 and in the statement of financial position on page 129 of these financial statements. Profit for the year ended 31 December 2018 amounted to RUB907,382 thousand (2017: RUB1,167,886 thousand). The total assets of the Company as at 31 December 2018 were RUB10,738,334 thousand (31 December 2017: RUB10,293,354 thousand) and the net assets were RUB10,639,935 thousand (31 December 2017: RUB10,198,001 thousand). DIVIDENDS declares and pays dividends, owners of GDRs on the relevant record date will be entitled to receive dividends in respect of ordinary shares underlying the GDRs. The Company is a holding company and thus its ability to pay dividends depends on the ability of its subsidiaries to pay dividends to the Company in accordance with relevant legislation in the country of their incorporation and any contractual restrictions. The payment of such dividends by its subsidiaries is contingent upon the sufficiency of their earnings, cash flows and distributable reserves. On 17 March 2017 the Board of Directors declared final dividends for the year 2016 attributable to the owners of the Company amounting to RUB338,063 thousand (USD5,804 thousand), which corresponds to RUB4.5 (USD0.08) per share. The dividend distribution was approved by the Annual General Meeting of the shareholders on 21 April 2017. The dividends were paid on 23 May 2017. On 8 September 2017 the Board of Directors declared interim dividends for the six months ended 30 June 2017 attributable to the owners of the Company amounting to RUB350,833 thousand (USD6,140 thousand), which corresponds to RUB4.67 (USD0.08) per share. The dividends were paid on 24 October 2017. On 16 March 2018 the Board of Directors declared final dividends for the year 2017 attributable to the owners of the Company amounting to RUB450,750 thousand (USD7,905 thousand), which corresponds to RUB6.0 (USD0.11) per share. The dividend distribution was approved by the Annual General Meeting of the shareholders on 17 April 2018. The dividends were paid on 22 May 2018. On 22 March 2019 the Board of Directors recommended the payment of RUB800,081 thousand as final dividends for the year 2018 which corresponds to RUB10.65 per share. EXAMINATION OF THE DEVELOPMENT, POSITION AND PERFORMANCE OF THE ACTIVITIES OF THE COMPANY The current financial position and performance of the Company as presented in these financial statements is considered satisfactory. In accordance with the Company’s Articles of Association dividends may be paid out of its profits. To the extent that the Company During 2018 year the Company has incorporated LLC Mother and Child Volga. Audited Financial StatementsDuring 2018 year the Company has acquired directly additional 30% share in LLC Fimedlab, 26% share in LLC Velum, 20% share in LLC Clinica Zdorovia and 15% share in LLC Capital Group, LLC Mother and Child Perm for USD8,332 thousand which corresponds to RUB533,753 thousand as at the date of the transfer of shares and RUB517,440 thousand as at the date of the payment. Indirect interest in shares by Kirill Dmitriev arises through his capacity as key management personnel of indirect shareholder. The calculation of effective interest is based on the total amount of issued and fully paid shares, including treasury shares acquired by the Company. During 2018 year the Company has acquired indirectly (through its subsidiary LLC Khaven) additional 30% share in LLC Mother and Child Ugo-Zapad and 15% share in LLC Mother and Child Ufa and LLC Mother and Child Saint- Petersburg for USD4,003 thousand which corresponds to RUB256,478 thousand as at the date of the transfer of shares and RUB250,795 thousand as at the date of the payment. The Company through its subsidiaries has one of the largest nationwide private healthcare regional networks for its core services and is expanding into new services. It has significant experience in the provision of full-service private maternity healthcare services. The Company has secured leading positions in the Russian private healthcare market across a range of services including obstetrics and gynaecology, fertility and IVF treatments, and paediatrics. It has also been diversifying its offering by adding other medical services for all family members, such as surgery, urology, traumatology, cardiology, and oncology, etc. The recently opened facilities have been multi- disciplinary from the very beginning. PRINCIPAL RISKS AND UNCERTAINTIES Details in relation to principal risks and uncertainties and steps taken to manage these risks and uncertainties are presented in Notes 15 and 17 of these financial statements. The Board of Directors has the overall responsibility for the establishment and supervision of the Company’s risk management framework. DIRECTORS’ INTEREST The direct and indirect interests of the members of the Board in titles of the Company as at 31 December 2018, 31 December 2017 and as at the date of signing these financial statements are as follows: FUTURE DEVELOPMENTS The Company’s goal is to maintain its leading position in high- quality women’s health and pediatrics, addressing the increasing demand for private healthcare services in Russia and beyond. The Company intends through its subsidiaries to expand its portfolio of hospital and outpatient facilities, broaden its service offerings by providing patients with the most up-to-date treatment procedures and medical technology available on the market, expand its services in Moscow and other regions, exploit the value of its integrated healthcare network by making effective use of services across its facilities, optimizing the benefits for patients and its subsidiaries as a whole. SHARE CAPITAL There were no changes in the share capital of the Company during the year. BOARD OF DIRECTORS The Board of Directors leads the process in making new Board member appointments and makes recommendations on appointments to shareholders. In accordance with the Appointment Policy for the Board of Directors and Committees, all directors are subject to appointment or approval of appointment by shareholders at the first Annual General Meeting after their appointment, and to re-appointment at intervals of no more than three years. Any term beyond six years (e.g. two three-year terms) for a non-executive director is subject to particularly rigorous review, and takes into account the need for progressive refreshing of the Board of Directors. The members of the Board of Directors who served as at the date of signing of these financial statements, are presented on page 118. NAME TYPE OF INTEREST EFFECTIVE INTEREST % Refer to Note 14.1. of these financial statements for the remuneration of the directors and other key management personnel. Mark Kurtser Kirill Dmitriev Simon Rowlands Indirect ownership of shares Indirect interest in shares Direct ownership of shares 67.90 5.55 0.33 THE BOARD COMMITTEES Since September 2012, the Board of Directors established the operation of the following three committees: the Audit Committee, the Nomination Committee and the Remuneration Committee. 120 121 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS AUDIT COMMITTEE The Audit Committee comprises of three non-executive directors, two of whom are independent. The Audit Committee is chaired by independent non-executive director Liubov Malyarevskaya since 19 February 2015, Mr. Kirill Dmitriev and Mr. Simon Rowlands are the other members. The Audit Committee meets at least four times each year and is responsible for considering: • the reliability and appropriateness of disclosures in the financial statements and external financial communication; • the maintenance of an effective system of internal controls including financial, operational and compliance controls and risk management system; • preparation of recommendations to the shareholders for approval in General Meetings in relation to the appointment, reappointment and removal of the external auditors; • approval of the remuneration and terms of engagement of the external auditors in respect of audit services provided; • the audit process, including monitoring and review of the external auditors’ performance, independence and objectivity; • development and implementation of the policy on non- audit services provided by the external auditors; and • monitoring compliance with laws and regulations and standard of corporate governance. The Audit Committee assists the Board of Directors in its oversight of the performance and leadership of the internal audit activity. Where the Audit Committee’s monitoring and review activities reveal cause for concern or scope for improvement, it shall make recommendation to the Board of Directors on actions needed to address the issues or to make improvements. INTERNAL AUDIT The Audit Committee is responsible for monitoring and review the effectiveness of the Company’s internal audit function. In this respect, the Audit Committee may require investigations by, or under the authority of, the head of Internal Audit into any activities of the Company which may be of interest or concern to the Audit Committee. The Company`s internal auditor is responsible for the recommendation of an audit plan to the Audit Committee. The internal auditor carries out auditing assignments in accordance with such plan and oversees the Company`s compliance with the plan`s recommendations. The internal auditor files a quarterly report with his findings to the Audit Committee. NOMINATION COMMITTEE The Nomination Committee comprises of one executive and two non-executive directors, one of whom is independent. The Nomination Committee is chaired by non-executive director Mr. Vladimir Mekler (since June 2016), non-executive director Mr. Simon Rowlands and executive director Dr. Mark Kurtser are other members since September 2015. The Nomination Committee meets at least once a year and is responsible for assisting the Board of Directors in discharging its corporate governance responsibilities in relation to appointment of all executive and non-executive directors, as well as the CEO and CFO of the Company. The main objective of the Nomination Committee is to lead the process for the Board of Directors’ appointments and make respective recommendation to the Board of Directors, ensuring proper balance of the Board of Directors and qualification of its members. The Nomination Committee also considers the composition of the Audit and Remuneration Committees. REMUNERATION COMMITTEE The Remuneration Committee comprises of two non-executive directors and one executive director. The Remuneration Committee is chaired by an independent non-executive director Mr. Simon Rowlands. The two other members are Dr. Mark Kurtser and Mr. Vladimir Mekler. The Remuneration Committee meets at least once a year and is responsible for assisting the Board of Directors in discharging its corporate governance responsibilities in relation to remuneration of all executive directors and the chairman of the Board of Directors. The main objective of the Remuneration Committee is to determine the framework and policy for the remuneration of the executive directors, the chairman of the Board of Directors and senior executives, and the specific remuneration of each executive director and the chairman of the Board of Directors and any compensation payments. CORPORATE GOVERNANCE Since 2012, the Company has maintained full compliance with the UK Corporate Governance Code. The Company is committed to the highest standards of corporate governance and transparency. The Board of Directors recognises that good governance is a strategic asset that helps it to deliver consistent long term value to its shareholders. By running the Company in an open way, the Board of Directors enables shareholders to understand how it has been able to deliver consistently strong results. The Board of Directors believes that corporate responsibility is an essential part of good governance and makes sound business sense, as well as being crucial to the appropriate management of risk within the Company. Improving its corporate governance structure in accordance with the internationally recognised best practices the Company adopted important policies and procedures. The Company’s corporate governance policies and practices are designed to ensure that the Company is focused on upholding its responsibilities to the shareholders. The Company’s corporate governance policies and practices include, inter alia: • Appointment policy for the Board of Directors and Committees; • Terms of reference of the Audit Committee, Nomination Committee and Remuneration Committee; • Code of Ethics and Conduct; Audited Financial Statements122 123 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Directors’ Responsibility Statement Each of the directors, whose names are listed below, confirms that, to the best of their knowledge: • the financial statements, prepared in accordance with IFRS as adopted by the EU and the requirements of the Cyprus Companies Law, Cap.113, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings includ- ed in the report taken as a whole; • the adoption of the going concern basis for the preparation of the financial statements continues to be appropriate based on the forego- ing and having reviewed the forecast financial position of the Company; and • the Management report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the report taken as a whole, together with a description of the principal risks and uncertainties that they face. The Directors of the Company responsible for reporting as at the date of this announcement are set out below: Vladimir Mekler Mark Kurtser Vitaly Ustimenko Alsu Nazyrova Kirill Dmitriev Simon Rowlands Liubov Malyarevskaya Chairman, non-executive director Executive director Non-executive director Executive director Non-executive director Non-executive independent director Non-executive independent director • Business Continuity Policy; • Disclosure Policy; • Regulations on Insider Information; • Risk Management Policy; and • Anti-Fraud Policy. INTERNAL CONTROL IN RELATION TO THE FINANCIAL REPORTING PROCESS The Company has set formal policies and written term of reference in relation to the financial reporting process that include: • Corporate Accounting policy Guidelines; • Methodology for the Transformation of Financial Statements from RAS to IFRS; • Financial Reporting Preparation Procedure; and • The Group’s structure. The objective of this policу is to establish uniform procedures and to implement requirements for the preparation of the financial statements of the Company. The