Vimian Group AB

STO:VIMIAN

Earnings Call Transcript 2022-Q3

[Operator]

Welcome to the Vimian Group Audiocast with Teleconference Q3 2022. [Operator Instructions] Just to remind you this conference is being recorded.Today, I am pleased to present CEO, Fredrik Ullman, and CFO, Carl-Johan Zetterberg Boudrie. Please begin your meeting.

[Fredrik Ullman, executive]

Thank you very much, and welcome to Vimian's third quarter earnings call. I'm pleased to have our new CFO Carl-Johan Zetterberg with me today. Warm Welcome to you Carl-Johan.

[Carl Johan Boudrie, executive]

Thank you very much, Fredrik. It's great to have join Vimian now from the 1st of November.

[Fredrik Ullman, executive]

So as usual, we'll go through the presentation then open up for Q&A. So as we move on to Slide 2, just a quick overview of where we are. 94% of the group is focused on companion animals. And I think we're well positioned with attractive niches in the market we play in, focused really on advanced care and chronic diseases. From an employee point of view, we're now north of 800 close to 900 employees in the group.If we look at our global footprint and move on to Slide 3. In the quarter, we had 47% of our revenues in North America; 45% in Western Europe; and 7% in APAC.If we move on to Slide 5. I'd like to give you a few highlights around the quarter, before I hand over to Carl-Johan for the financials.The macroeconomic environment continues to be a very challenging one. We've been working hard to accelerate organic growth since our second quarter. And we have really seen that generating good results. We see solid performance in our largest segments.Operationally, we've had very active quarter with a lot of commercial activities, a lot of physical and trade shows, product launches and quite a high level of education activities. We've also spent significant time across the segments integrating some of our acquired companies. We've rolled out new products in more geographies, and we've also consolidated our footprint in offices and production in certain companies.In August, we welcomed our first e-commerce platform, heiland.com. We have now onboarded Vimian's products onto the platform, and we have also strengthened that team. Heiland is currently active in Germany with 1,700 clinics doing their -- all their purchases through the platform. And the idea here is really to roll that out to more of our customers in Germany, but also roll out Heiland as a global platform. So we've strengthened the team to prepare for that launch.We're also very excited about the investment into customized specialty pharmaceuticals, and we continue to build strong position there. And we are now prepared to close the acquisition of the service provider to Bova in Australia early 2023 that we signed in July.In October, we completed a SEK 1.5 billion capital raise to reduce our net debt to around 3x. And we're very thankful to the -- for all the support from existing and new investors in that process. We recently finalized a review of our strategy and business planning since the company has grown a lot and changed a lot in purpose since last year. And I'm very excited about the ambition and the plan in all segments.We have strong positions in highly attractive segments. We see a very exciting plan forward with more opportunities for both organic and inorganic growth.So with that, I would like to hand over back to Carl, you want to speak about the numbers.

[Carl Johan Boudrie, executive]

Thank you, Fredrik. And turning to Slide 6, financial highlights for the quarter. We delivered continued strong growth in the quarter of 70.9% compared to the same period last year. Revenue for the group increased to EUR 70.9 million in the quarter.The organic growth was 5.2%, which is an acceleration compared to the second quarter of this year, despite the challenging macroenvironment. The key drivers of the organic growth was a solid growth in our 2 largest segments, MedTech and Specialty Pharma.Diagnostics segment continued to have tough comparable with sizable COVID sales during the third quarter last year. If we adjust for COVID sales, which was approximately 25% of total sales in the segment last year, Diagnostics delivered organic growth of approximately 10% in the quarter and also improved revenue over the second quarter of this year. For companion animals, the organic growth in the quarter was 8.3%.The pro forma organic growth was 7% in the quarter, which shows that our acquisitions are performing well and continue to grow. In the quarter, we continued to have a positive currency impact of 5.6% on revenue, driven by a significant strengthening of the U.S. dollar to the Euro.Margin was 24.3% in the quarter compared to 27.9% in the same quarter last year. The main drivers of the difference in adjusted EBITDA margin is consolidation of acquired entities with a different financial profile, which gives us a different business mix, but also selective investments in market activities such as education, trade shows, geographical expansion, plus strategic investments in organization.We continue to Slide 7 and look a little bit on the financial highlights year-to-date. The first 9 months of the year, we have grown with 65.1% to EUR 205.9 million in revenue. The organic growth in the first 9 months equaled 4% or 9.5% if we look at companion animals.We have seen strong growth in all segments with the exceptional Diagnostics where significant COVID related sales was realized during last year.Also for the first 9 months, just as in the third quarter, we have had positive impact from FX due to the strengthened U.S. dollar, which had increased in relevance as well as our share of revenue from North America have increased.Our adjusted EBITDA has increased to EUR 55.4 million. The margin is slightly lower compared to last year, reflecting consolidation of acquired businesses and strategic investments. But we see solid margins in our legacy business in our 2 largest segments, MedTech and Specialty Pharma.Moving to Slide 8. This slide is important when one is looking at Vimian to show how we have developed over time. At the end of the third quarter, the pro forma revenue equaled EUR 288 million, which is more than twice the revenue number of 2020. The fantastic growth is driven by strong organic performance in combination with continued strategic acquisitions. Since 2018, the average annual revenue growth had been 80%.Revenue growth have also fueled strong profit increase. Since 2018, EBITDA have increased with more than 100% in average per year, which is more than the annual revenue growth, reaching a pro forma EBITDA of EUR 83 million at the end of the third quarter. There are several organic growth initiatives underway and potential of synergies between our segments and acquired entities to drive continued strong revenue and profit growth.Back to Fredrik for some further insights and business updates per segment.

