CEO review

The past year has been transformational for the Netcare Group. The continued strength of our South African operations has allowed us to advance our strategy of building comprehensive healthcare networks both in South Africa and abroad.

Dr Richard Friedland Chief Executive Officer

19,5% increase to SA stand-alone adjusted HEPS to 70,5 cents per share

Taking Netcare to a new level
Delivering healthcare is a complex business. It involves balancing healthcare economics and high quality care, cost effectiveness and clinical outcomes, all the while adhering to the strictest ethical and clinical principles. Sustaining acceptable returns for shareholders in a way that earns the trust, patronage and partnership of a diversity of other stakeholders, demands that healthcare companies are able to balance these imperatives in an everchanging healthcare environment. 

Despite this multifaceted interplay of imperatives, the simple fact is that our company exists to provide a basic human need - wellbeing; and a fundamental human right - access to affordable healthcare. Whether it is a sophisticated surgical procedure or the provision of primary care, Netcare recognises that providing a critical service to society frames everything that we do as a healthcare company, and we embrace our role and responsibilities in this context.

Globally, healthcare is said to be at the cross roads. Exciting developments and discoveries in medical sciences and technology hold the promise of healthier nations world-wide but healthcare costs are rising, quality is poor and inconsistent, and access or choice in many countries is limited. Combined with the ever-increasing demand for healthcare driven by the impact of aging populations, increasing disease burdens, changes to the funding of public healthcare as well as seminal demographic shifts, these forces will require fundamental restructuring of healthcare systems if they are to be effective and sustainable.

In South Africa, as we continue to normalise our society, the need to broaden access to and improve affordability of quality healthcare is challenging healthcare providers to develop alternative models of delivery. In the United Kingdom, public healthcare reform and a demand for greater choice in healthcare offerings speak to systemic change and escalating societal expectations.

As healthcare challenges increasingly dictate political agendas, governments around the world are realising that different solutions are needed. As a significant provider of healthcare services, Netcare believes it has much to contribute to this crucial debate. We are working hard at becoming a reliable, strategic partner both to the Department of Health in South Africa and the National Health Service (“NHS”) in the United Kingdom, in pursuit of new models to meet the challenges of providing accessible and affordable healthcare, and extending the opportunities of better health to both nations.

In the last decade, Netcare has grown into a uniquely positioned healthcare company, with strong growth prospects and exceptional people at every level. Netcare now provides a comprehensive network of core and ancillary services to meet the healthcare needs of our patients in South Africa and the United Kingdom, whether they are privately or publicly funded. We have become a leader in our field and an innovator in testing new solutions that meet changing healthcare demands without eroding shareholder value.

In an industry where improving efficiency, affordability and the quality of clinical services are critical, scale is becoming increasingly important. The £2,2 billion acquisition of a 52,6% interest in the largest private hospital provider in the United Kingdom - General Healthcare Group (“GHG”) - has provided Netcare with a leadership position in the United Kingdom, one of the largest and most dynamic healthcare markets globally.

Netcare is now a significant provider of healthcare in the two countries we serve. A major benefit of this new reach is that it creates a conduit for the two-way flow of knowledge and best practice between our SA and UK businesses, and the sharing of solutions between the public and private sectors in both markets. Netcare’s ability to successfully export its intellectual property and healthcare technology was recently recognised by the Gauteng Chamber of Commerce and Industry’s “Exporter of the Year” award.

As we integrate the two businesses further in the year ahead, the combined expertise and experience of senior teams from both businesses will be employed to drive innovation, excellence and growth in both territories across both public and private sectors. We believe Netcare is positioned to make a significant contribution.

Financial review
The 2006 financial year was characterised by the strong performance of the South African operations, a myriad of corporate finance activities and a significant restructuring of the balance sheet.

Netcare’s revenue grew by 54% to R11,6 billion while Group operating profit grew 30% to R1,6 billion, driven not only by the acquisition of GHG, but also by the 11% revenue growth in the South African market. Significantly, adjusted stand-alone headline earnings per share for our South African business grew 20% to 70,5c, while total distributions per share rose 8% to 27 cents.

Overall, the GHG transaction was earnings dilutive in this year, as we assumed significant debt. But buoyed by a portfolio of well-located hospital properties in the United Kingdom and opportunities to grow earnings, we expect the GHG operations to be cash generative, helping us to de-leverage the exposure in the medium to long term.