procedure should be reviewed for compliance with International Financial Reporting Standards as well as current conditions and planned changes in the Company’s business activities annually. When necessary, amendments and additions to this Procedure should be adopted. All shareholders are entitled to attend the general meeting or be represented by a proxy authorised in writing. In the general meeting, on a poll, every share gives the holder the right to cast one vote, whereas, on a show of hands, each member has one vote. A corporate member may, by resolution of its directors or other governing body, authorise a person to act as representative at any meeting of the Company. BRANCHES MD Medical Group Investments Plc has a branch in Moscow. TREASURY SHARES During the year ended 31 December 2018, the Company distributed the GDRs earlier acquired by the Company to the participants of Long-term Management Incentive Plan (LTIP) signed in 2014. No additional treasury shares were acquired. EVENTS AFTER THE REPORTING PERIOD No significant events occurred after the reporting period. MEETINGS OF SHAREHOLDERS INDEPENDENT AUDITORS The Company shall in each year hold a general meeting as its annual general meeting in addition to any other meetings in that year. An annual general meeting and any other shareholders’ meeting called to pass a special resolution can be convened by the Board of Directors by a notice, specifying the matters to be discussed, issued at least 21 days before the meeting. Any other meetings shall be convened by the Board of Directors by a notice, specifying the matters to be discussed, issued at least 14 days before the meeting. If the notice period is less than 21 days or 14 days as applicable, the meeting will be deemed to have been duly called if it is so agreed: • in the case of a meeting called as the annual general meeting, by all the shareholders entitled to attend and vote; and in the case of any other meeting, by a majority in number of the members having a right to attend and vote at the meeting, being a majority together holding not less than 95 per cent in nominal value of the shares giving that right. • A notice convening a general meeting must be sent to each of the shareholders. The independent auditors of the Company Messrs. KPMG Limited have expressed their willingness to continue in office. A resolution giving authority to the Board of Directors to fix their remuneration will be submitted to the Annual General Meeting. By order of the Board of Directors, Mark Kurtser Managing Director, member of the Board of Directors Moscow, 22 March 2019 Audited Financial StatementsIndependent Auditors’ Report to the Members of MD Medical Group Investments plc REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS OPINION We have audited the financial statements of the parent company MD Medical Group Investments Plc (the “Company’’) which are presented on pages 128 to 148 and comprise the statement of financial position as at 31 December 2018, and the statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the financial statements of the parent company give a true and fair view of the financial position of the Company as at 31 December 2018, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRS- EU”) and the requirements of the Cyprus Companies Law, Cap. 113, as amended from time to time (the “Companies Law, Cap. 113”). BASIS FOR OPINION We conducted our audit in accordance with International Standards on Auditing (“ISAs”). Our responsibilities under those standards are further described in the “Auditors’ responsibilities for the audit of the financial statements” section of our report. We remained independent of the Company in accordance with the Code of Ethics for Professional Accountants of the International Ethics Standards Board for Accountants (“IESBA Code”) and the ethical requirements in Cyprus that are relevant to our audit of the financial statements, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. KEY AUDIT MATTERS Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 124 125 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS INVESTMENTS IN SUBSIDIARIES Please refer to Notes 2(d) and 9 of the financial statements (RUB10,169,345 thousand). The key audit matter How the matter was addressed in our audit The carrying value of the investments in subsidiaries amounts to RUB10,169,345 thousand and accounts for more than 90% of the Company’s total assets as at 31 December 2018. Among others, our audit procedures included the following: • Evaluating the assessment of the management with regards to indications of impairment by: — assessing the industry in which the subsidiaries are operating to Significant judgement is required by the management of the Company in determining whether there are any indications of impairment and, where such indications exist, in assessing the recoverable amount of the investments. We focused on this area because of the significance of the carrying amount of the investments in the financial statements and because inherent uncertainty and subjectivity is involved in forecasting and discounting future cash flows, which are the basis of the assessment of the recoverable amount of the investments and hence their carrying amount recorded in the financial statements. obtain an understanding of growth rates and outlook. — examining the subsidiaries’ historical and current performance. This examination was made with reference to the most recent audited financial information and/or management accounts at the reporting date. We also held discussions with management to understand future expectations. • In the cases where indications of impairment were present, we as- sessed the principles and integrity of the model used by the man- agement to estimate the recoverable amount of the investments. This included evaluating the assumptions and methodologies used by the management of the Company based on which the forecasted cash flows were prepared. We challenged management’s assumptions on the forecasted revenues, growth rates, profit margins, tax rates and discount rates by: — comparing them to our expectations based on our knowledge of the subsidiaries operations, historical trends and the results of the operations of other group entities that operate in the same industry. — using our internal valuation specialists to assess the discount rates, the assumptions used and the appropriateness of the valuation models used. OTHER INFORMATION The Board of Directors is responsible for the other information. The other information comprises the management report, the corporate governance statement and the corporate social responsibility statement, but does not include the financial statements and our auditors’ report thereon. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon, except as required by the Companies Law, Cap. 113. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. With regards to the corporate social responsibility statement, we have nothing to report. Audited Financial Statements126 127 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS OTHER LEGAL REQUIREMENTS Pursuant to the additional requirements of law L. 53(I)/2017, and based on the work undertaken in the course of our audit, we report the following: • In our opinion, the management report, the preparation of which is the responsibility of the Board of Directors, has been prepared in accordance with the requirements of the Companies Law, Cap. 113, and the information given is consistent with the financial statements. • In the light of the knowledge and understanding of the Compa- ny’s business and environment obtained in the course of the au- dit, we have not identified material misstatements in the man- agement report. • In our opinion, the information included in the corporate govern- ance statement in accordance with the requirements of subpara- graphs (iv) and (v) of paragraph 2(a) of Article 151 of the Com- panies Law, Cap. 113, and which is included as a specific section of the annual report, has been prepared in accordance with the requirements of the Companies Law, Cap, 113, and is consist- ent with the financial statements. • In our opinion, the corporate governance statement includes all information referred to in subparagraphs (i), (ii), (iii), (vi) and (vii) of paragraph 2(a) of Article 151 of the Companies Law, Cap. 113. • In our opinion, based on the work undertaken in the course of our audit, the corporate governance statement includes all informa- tion referred to in subparagraphs (i), (ii), (iii), (vi) and (vii) of para- graph 2(a) of Article 151 of the Cyprus Companies Law, Cap. 113.3 • In light of the knowledge and understanding of the Group and its environment obtained in the course of the audit, we are required to report if we have identified material misstatements in the cor- porate governance statement in relation to the information disclosed for items (iv) and (v) of subparagraph 2(a) of Article 151 of the Cyprus Companies Law, Cap. 113. We have nothing to report in this respect. OTHER MATTER This report, including the opinion, has been prepared for and only for the Company’s members as a body in accordance with Section 69 of Law L. 53(I)/2017 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whose knowledge this report may come. The engagement partner on the audit resulting in this independent auditors’ report is Zakis E. Hadjizacharias. Zakis E. Hadjizacharias, CA Certified Public Accountant and Registered Auditor for and on behalf of KPMG Limited Certified Public Accountants and Registered Auditors No. 11, June 16th 1943 Street, 3022 Limassol, Cyprus. 22 March 2019 With regards to the management report and the corporate governance statement, our report is presented in the “Report on other legal and regulatory requirements” section. RESPONSIBILITIES OF THE BOARD OF DIRECTORS AND THOSE CHARGED WITH GOVERNANCE FOR THE FINANCIAL STATEMENTS The Board of Directors is responsible for the preparation of financial statements that give a true and fair view in accordance with IFRS- EU and the requirements of the Companies Law, Cap. 113, and for such internal controls as the Board of Directors determines are necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Board of Directors is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless there is an intention to either liquidate the Company or to cease operations, or there is no realistic alternative but to do so. The Board of Directors is responsible for overseeing the Company’s financial reporting process. AUDITORS’ RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. • Obtain an understanding of internal controls relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal controls. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Board of Directors • Conclude on the appropriateness of the Board of Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Company to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves a true and fair view. We communicate with those charged with Governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal controls that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS OTHER REGULATORY REQUIREMENTS Pursuant to the requirements of Article 10(2) of EU Regulation 537/2014 we provide the following information in our Independent Auditors’ Report, which is required in addition to the requirements of ISAs. • Date of our appointment and period of engagement We were first appointed auditors of the Company by the General Meeting of the Company’s members on 10 July 2012. Our appointment has been renewed annually by shareholders’ resolutions. Our total uninterrupted period of engagement is 10 years covering the periods ending 31 December 2009 to 31 December 2018. • Consistency of the additional report to the Audit Committee with the Independent Auditors’ Report Our audit opinion is consistent with the additional report presented to the Audit Committee, dated 22 March 2019. • Provision of non-audit services (“NAS”) We have not provided any prohibited NAS referred to in Article 5 of EU Regulation 537/2014 as applied by Section 72 of the Auditors Law of 2017, L.53(I)2017, as amended from time to time (“Law L53(I)/2017”). Audited Financial Statements128 129 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Statement of Profit or Loss and Other Comprehensive Income Statement of Financial Position For the year ended 31 December 2018 As at 31 December 2018 Dividend income Revenue from branch operations Revenue from advertising Gross profit Other income Other expense Administrative expenses Operating profit Finance income Finance expenses Net foreign exchange gain / (loss) Net finance income / (expenses) Profit before tax Income tax Profit for the year NOTE 14.2 14.3 6 4 5 5 5 5 7 2018 RUB’000 2017 RUB’000 1,065,937 1,380,400 168,931 7,151 108,715 733 1,242,019 1,489,848 921 (11,940) (387,774) 843,226 5,000 (1,551) 77,145 80,594 96,601 (9,510) (378,924) 1,198,015 4,453 (1,237) (46,262) (43,046) 923,820 1,154,969 (16,438) 12,917 907,382 1,167,886 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 907,382 1,167,886 ASSETS Property, plant and equipment Intangible assets Deferred tax assets Investments in subsidiaries TOTAL NON-CURRENT ASSETS Inventories Trade, other receivables and deferred expenses Cash and cash equivalents TOTAL CURRENT ASSETS TOTAL ASSETS EQUITY Share capital Share premium Reserves Retained earnings TOTAL EQUITY LIABILITIES Trade and other payables Tax liability TOTAL CURRENT LIABILITIES TOTAL EQUITY AND LIABILITIES 31 DECEMBER 2018 RUB’000 31 DECEMBER 2017 RUB’000 NOTE 7 9 10 11 13 7 7,845 8,537 4,846 10,169,345 10,190,573 739 48,563 498,459 547,761 4,019 6,406 40,637 9,277,456 9,328,518 478 32,567 931,791 964,836 10,738,334 10,293,354 180,585 5,243,319 304,254 4,911,777 180,585 5,243,319 303,407 4,470,690 10,639,935 10,198,001 98,399 - 98,399 75,999 19,354 95,353 10,738,334 10,293,354 On 22 March 2019 the Board of Directors of MD Medical Group Investments Plc approved and authorised these report and financial statements for issue. Vladimir Mekler Chairman of the Board of Directors Mark Kurtser Managing Director Andrey Khoperskiy Chief Financial Officer The Notes on pages 136 to 148 are an integral part of these report and financial statements. The Notes on pages 136 to 148 are an integral part of these report and financial statements. Audited Financial Statements130 131 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Statement of Сhanges in Equity For the year ended 31 December 2018 Balance at 1 January 2018 Total