Vimian Group AB

STO:VIMIAN

Earnings Call Analysis

Vimian Q3: Strong Growth Amid Margin Focus

In Q3 2023, Vimian Group reported a robust organic growth of 12% due to positive performance across all sectors, particularly specialty pharma and veterinary services, outpacing the overall animal health market's growth. Revenue climbed by 13% to EUR 79.9 million, with a net profit of EUR 7.6 million and an unchanged adjusted EBITDA margin of 22.9%. Acquisitions added 7% to growth, while currency fluctuations had a 6% adverse effect. The company aims to sustain this growth trajectory and intensify margin expansion efforts. However, certain segments like U.S. Specialized Nutrition grew quicker than anticipated, affecting margins, which the company plans to address. There's also substantive progress in veterinary services and diagnostics, showing an overall above-market performance for the quarter.

Strong Quarter with Focus on Organic Growth and Cash Flow

Vimian Group's third quarter was marked by a resilient 12% organic growth, with net profits and cash flow on the rise. The company generated $11.6 million in cash from operating activities, and net profit climbed to EUR 7.6 million for the period. Adjusted EBITDA margins stood at 22.9%, echoing strong sales in MedTech and the rapid rise of U.S. Specialized Nutrition. Management's forward-looking statement indicated an ongoing commitment to sustain solid organic growth alongside concerted efforts to drive margin expansion. This is particularly noteworthy against the backdrop of a challenging macroeconomic environment, where pet owners persist in prioritizing pet healthcare, proving the market's durable nature.

Revenue Uptick and Margin Oversight

The CFO, Carl-Johan, delved into the financial details, announcing a significant 13% revenue increase to EUR 79.9 million for the quarter, led by specialty pharma and veterinary services. Total revenue for the first nine months reached $249.3 million, a notable 21% year-over-year growth. Despite an impressive gross margin performance in a high-inflation context, the leadership team recognized a need for improved margin levels. Initiatives are underway to counterbalance the margin pressures from the fast-growing U.S. Specialized Nutrition segment and to strive for a long-term increase in profitability.

Geographic Diversification and Strategic Developments

With roughly equal revenue shares from Europe and North America, the geographic diversification of Vimian Group remains a strategic advantage. Acquisitions such as Bova Australia and Vettr have reinforced the company's Australasian presence. A pro forma revenue indication of EUR 333 million showcases the remarkable growth track, with strategic ventures poised to fuel future financial performance, which is a positive sign for investors.

Specialty Pharma Gains and Strategic Positioning

Magnus, CEO of the specialty pharmaceutical segment Nextmune, reported a strong organic growth of 18%, with promising developments in several therapeutic areas. The U.S. market experienced some challenges, but measures to regain momentum are showing positive signs, expected to stabilize by the first half of 2024. With over 20 new product launches, participation in veterinary congresses, and ongoing strategic investments, specialty pharma is positioned for continued growth with special attention on profitability in the following months.

Mixed Performance in MedTech and Services Expansion

MedTech's slower growth was attributed to specific U.S. sales patterns, whereas other regions displayed high single-digit growth. Investments have been made to fortify the sales force, reflecting operational progress and a focus on supply chain improvements. Conversely, Veterinary Services experienced robust organic growth of 14% and EBITDA growth of 60%, marking the fourth consecutive quarter of margin expansion and strong recruitment, demonstrating effective business execution and customer engagement.

Impressive Diagnostics Surge and Marginal ESG Highlights

Diagnostics outperformed market growth, securing market share amid a challenging livestock environment. Margin improvements reflect a strategic cost program, signaling deliberate financial discipline. Notably, investments in companion animal diagnostics innovation are set to expand, aiming at a broader geographic presence. Additionally, there were brief mentions of environmental, social, and governance (ESG) initiatives, aligning with actions to maintain a strong development trajectory for the company.

Guidance Affirmation Amidst IPO Aspirations

As for future performance, the company reaffirmed the midterm guidance introduced during the IPO. Expectations are pinned on sustaining organic revenue growth of at least 15% and complementing this with further expansion from mergers and acquisitions (M&A) and capital expenditure (ApEx), aiming for a total of at least 30% reported growth. This commitment underscores management's confidence in Vimian Group's robust growth strategy and its potential to yield returns for investors.