[Fredrik Ullman, executive]

Thank you, Carl-Johan. So if you move on to Slide 9 and moving to our Specialty Pharma segment, here we see continued solid performance across all therapeutic areas and with particularly strong performance in Bova UK and GlobalOne.In both these companies, we see strong innovation capabilities and 12% of the sales in GlobalOne and 24% of sales in Bova in the quarter are coming from products launched in the last 18 months.We also see strong growth in over 60% -- sorry, strong growth of over 60% in online direct-to-consumer sales, following successful rollout of more of our products into online channels. The margin difference versus previous year is predominantly due to consolidation of acquired companies. The margin of the legacy business is 1.5% point lower, which reflects strategic investments to launch the full portfolio and also launching new products. So we've had higher commercial activities this year than the same quarter last year.So we had a very active and successful quarter when it comes to trade shows. And we launched our new allergy testing platform, first-in-class molecular testing platform. And we have now buy-in from key veterinary specialists, and we're very excited to proceed with the full commercial launch beginning of next year of this new platform.We're also making good progress in the integration of acquired companies and Avacta, VetAllergy and Dermoscent Inc. were fully integrated into Nextmune's country organizations in the quarter. So all in all, very good performance in specialty pharma, and we continue to deliver on our strategy of implementing the full product portfolio across all geographies and channels.If we move on to Slide 10 and look at our MedTech business, which is 36% of the revenue. In MedTech, we accelerated organic growth after Q4, where we had some -- we had a annual order program, which caused some pull forward effect. And we delivered a good quarter with strong momentum in the U.S., where we saw continued high caseloads in clinics and busy surgeons.Like in Specialty Pharma, we've spent also here significant time on integration and all the acquired distributors in U.K., Asia Pacific and France now carry the full Movora brand portfolio to accelerate sales and improved customer service. So a very strong quarter for this segment, and we're happy about that.Now if we move on to Slide 11. As you know, education plays a very important role in this business as it does in other segments as well. And we focus a lot on educating orthopedic surgeons. So we had the first big international event under the Movora brand in Las Vegas with world-renowned lecturers and 120 orthopedic surgeons attending.Since January, we hosted almost 100 physical surgery trainings led by some of the world's most renowned veterinary specialists. And these trainings -- veterinarians practically trained to perform more advanced orthopedic surgery, which is important to expand the access to advanced care and expand the market. So also this summer, we inaugurated our Movora branded training facility in Boston, where we now train on all the brands within this segment.If we move on to Slide 12 and look at our Veterinary Services. Here, we see a positive underlying trend with good growth driven by the implementation of our new tiered membership model and renewed supply agreements. We saw lower organic growth because of significant supplier revenues that were booked in Q3 last year, while we now actually accrue across the year for those type of revenues. So if you adjust for this, the underlying organic growth remains strong.The margin in the quarter reflects 3 things: accelerated investments ahead of the launch in Brazil and Eastern Europe; investments in developing heilands.com, our new e-commerce platform for entry in new geographies and also new business models. And also, we have some seasonally -- we had a smaller quarter in our U.S. business, VerticalVet, which is normal seasonality. And given the good margin of VerticalVet, this actually weighs on the margin of this segment.A big milestone in the quarter was the entrance into Brazil, where we have a number of new members on the platform. And we have the team in place, and we have started to -- we are now in full recruitment of members -- member clinics. So this is a large underpenetrated market where we are the first movers with our membership model.So while the reported numbers in this quarter are below targets, we are confident about the strong execution from the new management team and the underlying performance, which will be realized in the coming quarters.Moving on to Slide 