Strategic review
The past year has been transformational for the Netcare Group. We made significant progress on Netcare’s growth strategy, building the foundation for a comprehensive healthcare network that operates to world-class standards and leverages its economies of scale to provide high quality, affordable services.

In South Africa, Netcare continues to experience solid organic growth across its divisions. Healthy economic growth has meant that more South Africans have found formal employment, leading to increased prosperity and improving living standards over the past five years. Since healthcare is a late economic cycle beneficiary, the growth in private healthcare has only begun to show more recently. Statistics South Africa’s General Household Survey 2006 shows that now about 40% of South Africans, many of whom are not medical scheme members and pay out-of-pocket, access different elements of private healthcare.

For the first time in eight years, medical schemes in South Africa reported positive growth in membership, to 6,8 million lives in 2005. Declining medical inflation, which has made healthcare more affordable, increased incidence of lifestyle-related diseases and an aging population has spurred growth in the South African private healthcare sector.

In this market sector, we are focused on expanding services by making the latest advances in medical technology and treatment protocols available to patients. The Group’s centres of excellence provide specialist, and where necessary, multi-disciplinary medical interventions, in several new areas of demand, such as weight loss surgery. In addition to significant investment in existing facilities and new technology, Netcare will commission the Group’s first greenfield hospital projects since it was founded ten years ago, in 2007.

The increased subsidisation of medical aid for government employees and the introduction of the Government Employees Medical Scheme (“GEMS”) and other Low Income Medical Schemes (“LIMS”) is expected to bring significant numbers of employed, currently uninsured people into the medical scheme pool. Following government’s commitment to bring all its employees onto medical schemes, it is possible that corporates may follow, driving growth in medical scheme membership overall. This past year, Netcare embraced this challenge by becoming one of the first large companies in South Africa to significantly subsidise medical aid cover to its staff who were unable to afford the Company’s scheme.

However, the challenges are significant – much of this growth will be driven by lower-margin, higher volume services and necessitates a fundamental shift in the way the sector currently operates. Netcare’s experience in the United Kingdom in developing outcomesbased, cost-effective service models with the NHS provides a strong platform from which to interrogate and implement new models in South Africa. The recent acquisition of Prime Cure, with its intellectual property and experience in this emerging market, strategically positions the Group to broaden access to affordable, high quality healthcare in this growing market segment. Netcare understands the importance of a compliant primary care network in the overall delivery of cost effective, accessible and quality healthcare. Together with Medicross, we now have 106 primary healthcare facilities in the Netcare stable.

The development of our Public Private Partnership (PPP) model is beginning to bear fruit. Going forward, PPPs provide a potential vehicle to expand the reach and efficacy of healthcare provision in South Africa in a way that involves and engages the capacity of all stakeholders. Our intent to foster a partnership approach with government is evidenced by the increasing engagement between our newly formed health policy unit and public sector stakeholders on policy and regulatory issues.

The skills shortage in South Africa of nurses, pharmacists and paramedics requires a national solution, as it is the key factor limiting service delivery and growth in the sector. We welcome government’s initiative to increase its intake of nursing students. The Netcare Training Academy has also committed itself to the Joint Initiative for Priority Skills for South Africa and will be doubling our current training of approximately 1 500 nursing students in 2007, the largest intake since inception.

Netcare’s contribution to uplifting specialist skills in the healthcare sector is illustrated by our continued funding of nursing colleges across the country, as well as specialist chairs at medical schools. We have also been actively involved in attracting skilled professionals back to South Africa through our “Woza Khaya” (“Come Home”) initiative.

In the United Kingdom, the private healthcare market is undergoing momentous change – an aging population, new technology and treatment options, increasing incidence of lifestyle diseases, and rising demand for greater choice in health services is expected to drive growth over the next few years. These key macro-economic drivers of usage of healthcare in the UK are extremely promising. The elderly population is forecast to rise by three million people in the next 15 years, while lifestyle diseases are affecting more and more Britons each year. Advances in medical technology and treatments are enabling earlier diagnostics and better prognoses.

In the UK market, Netcare’s growth strategy rests on two pillars. The first pillar involves focusing on further developing and differentiating private healthcare provision in this relatively undeveloped sector of the UK market through the reach and scale provided by GHG while the other involves building on the strong track record established by Netcare UK in supplying services to the NHS.

The UK has the lowest number of privately provided hospital beds and Private Medical Insurance (“PMI”) cover in Europe. Given the macroeconomic factors driving healthcare demand and potential funding constraints in the NHS after 2008, the acquisition of GHG, with its strong national presence in good locations and well-invested purposebuilt facilities, was highly attractive to Netcare.