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to Vimian Group Q3 Report 2023. For the first part of the conference call, the participants will be in listen-only mode. [Operator Instructions]. Now I will hand the conference over to the speakers. Please go ahead.

[Fredrik Ullman, executive]

Welcome to Vimian Third Quarter Earnings Call. I'm Fredrik Ullman, CEO. And with me today is our CFO, Carl-Johan Boudrie today. We also have Magnus Kjellberg here with us, the CEO of our Specialty Pharma segment, Nextmune. And after the Q3 presentation, he will give you a brief update on Nextmune and its development since our IPO. Please move to next slide. So in the third quarter, we reported strong organic growth of 12%, which is well ahead of the animal health market. We continued our efforts to improve cash flow and delivered $11.6 million in cash from operating activities in the quarter.Our net profit increased to EUR 7.6 million. The adjusted EBITDA margin of 22.9% primarily reflects our sales pattern in MedTech and a mix impact from our U.S. Specialized Nutrition growing faster than expected. Carl-Johan will go into further detail on this later on the presentation. Going forward, we focus on sustaining a solid organic growth while continuing our efforts to drive margin expansion. Our market in Companion Animal Health remains resilient with continued growth, and we see pet owners prioritizing health care for pets despite a very challenging macroeconomic situation. Now I'd like to hand over to Carl-John for further deep dive into the numbers.

[Carl Johan Boudrie, executive]

Thank you very much, Fredrik, and good morning, everyone. You can turn to next slide. As Fredrik highlighted, we continued our solid development with 13% revenue growth, exceeding EUR 79.9 million in revenue. Organic growth was 12% with good development in all segments, especially specialty pharma, with 18% organic growth in veterinary services with 14% organic growth. Acquisitions contributed 7% to growth in the quarter, and currency movements had a negative impact of 6%.For the first 9 months, revenue increased to $249.3 million in overall growth of 21%. Organic revenue growth year-to-date was 13% with good growth in all segments, especially in specialty pharma. The adjusted EBITDA increased by 6% to $18.3 million at a margin of 22.9%. Next slide, please. As commented on previous slide, adjusted EBITDA margin was 22.9% in the third quarter. And here, you can see the building blocks for the year-over-year margin development. Margin reflects the sales pattern in MedTech with the extended annual ordering program shifted high-margin sales to the first quarter in combination with mix effect from the continued very strong growth in U.S. Specialized Nutrition and strategic investments in specialty pharma.Overall, we continue to see a stable or improving gross margin in a high inflationary environment. Excluding impact from fast-growing U.S. Specialized Nutrition, gross margin was stable in the quarter. Although our MedTech sales pattern and mix effect from U.S. Specialized Nutrition have impacted our margins negatively. We are not satisfied with the current levels and are initiating further measures to ensure we focus on driving margin expansion in the coming quarters. Next slide. We have a diversified geographical footprint with Europe and North America, each accounting for approximately 45% of revenue.With the acquisitions of Bova Australia and Vettr earlier in the year, we have strengthened our business in Australia, in specialty pharma and veterinary services. And with the growth in APAC and our successful growth of the annual order program in MedTech as well as strong performance of Specialized Nutrition in the U.S., Europe has despite good growth, a slightly smaller share of total revenue in the last 12 months. Next slide, please. The strong development recorded in the last couple of quarters continues. And as of the third quarter, our pro forma revenue was EUR 333 million. Since 2020, we have more than tripled the business through organic growth and continued strategic acquisitions.Revenue have also supported strong profit increase. We have grown our profit ahead of revenue, almost quadrupling adjusted EBITDA to EUR 86 million. We continue to actively focus on organic growth and initiatives and synergies within and between our segments to support continued strong revenue and profit development. Now handing over to Magnus, who will give some details to the quarter for specialty pharma, and then Fredrik will continue with more details on the other segments.