13. Diagnostics, as Carl-Johan mentioned, continues to be impacted by the phaseout of COVID-related sales, which was about 25% of sales in Q3 last year. Now those sales are really out of the books. And what is really encouraging, though in the first half of the year we saw a negative impact from the Ukraine war on feed prices and such, we're actually now starting to see a recovery in the core livestock business with 10% growth in the quarter, thanks to very strong execution on the ground by the team, offsetting the macroeconomic headwinds.The margin is low due to lower COVID sales and negative operating leverage and some exceptional scrapping of COVID-related stocks worth about 4%. But we are taking action here on cost optimization to improve profitability.We have consolidated the production footprint of the acquired company, Afosa. We have merged offices in Switzerland with Movora. And so when we -- and we have other levers to pull to improve profitability here, that will take a bit more time. But with -- when the COVID comparatives are out of the book, I expect to see good growth from mid-next year in this segment as well.If we move on to Slide 14 and look at our M&A track record for the quarter. We had 4 acquisitions, 1 clinic. We acquired the orthopedic business, NGD in the U.S. As I mentioned, we closed the deal with heiland.com, and we signed the service provider to Bova in Australia, which will close early next year.So while we selectively execute on our M&A pipeline, we do put significant efforts into integration right now, primarily with focus on commercial synergies, but also, in some cases, extracting cost synergies.On Slide 15, I would just like to give you a bit more color on why we have bought some distributors since we got the questions in last year and the rationale for value creation, although that weighs on the margins initially. So if you take this example, this is a company we bought mid-'21. And when we bought this company, it had about a 40% gross profit margin and about 10% EBITDA margin.And we gave them access to our terms of purchasing, so better purchasing terms, a broader portfolio. And what we've seen in the last 18 months, so compared to their full year 2020, the last 12 months track record ending in last of September this year, we are now at a gross profit margin of 57% and the EBITDA has actually increased by 135%.So when we look at this type of investment, and we are actually able to finance it with debt, our return on equity, given the price we paid for the company and the valuation of Vimian today, we see a 9x multiple of money for this acquisition in 1.5 years.So I hope that this gives you a little bit of a better illustration. I would say this is an exceptionally good case. We don't -- we cannot deliver this type of return on every single acquisition we do. But this is to illustrate to all of you how we think about value creation and sometimes we choose to do deals that are also margin eroding initially. But from a value creation point of view and return on capital deployed point of view, it highly value creating.So moving on to Slide 16, and showing a little bit what the position of Vimian today as we have grown the company and added a number of pieces of the puzzle. So here you see the value chain. From the right, you have producing companies, you have the channel with VetFamily and you have the clinics under pet parent.So we play in the Specialty Pharma, MedTech and Diagnostics spaces. And in the last year, we have added a new therapeutic area with specialty pharmaceuticals within Nextmune. In Movora, we have not only gained a lot of market share and grown that business tremendously, but we've also added imaging, which is new for 2022 with C arm X-ray, we have started with 3D printed implants for more complex surgery. And in the Diagnostics space, we've also added now a rapid test for livestock and companion animals, and we will come with more innovation in those spaces. So that's on the product side.Now on the channel side, we have VetFamily. We've entered the U.S. with VerticalVet and we've added a B2B e-commerce platform with Heiland where we bring all our products now onto their platform and we've broaden the reach of that platform. That's the ambition going forward. And of course, we also have our B2C e-commerce businesses where we sell over Amazon, Chewy and other channels. And this, of course, is on top of the direct sales channels in all our product categories.And now moving on to the financials, I would like to hand over to Carl-Johan on again to give you a more deep dive on the numbers.

[Carl Johan Boudrie, executive]