There is significant opportunity within GHG to develop new products and additional services, with products for back pain, women’s health, varicose veins and sports injuries among the opportunities identified. We have also established a pilot casualty centre at one of our flagship hospitals in Manchester, the Alexander Hospital, as a model that could be rolled out to other operations.

Over the next year we will continue to focus on extracting efficiencies and scale benefits in GHG, while leveraging the experience we have gained in the South African market to grow GHG’s private healthcare offering in a way that is differentiated and relevant to the changing dynamics in UK healthcare.

The NHS, the dominant provider of 96% of healthcare in the UK, is expected to experience real funding constraints post 2008 as the current increase in its funding returns to more inflationary linked uplifts. Importantly the NHS is evolving from being the sole provider of its services to becoming both a purchaser or commissioner of services and provider. As a result, it has begun outsourcing a much larger proportion of its services. Netcare’s experience in working with the NHS and developing models that are profitable, while operating within a standardised tariff environment, demonstrates that Netcare is able to provide “more for less”, while meeting the strictest ethical and clinical governance standards.

Since establishing Netcare’s presence in the UK in 2001, we have secured a sizeable portion of the NHS outsourcing market – often competing against domestic and international groups. Netcare has consistently delivered competently against the strict service and quality standards demanded of NHS contracts. This year Netcare was awarded the “Best Operational Healthcare Project” by the UK’s Public Private Finance organisation for its pathfinder mobile ophthalmology units.

During 2006, Netcare UK extended its involvement in the UK healthcare market into primary care, securing contracts to treat more than 220 000 new patients a year in Cumbria and Lancashire. We also secured two diagnostic projects with a joint venture partner in London and the east of England to perform 440 000 radiological procedures over a five-year period. Our first commuter walk-in centre will open in Leeds in January 2007 treating 180 patients per day. Netcare will next year begin the first ever Treatment Centre in Scotland at Stracathro in partnership with the Scottish Health Executive to offer orthopaedic, general surgery and ear, nose and throat surgery to over 8 000 patients over the next three years.

The British government has committed itself to extending patient’s choice of providers if they breach the 18 week waiting period from GP referral to definitive treatment. Fortyfour of BMI’s hospitals have been chosen to participate in the pilot of this programme, known as the Extended Choice Network. This represents a real opportunity for growth within the BMI network of hospitals.

Management priorities
The year ahead will be one of consolidation and mobilisation. In South Africa, we will commission our two new hospitals, Blaauwberg and Alberlito, to support the continued demand for healthcare services from our traditional market. We will further develop our lower cost models, finding innovative and affordable solutions for the growing emerging market. We need to carefully integrate Prime Cure to ensure it is fit for the significant growth it could experience. We will remain focused on reducing costs and in 2007 we will continue our rollout of SAP, coupled with a review of central costs to ensure we remain efficient in the long-term.

In the United Kingdom, the ongoing integration of GHG remains a priority. We will actively engage with our doctor consultants in the United Kingdom as we do in South Africa to ensure we build a committed doctor base. We intend on reviewing our diagnostics services as opportunities exist to rationalise them and we will look to expand our service offering. Netcare UK has garnered several new contracts from the NHS and in 2007 we will mobilise such contracts and prepare the BMI hospital network for Extended Choice.

We are cognisant of the complex challenges we face as a healthcare provider but the management of Netcare remain confident that the Group is well placed to make a significant contribution to healthcare development given its track record, its scale, its competencies and its world-class operating standards.

As we grow our business we will stay true to the ethical and social imperatives at the heart of providing healthcare, and to work tirelessly alongside our many partners and stakeholders towards a future world where universal access to affordable, quality healthcare is not a distant reality.

Appreciation
Throughout the past year, Netcare employees across all disciplines and operations have continued to provide passionate and dedicated care, often beyond the call of duty, to millions of patients. The contribution of every individual member of the Netcare family is evident not only in our financial results, but also in the strategic progress made taking the Group into a new and exciting era of healthcare.

It has been an intense year of extensive corporate activity and I would like to thank the board for their wise guidance and unwavering support of management.

As we continue to push the boundaries to seek better and broader healthcare solutions, I thank every member of my team that has helped to make Netcare the energetic and compassionate healthcare provider it is today.

Dr Richard Friedland
Chief Executive Officer