[Unknown Executive]

Thank you, Johan. And next slide, please. We delivered very strong organic growth of 18%, with double-digit growth in 3 out of 4 therapeutic areas, specialty pharmaceuticals, dermatology and specialized nutrition as we capture the benefits of previous year's innovation and leverage our strong market positions. We see double-digit growth in [indiscernible] in Europe, where our new [indiscernible] has been well received by the market, while the U.S. value business is temporarily held back by slower uptake in transfer to our new [indiscernible]. We have launched several commercial initiatives to regain momentum in the U.S. value business, including additional education initiatives, and we see sales picking up now and expect it to normalize over first half of 2024.The adjusted EBITDA margin primarily reflects the mix effect from strong growth in U.S. special attrition, explaining almost 70% of the margin decline, combined with our strategic investments and the impact of temporarily lower sales in U.S. Energy. Besides working hard to regain momentum in U.S. Energy, we're also initiating further initiatives to drive efficiency across European operations. Our pipeline for new products remains strong, and we launched more than 20 new products during the quarter, taking the total for the year so far to 65. We continue to build strong market positions, attending 15 veterinary congresses in the quarter.At 2 major congresses, the European Veterinary Dermatology Specialist Congress with 750 veterinarians and U.K.'s largest econ Congress with 800 veterinarians, we were also the main sponsor. Overall, our positive growth momentum in specialty pharma continues, and we have eyes on profitability for the coming months.

[Fredrik Ullman, executive]

Thank you very much, Magnus. Moving on to MedTech, please move to the next slide. Thank you. The slower growth in MedTech in the third quarter reflects the sales pattern in the U.S. with our annual order program [indiscernible] and a small buildup of back orders. In the other regions, Europe and Asia Pacific, we report high single-digit growth in the quarter. The lower profitability is an effect of lower sales growth in combination with investments into the organization, building the sales force since the second half of 2022.Given the sales pattern in MedTech, where we sell high-margin products and large share of our customers' annual needs already in the first quarter, the year-to-date numbers with 13% organic growth and 32% margin improved by 100 basis points, better reflects the segment's underlying performance. Operationally, we continue our work on the supply chain side and have started to take down inventory. We held 19 onsite surgery trainings with over 180 veterinarians in the quarter. What we see from a market side, overall, the sales processes are starting to take slightly longer in the current macro economy. But we continue to see solid demand for veterinary orthopedics across our geographies.Moving on to the next slide and veterinary services. Next slide, please. In Veterinary Services, we continue to see strong organic growth of 14% and 60% EBITDA growth with positive momentum in key geographies. We have another quarter with high recruitment pace in new members, especially in our new markets, a total of 620 new members in the quarter and good conversion to higher membership tiers. This is now the fourth consecutive quarter with margin expansion driven by strong growth in the core business and profitability improvement for co-owned clinics.We've built solid digital skill sets and expertise in veterinary services. And the team's expertise is now actually leveraged across Vimian Group for our development of a shared CRM system and data warehouse. So in summary, we see really good momentum in veterinary services. Moving on to diagnostics on the next page. In diagnostics, we saw another quarter of solid growth, well ahead of livestock diagnostics market, and we continue to capture market share. Overall, we see the livestock environment becoming increasingly challenging with slow growth. The margin for the third quarter improved significantly versus last year's, thanks to our cost program, and we report a robust number compared to listed livestock peers.Parts of the savings, though, for the cost program will be reinvested into new growth initiatives. So we should not expect margin expansion from this point in diagnostics. We continue to progress our innovation projects targeting the companion animal market with good ramp-up in installations for our new AI-enabled platform detecting parasites. And over the next year, we will ramp up our investments in compound animal diagnostics to roll out this technology to more geographies. So overall, we're very satisfied to deliver above-market performance for diagnostics this quarter.Moving on to the next slide and our ESG agenda. Next slide, please. Summarizing our ESG highlights for the quarter. I'm pleased to share that we have now established a carbon reduction plant for our Scope 1 and 2 emissions, which is in line with science-based targets and the Paris agreement. We're also in the process to uncover our Scope 3 emissions. As per 1st of November, we have our new chief of people for the group Bart onboard. Bart has a long background in leadership development in multinational companies, and at Vimian, he will focus on leadership development as well as overall employee experience. We're pleased to have him on board, and we're really thrilled to embark on this new journey on people development with Bart. With that, I'd like to hand over to Carl-Johan for more details on the financials.