Thank you. And can we turn to Slide 18. The strong revenue growth in the quarter resulted in a revenue of EUR 70.9 million compared to EUR 41.5 million in the same quarter of last year.For the first 9 months, revenue was EUR 205.9 million, which is a significant increase compared to EUR 124.6 million last year. Operating profit equaled EUR 8.8 million, which is an increase of EUR 4.3 million or 105% compared to the same period last year. The slightly lower operating margin in the quarter is a consequence of the different business mix and market investments that we highlighted previously.Profit before tax was minus EUR 0.6 million, impacted especially by increased net financial items. The net financial items have increased primarily as a result of higher financing costs of equaling EUR 4.1 million in the quarter with increasing interest rates. Adjustments of earnouts, including discontinued discounting effects of EUR 3.4 million, a negative exchange rate impact of EUR 1.9 million. Going forward, we will increase focus on operational efficiency and improvements in net working capital to further improve profitability and cash flow of the group.Turning to next page to Slide 19. The cash conversion in the quarter was 5%, which is down from 61% in the same quarter of last year. Year-to-date, the cash conversion is 39%, and we have historically seen significant variability between quarters in cash conversion, given the nature of our business and due to acquisitions. The operating cash flow equals minus EUR 5.8 million in the quarter and EUR 4.1 million year-to-date.The cash conversion and operating cash flow is impacted by mainly a change in net working capital of minus EUR 16.7 million in the quarter as we have ensured supply for the annual order program in MedTech in the first part of next year as well as securing supply for high-growth areas within Specialty Pharma. Also new acquisitions had impacted the change in net working capital in the quarter.Cash flow from investing activities and financing activities mainly reflects acquisitions in the period and related financing of the same. Cash and cash equivalents at the end of the third quarter was EUR 51.2 million, which is in line with the same period of last year.Moving to Slide 20. The net debt as per end of the third quarter was EUR 340.9 million, resulting in a leverage, which is net debt the last 12 months pro-forma EBITDA of 4.1x. As Fredrik mentioned earlier, in September, we carried out a directed share issue of close to 53 million shares, raising proceeds of SEK 1.5 billion in order to finance selected strategic acquisitions and reduced investments.The first tranche of the direct share issue of approximately SEK 0.5 billion was completed in September and the second tranche early October. Including the second tranche of direct share issue, net debt equaled SEK 255 million at the end of the third quarter with a leverage of approximately 3x. As a consequence, we have good position to continued building a strong foundation through strategic acquisitions and investments.Turning to Slide 21, and give you a short update on current trading. We continue to see that the companion animal health market shows resilience in these turbulent macroeconomical times with continued growth. During October, we have seen similar organic growth trends in our business as we did during the third quarter, and we continue to strengthen our market positions during the final quarter of the year. The higher level of inventory, we expect to continue in the fourth quarter ahead of annual ordering program in the first part of next year in our MedTech segment.So I hand over back to you, Fredrik, for a summary of the quarter.

[Fredrik Ullman, executive]

Thank you very much, Carl-Johan. So if we move on to Slide 22, just to summarize. So we are withstanding this period of exceptional macroeconomic uncertainty. We've accelerated the growth since the second quarter with solid performance of 8% to 10% organic growth in the largest segment. The margin development in the quarter primarily reflects the consolidation of acquired companies with a different profile, but of course, also an active quarter with physical trade shows and commercial investments with new product launches compared to the same quarter last year.With Carl-Johan onboard, we'll put additional focus on operating leverage and cash flow management across the group. As I mentioned, we're excited about coming out of the business planning process and seeing the long-term potential of Vimian across the board.And while we continue to focus on the integration of our acquired businesses, we'll also selectively execute on our M&A pipeline, which is still very exciting. We are looking for multiples or valuations to come down a bit in the private sector.We're rolling out our ESG strategy as well, where we have actually now integrated the sustainability agenda into each segment's business plan, and we are now moving our focus to our people agenda with the ambition to be the best place to work in animal health. And so we're soon onboarding a new head of people to lead this work.We believe strongly in the attractiveness of our niches. And while we are in times of uncertainty, I think we see a very strong path to very strong profitable growth in the coming years, of course, the short term is uncertain in the world. But in the mid and long term, we are very bullish and confident in our business and our strategy remains intact in that sense.So with that, I'd like to open up for Q&A.

[Operator]

[Operator Instructions]. Our first question comes from the line of Erik Cassel at ABG.

[Erik Cassel, analyst]

I have a question on the contingent consideration adjustments. It seems to me like you had a positive effect of EUR 4.9 million from changing in fair value that was above the EBIT line here in Q3. And this does seem to be accounted for in the adjusted EBITDA. But could you just walk us through these fair value adjustments on a segment level, to sort of understand where these positive effects landed?

[Fredrik Ullman, executive]

These are questions to Carl-Johan.

[Carl Johan Boudrie, executive]

Okay. I think what we -- so what we have on contingent considerations, the effect that we have is on the net financial items, whereas we said, we had a negative effect of EUR 4.3 million in the quarter. And if we just look at the quarter, the main reason for that is -- its adjustments on sort of discounting effect of it.If you look year-to-date, and as we mentioned in the second quarter, we did do an adjustment in fair value and profitability adjustments, which gave a positive effect in the second quarter. But in the third quarter, there's a negative effect below operating profit in the net financial items due to the discounting effect. And then the difference in the opening balance and the closing balance is driven by acquisitions that we've done in the quarter.