comprehensive income Profit and other comprehensive income for the year Contributions by and distributions to owners Equity-settled share-based payment Other movements Dividends declared TOTAL TRANSACTIONS WITH OWNERS BALANCE AT 31 DECEMBER 2018 Share premium and other reserves are not available for distribution. ATTRIBUTABLE TO OWNERS OF THE COMPANY ATTRIBUTABLE TO OWNERS OF THE COMPANY NOTE SHARE CAPITAL RUB’000 TREASURY SHARES RUB’000 SHARE PREMIUM RUB’000 OTHER RESERVES RUB’000 RETAINED EARNINGS RUB’000 TOTAL RUB’000 180,585 (4,544) 5,243,319 307,951 4,470,690 10,198,001 - - - - - 180,585 - 847 - - 847 (3,697) 8 - - - - - - - - - - 907,382 907,382 - (15,545) (450,750) (466,295) 847 (15,545) (450,750) (465,448) 5,243,319 307,951 4,911,777 10,639,935 The Notes on pages 136 to 148 are an integral part of these report and financial statements. Audited Financial Statements132 133 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Statement of Сhanges in Equity For the year ended 31 December 2017 Balance at 1 January 2017 Total comprehensive income Profit and other comprehensive income for the year Contributions by and distributions to owners Equity-settled share-based payment Closing of motivation program Dividends declared TOTAL TRANSACTIONS WITH OWNERS BALANCE AT 31 DECEMBER 2017 Share premium and other reserves are not available for distribution. ATTRIBUTABLE TO OWNERS OF THE COMPANY ATTRIBUTABLE TO OWNERS OF THE COMPANY NOTE SHARE CAPITAL RUB’000 TREASURY SHARES RUB’000 SHARE PREMIUM RUB’000 OTHER RESERVES RUB’000 RETAINED EARNINGS RUB’000 TOTAL RUB’000 180,585 (18,737) 5,243,319 307,951 3,971,139 9,684,257 - - - - - 180,585 - 34,754 (20,561) - 14,193 (4,544) 8 - - - - - - - - - - 1,167,886 1,167,886 - 20,561 (688,896) (668,335) 34,754 - (688,896) (654,142) 5,243,319 307,951 4,470,690 10,198,001 The Notes on pages 136 to 148 are an integral part of these report and financial statements. Audited Financial Statements134 135 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Statement of Cash Flows For the year ended 31 December 2018 Cash flows from operating activities Profit for the year Adjustments for: Equity-settled share-based payment transaction Depreciation of property, plant and equipment Amortisation of intangible assets Dividend income Finance expenses Interest income Net foreign exchange (gain) / loss Gain under Escrow Agreement Income tax Impairment of investments in subsidiaries NOTE 2018 RUB’000 2017 RUB’000 NOTE 2018 RUB’000 2017 RUB’000 907,382 1,167,886 847 1,330 3,121 34,754 194 1,439 Cash flows from investing activities Capital contributions to subsidiaries Payment for acquisition/contstruction of property, plant and equipment Payment for acquisition of intangible assets Acquisition of non-controlling interest Interest received 14.2 (1,065,937) (1,380,400) Proceeds from Escrow Agreement 5 5 5 6 7 9 1,551 1,237 (5,000) (77,145) (4,453) 46,262 - (96,592) 16,438 (12,917) 6,874 7,855 Net cash flows used in investing activities Cash flows used in financing activities Finance expenses paid Dividends paid Net cash flows used in financing activities (325,000) (211,882) (5,156) (5,251) (2,869) (2,323) (517,440) (53,000) 5,000 4,453 - 96,592 (847,847) (169,029) (1,551) (1,237) (494,339) (680,791) (495,890) (682,028) (539,438) 282,885 931,791 703,343 106,106 (54,437) Net (decrease) / increase in cash and cash equivalents Cash and cash equivalents at the beginning of the period Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents as at the end of the year 10 498,459 931,791 The Notes on pages 136 to 148 are an integral part of these report and financial statements. Cash flows used in operations before working capital changes (210,539) (234,735) Increase in trade and other receivables Increase in inventories Decrease in trade and other payables Cash flows used in operations Dividends received Net cash flows from operating activities (15,978) (10,549) (261) (34,860) (118) (1,056) (261,638) (246,458) 1,065,937 1,380,400 804,299 1,133,942 Audited Financial StatementsNotes to the Financial Statements For the year ended 31 December 2018 1. INCORPORATION AND PRINCIPAL ACTIVITIES MD Medical Group Investments Plc (the “Company”) was incorporated in Cyprus on 5 August 2010 as a private limited liability company under the provisions of the Cyprus Companies Law, Cap. 113. In August 2012, following the special resolution passed by the shareholder, the Company was converted into a public limited liability company in accordance with the provisions of the Cyprus Companies Law, Cap. 113. Its Registered Office is at Dimitriou Karatasou 15, Anastasio Building, 6th floor, office 601, Strovolos, 2024, Nicosia, Cyprus. The principal activity of the Company is that of an investment holding company and, for that purpose, to acquire and hold controlling and other interests in the share or loan capital of any company or companies of any nature, but primarily in the healthcare industry. 2. BASIS OF PREPARATION (A) STATEMENT OF COMPLIANCE These report and financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS-EU) and the requirements of the Cyprus Companies Law, Cap.113. These are the separate financial statements of the Company. The Company has also prepared consolidated financial statements in accordance with IFRS as adopted by the EU for the Company and its subsidiary (“the Group”). The consolidated financial statements are available at 15 Dimitriou Karatasou street, Anastasio Building, 6th floor, office 601, 2024 Nicosia, Cyprus. Users of these parent’s separate financial statements should read them together with the Group’s consolidated financial statements as at and for the year ended 31 December 2018 in order to obtain a proper understanding of the financial position, the financial performance and the cash flows of the Company and the Group. (B) BASIS OF MEASUREMENT These report and financial statements have been prepared under the historical cost convention. (C) ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS As from 1 January 2018, the Company adopted all changes to International Financial Reporting Standards (IFRSs) which are relevant to its operations. This adoption did not have a material effect on the financial statements of the Company. The following Standards, Amendments to Standards and Interpretations have been issued by International Accounting Standard Board, but are not yet effective for annual periods beginning on 1 January 2018. Those which may be relevant to the Company are set out below. The Company does not plan to adopt these Standards early. STANDARDS AND INTERPRETATIONS ADOPTED BY THE EU AS AT 1 JANUARY 2019: • IFRS 16 Leases (effective for annual periods beginning on or after 1 January 2019); • IFRIC 23 Uncertainty over Income Tax Treatments (effective for annual periods beginning on or after 1 January 2019); • Amendments to IFRS 9: Prepayment Features with Negative Compensation (effective for annual periods beginning on or after 1 January 2019); • Amendments to IAS 28: Long-term Interests in Associates and Joint Ventures (effective for annual periods beginning on or after 1 January 2019). STANDARDS AND INTERPRETATIONS NOT YET ADOPTED BY THE EU AS AT 1 JANUARY 2019: • IFRS 17 Insurance Contracts (effective for annual periods beginning on or after 1 January 2021); • Annual Improvements to IFRS Standarts 2015–2017 Cycle (effec- tive for annual periods beginning on or after 1 January 2019); • Amendments to IAS 19: Plan Amendment, Curtailment or Settlement (effective for annual periods beginning on or after 1 January 2019); • Amendments to References to the Conceptual Framework in IFRS Standards (effective for annual periods beginning on or after 1 January 2020); • Amendments to IFRS 3: Business Combinations (effective for annual periods beginning on or after 1 January 2020); 136 137 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS • Amendments to IAS 1 and IAS 8: Definition of Material (effective for annual periods beginning on or after 1 January 2020). Management expects that the adoption of these standards in future periods will not have a material effect on the financial statements of the Company. (D) USE OF ESTIMATES AND JUDGEMENTS Preparing these financial statements in accordance with IFRSs requires management to exercise their judgement to make estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. The estimates and underlying assumptions are based on historical experience and various other factors that are deemed reasonable based on knowledge available at that time. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed and where necessary revised on an ongoing basis. Revisions to estimates are recognised prospectively. In particular, information about significant areas of estimation, uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described below: Income taxes Significant judgment is required in determining the provision for income taxes. There are transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Company recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. Impairment of investments in subsidiaries The Company periodically evaluates the recoverability of investments in subsidiaries whenever indicators of impairment are present. Indicators of impairment include such items as declines in revenues, earnings or cash flows or material adverse changes in the economic or political stability of a particular country, which may indicate that the carrying amount of an asset is not recoverable. If facts and circumstances indicate that investment in subsidiaries may be impaired, the estimated future discounted cash flows associated with these subsidiaries/associates would be compared to their carrying amounts to determine if a write down to fair value is necessary. Equity- settled share-based arrangements For the calculation of the fair value of equity-settled share-based program, the market price of shares (Level 1 input) as at the grant date is being used. Measurement of fair values A number of the Company’s accounting policies and disclosures require the measurement of fair values, for both financial and non financial assets and liabilities. When measuring the fair value of an asset or a liability, the Compa- ny uses observable market data as far as possible. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows: • Level–1 quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level–2 inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). • Level–3 inputs for the asset or liability that are not based on ob- servable market data (unobservable inputs). If the inputs used to measure the fair value of an asset or a liability fall into different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. Impairment of intangible assets and property, plant and equipment Intangible assets and property, plant and equipment are initially recorded at acquisition cost and are amortised on a straight line basis over their useful economic life. Intangible assets and property, plant and equipment that are acquired through a business combination are initially recorded at fair value at the date of acquisition. Intangible assets with indefinite useful life are reviewed for impairment at least annually. The impairment test is performed using the discounted cash flows expected to be generated through the use of the intangible assets and property, plant and equipment, using a discount rate that reflects the current market estimations and the risks associated with the asset. When it is impractical to estimate the recoverable amount of an asset, the Company estimates the recoverable amount of the cash generating unit to which the asset belongs. E) FUNCTIONAL AND PRESENTATION CURRENCY These report and financial statements are presented in Russian Rubles (RUB’000) which is the functional currency of the Company. Financial information presented in Russian Rubles has been rounded to the nearest thousand except when otherwise indicated. 3. SIGNIFICANT ACCOUNTING POLICIES The following accounting policies have been applied consistently for all the years presented in these financial statements and in stating the financial position of the Company. FINANCIAL STATEMENTS The Company has subsidiary undertakings for which section 142(1) (b) of the Cyprus Companies Law Cap. 113 requires consolidated Audited Financial Statementsfinancial statements to be prepared and laid before the Company at the Annual General Meeting. Consolidated financial statements are presented separately. These are the Company’s standalone financial statements. SUBSIDIARY COMPANIES Subsidiaries are entities controlled by the Company. Control exists where the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Investments in subsidiary companies are stated at cost less provision for impairment in value, which is recognised as an expense in the period in which the impairment is identified. DIVIDEND INCOME Dividend income is recognised in the statement of profit or loss and other comprehensive income when the right to receive payment is established. REVENUE Revenue is measured based on the consideration specified in a con- tract with a customer and comprises the invoiced amount for servic- es. The Company recognises revenue when it transfers control over service to a customer. The Company has initially applied IFRS 15 from 1 January 2018. There was no significant effect on these report and financial statements. FINANCE INCOME Finance income includes interest income which is recognised as it accrues in profit or loss using the effective interest method. FINANCE EXPENSES Finance expenses include bank charges and interest expense. Bank charges are recognised as expenses in the period in which they fall due and interest expense is recognised as it accrues in profit or loss using the effective interest method. FOREIGN CURRENCY TRANSACTIONS Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss under the category finance income or finance expenses. TAX The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in profit or loss because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting date. Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the statement of financial position liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference aris- es from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Company is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised. Deferred tax is charged or credited to profit or loss, except when it relates to items charged or credited directly to other comprehensive income or equity, in which case the deferred tax is also dealt with in other comprehensive income or equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis. DIVIDENDS DECLARED Dividend distribution to the Company’s shareholders is recognised in the Company’s financial statements when the shareholders` right to receive the dividens is established, either through Board resolution (for interim dividends) or by the Company’s shareholders in the Annual General Meeting (for final dividends). FINANCIAL INSTRUMENTS Recognition The Company recognises financial assets and financial liabilities when, and only when, it becomes a party of the contractual provisions of the financial instrument. Classification The Company classifies financial assets on the basis of both: the Company`s business model for managing financial assets, as well as the contractual cash flow characteristics of the financial assets. The Company’s financial assets comprise of trade and other receivables and cash and cash equivalents. They are non-derivative 138 139 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS financial assets with fixed or determinable payments that are not quoted in an active market and for which there is no intention of trading the receivable. They are classified as current assets unless the Company has an unconditional responsibility to accept deferral of receipt for at least twelve months after the balance sheet date, in which case they are classified as non-current assets. The Company’s financial liabilities comprise of trade and other payables and borrowings. They are non- derivatives that are either designated in this category or not classified in any of the other categories. They are classified as current liabilities unless there is an unconditional right to defer settlement for at least twelve months after the balance sheet date, in which case they are classified as long term liabilities. Measurement Financial assets and financial liabilities are initially measured at fair value plus any directly attributable transaction costs. Trade and other receivables are amounts due from customers for services performed in the ordinary course of business and are stated after deducting the appropriate allowances for any impairment. For the purpose of the statement of cash flows, cash and cash equivalents include cash in hand, cash at bank and short term highly liquid investments with maturity of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value and are used by the Company in the management of its short term investments. Impairment of non-derivative financial assets At each balance sheet date the Company recognises a loss allowance for expected credit losses on financial assets measured at amortised cost. The loss allowance for financial assets at amortised cost is recognised in profit or loss in respondance with a balance sheet account reducing the carrying amount of the financial asset. Expected credit losses are determined based on historical data of relevant probability of default. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost the reversal is recognised in profit or loss. The Company has initially applied IFRS 9 from 1 January 2018. There was no significant effect on these report and financial statements. Derecognition of financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when: • the rights to receive cash flows from the asset have expired; • the Company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass through” arrangement; or • the Company has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has trans- ferred control of the asset. Any interest in such derecognised financial assets that is created or retained by the Company, is recognised as a separate asset or liability. Derecognition of financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms,or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in profit or loss. Offsetting financial instruments Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the statement of financial position. IMPAIRMENT OF NON-FINANCIAL ASSETS Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to depreciation or amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). SHARE CAPITAL Proceeds from the issue of ordinary shares are classified as equity. The difference between the issue price of the shares and their nominal value is taken to the share premium account. Incremental costs directly attributable to the issue of new shares are recognised as a deduction from share premium net of any tax effect. TREASURY SHARES When shares recognised as equity are repurchased, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the treasury share reserve. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity, and the resulting surplus or deficit on the transaction is presented in additional paid-in capital. Audited Financial Statements140 141 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Reconciliation between profit before taxation and income tax expense: 8. DIVIDENDS 2018 RUB’000 2017 RUB’000 EQUITY-SETTLED SHARE-BASED PAYMENT ARRANGEMENTS Fair value of equity-settled share-based payment arrangements with employees is measured at the grant date based on the market price of the shares. Service and non-market vesting conditions are not taken into account when estimating the fair value at the grant date. The grant date is the date on which the Company and its employees agree the terms and conditions of the share-based payment arrangement. Fair value is not remeasured subsequent to the grant date. Annually the number of shares which are expected to vest is true-up for the differences between the number of shares initially expected to vest and the actual number of shares vested, based on the fulfilment of service and non-market conditions. Within the vesting period, fair value of the equity-settled share- based payment arrangement with employees adjusted to reflect the true-up of the instruments which will not vest, is recognised as staff costs with the corresponding increase recognised in equity. PROVISIONS Provisions are recognised when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where the Company expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. COMPARATIVES Where necessary, comparative figures have been adjusted to conform to changes in presentation in the current period. 4. ADMINISTRATIVE EXPENSES The remuneration of the independent auditors includes an amount of RUB17,784 thousand regarding audit services, RUB375 thousand regarding audit related services and an amount of RUB362 thousand regarding tax services. 5. NET FINANCE INCOME / (EXPENSES) Accounting profit before tax 923,820 1,154,969 Finance income Bank interest received Net foreign exchange gain Finance expenses Bank charges 2018 RUB’000 2017 RUB’000 5,000 77,145 4,453 - (1,551) (1,237) Net foreign exchange loss - (46,262) NET FINANCE INCOME / (EXPENSES) 80,594 (43,046) 6. OTHER INCOME During 2017 year the Company received other income of RUB96,601 thousand. This income arose mostly from the Escrow Deed approved on 26 September 2014, under which the Company received RUB96,592 thousand (USD1,575 thousand) from Escrow Agent in March 2017 as a result of negotiations with the seller of Ivicend Holding Ltd. Tax calculated at the applicable tax rates (184,764) (230,994) Reversal of tax provision 19,354 - Tax effect of allowances and income not subject to tax 213,187 276,080 Current-year losses for which no deferred tax asset is recognised (64,216) (32,169) TAX AS PER STATEMENT OF COMPREHENSIVE INCOME - CHARGE (16,438) 12,917 The corporation tax rate is 20% (2017: 20%). The Company in 2015 changed its tax residency from Cyprus to Russian and opened a branch in Moscow. As a result the Company is taxable under Russian Tax Code which impose corporation tax at the rate of 20%. As at 31 December 2018 deferred tax asset relating to tax losses carried forward in the amount of RUB157,586 thousand (31 December 2017: RUB93,370 thousand) has not been recognised in the financial statements since it is expected that no sufficient taxable profits will be available to allow it to be recovered. On 17 March 2017 the Board of Directors declared final dividends for the year 2016 attributable to the owners of the Company amounting to RUB338,063 thousand (USD5,804 thousand), which corresponds to RUB4.5 (USD0.08) per share. The dividend distribution was approved by the Annual General Meeting of the shareholders on 21 April 2017. The dividends were paid on 23 May 2017. On 8 September 2017 the Board of Directors declared interim dividends for the six months ended 30 June 2017 attributable to the owners of the Company amounting to RUB350,833 thousand (USD6,140 thousand), which corresponds to RUB4.67 (USD0.08) per share. The dividends were paid on 24 October 2017. On 16 March 2018 the Board of Directors declared final dividends for the year 2017 attributable to the owners of the Company amounting to RUB450,750 thousand (USD7,905 thousand), which corresponds to RUB6.0 (USD0.11) per share. The dividend distribution was approved by the Annual General Meeting of the shareholders on 17 April 2018. The dividends were paid on 22 May 2018. On 22 March 2019 the Board of Directors recommended the payment of RUB800,081 thousand as final dividends for the year 2018 which corresponds to RUB10.65 per share. 2018 RUB’000 2017 RUB’000 7. INCOME TAX 9. INVESTMENTS IN SUBSIDIARIES Payroll and related social taxes 166,634 177,989 Call center services 68,957 54,548 Legal and professional expenses 35,202 59,104 IT support Advertising Licences 32,198 27,570 24,336 23,182 18,554 – Independent auditors’ remuneration 18,521 18,224 Other expenses 23,372 18,307 387,774 378,924 Income tax Reversal of tax provision Deferred tax CHARGE FOR THE YEAR 2018 RUB’000 2017 RUB’000 - 19,354 (35,792) (16,438) - - 12,917 12,917 Balance at 1 January Purchase of NCI Capital contribution Impairment of investments in subsidiaries BALANCE AT 31 DECEMBER 31 DECEMBER 2018 RUB’000 31 DECEMBER 2017 RUB’000 9,277,456 9,020,429 533,753 365,010 (6,874) 53,000 211,882 (7,855) 10,169,345 9,277,456 Audited Financial StatementsThe details of the subsidiaries are as follows: NAME COUNTRY OF INCORPORATION ACTIVITIES CJSC MD PROJECT 2000 Russian Federation Medical services LLC Khaven LLC Velum LLC Capital Group LLC FimedLab1 Russian Federation Medical services Russian Federation Medical services Russian Federation Pharmaceutics retail Russian Federation Medical services LLC Clinic Mother and Child Russian Federation Holding of trademarks LLC Clinica Zdorovia Russian Federation Medical services LLC Ivamed LLC Dilamed CJSC Listom LLC Ustic-ECO Russian Federation Medical services Russian Federation Medical services Russian Federation Service company Russian Federation Medical services LLC Mother and Child Perm Russian Federation Medical services LLC Mother and Child Ufa Russian Federation Medical services LLC Mother and Child Saint- Petersburg Russian Federation Medical services LLC MD PROJECT 2010 Russian Federation Medical services LLC Mother and Child Ugo-Zapad Russian Federation Medical services LLC MD Service Russian Federation Pharmaceutics retail LLC Mother and Child Nizhny Novgorod Russian Federation Medical services LLC Mother and Child Yekaterinburg Russian Federation Medical services LLC Mother and Child Tyumen Russian Federation Medical services CJSC MK IDK LLC Apteka IDK LLC CSR Russian Federation Medical services Russian Federation Pharmaceutics retail Russian Federation Medical services LLC MD Assistance Russian Federation Assistance services LLC Mother and Child Yaroslavl Russian Federation Medical services LLC Mother and Child Kostroma Russian Federation Medical services LLC Mother and Child Vladimir Russian Federation Medical services LLC MD Management Russian Federation Management company LLC Mother and Child Ryazan Russian Federation Medical services LLC Mother and Child Kazan Russian Federation Medical services 31 DECEMBER 2018 EFFECTIVE HOLDING, % 31 DECEMBER 2017 EFFECTIVE HOLDING, % 95 100 90 95 90 100 80 100 100 100 70 95 95 85 100 90 95 100 100 100 100 100 100 100 80 80 80 100 100 100 95 100 64 80 60 100 60 100 100 100 70 80 80 70 100 60 95 100 100 100 100 100 100 100 80 80 80 100 100 100 142 143 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS NAME Ivicend Holding Ltd JSC MC Avicenna COUNTRY OF INCORPORATION ACTIVITIES Cyprus Holding of investments Russian Federation Medical services LLC H&C Medical Group Russian Federation Medical services LLC Centre of Reproductive Medicine Russian Federation Medical services LLC Medica-2 Russian Federation Medical services LLC Mother and Child Siberia Russian Federation Medical services LLC Krasnoyarskii center of Reproductive Medicine LLC Novosibirskii center of Reproductive Medicine LLC Omskii center of Reproductive Medicine LLC Barnaulskii center of Reproductive Medicine Russian Federation Medical services Russian Federation Medical services Russian Federation Medical services Russian Federation Medical services LLC Nika Russian Federation Holding of land LLC Stroy Vector Pluss Russian Federation Rental services LLC Mother and Child Vladivostok Russian Federation Medical services LLC Irkutsk Clinical Hospital Russian Federation Medical services LLC Mother and Child Volga Russian Federation Management company 31 DECEMBER 2018 EFFECTIVE HOLDING, % 31 DECEMBER 2017 EFFECTIVE HOLDING, % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - 1 Following a small re-organisation of the MDMG group that took place in 2017 and continued in 2018, the investment in LLC Fimedlab was impaired because its carrying amount exceeded its recoverable amount. As such, an impairment loss of RUB6,874 thousand was charged to the statement of profit or loss and other comprehensive income under “Other expenses”. (An impairment loss took place in 2017 in the amount of RUB7,855 thousand which was also charged to the statement of profit or loss and other comprehensive income under “Other expenses”.) During 2018 year the Company has incorporated LLC Mother and Child Volga. During 2018 year the Company has acquired directly additional 30% share in LLC Fimedlab, 26% share in LLC Velum, 20% share in LLC Clinica Zdorovia and 15% share in LLC Capital Group, LLC Mother and Child Perm for USD8,332 thousand which corresponds to RUB533,753 thousand as at the date of the transfer of shares and RUB517,440 thousand as at the date of the payment. During 2018 year the Company has acquired indirectly (through its subsidiary LLC Khaven) additional 30% share in LLC Mother and Child Ugo-Zapad and 15% share in LLC Mother and Child Ufa and LLC Mother and Child Saint- Petersburg for USD4,003 thousand which corresponds to RUB256,478 thousand as at the date of the transfer of shares and RUB250,795 thousand as at the date of the payment. During 2017 year the Company indirectly (through its subsidiary Ivicend Holding Limited) acquired 2 entities LLC Nika and LLC Stroy Vector Pluss and incorporated LLC Mother and Child Vladivostok, LLC Mother and Child Kazan and LLC Irkutsk Clinical Hospital. The Company in 2017 indirectly acquired 10% of non-controlling interest in LLC Mother and Child Saint- Petersburg and 15% of non-controlling interest in LLC Centre of Reproductive Medicine for RUB53,000 thousand. Vitanostra Limited, a subsidiary of the Company was entered into members` voluntary liquidation in 2017 and the investments that were previously held by Vitanostra Limited were distributed to the Company. Audited Financial Statements144 145 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS 10. CASH AND CASH EQUIVALENTS 31 DECEMBER 2018 RUB’000 31 DECEMBER 2017 RUB’000 Cash at bank and in hand 1,970 4,988 Bank deposits with maturity less than 3 months 496,489 498,459 926,803 931,791 Currency: USD RUB EUR 31 DECEMBER 2018 RUB’000 31 DECEMBER 2017 RUB’000 385,000 113,436 23 895,992 35,795 4 498,459 931,791 14.1 OPERATIONS WITH KEY MANAGEMENT PERSONNEL The remuneration of the members of the key management personnel and non-executive directors for the year ended 31 December 2018 was RUB48,920 thousand (31 December 2017: RUB26,723 thousand). The remuneration of the members of the key management personnel which remained unpaid as at 31 December 2018 was RUB11,497 thousand (31 December 2017: RUB14,511 thousand). The Company provided advertising services to the key management personnel for the year ended 31 December 2018 amounted to RUB1,329 thousand (for the year ended 31 December 2017: RUB762 thousand). Indirect interest in shares by Kirill Dmitriev arises through his capacity as key management personnel of indirect shareholder. The calculation of effective interest is based on the total amount of issued and fully paid shares, including treasury shares acquired by the Company (Note 12). 