[Carl Johan Boudrie, executive]

Thank you, Fredrik, one slide more, please. Thank you. The good revenue growth supported the adjusted EBITDA increase of 6% in the quarter to EUR 18.3 million, and the operating profit improved from $8.8 million to $9.9 million, an increase of 12% equal to an operating profit margin of 12.4%. The operating profit includes items affecting comparability, which decreased to $2.6 million primarily due to lower acquisition-related costs. The main items affecting comparability are $1.3 million of acquisition-related costs in specialty pharma and $0.7 million in MedTech, primarily related to legal costs for the U.S. litigation.Net financial items amounted to minus $0.1 million. This consists of 3 main parts being financing costs of $5.1 million with an average interest rate of 6.3% during the quarter. Second element being contingent considerations where the quarterly discounting impact is offset by positive impact from probability adjustments, giving a net impact of minus $0.4 million. And finally, the financial items benefits from the $5.4 million positive impact from exchange rates.The tax expense for the quarter amounted to $2.2 million. Tax expense as a percentage of pretax profit amounted to 23% in the quarter. Year-to-date, tax expense is $9.5 million. As a reminder, the high tax expense year-to-date reflects a taxable result higher than the net result due to tax losses without recognition of deferred tax assets and nondeductible expenses, mainly non-realized currency impact recognized in the financial items and impairments of contingent liabilities.Profit for the quarter improved to $7.6 million. Earnings per share before and after dilution amounted to EUR 0.02. Next slide, please. Cash flow from operating activities amounted to $11.6 million in the quarter. This is an improvement from both the same quarter last year as well as the second quarter of this year. Our efforts to improve working capital have started to yield some effects with the reduction of inventory in MedTech, although to some extent offset in the third quarter of this year by higher stock levels in fast-growing U.S. Specialized Nutrition in specialty pharma.For the first 9 months, the reported cash flow from operating activities includes the litigation payment as per the settlement reach with DePuy Synthes on April 4. Net working capital amounted to $7.0 million, equal to 24% of revenue. Accounts receivables continues to decline as annual ordering program customers pay their monthly installments. But the net working capital in the quarter was unfavorably impacted by currency movements in the period. Cash and cash equivalents amounted to $49.3 million at the end of the period compared to $50.8 million at the end of the previous quarter.At the end of the period, net debt amounted to $287.9 million versus $296.1 million as of June 30 this year. This results in a leverage net debt to last 12 months pro forma EBITDA of 3.0, an improvement from 3.1 at the end of the second quarter. The reported net debt is not impacted by the settlement in the U.S. patent dispute as we have a contractual indemnification protection through the purchase agreement from the acquisition of [indiscernible]. Therefore, the amount of the receivable and the indemnification is deducted from net debt.During the quarter, the receivable in the balance sheet have been reclassified to noncurrent receivables as the legal procedures takes more time as we have not yet received a date for the main hearing. It is positive that we start to see effect on operating cash flow and leverage from our efforts. We'll continue to drive improvements in cash flow and specifically net working capital going forward to support organic deleveraging.If we move to the next slide and talk about current trading. The first 9 months of the year have shown strong organic growth with positive development in all segments. In October, the momentum continues with high single-digit growth and the reacceleration of sales in MedTech as the pull-forward effect from the annual order program [indiscernible]. The animal health market has proven to be resilient, but as the global economy and macroeconomic outlook are still uncertain, we continue to monitor demand very closely. Overall, we are positive about the development in our business and remain committed to drive margin expansion in the coming quarters, although expecting the mix effect from strong growth in U.S. Specialized Nutrition and effect of investments to prevail for the rest of the year.The process to retrieve compensation and the indemnification protection in U.S. patent dispute is ongoing with filings to the court, and we are naturally working hard to finalize this. Now I would like to hand over to Magnus, who will give us a deep dive on our largest segment, specialty pharma.