[Fredrik Ullman, executive]

We take up these earnouts on the balance sheet as net debt, but probability adjusted. In certain quarters, if we realize that something will most likely not be paid out that probability adjustment can be then adjusted and have a positive effect. But we also put a discounting factor on those since they are out in time. And if they then come closer in time, there could be a negative effect on the financial items due to the fact that we discount them due to the time effect of when we have to pay them.

[Erik Cassel, analyst]

And then the cash generation was a bit concerning, I guess. And you guide for continued higher levels of inventory in Q4 as well, but didn't really quantify this. I mean, does that imply a further negative cash flow effect from working capital. Or are you rather guiding for inventories to be on par with Q3 considering that it's already relatively high?

[Fredrik Ullman, executive]

No, we're not expecting the inventories to go up. Actually, one of the companies which -- one of the companies we've had an increase in inventories is in GlobalOne where we started with very low inventories, we actually had problems with the high level of growth. Just from a supply chain point of view, we have diversified our supplier base there to be able to increase our production capacity, and we have then increased the stock levels to a more sustainable level to support the growth going forward. We do not expect the inventory level to continue to grow, which is that we went from a very low base to something more sustainable in that area.And in the orthopedics space, it's a normal cycle. We have inflow or stock buildup prior to the AOP program and the stock level going down when we ship out for the annual order program. So you'll see -- typically, you'll see cash conversion being quite variable in the MedTech space from quarter-to-quarter due to that annual order program effect. But we don't expect inventory levels to go up any further at this point.

[Operator]

Our next question comes from the line of [indiscernible] at Barclays.

[Unknown Analyst]

I have 2, please. Could you provide some more color around the strategic review you have completed on the 5-year business plan? Could we see the midterm financial targets you have revised -- sorry, could we see the midterm financial targets you have been revised or are you still confident in your organic growth target of at least 15%? And are you planning for a slowdown in M&A activity at all?And then my second question is, some of your peers are talking about lower vet visits, reduction in livestock testing and uncertainty related to new capital equipment placements. Is this something that you're witnessing? Or are you concerned that this could be more of a feature in 2023?

[Fredrik Ullman, executive]

So just to make sure I understood the question. So in terms of -- so you would like to get some color around the strategic plan and our targets? And the second question was capital investment in Diagnostics and livestock diagnostic volumes going down?

[Unknown Analyst]

Yes. And lower vet visits is something that your peers have spoken about as well.

[Fredrik Ullman, executive]

Yes. So if you look at the strategic plan, the -- it's a bottom-up exercise that we've done throughout the 4 verticals, and the midterm growth and profitability is strong. We do see operational leverage. We have invested in the group in the last year to be able to manage the growth that we are creating. But when we look in the next 5 years -- so we do this '22 to '27, we do see actually strong growth in all 4 verticals and operational leverage in all 4 verticals.In the short term, as I mentioned, there is, of course, some uncertainty with what's going on in Ukraine and the inflation and the overall economy. But if you look at -- on the 5-year horizon, which we set our goals around, we do not see a reason to change our targets.When we look at the -- now it might be that it was going to take us slightly longer to reach 35% EBITDA margin across the group. And of course, depending on what we buy, it's hard to predict the exact profile of the company depending on what M&A transaction we do. But we do see that the businesses we own today has the potential to reach that number and also reach the organic growth number of 15% over time.But again, it may take us -- it's not going to happen in the next 12 months in this current environment, I think. But when we look at our business horizon of 5 years, we do think that, that's achievable.On your second question -- does that answer your first question?

[Unknown Analyst]

Yes, that's perfect.