14.5 RECEIVABLES FROM / (PAYABLES TO) SUBSIDIARY COMPANIES 2018 RUB’000 2017 RUB’000 Receivables from subsidiary companies 39,731 20,426 Payables to subsidiary companies (40,042) - The exposure of the Company to credit risk, currency risk and impairment losses in relation to cash and cash equivalents is reported in Note 15 of the financial statements. 14.2 TRANSACTIONS WITH SUBSIDIARY COMPANIES 11. SHARE CAPITAL Authorised share capital Issued and fully paid ordinary shares 1 January / 31 December NUMBER OF SHARES 125,250,000 75,125,010 NOMINAL VALUE USD SHARE CAPITAL RUB’000 SHARE CAPITAL USD’000 0.08 0.08 - 10,020 180,585 6,010 12. SHARE PREMIUM, RESERVES AND RETAINED EARNINGS SHARE PREMIUM Share premium includes the total amount received in excess of the total nominal value of the new share capital issued. Incremental costs directly attributable to the issue of new shares are recognised as a deduction from equity (share premium) net of any tax effect. RETAINED EARNINGS Retained earnings include accumulated profits and losses incurred by the Company. OTHER RESERVES Exchange differences relating to the translation of the net assets of the Company from its functional currency to the presentation currency before changing the functional currency from the United States Dollar to the Russian Ruble were recognised directly in other comprehensive income and accumulated in the other reserves. Other reserves include common control transactions reserve, capital contribution reserve and treasury shares. There were no significant changes during 2018. 13. TRADE AND OTHER PAYABLES Accruals Other payables 31 DECEMBER 2018 RUB’000 31 DECEMBER 2017 RUB’000 30,561 67,838 46,883 29,116 98,399 75,999 The exposure of the Company to liquidity risk in relation to trade and other payables is reported in Note 15 of the financial statements. 14. RELATED PARTY TRANSACTIONS As at 31 December 2018, 67.9% of the Company’s share capital is owned by MD Medical Holding Limited, a company beneficially owned by Dr. Mark Kurtser. The 32.1% of the Company’s share capital is owned by Guarantee Nominee Limited, who holds the shares on behalf of the GDR holders. The following transactions were carried out with related parties: 2018 RUB’000 2017 RUB’000 Dividends received 1,065,937 1,380,400 1,065,937 1,380,400 The Company recognised the impairment of LLC Fimedlab. The relevant information is shown in Note 9. Vitanostra Limited, a subsidiary of the Company, was entered into members` voluntary liquidation in 2017 and the investments that were previously held by Vitanostra Limited were distributed to the Company. The relevant information is disclosured in Note 9. 14.3 REVENUE FROM SUBSIDIARIES FOR BRANCH OPERATIONS During the year the Company received revenue from subsidiaries for branch operations amounted to RUB168,931 thousand (2017: RUB108,715 thousand) which relates to licences, advertising, IT support and call center expenses recharged to its subsidiaries. The relevant expenses are presented in Note 4. 14.4 DIRECTORS’ INTERESTS The direct and indirect interests of the members of the Board in titles of the Company as at 31 December 2018, 31 December 2017 and as at the date of signing these financial statements are as follows: NAME TYPE OF INTEREST EFFECTIVE INTEREST % Mark Kurtser Kirill Dmitriev Simon Rowlands Indirect ownership of shares Indirect interest in shares Direct ownership of shares 67.90 5.55 0.33 14.6 DIVIDENDS DECLARED TO RELATED PARTIES Dividends declared to the parent company MD Medical Holding Limited amounted to RUB306,140 thousand for the year ended 31 December 2018 (31 December 2017: RUB467,885 thousand). 15. FINANCIAL RISK MANAGEMENT FINANCIAL RISK FACTOR The Company is exposed to the following risks from its use of fi- nancial instruments: • Credit risk • Liquidity risk • Market risk The Board of Directors has the overall responsibility for the establishment and supervision of the Company’s risk management framework. The Company’s risk management policies are established to identify and analyse the risks faced by the Company to set appropriate risk limits and controls and monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and in the Company’s activities. (i) Credit risk Credit risk arises when a failure by counterparties to discharge their obligations could reduce the amount of future cash inflows from financial assets on hand at the reporting date. Cash balances are held with various financial institutions. Audited Financial StatementsExposure to credit risk The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was: Trade, other receivables and deferred expenses Cash at bank 31 DECEMBER 2018 RUB’000 31 DECEMBER 2017 RUB’000 43,747 498,459 542,206 28,569 931,791 960,360 The Company held cash and cash equivalents excluding cash in hand of RUB498,459 thousand at 31 December 2018 (31 December 2017: RUB931,791 thousand) which represents its maximum credit exposure on these assets. The cash and cash equivalents are mostly held with bank and financial institution counterparties, which are rated Baа3 A3, based on rating agency Moody’s Investors Service ratings. (ii) Liquidity risk Liquidity risk is the risk that arises when the maturity of assets and liabilities does not match. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The Company has procedures to minimise such losses including maintaining sufficient cash and other highly liquid current assets. The following are the contractual maturities of financial liabilities including estimated interest payments: 31 DECEMBER 2018 Trade and other payables 31 DECEMBER 2017 Trade and other payables CARRYING AMOUNTS RUB’000 CONTRACTUAL CASH FLOWS RUB’000 2 MONTHS OR LESS RUB’000 BETWEEN 2-12 MONTHS RUB’000 NOTE BETWEEN 1-2 YEARS RUB’000 BETWEEN 2-5 YEARS RUB’000 MORE THAN 5 YEARS RUB’000 13 98,399 98,399 98,399 - - - - CARRYING AMOUNTS RUB’000 CONTRACTUAL CASH FLOWS RUB’000 2 MONTHS OR LESS RUB’000 BETWEEN 2-12 MONTHS RUB’000 BETWEEN 1-2 YEARS RUB’000 BETWEEN 2-5 YEARS RUB’000 MORE THAN 5 YEARS RUB’000 13 75,999 75,999 75,999 - - - - (iii) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices which affects the Company’s income or the value of its holdings of financial instruments. Interest rate risk Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in market interest rates. Borrowings issued at variable rates expose the Company to cash flow interest rate risk. Borrowings issued at fixed rates expose the Company to fair value interest rate risk. The Company’s management monitors the interest rate fluctuations on an ongoing basis and acts accordingly. As at the reporting date the interest rate profile of interest bearing financial instruments was as follows: NOTE 2018 RUB’000 2017 RUB’000 Fixed rate financial assets 10 496,489 926,803 The Company does not account for any fixed rate instruments at fair value through profit or loss and does not have any derivative financial instruments, therefore a change in interest rates at the reporting date would not affect profit or loss or equity. 146 147 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Currency risk Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates. Currency risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the Company’s functional currency. The Company is exposed to foreign exchange risk arising from various currency exposures primarily with respect to the United States Dollar. The Company’s management monitors the exchange rate fluctuations on a continuous basis and acts accordingly. The Company’s exposure to foreign currency risk was as follows: 31 DECEMBER 2018 31 DECEMBER 2017 USD’000 EUR’000 GBP’000 USD’000 EUR’000 GBP’000 Assets Cash at bank Trade and other receivables Liabilities Trade and other payables and accruals NET EXPOSURE 385,000 318 - 385,318 23 - - 23 - - 895,992 - 4 - (373) (373) (737) 895,255 (327) (323) - - - - The following significant exchange rates applied during the year: USD EUR GBP AVERAGE RATE REPORTING DATE SPOT RATE 2018 62.7078 73.9546 83.5756 2017 58.3529 65.9014 75.2379 2018 69.4706 79.4605 88.2832 2017 57.6002 68.8668 77.6739 SENSITIVITY ANALYSIS A 10% weakening of the Russian Ruble against the above currencies will result in the increase in profit and equity of RUB38,496 thousand as at 31 December 2018 (31 December 2017: RUB89,493 thousand). A 10% stengthening of the Russian Ruble would have an opposite impact. CAPITAL MANAGEMENT The Company’s objectives in managing capital are to safeguard the Company’s ability to continue as a going concern in order to provide returns to owners and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure the Company may adjust the amount of dividends paid to shareholders, return capital to owners or issue of new shares. 16. FAIR VALUES As at 31 December 2018 and 31 December 2017 the Company had no financial assets or liabilities measured at fair value. The fair values of the Company’s financial assets and liabilities approximate their carrying amounts at the reporting date except the investments in subsidiaries which are presented at cost less impairment. 17. CONTINGENT LIABILITIES (A) INSURANCE As per current legislation in Russian Federation medical clinics are not required to insure their activities. There is a draft Law regarding obligatory insurance of medical clinics as from 2013. The Law has not yet been enacted. At present the Company does not insure its operational activities but has obtained insurance cover for some property, plant and equipment. Until the Company obtains Audited Financial Statementsadequate insurance coverage there is a risk of material adverse effect on operations and statement of financial position. (B) RUSSIAN BUSINESS ENVIRONMENT The operations of the Company`s subsidiaries are primarily located in the Russian Federation. Consequently, the Company is exposed to the economic and financial markets of the Russian Federation which display characteristics of an emerging market. The legal, tax and regulatory frameworks continue development but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in the Russian Federation. The conflict in Ukraine and related events has increased the perceived risks of doing business in the Russian Federation. The imposition of economic sanctions on Russian individuals and legal entities by the European Union, the United States of America, Japan, Canada, Australia and others, as well as retaliatory sanctions imposed by the Russian government, has resulted in increased economic uncertainty including more volatile equity markets, a depreciation of the Russian Rouble, a reduction in both local and foreign direct investment inflows and a significant tightening in the availability of credit. In particular, some Russian entities may be experiencing difficulties in accessing international equity and debt markets and may become increasingly dependent on Russian state banks to finance their operations. The longer term effects of recently implemented sanctions, as well as the threat of additional future sanctions, are difficult to determine. The financial statements reflect management’s assessment of the impact of the Russian business environment on the operations and the financial position of the Company. The future business environment may differ from management’s assessment. (C) RUSSIAN TAX ENVIRONMENT The taxation system in the Russian Federation continues to evolve and is characterised by frequent changes in legislation, official pronouncements and court decisions, which are sometimes contradictory and subject to varying interpretation by different tax authorities. Taxes are subject to review and investigation by a number of authorities, which have the authority to impose severe fines, penalties and interest charges. A tax year generally remains open for review by the tax authorities during the three subsequent calendar years; however, under certain circumstances a tax year may remain open longer. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive and substance-based position in their interpretation and enforcement of tax legislation. These circumstances may create tax risks in the Russian Federation that are substantially more significant than in other countries. Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Russian tax legislation, official pronouncements and court decisions. However, the interpretations of the tax authorities and courts, especially due to reform of the supreme courts that are resolving tax disputes, could differ and the effect on these financial statements, if the authorities were successful in enforcing their interpretations, could be significant. Currently, the Russian Government focuses on the ways to combat offshore structures which historically were widely used by Russian businesses and tighten the tax anti-avoidance regulations. Recent new Russian legislation is aimed at regulating transactions with offshore companies and their activities, which may potentially impact the Company’s tax position. 18. EVENTS AFTER THE REPORTING PERIOD No significant events occurred after the reporting period. Sustainable development For the year ended 31 December 2018 Contents 159 Annex 1.GRI Index Disclosure 162 Annex 2. Sustainale Development Risk Management 164 Annex 3. Information on the gender and age of the Board of Directors as of 31 December 2018. 164 Annex 4. Information on the gender and age of employees as of 31 December 2018: 165 Annex 5. Information on the staff 166 Annex 6. SanPin 2.1.7.2790-10 Sanitary and Epidemiological Requirements for Treating Medical Waste 167 Annex 7. Main methods for obtaining information Audited Financial Statements150 151 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Sustainable development INTERACTION WITH STAKEHOLDERS In order to identify key stakeholders, an analysis of all business functions of MD Medical Group was held. Given the fact that MD Medical Group understands the importance of being a socially responsible Company and following the prin- ciples of sustainable development, the Company committed to include a sustainable development section in its annual reporting cycle, namely in its Annual Reports, in 2017. That’s why this year the Company’s Annual Report also includes a section on sustainable development. This section was prepared in accordance with the GRI Sustainability Reporting Guidelines, Core option and the EU’s 2014/95/EU directive. The section provides key benchmarks and the results in the field of sustainable development for the time period from 1 January to 31 December 2018. In order to analyze current trends in the sphere of sustainable development in the Company, a comparison of the key indicators, such as electricity, heating energy and water consumption by MD Medical Group’s clinics and hospitals, etc. with similar data for the previous reporting period is presented in the Section1. The companies whose performance is reflected in the Section were consolidated in accordance with IFRS principles (IFRS 10 — Consoli- dated Financial Statements), unless otherwise stated. Matrix of material topics 10.5 10 9.5 9 8.5 8 7,5 7 6,5 6 6 10 4 7 6 5 9 8 32 1 Economic impact Social impact Environmental impact High-quality medical care 6,5 7 7,5 8 8,5 9 9,5 10 10.5 i i s n o s c e d d n a s t n e m s s e s s a r e d o h e k a t s n o e c n e u l f n l I Significance of economic, environmental and social impacts 1. Water 2. Energy 3. Waste management 4. Anti-corruption 5. Non-discrimination 6. Diversity and equal 8. Employment 9. Training opportunities 7. Product and service and education 10. Service quality labelling The Sustainable Development Section for 2018 is a part of the An- nual Report for the year 2018 and is available on the MD Medical Group’s official website (www.mcclinics.com). conducted in order to identify “best practices” in this industry and, thus, to understand which indicators are disclosed by companies in their reports and how, in general, the reports are compiled. IDENTIFYING MATERIAL TOPICS The materiality identification process included three main steps: Firstly, an analysis of 2017 material topics was carried out, as well as of the changes that have occurred at MD Medical Group during the reporting period. Major emphasis was placed on interaction with stakeholders, further improvement of the supply chain and business development in general. During the preparation of the re- port, a dedicated team of specialists was formed. The team actively interacted with employees of various functional divisions of the Company to include their opinions and all required informa- tion in the Section. Secondly, a benchmark analysis of global sustainable development practices employed by the largest companies in the industry was Thirdly, a reconciliation procedure was carried out. The experts compiled the list of disclosures in the Annual Report, in particular, in the Section. Then, selected topics were evaluated using quantita- tive methods. Thus, the matrix of material topics was compiled. All material topics are disclosed in the Sustainable Development Section and other chapters of the Annual Report. The current version of the GRI Standards does not cover one of the most important material topics “Quality of Service Provi- sion”. Stakeholders both within and outside the Company have highlighted that this topic is of high importance for them, because it reflects the level of customer satisfaction. Besides, the provision of patients with the Highest Quality of Care is one the key priorities for MD Medical Group. Thus, in order to disclose this information in a proper way the Company uses its own indicators. MD Medical Group introduced a number of indicators MD 1-MD 5 in the previ- ous Annual Report2. 1 Annex 7 Main Methods for obtaining the information 2 2017 Annual Report, p. 142 In addition to this, a benchmark of medical health care practices, and the impact of the business on people, both inside and outside the Company, was conducted. As a result, the following list of stakeholders was compiled: • patients and their families; • employees; • suppliers; • shareholders and investors; • government authorities; • mass media. MD Medical Group pays great attention and attaches great importance to the interests of its stakeholders. The Company regularly inter- acts with all stakeholders in order to improve the effectiveness of its business and quality of the services provided. Stakeholders and their expectations CLIENTS (ENTIRE FAMILIES) EMPLOYEES SUPPLIERS SHAREHOLDERS AND INVESTORS GOVERNMENT AUTHORITIES MASS MEDIA • Quick and easy access to high quality services • Professional growth • Career opportunities • Lucrative compensation • Business sustainability • Procurement transparency • Transparent and open information • Positive contribution of business • Business sustainability • Financial results • Compliance • Willingness to cooperate • Availability of information • Transparency and clarity of information Main communication channels ONLINE FACILITIES OFFLINE FACILITIES SPECIAL FACILITIES EVENTS • Corporate website • Intranet portal • Clinics’ official website on social networks • Mobile application • Media • Annual report • Corporate magazine • Information stands/screens • Publications • Written replies to enquiries • Quality hot-line for patients • Comprehensive feedback • Hot-line for employees • Internal corporate magazine “Indicator” for employees • Meetings with employees • Conferences • Company representatives’ public speeches INTERACTION WITH PATIENTS MD Medical Group is particularly focused on interaction with its patients, as they are of the greatest value to the Company. This year, the Company continued to develop interaction mech- anisms. Thus, all the clinics and hospitals arrange topical events in order to increase patients’ awareness of health matters, to inform patients of MD Medical Group’s services, to enhance the availability of services and to improve access to them. These events are ded- icated to various topics including obstetrics (pregnancy planning and management; delivery); treatment for infertility and IVF; and paediatrics. And it is important to highlight that the speakers are MD Medical Group’s leading professionals. During the reporting period the Company held approximately 290 open days at all facilities of the group, hosting more than 8,100 visitors. In addition to this, MD Medical took part in more than 31 events held by our partners, attended by more than 3,600 people. MD Medical Group continues to develop modern channels of communication with patients. So approximately 63 webinars and on-line events were conducted. Events like this gives the opportunity for a large number of people to consult specialists and obtain necessary health services. Moreo- ver, MD Medical Group performed 8,387 IVF’s under MHI (Manda- tory Health Insurance) last year and gave 510 patients high-tech- nology medical assistance. The Company continues to expand the list of medical care ser- vices, including high-tech health care services. The development of a mobile application was started in 2018 in order to increase the effectiveness and speed of interaction with the Company’s cli- ents, as well as to increase their awareness. The mobile application will provide users with the following features: • to contact the clinic staff quickly (has already been implemented); • to make an appointment to see a doctor (has already been implemented); • to see the results of medical analyses in the patient’s online ac- count (this initiative will be fully implemented by March 2019); • to make payments (prepayments), to replenish deposit agree- ments (at the development stage); MD Medical Group is going to expand the method of informing its clients by email. For instance, MD Medical Group plans to send a letter to its clients with a guide to prepare for the medical proce- dure for which they have an appointment. Besides the mobile application, a web version of this application will also be created1. The site will begin to work in 2019. The Company continues to use mechanisms which were developed and implemented in 2017 to obtain patient feedback on the qual- ity of services, namely a customer satisfaction (CSAT) score on phone-in consultations and a quality hot-line. In order to measure CSAT, employees of the Company process feedback received from customers, which includes three main indi- cators: • speed and convenience of the consultation; • completeness and ease of understanding; • the consulting employee’s politeness and friendliness. The Company monitors and analyzes this indicator on a regular basis, because the clients can leave their feedback at any stage of a consultation. The second mechanism for receiving feedback from the client is the hot-line. Patients may leave comprehensive feedback through any convenient channel, such as using the form on the website, sending an e-mail to quality@mcclinics.ru, or through the operator of the single contact center2. INTERACTION WITH EMPLOYEES The Company fully understands the importance of maintaining effective communication with all types of employees. That is why the Company has expressed its commitment to holding five-min- ute daily conferences in the Group’s hospitals where doctors participate. The main purpose of these conferences is to discuss all the events that happened the previous day. In addition, there are a number of other activities, such as doctors’ weekly conferences, head nurses’ weekly conferences, and weekly conferences with the Group’s general directors. The Company is introducing and using digital technologies, namely, calls on Skype, to build effective interaction with its regional divisions. The staff also hold five-min- ute daily conferences. Understanding the importance of protecting data of the Company and its clients, as well as the importance of creating a way to effec- tively and quickly interact within the Company, MD Medical Group has developed an in-house corporate intranet portal, which is used daily by Company employees. Moreover, the Company introduced a whistle-blowing policy in 2012, which is still in use today. According to this policy every employee can write to hotline@mcclinics.ru. This network is used to detect employee fraud and other misconduct. If any violation has been identified, an internal investigation is conducted. 1 The Company works with general and personal data in compliance with Federal Law No. 152-FZ On Personal Data dated 27 July 2006 2 2017 Annual Report, p. 144 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS 152 153 PERSONNEL HR MANAGEMENT MD Medical Group is fully aware of the importance of hiring, developing, training and communicating with human resources as one of the key determinants of success. Given the specifics of the industry, the specific aspects of the Group’s key business functions, type of fa- cilities, geography of hospitals and clinics, and the Company’s corporate culture and goals, the HR management structure is as follows: HR management structure CEO HR Director Regional HR Directors Mother & Child Centre Mother & Child Urals Mother & Child Volga Mother & Child Siberia HR managers in the clinics and hospitals To improve the effectiveness of the HR system and MD Medical Group as a whole the Company developed and implemented a number of regulations and rules in 20171. OBJECTIVES IN HR MANAGEMENT In 2018, the Company set a number of objectives in the field of personnel management and successfully attained them during the reporting period. OBJECTIVE RESULTS Expanding the geographical scope of business MD Medical Group opened new clinics (Lefortovo, Tula, Volgograd, Nizhniy Novgorod, Kazan) as well as hospitals (Samara), and expanded clinics (Vladimir and Kostroma). All of the above-mentioned facilities were staffed in a timely manner in 2018. Hiring new staff The interns were transferred to the Company’s staff after the internship, and Company employees were promoted according to plan. Organizational and personnel audit All audits were completed with no significant comments. Webinars and conferences on organizational, research and educational matters Timely organization of employee qualification upgrading Ratio of medical staff to non-medical staff for treatment-and-prophylactic institutions with preferential taxation 1 2017 Annual Report, p. 145 25 webinars and 18 conferences were held on a wide range of topics in 2018. Staff development was carried out in a timely manner. More than 1,100 medical staff completed mandatory and additional professional development programs in 2018. In addition to this, the employees were trained in occupational health and industrial safety on a scheduled basis, as required by law. The average number of training hours per employee was 45.6. Compliance of this indicator with the norm of 50%. PROFESSIONAL DEVELOPMENT DEVELOPMENT OF THE SUPPLY CHAIN In addition to this, MD Medical Group continues to develop residen- cy training programs. There is a possibility to choose one of two fields of study in residency: • obstetrics and gynaecology; • neonatology. 