[Unknown Executive]

Thank you, Carl-Johan. And next slide, please. Over the past few years, [indiscernible] has transformed along a number of dimensions. Since been an IPO, we have doubled the size of the business and [indiscernible] today around the same size as Vimian was at the time of IPO, have accelerated organic growth in a challenging macroeconomic climate, thanks to strong innovation and R&D, coupled with successful commercial initiatives. We have entered a new therapeutic area, customized special pharmaceuticals and significantly strengthened our therapeutic area of Specialized Nutrition in the U.S. Today, we run a business with 4 therapeutic areas, targeting attractive niches in the animal health market with unmet medical needs.At the time of the IPO, we had around 8% of sales in Europe. Today, we have a well-diversified geographic presence and exposure to the largest and health markets in the world with 40% of sales in North America, 50% in Europe and 10% in Asia Pacific/Rest of world. Since the bean IPO, we have accelerated our investments in innovation and today have a broader and deeper pipeline of new products, covering life cycle management, innovative R&D and disruptive R&D, providing a runway on new product launches going forward.We started our journey in the veterinary channel. Over the past 2 years, we have diversified our channel presence, leveraging our veterinary legacy. It is important for us to be where vets are. It's important for us to be where pet parents are to ensure access to our offering. We have since the Vimian IPO stepped up our digital presence. Today, 20% to 25% of our revenue comes from our direct veterinary and direct pet parent e-commerce business, providing convenience to our clients and efficiency to Nextmune as our online ordering platform is integrated with our ERP systems.Our culture is close to our hearts. Our culture is characterized by [indiscernible] mentality and our founders mentality. We run a business with deep accountability and deep empowerment to our next new cantonization and corporate functions. Next page. We enjoy each market leadership across 4 tactic areas. Our offering covers around 1,000 key SKUs across 7 core brands. Our business is protected by more than 45 patent families covering diagnostics, prescription and nonprescription products. We have direct business relationships with over 15,000 vets. We have our own Nextmune go-to-market organizations in 12 countries with field sales reps and inside sales reps divided into prescription and on prescription.And all in all, our products are sold in over 75 countries worldwide. We have a roughly 50-50 split of sales between in-house production and outsourced production. Our in-house production is USDA licensed, FDA-registered and CGMP compliant. We are today around 450 Nextmunians in the business with a healthy 50-50 split among female and male managers. Next page, in Energy, especially pharmaceuticals, we offer a tailored name patient pharmaceuticals and diagnostics. These products require prescription and are sold in a veterinary channel only, we produce almost 100% of the Circa 500 core SKUs in-house.Our flagship plants are PACs, the only commercial molecular [indiscernible] or to veteran, the only approved [indiscernible] in Europe; and BOVA as the umbrella brand for specialty medicine such as the patented injectable [indiscernible] for gastritis. In dermatology and Specialized Nutrition, we offer pharmaceuticals and OTC for veterinary pet specialty retail, retail and online. Our dermatology business covers topical solutions to treat bacterial infections. Bacteria infections are a typical second eye condition for allergy patients. So the gels, creams and air drops that we offer are synergistic for allergy sufferers.Our key brands are ICF, reactive and chemical-based active ingredients and Dermacent, proactive and natural-based active ingredients. Our Specialized Nutrition business covers food supplements, for example, to support liver, kidney and dental. Monoprotein diets are also offered, which are synergistic for food allergy patients who can only tolerate certain proteins. In dermatology and Specialized Nutrition, we provide prescription products and nonprescription products prescribed events, so-called RX-OTC in the veterinary channel and OTC in the B2C retail channel.Our products are commercialized for our 12 cantonizations divided into prescription and nonprescription sales teams. Next page, our growth strategy is centered around 4 pillars across the 4 therapeutic areas. Capture white space catering to the unmet medical needs among dogs, cats and horses and educating the market in the latest valent treatments, one; two, drive innovation and product development to make treatment solutions more efficacious, more affordable for vets and pet parents. Three, ensure that all products are available in all key geographies and channels. and four, unlock best practices between our counteractions and ensure efficiencies both in contrition and corporates.We may also use M&A selectively over time to support these 4 pillars. Next page, we see significant potential across the 4 therapeutic areas. Allergy is the most common quantifies among pets. It is underdiagnosed, undertreated. And since this chronic doesn't go away, we can be relevant throughout the lifespan of the patient, providing recurring revenue streams. Our strategic focus going forward, leveraging our global leadership will be to drive innovation and education to untapped white space, 10% of all scripts in the U.S. are customized, especially Pharmaceuticals. We are a market leader outside of the U.S., where penetration is only a few percent.We see no reason for the markets which we are present not to converge to the penetration levels of the U.S. Also strategic focus going forward will be on developing new high-quality medicine driving wallet chair among existing accounts and new accounts. In dermatology, we're leveraging a trend to substitute antibiotics for new innovative options to treat topical bacterial infections. We will leverage our brand equity and shift to go direct in big 5 and access new channels in the European markets. In Specialized Nutrition, we have tailwind from increased focus on preventive care.We are particularly addressing the USD 600 million market for dental treats. Our strategic focus going forward will be on developing new products, increase wallet share among existing accounts and new accounts and online B2C. Next page. We are enjoying good momentum, growing on an organic basis at 2x the industry. Hence, we are taking market share in an industry that is benefiting from structural growth trends that are proved resilient in good times and bad times.We see significant potential across our 4 therapeutic areas. We have put in place a multi-tranche growth strategy to untap this potential, coupled with operational leverage from the infrastructure in the business. All in all, I believe we have a strong platform for profitable cash-generative growth in Nextmunes. Thank you.