[Fredrik Ullman, executive]

Okay. If you look at the second question, yes, there has been a slowdown in diagnostics for livestock in certain regions. There are governments that are restricting the capital because of indebtedness of governments post COVID. And of course, that has an impact on our Diagnostics business. And we have seen a slowdown of sales of capital equipment.Now the Diagnostics business is 7% of Vimian. Livestock is less than 7% of our business. So it's not something that will have a massive impact for us. And we are focusing our strategy more on the private segment and companion animal segment to work with -- on synergies between Indical and Vimian. And of course, the whole diagnostics space has been shaken quite a lot by the COVID situation -- raw materials, the plastics, reagents of all kinds are impacts -- have been impacted from a pricing and demand point of view throughout the COVID wave. I think you'll see that in most companies.But if you look at the midterm and long-term of that segment, as long as you believe that people will continue to consume animal protein. As long as you believe that 60% of emerging diseases come from animal origin, as long as you believe that food safety is important, and as long as you believe that the world is not yet at a state-of-the-art level of monitoring preventive care and diagnostics, which is our fundamental belief, we see that this is an area that will be attractive long term.So pre-COVID Indical growing 20% organically. And now we're seeing this wave, and of course, we have to reset the cost base a bit here because we had such strong growth. We are doing -- we're taking those measures as we speak. But we believe in this segment strongly. We think that there will be a strong focus on the reduction of antibiotics and the diagnostic data is fundamental to enable that. So that's why we continue to be bullish about that segment despite the short-term headwind. I hope that answers the second question.

[Unknown Analyst]

Yes.

[Operator]

Our next question comes from the line of Rickard Anderkrans at Handelsbanken.

[Rickard Anderkrans, analyst]

Starting off on the margin side. So margins were hampered by investments and some exceptional items here and there in the quarter. How should we think about margins, first of all, heading into Q4? Do you expect a significant recovery there? And if you also could comment on how you -- how we should think about the dynamics heading into 2023 as well.

[Fredrik Ullman, executive]

Sure. You do you want to take the first question, Carl-Johan? Or I can take that. Okay. So, I don't -- we don't expect a massive recovery in margins short -- I mean in the quarter. We are working on improving profitability. Those type of measures take time to see -- to be seen in the numbers. From a gross profit point of view, like-for-like gross profitability is stable and strong. We have good pricing power. We're not seeing any erosion on that end.We continue -- as I said, our strategy is intact. We continue to invest in VetFamily's regional expansion. We continue to invest in innovation. And because we have a long-term focus, I mean, of course, we can improve short-term profitability if we say, okay, let's slow down our -- or stop those type of investments, we don't believe that's the right thing to do because it's a bit stormy out there because we want to build a great company for the long run. And so, no, of course, we could -- if we just were to optimize for margin, we could. But the Board is very clear with us that they would like us to be more long-term focused.And if you look at how we move into Q -- into next year, we expect, as I mentioned, we do expect operational leverage next year on the like-for-like. Of course, all our businesses don't have the same profit profile, but the mix effect can have an impact on the group margin, and that's a bit more difficult to predict. But, overall, like-for-like, if you look at same company sales and same company profitability, we do see operational leverage with growth in all our businesses.

[Rickard Anderkrans, analyst]

And can you comment on the pricing? You talked about pricing power. Can you comment about the price increases across the organization year-to-date, if you could sort of aggregate that or provide a number would be helpful.

[Fredrik Ullman, executive]

Yes, sure. So we've had a, I would say, an average of 5% increase. So if you look at the companion animal space, we've grown year-to-date 9.5% totally and roughly 5% is pricing. In the Diagnostics space, prices were high due to COVID scarcity of basic products. So there, we have less pricing power, but we do expect to see price increases in -- going into 2023 in that space as well. So roughly 5% for the group. And in some spaces we've done multiple increases, in others, we've done single increases.

[Rickard Anderkrans, analyst]

And then final one from my side. You mentioned that you're gaining market share in the MedTech side with Movora. Could you possibly quantify the market share of Movora or -- yes, would be helpful.

[Fredrik Ullman, executive]

Yes. I cannot give you a precise number on the market share, Rickard, because there is no public information about it. But my -- if I had to give you a wild guess, I would say that we are probably at around 30% in Western Europe and North America, maybe a bit more. That would be just a wild guess, so don't take that with too much weight.But of course, we've gone from owning a business in 2019 of between EUR 7 million and EUR 8 million to -- we're going to be soon at $100 million in revenue in that business. So it's a clear increase in market share, both organically and through acquisitions. We estimate that markets to grow at around 5% globally and this year, we are growing 10%, so roughly twice the market speed.

[Operator]

Our next question comes from the line of Kristofer-Liljeberg of Carnegie.

[Kristofer Liljeberg-Svensson, analyst]

3 questions. First, coming back to the cash flow and increased working capital -- yes, increased inventory. If I look at loss, it doesn't seem you had the same type of inventory buildup, so if you could explain that. Is it that you have to build up earlier this year because of supply issues, for example.