28 students were trained in residency in 2018 (11 first-year students and 17 second-year students) and 8 students fully completed the course that year. The Company has established the following goals in the field of personnel management for 2019: • providing clinics and hospitals with personnel in view of the in- crease in the range of services provided; • training of medical residents, internships for future employees / managers; • compliance with the ratio of medical staff to non-medical staff for treatment-and-prophylactic institutions with preferential taxation (50%); • subsequent development and expansion of business. MD Medical Group is particularly focused on employees’ profes- sional development, because, as noted earlier, the Company con- siders human resources as one of the key determinants of success. The Group conducted mandatory and additional professional development programs attended by 1,100 people in the reporting period. The Company continues to develop and introduce digital technologies, and the number of webinars thus increased by 13.6% compared with the previous reporting period. In addition to this, MD Medical Group is focused on the creation of publications on various subjects; thus, Company employees regularly publish articles in leading international and Russian pro- fessional journals. Moreover, a distinctive feature of the MICE conducted by MD Med- ical Group is that outside professionals are free to take part in these events along with the Group’s staff. Accordingly, the Company held 18 conferences in 2018 for mixed professional groups including its own and third-party specialists. Special focus is on new hospital personnel. New employees are seconded on internships at already-existing facilities of the Group in order to familiarize themselves with the Company’s key activi- ties, to study the work rules and standards of the Company and to train for future work. The staff of existing MD Medical Group facili- ties are promoted to senior managers at new facilities of the group. 154 155 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS THE GROUP’S APPROACH TOWARDS SUPPLY CHAIN MANAGEMENT An effective supply chain is an important condition for the success of MD Medical Group and ensures patients’ safety and the eco- nomic sustainability of the Company. The Group has a full and well-developed supply chain, which begins with analysis of demand for materials and equipment within all its facilities and ends with a wide range of services provided by the Company to its clients1. Given the specific features of the industry in general, the Company purchases many different materials. The Company tries to diversify suppliers as much as possible in order to achieve better product quality and sustainability. That is why MD Medical Group is fo- cused on working both with Russian and international suppliers. Supply chain of medications and equipment It is important to note that the Group offers equal opportunities for participation in tenders, including small businesses. The principles that guide the Company in conducting business, and in particu- lar when interacting with stakeholders within the supply chain, are the following ones: good faith, transparency, impartiality and fairness. There are three main types of supply chain: medications, medical expendables and equipment. There were a number of changes in the supply chain in 2018, namely: • medicines and medications began to be procured centrally; • the special electronic trading platform was used to procure items; • strict control of procurement activities “on the ground” was intro- duced in accordance with regulations; • a clear consistent format was used when entering into contracts. Inventory of medications and in-clinics’ warehouses • • Generation of a request to manufacturers PRODUCERS • Analysis of demand in the market of medication and medical eqiupment • Production of various medicines • Dispatch manufactured medications and equipment to warehouses CLINICS MEDICATIONS, EQUIPMENT FEDERAL LEVEL • Medications are sent to regional dealers (pharmacies) • Equipment is sent to the clinics’ warehouses REGIONAL LEVEL • Reciept of goods • Storage of medications and equipment • Sending goods to regional warehouses and regional transport companies Supply chain of medical expendables • Generation of a request to manufacturers PRODUCERS • Order depleted items Marketing of the products Send goods to the warehouses CLINICS MEDICATIONS EXPENDABLES FEDERAL LEVEL • Inventory of supplies and remainders in clinics warehouses • Determinig procurement plans • Generation of an order If goods are in stock, send them If goods are in stock, send them REGIONAL LEVEL • Generation of aggregated orders ship necessary materials 1 2017 Annual Report, p. 147 156 157 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Thus, there were changes in the number of companies involved in sypply of medications and expendables. Number of companies involved in different types of supply chain Supply of medications Supply of expendables Supply of equipment BEFORE 01.09.2018 Not more than 6 Not more than 3 Not more than 2 AFTER 01.09.2018 Not more than 1 or 2 Not more than 2 Not more than 2 ENVIRONMENT AND WORKPLACE SAFETY ENVIRONMENTAL MANAGEMENT: MD Medical Group is fully aware of the importance of preserving the environment. The Group is doing its utmost to increase resource efficiency, to optimize business processes and to reduce to a min- imum the negative environmental impact. The use of electricity, heating, and cooling is a necessary requirement of patient care. MD Medical Group is taking measures to optimize the process and lower energy usage. Environmental impact management on the Group’s level is within the scope of the CEO’s competence, and, in the hospitals and clinics, within the scope of responsibility of the CEO and chief technical director. The hospitals and clinics supervise compliance with legislative environmental safety requirements. The management systems meet the requirements of international certificates ISO 14001-2004 Environmental management systems and ISO 50001:2011 Energy management systems. The reporting boundaries for environment indicators include all hospitals and clinics1. ENERGY EFFICIENCY Given the fact that MD Medical Group continues to actively develop and expand its business, energy efficiency remains one of the main priorities of MD Medical Group. Thus, the Company is doing its utmost to increase energy efficiency by adoption of en- ergy efficient technologies, and by continuously improving energy management as well as the distribution system. The increase in consumption of electricity and energy for heating by hospitals occurred due to the construction works and opening of a new hospital in Samara in February 2018. Several clinics also had started their work in 2018. The detailed information about the electricity and heating consumption is presented at the Annex 7 of the Report. MD Medical Group’s facilities essentially receive energy for heating from municipal central heating utilities and networks. The Company is also focused on equipping group facilities with a backup power supply, for instance diesel generators, in order to use them in case of an emergency. Electricity consumption by MD Medical Group’s clinics and hospitals, GJ (GigaJoule) Fuel consumption by MD Medical Group’s clinics and hospitals, litres 2017 2018 CHANGE Petrol CLINICS HOSPITALS TOTAL Diesel CLINICS HOSPITALS 76,699 91,261 71,502 98,003 167,960 169,505 42,782 58,692 44,714 55,949 -7% 7% 1% 5% -5% -1% 2017 2018 CHANGE TOTAL 101,474 100,663 CLINICS HOSPITALS TOTAL 9,688 69,750 79,438 10,732 79,991 90,723 11% 15% 14% Heating energy consumption by MD Medical Group’s clinics and hospitals, GJ 2017 2018 CHANGE CLINICS HOSPITALS 25,560 131,478 25,974 157,728 TOTAL 157,038 183,702 2% 20% 17% Total energy consumption by MD Medical Group’s clinics and hospitals, GJ 2017 2018 CHANGE CLINICS HOSPITALS 35,248 201,228 36,706 237,720 TOTAL 236,476 274,426 4% 18% 16% RATIONAL USE OF WATER Given the need for efficient use of water resources, MD Medical Group monitors its water consumption on a regular basis and con- stantly improves the water management system. All the facilities of the Company use water from municipal water supply networks under State Standard GOST Р 51232-98 (2002). Water consumption by MD Medical Group1, cub. M 2017 2018 CHANGE CLINICS 25,927 26,334 HOSPITALS 144,447 163,463 Perinatal Centre 33,600 34,147 Lapino Clinical Hospital Ufa Clinical Hospital Avicenna Samara Hospital 68,358 67,403 30,173 12,316 n/a 33,119 17,328 11,466 TOTAL 170,374 189,797 2% 13% 2% -1% 10% 41% n/a 11% Last year, the Company decided to publish its first report under the GRI standards and, thus, to define the boundaries of disclosure of waste management due to the specific nature of the record- keeping. This year MD Medical Group discloses this aspect in more detail. The Group’s clinics and hospitals dispose of their regulated waste as required by SanPin 2.1.7.2790-10 Sanitary and Epidemiological Requirements for Treating Medical Waste2. Each clinic and hos- pital can produce medical waste of a different class. It depends on the list of services provided by the MD Medical Group facility. Consequently, the structure of produced medical waste may differ among Company facilities. Waste management chain in hospitals Landfill Incineration CONTRACTORS Disposed of by the contractors Disposed of by the contractors TYPE Non hazardous Waste Hazardous OWN LEVEL Composting Decontamination and pulping WASTE MANAGEMENT MD Medical Group fully complies with legislation of the Russian Federation in the field of waste management for the medical in- dustry. The Company does its best to reduce its potential negative impact. The process of waste management depends on what class of waste is disposed of and on the location of the MD Medical Group facility. In order to dispose of class A waste, the Company concludes an agreement with a contractor which provides services to the entire facility where the Company’s clinic or hospital is located. To dispose 1 Annex 7. Main Methods for obtaining the information. 1 Annex 7. Main Methods for obtaining the information. 2 Read more about SanPin 2.1.7.2790-10 Sanitary and Epidemiological Requirements for Treating Medical Waste in Annex 6. of the other classes of medical waste MD Medical Group signs agreements with contractors. Several hospitals participate directly in the recycling process by using a special apparatus to decontaminate and treat medical wastes by heat, and after medical wastes begin to be classified as non-hazardous household solids that can be safely disposed of in a conventional manner. All Company facilities have containers for the temporary storage of mercury-vapor bulbs. Waste by disposal method (hospitals), metric tonnes 2017 2018 CHANGE Landfilling (non-hazardous wastes) Composting (non-hazardous wastes) Bulk incineration (hazardous wastes) 2,698 3,098 15% 0.5 4.1 1.8 2.9 260% -30% 15% TOTAL 2,707.9 3,102.7 Waste by disposal method (clinics), metric tonnes 2017 2018 CHANGE Landfilling (non-hazardous wastes) Composting (non-hazardous wastes) Bulk incineration (hazardous wastes) TOTAL 382 424 11% - 36 418 - 40 464 - 12% 11% WORK, FIRE AND INDUSTRIAL SAFETY EDUCATION MD Medical Group attaches great importance to the process of ed- ucation in the field of work, fire and industrial safety. Every member of the Company is aware of the necessity to comply with all work, fire and industrial safety requirements. Thus, the Company has de- veloped and adopted a range of training programs based on best practices and aimed at creating a culture of safety in the Company. There are several types of training program, designed in accordance with employee competencies: for managers, professionals, mid-lev- el medical and clerical staff, menial workers, electricians, operators of pressurized equipment, heating installations, lift controllers, etc. All employees, without exception, are trained in safe working meth- ods within their establishments and are tested for their knowledge at least once every three years. MD Medical Group attaches great importance to training auxiliary and unskilled staff in first aid at work at least once a year as prescribed by article 225 of the Russian Labour Code. In addition to this, MD Medical Group hospitals have designed and apply instructions to provide first aid to victims in case of accidents at work. 158 159 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Annex 1. GRI Index Disclosure GRI STANDARDS DISCLOSURE NUMBER TITLE PAGE IN THE REPORT AND/OR REFERENCE GRI 102: GENERAL DISCLOSURES 102-1 102-2 102-3 102-4 102-5 102-6 102-7 102-8 102-9 102-10 102-11 102-12 Name of the organization 71 Activities, brands, products, and services 18-19, 42-45 Location of headquarters Location of operations Ownership and legal form Markets served 70 22-23 70-71 22-23 Scale of the organization 49, 42-45, 5 Information on employees and other workers 164-165 Supply chain 155-156 Significant changes to the organization and its supply chain 14-17, 22-23, 155-156 Precautionary Principle or approach The Group has not adopted the Precautionary Principle or approach. External initiatives n/a 102-13 Membership of associations The clinics of the Group as well as staff are members of the following national and international organizations: • Russian Association of Human Reproduction; • Russian Association of Obstetricians and Gynecologists; • Chamber of Commerce and Industry of the Samara Region; • Chamber of Commerce and Industry of the Urban District of Togliatti, Samara Region; • European Society of Human Reproduction and Embryology; • Association of Obstetricians and Gynecologists of Endocrinologists of the Perm Region; • Moscow Society of Obstetricians and Gynecologists; • Association of Obstetricians and Gynecologists of the Irkutsk Region; • Association of Gynecologist-Endoscopists of Russia. • International Academy of Perinatal Medicine. Statement from the senior decision-maker 10-11 Key impacts, risks, and opportunities Annex 2. Sustainable Development Risk Management 102-14 102-15 102-16 Values, principles, standards, and norms of behaviour 102-18 Governance structure 102-22 Composition of the highest governance body and its committees 19, 52 62-68 62-65 160 161 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS GRI STANDARDS DISCLOSURE GRI STANDARDS DISCLOSURE NUMBER TITLE PAGE IN THE REPORT AND/OR REFERENCE NUMBER TITLE PAGE IN THE REPORT AND/OR REFERENCE 102-24 Appointing and selecting the highest governance body 58-59, 62-65 102-40 List of stakeholder groups 151 Collective bargaining agreements There is no signed collective bargaining agreement. Identifying and selecting stakeholders 2017 Annual Report, p.142-143 Approach to stakeholder engagement 151-152 Key topics and concerns raised 150 Entities included in the consolidated financial statements 90-92 GRI 404: TRAINING AND EDUCATION 404-2 Programmes for upgrading employee skills and transition assistance programs GRI 405: DIVERSITY AND EQUAL OPPORTUNITY 154 164 Defining the report’s content and topic boundaries 102-47 List of material topics 102-48 Restatements of information Changes in reporting Reporting period 151-152 151-152 This Report does not contain restatements of information provided in previous reports. No changes have occurred. 