[Fredrik Ullman, executive]

Thank you, Magnus, for the insights into Nextmunes, a truly exciting journey with significant potential ahead of us. Please move to the next slide. So to summarize the quarter. So after 2 solid reports in '23, we today delivered continued strong organic growth with improved net profit and operational cash flow. The margin is lower than in Q3 last year, and we're working actively to achieve margin expansion over the coming year.Looking at the full 9 months period, we are delivering strong results versus peers with 13% organic growth, coupled with 17% adjusted EBITDA growth, significant increase in net profit and positive cash flow allowing us to organically reduce our leverage. Looking ahead, we continuously develop our M&A pipeline. But near term, our main focus remains on organic growth, cash flow and margins, and we look forward to launching the great technologies we are developing in all our verticals. Now this will be the last quarter for me to present the quarterly results. I would really like to thank all of you for the good cooperation and the support over the past years. And with that, I would like to open up for Q&A.

[Operator]

[Operator Instructions] The next question comes from Kristofer Liljeberg from Carnegie. Please go ahead.

[Kristofer Liljeberg-Svensson, analyst]

Thank you, it's Kristofer from Carnegie. Two questions. First, on the annual order program in MedTech. For me, it seems like the effect here , the negative effect is bigger in the third quarter than in the second quarter. That's not what we saw last year. So maybe you could explain a little bit about that and where you have had any customers returning products here in the third quarter? Second question regarding margin improvements and your visibility, given that there is a negative margin trend in the 2 largest businesses. And at the same time, I think you said that during the presentation that we shouldn't expect diagnostic margin will improve further from the current level as you would invest in growth. So given the comments you made, do you expect EBIT margin or EBITDA margin to improve in the fourth quarter? And how should we think about margins going into 2024?

[Fredrik Ullman, executive]

Hi Kristofer, thank you and relevant questions. So let me give you some more color maybe to the margins where an AOP program, I would say that's part of that explanation. So if we start with your question around AOP and as we have communicated, our AOP in Q1 was exceptionally strong, and we did see some pull-in effects from the second and the third quarter of this year. If we take MedTech margins in the third quarter of this year, we did have slightly better-than-expected performance in the second quarter in MedTech, which, to some extent, made us optimistic about the third quarter as well because in the second quarter, we were able to a larger extent to offset the negative effects, you could say, from pull forward than we were able to do in the third quarter.So short, I would say, similar effects pull forward wise in the third quarter as we saw in the second quarter. And on your questions on the returns, no, we have not seen any significant numbers on returns in the third quarter. What did impact us negatively to some extent, in the third quarter as well for MedTech is we did have a few back orders that we couldn't deliver in especially power tools that impacted sales and margins a bit negatively in the quarter. I would say pull forward is to a large extent as we expected in the third quarter as well.