[Fredrik Ullman, executive]

That's actually because last year we didn't own GlobalOne, which is the company in the U.S. that drove part of this. And GlobalOne is the company that grew triple digit in Q1 this year, and that had restricted inventories to continue to grow at that pace. So that's number one.And then the AOP program in MedTech, of course, we've added a number of companies to the group. That means that there's also more companies that are part of the annual order program. So that means that the annual order program becomes a bigger program this year than it was last year. So just in actual numbers, that product increases.And of course, when we bring in our own products to the distributors, that increases the inventory initially as we launch more products.

[Kristofer Liljeberg-Svensson, analyst]

Please comment about supply also. But was that only related to pharmaceutical business? Or do you see this in MedTech also that you have to keep higher inventories because of supply issues?

[Fredrik Ullman, executive]

No, this was mainly related to GlobalOne, where we had very low inventories, and we've added one additional supplier. In MedTech, depending on the product category, we have some products that have very high inventory turns. And some products are more complex that need -- where we need to have more stock.But overall, I think, honestly, this is something we can improve. I don't think we are -- that net working capital has not been the primary focus of the businesses that we have acquired. And of course, when we have grown from a EUR 7 million, EUR 8 million business to soon EUR 100 million business, it gives us clear opportunities for streamlining supply chains and renegotiating supply agreements and getting more scale out of what we do.So I expect that we will put more focus on this going forward and expect that we can improve our supply chain and inventory levels in those -- in that space now that we have with the acquisitions we've done.

[Kristofer Liljeberg-Svensson, analyst]

And the slight improvement of the margin in MedTech versus the second quarter, is that just natural variations? Or are we starting to see some leverage effects or positive integration of acquisitions or so?

[Fredrik Ullman, executive]

No, it's clearly the effect of -- it's both -- I mean, operational leverage. I mean you sell more, gross profit falls on to the bottom line. But also, as I mentioned, one of the distributors, we've increased the gross profit from 40% to 57% in 18 months. So that you clearly see on the bottom line. And we have integrated, for instance, Spectrum and where we acquired the company, and we were able to take over the sales and hardly any OpEx. So we could integrate that commercially fully and get the gross profit on to the bottom line. And that's what we do continuously with more and more companies there. So that's what you see in improvement of margins.

[Kristofer Liljeberg-Svensson, analyst]

And the margin in Specialty Pharma, of course, you have explained, you have a dilutive effect from acquisitions there this year. But how -- do you think will this continue in 2023? Or do you think you could improve margins in the acquired businesses so that we could be back at 30% margin again there pretty soon?

[Fredrik Ullman, executive]

Yes, we do expect to see operational leverage there. As I mentioned before, depending on how quick -- I mean, if you have that mix -- if you have a company with slightly lower margin profile growing faster than the rest of that business, that will have a negative effect on margin growth. From a marginality point of view, it will have a positive effect on cash flow. But if you -- if we assume that all these businesses will grow at the same pace, so the mix stays the same, then we do expect to see operational leverage.

[Operator]

Our next question comes from the line of Peter Verdult at Citi.

[Peter Verdult, analyst]

Just 2 topics, please. Picking up just off on M&A. Net debt up 3x. You made one comment about private valuations coming down, but maybe I could just push you just firstly on appetite to add leverage or use further equity in 2023 given the macro outlook? And just are you seeing valuation expectations moderate or actually change significantly? So first question on topic around M&A and appetite doing more given the macro.And that segues into the second question, just on organic growth outlook for 2023. I mean, we're around 5% to 8%, depending on how you cut it right now. Movora was a clear star in Q3, spec pharma solid. But are these segments sort of very exposed to how discretionary it seems to be highly discretionary segments. So how worried or not are you that you will see the macro does turn South a significant slowdown in these businesses in 2023 on an organic basis?

[Fredrik Ullman, executive]