405-1 Diversity of governance bodies and employees 102-41 102-42 102-43 102-44 102-45 102-46 102-49 102-50 102-51 102-52 102-53 102-54 102-55 102-56 Date of the most recent report The last Annual Report was published in March 2017. Reporting cycle Annual cycle. Contact point for questions regarding the report 168 Claims of reporting in accordance with GRI Standards This report has been prepared in accordance with GRI Standards: Core option. GRI content index External assurance 159-161 No external assurance for the Group’s Sustainability Report was sought. GRI 103: MANAGEMENT APPROACH 103-1 103-2 Explanation of the material topic and its boundary 151 The management approach and its components 14-15, 50, 150, 153-154, 156-158 103-3 Evaluation of the management approach 14-15, 50, 150, 153-154, 156-158 GRI 205: ANTI-CORRUPTION 205-3 Confirmed incidents of corruption and actions taken No incidents of corruption were detected in the reporting period. See p. 163 for more about the prevention of corruption and bribery risks GRI 302: ENERGY 302-1 Energy consumption within the organization 156, Annex 7. Main methods for obtaining information GRI 303: WATER 303-1 Water withdrawal by source 157 GRI 306: EFFLUENTS AND WASTE 306-2 Waste by type and disposal method 158-159 Despite the absence of an established diversity policy, the Board of Directors is sufficiently diversified. For instance, directors who are specialists in various fields such as audit, finance, law, medicine, investments, etc. are members of the Board. The sufficient diversity of the skills of the Board’s members contributes to a qualified discussion, with the voicing of different points of view, reflecting different ways of thinking. In our understanding, the term “diversity” of the Board of Directors means that its members should be specialists with: • a broad vision of management and development processes; • successful management experience; • a deep understanding of business processes, especially in such aspects as designing a development strategy and monitoring its implementa- tion, the system of internal control and audit, risk management, the spe- cifics of the particular business, and the motivation of top management. Greater diversity enables the Board to consider issues from different perspectives and develop more balanced business strategies. GRI 406: NON-DISCRIMINATION 406-1 Incidents of discrimination and corrective actions taken The Group did not detect any incidents of discrimination in the reporting period. GRI 417: MARKETING AND LABELLING 417-2 Incidents of non-compliance concerning product and service information and labelling The Group prepares its marketing communications in compliance with Federal Law No. 38-FZ On Advertising dated 13 March 2006 and Law No. 2300-1 of the Russian Federation On Protection of Consumer Rights dated 7 February 1992 (as amended on 1 May 2017). As part of measures to monitor compliance with the statutory requirements for products and services information and labelling, all advertising contracts are initialled by the marketing director (deputy general director, marketing) and the legal department. No confirmed incidents of non-compliance concerning product and service information and labelling occurred in the reporting period. 417-3 Incidents of non-compliance concerning marketing communications No confirmed incidents of non-compliance concerning marketing communications occurred in the reporting period. QUALITY MEDICAL ASSISTANCE TO PATIENTS MD1 MD2 MD3 MD4 MD5 Development and extension of the list of services Annual capacity of the hospitals Development of hi-tech medical care Highly-qualified personnel Dialogue with patients 42-45 24-37 18-19 50, 152 152 162 163 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS HUMAN RIGHTS RISKS Discrimination The Group permits no discrimination against any minorities. There have been no discrimination claims or legal action over the whole history of the Company. Work under compulsion MD Medical Group’s corporate culture and ethics exclude any compulsion. Remuneration discrimination Bonuses and rewards in the Group are economically substantiated and paid on the basis of per- formance and attainment of targets set by the Company. There is no remuneration discrimina- tion in the Company. CORRUPTION AND BRIBERY RISKS Risk of corrupt actions and pay- ments to government authorities In order to avoid any offenses MD Medical Group makes sure that any interaction with superviso- ry and regulatory authorities is duly documented. The Company’s CEO and shareholders are im- mediately notified of any disputes or differences arising between the Company and supervisors or regulators. All financial operations in the Group are reflected in appropriate financial records which are subject to financial audit Risk of bribery of the Group’s employees for the benefit of third parties MD Medical Group’s procurement procedures are sufficiently transparent to reduce the risk of corruption and fraud. Moreover, the Company has developed and uses an efficient and trans- parent procedure for selecting suppliers. Annex 2. Sustainable Development Risk Management MD Medical Group continues to actively update its sustainable development risk management mechanisms. Given the complexity of business processes, special features of the industry, the current economic situation in the country and all of the above mentioned facts, the risk management department has identified the following groups of sustainable development risks: • environmental impact risks; • social and employment risks; • human rights risks; • corruption and bribery risks. Although MD Medical Group assesses the probability of these risks occurring as low, the Company has developed and applied a series of preventive measures. RISK GROUPS RISK MANAGEMENT MECHANISMS ENVIRONMENTAL IMPACT RISKS Incorrect hazardous waste disposal MD Medical Group has developed and continues to constantly improve the procedure for selecting contractors, who are required to have all the necessary resources and skills to dispose of hazardous medical wastes in a proper way. Substantial increase in energy con- sumption and decrease in energy efficiency MD Medical Group is aware of the importance of using a modern high-performance power sup- ply system. MD Medical Group applies various energy saving measures in accordance with inter- nal standards and procedures. In addition to this, the Company installs energy-saving equipment at all facilities of the Group. Substantial increase in water con- sumption Increase in paper consumption SOCIAL AND EMPLOYMENT RISKS The Groups monitors the condition of water and heat supply pipelines. MD Medical Group fulfills the requirements of the official Electronic Government program cur- rently implemented in Russia in order to switch to electronic external document flow. Statutory restrictions related to employment The Group monitors appropriate changes in relevant legislation on a regular basis and promptly reacts to them. Insufficient availability of Compa- ny’s care services facilities Deterioration of the Group’s rela- tions with staff MD Medical Group is expanding the geography of its presence, opening new Group facilities in order to increase access to the Company’s services for a large number of patients. The Com- pany sets prices for its services taking into account the income level of the population of each specific region of presence. In addition, the Group is committed to meeting the requirements of the federal IVF program under obligatory health insurance policies. MD Medical Group monitors its personnel’s satisfaction by conducting regular surveys and creates conditions for the development and realization of its employees’ professional poten- tial. The Group maintains employee health care and maternity support programs, programs for the organization of employees’ leisure and recreation, and professional development programs. 164 165 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Annex 5. Information on the staff 2017 Male Female TOTAL 2018 Male Female TOTAL MOTHER & CHILD CENTRE MOTHER & CHILD URALS MOTHER & CHILD SIBERIA MOTHER & CHILD VOLGA 701 3,183 3,884 135 753 888 284 1,037 1,321 84 624 708 MOTHER & CHILD CENTRE MOTHER & CHILD URALS MOTHER & CHILD SIBERIA MOTHER & CHILD VOLGA 737 3,254 3,991 151 839 990 291 1,072 1,363 151 854 1,005 TOTAL 1,204 5,597 6,801 TOTAL 1,330 6,019 7,349 % 18 82 100 % 18 82 100 The staffing data is set forth above for the entire scope of the 2017 and 2018 consolidated financial reporting as per the records maintained on a permanent basis. The Group had no automated records with respect to the terms of effect of employment agreements in 2017 and 2018, because of the planned transition to the new accounting system. Annex 3. Information on the gender and age of the Board of Directors as of 31 December 2018. Men — 70%; Women — 30%; 30–50 years of age — 60%; Older than 50 years of age — 40%. Annex 4. Information on the gender and age of employees as of 31 December 2018: Men — 18%; Women — 82%; Younger than 30 — 13%; 30–50 years of age — 62%; Older than 50 years of age — 25%. Annex 6. SanPin 2.1.7.2790-10 Sanitary and Epidemiological Requirements for Treating Medical Waste SanPin 2.1.7.2790-10 Sanitary and Epidemiological Requirements for Treating Medical Waste is a regulatory legal act, registered by the Min- istry of Justice of the Russian Federation on February 17, 2011 (registration number: 19871). According to this document, there are five major classes of medical waste: • Class A (А) - epidemiologically non-hazardous waste close in composition to municipal solid waste (packaging, paper, cardboard, etc.); • Class B (Б) - epidemiologically hazardous waste. This class includes human blood and blood products as well as other biological liquids; • Class V (В) - extremely epidemiologically hazardous waste (materials that were in contact with patients with infectious diseases); • Class G (Г) - toxicologically hazardous waste of classes from 1 to 4. This class includes medicines, diagnostics, and disinfectants that can- not be used, namely those medical supplies that have been damaged or expired; • Class D (Д) - radioactive waste. 166 167 1. OVERVIEW 2. STRATEGY 3. INVESTING IN STRATEGIC EXPANSION 4. CONTINUED STRONG PERFORMANCE 5. CORPORATE SOCIAL RESPONSIBILITY 6. CORPORATE GOVERNANCE AND RISK MANAGEMENT 7. REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 8. REPORT AND SEPARATE FINANCIAL STATEMENTS 9. SUSTAINABLE DEVELOPMENT 10. CONTACTS AND ADVISERS Annex 7. Main methods for obtaining information For a number of indicators the forecast technique method was used due to the lack of detailed accounting data, either for reasons pertain- ing to specific facilities, in particular due to the fact that a number of facilities are located in rented premises, or due to the non-relevance of such information for decision-making by the MD Group or stakeholders. When forecasts are made, the calculations are based applying some of the following indicators: • for waste – the average amount of waste that is generated per day; • for fuel – the amount of money spent on the purchase of fuel divided by the cost of one liter of gasoline; • for water, electricity and heating – the amount of money spent on utilities and rent. Regional rates were used in the calculations; The total amount of data obtained by the forecast method does not represent a significant share of the consolidated sum. Electricity consumption by MD Medical Group’s clinics and hospitals, KWh Fuel Consumption by MD Medical Group’s clinics and hospitals, litres 2017 2018 CHANGE CLINICS HOSPITALS 2,691,062 2,981,110 19,374,924 22,219,777 Perinatal Centre 4,407,515 4,396,895 Lapino Clinical Hospital 6,769,872 7,478,484 Ufa Clinical Hospital 4,669,425 4,673,587 Avicenna 2,357,342 2,624,086 Samara Hospital 1,170,770 3,046,725 TOTAL 22,065,986 25,200,887 11% 15% 0% 10% 0% 11% 160% 14% Heating energy consumption by MD Medical Group’s clinics and hospitals, Gcal CLINICS HOSPITALS 2018 CHANGE 2017 6,109 6,208 31,424 37,968 Perinatal Centre 5,893 5,864 Lapino Clinical Hospital 10,467 10,458 Ufa Clinical Hospital 12,274 12,799 Avicenna Samara Hospital 2,790 - 4,667 3,910 TOTAL 37,533 43,906 Petrol CLINICS HOSPITALS Perinatal Centre Lapino Clinical Hospital Ufa Clinical Hospital Avicenna Samara Hospital 2017 2018 CHANGE 76,699 71,502 91,261 30,718 30,594 13,039 16,910 - 98,003 25,488 34,490 13,356 15,773 8,896 -7% 7% -17% 13% 2% -7% n/a 1% TOTAL 167,960 169,505 Diesel CLINICS HOSPITALS Perinatal Centre Lapino Clinical Hospital Ufa Clinical Hospital Avicenna Samara Hospital 2017 2018 CHANGE 42,782 58,692 10,204 33,825 5,966 8,697 - 44,714 55,949 13,954 26,215 5,802 9,978 - 5% -5% 37% -22% -3% 15% TOTAL 101,474 100,663 -1% 2% 20% 0% 0% 4% 67% n/a 17% Contacts and Advisers REGISTERED OFFICE STOCK EXCHANGE FROM OUTSIDE THE US tel: +1 651 453-2128 GLOBAL INVEST DIRECT tel: +1 800 428-4237 www.mcclinics.com Dimitriou Karatasou, 15, Anastasio building,6th floor, Flat/Office 601, Strovolos, 2024, Nicosia, Cyprus info@mcclinics.ru tel: +357 22 50 40 00 fax: +357 22 50 41 00 INDEPENDENT AUDITORS KPMG Ltd 11, 16th June 1943 Street 3022 Limassol — Cyprus limassol@kpmg.com.cy tel: +357 25 86 90 00 fax: +357 25 36 38 42 DEPOSITARY BANKS JPMorgan Chase Bank, NA. 1 Chase Manhattan Plaza, Floor 58 New York, NY, 10005-1401 USA tel: (800) 990-1135 London Stock Exchange Plc 10 Paternoster Square London EC4M 7LS UK tel: +44 20 7797 1000 www.londonstockexchange.com INVESTOR RELATIONS Dmitry Yakushkin Head of Investor Relations ir@mcclinics.ru tel: +7 495 331 4120 MEDIA RELATIONS EM MDMG@em-comms.com tel:+7 495 363 2849 

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