So on the M&A side, what we do see is that some -- when we look at the market in the private sector, some of those we will bid against in certain cases have post acquisitions because of uncertainty and waiting for valuations to go down. We think historically, you've always seen about a year delay between the public market and seeing valuations going down in the private segment.We have seen valuations going down or starting to trend downwards. Given the -- we don't -- we expect to reduce our leverage over time with profitability and cash conversion that will improve over time. So we're selectively looking at M&A, and we have a pipeline, but we are -- actually strong pipeline, but we are looking at -- we would like to see some of those valuations become more attractive given the current environment and cost of capital.On the other question, you mentioned organic growth, so moving into Q4, we are seeing, as I mentioned -- we mentioned in the report similar trends as in Q3. The Diagnostic organic or the effect of COVID will see phasing up completely in Q2 next year. So from that point in time, if everything continues as is, then of course, Diagnostics should be growing or also contributing positively to our organic growth.And we are not seeing yet any severe signals of slowdown. Of course, it's lower than last year. I mean, last year, we had a 16% organic growth, and now we are seeing about half of that in the companion animal space. Can I guarantee that I will -- that we won't see any slowdown or postponement of surgical procedures No, I can't. I think that you -- I mean, just logically, we haven't seen it yet. But I would say, logically, what you'll see is that people will probably do fractures, because that's a more surgeon's remedy to be done, so that the animal feels good immediately.Some of the more advanced surgeries might be more elective and where people -- and more expensive and there some people might postpone the investment. But at this point, we're seeing good traction across the business. And we're looking at '23 are businesses are optimistic about what -- how '23 will pan out. And of course, the winter will be a bit a question mark right now with -- at least in Europe with gas prices and the current uncertainty. But if we look at the full year '23, the teams are ambitious and quite optimistic.

[Operator]

Our next question comes from the line of Patrik Ling at DNB Markets.

[Patrik Ling, analyst]

I have 2 short questions. Maybe I missed it, but when you talk to -- Fredrik, about Specialty Pharma, you presented it as a 9% pro forma organic growth, but for all other divisions you talked about just organic growth. So could you please repeat what you said about the true underlying organic growth for Specialty Pharma this quarter?

[Fredrik Ullman, executive]

Yes. So the organic growth for the quarter was 8.4%. Yes, Specialty Pharma was 8.4% and pro forma was 9%. So pretty much in line.

[Patrik Ling, analyst]

I missed that. Then my second question, which is actually a follow-up to the question about pricing power and price increases. When you look at your long-term ambitions of 15% organic growth or more, what type of price increases are you including in that, if any?

[Fredrik Ullman, executive]

Typically on such a plan, we look at 2% to 3% yearly. So this year has been a bit more than that. But the normal price increases will be more 2% to 3%. If you look at price rise.

[Patrik Ling, analyst]

And that is also what has been realized in the past, so that's in line with historic numbers?

[Fredrik Ullman, executive]

Yes.

[Operator]

And currently, we have one further person in the queue that's [indiscernible] at Nordea.

[Unknown Analyst]

2 first questions regarding still the annual order program and the inventory levels. So should we expect this to happen mainly now in '23 in Q1? Or do you have some spillover effect to Q4 or Q2 when thinking next year's annual order program?

[Fredrik Ullman, executive]

It could have some spillover effect into Q4 this year. And it can depend -- it could also spillover into Q2 next year. It's not a 3-week program because it's a lot of customers that stock up quickly, and it can be depending on who orders. When we also announced price increases into the new year, some will place orders prior to any price increases. So that will spillover then into Q4. And then some will wait a little bit and place orders slightly later. So it's hard to predict the exact timing window of the AOP program.

[Unknown Analyst]

And second question relating to this U.S. legal fees on patent litigation. So how long actually these are running and to what these are actually related to?

[Fredrik Ullman, executive]

So we had the -- also on the prospect of the IPO, there is a patent litigation between J&J, Synthes and [ BOI ], one of the companies in orthopedics that we acquired in 2020, which relates to a case that was already running when we acquired the company and for which we have a -- what do you call it, a guarantee from the sellers --

[Carl Johan Boudrie, executive]

Identification.

[Fredrik Ullman, executive]

Identification. And so those costs -- how long they will run, it's hard to tell with these types of cases because it depends on when -- if we can find a settlement or not. But I hope that we will get clarity on that in the first half of next year. But there is very limited damage on -- or limited risk of any damage to Vimian actually because the seller keeps -- we have a high identification hurdle.

[Operator]

And as there are no further questions in the queue at this time. I'll hand the floor back to our speakers for the closing comments.

[Carl Johan Boudrie, executive]

Thank you. Maybe just before Fredrik will further announce the final comments, I just want to clarify maybe question on fair value. So there's no uncertainty on that one. So the change in fair value that the discounting effect that we disclosed and that impacts financial net in this quarter negatively, but there's no impact on the adjusted EBITDA as a result of the change in fair value, just to make that clear.

[Fredrik Ullman, executive]

Good. Thank you very much. Thank you, Carl-Johan, and thank you, everyone, on the call for attending this call. We continue to build Vimian and again, we stay true to our strategy and we continue to be bullish about the business despite the macroeconomic environment that we have to navigate right now.But mid to long term, we're very bullish about the business and feel very good about the team as well and the business that we're building. So thank you so much for today and speak to you all soon.