[Kristofer Liljeberg-Svensson, analyst]

Sorry, your commentary on second quarter being better than you expected. Was that other markets outside the U.S. that compensated in the second quarter that didn't do so here in the third quarter?

[Fredrik Ullman, executive]

Exactly. We did see a very strong performance in markets outside of North America in the second quarter that compensated to a large extent from, you could say, the pull-forward effect of the annual order program.

[Kristofer Liljeberg-Svensson, analyst]

Okay. That makes sense. Thank you.

[Fredrik Ullman, executive]

So continuing on sort of the margin question, and as we said, so margin-wise, in the third quarter, we did see a negative effect from, as I said, ManTech and secondly, from specialty pharma. Looking forward for the fourth quarter and also maybe the quarters to come, if we start with the fourth quarter, as I said, we do see an acceleration of sales in MedTech in October, which should trigger margin recovery from where we stand today. In October, also in MedTech, we saw just as an overall business, high single-digit growth in October.In Specialty Pharma, we see room for improvement sequentially, but there will be some continued effect from mix with the fast growth in U.S. Specialized Nutrition. And it will take some time, which did affect us in the third quarter, and we do expect to see some effect in the fourth quarter to recover the U.S. allergy margin fully with the launch of the new test and that sort of to materialize in stronger sales growth. Having that said, we're not satisfied with the margins that we have in the third quarter, although as mentioned, we have certain effects in the specialty MedTech and Specialty Pharma, which can explain the difference.But we are not satisfied where we are, and we are taking measures to make sure that we drive margin expansion in the coming quarters while for Q4 we expect sequential margin improvement from the levels in Q3. And our ambition is to also drive year-over-year margin expansion in the fourth quarter. But as mentioned, we do have the U.S. Specialized Nutrition and U.S. allergy situation that will prevail in the fourth quarter as well. So sorry for a long answer, Kristofer, but trying to give you some [indiscernible].

[Kristofer Liljeberg-Svensson, analyst]

Yes, that's very good, very helpful. Thank you for that.

[Operator]

The next question comes from Adela Dashian from Jefferies. Please go ahead.

[Adela Dashian, analyst]

Good morning, sticking on with the margin question earlier, and you did mention throughout the presentation your efficiency initiatives, could you maybe dive into more specifically what it is exactly that going to drive margins going forward as a result of these initiatives and in which segments they are the most relevant?

[Carl Johan Boudrie, executive]

Good morning Adela and thank you. I can start. And then as we have Magnus here, he can give you some more color when it comes to specialty pharma. In general, as before, we see a continued good momentum in the business, and we see potential over time to drive more sales over the same cost base. In MedTech, as I said, we do see sales reaccelerating and sort of support with stronger sales of the same cost base to improve margins. Then I would say, in general, is making sure that we are as efficient and as effective we can be and being cost-conscious, ensuring that we invest in the right areas.And I would like to hand over to Magnus because Specialty Pharma, I would say, is a perfect example of exactly those type of activities. So Magnus can give you some more color to Adela Dell when it comes to specialty pharma.

[Unknown Executive]

Thank you, Carl-Johan. And just to take one step back, I just wanted to reemphasize that the margin decline that we see in Q3, almost 70% of that impact comes from revenue mix of the strong growth from U.S. Patient Nutrition. Now yes, we are exploring efficiencies in next new, both COGS and OpEx. This is the type of exercise where many small streams will make up the river. We're going through all key line items in all entities, and we have identified a long list from which we will prioritize a short list. Just to give you an example, we attend almost one Congress per week. And one metric of a successful congress is the number of leads generated from a Congress, we will deprioritize congresses that don't generate the leads that we expect and prioritize congress that generates leads that we expect, just give one example. We are also looking at efficiencies in production and in our laboratory operations in the U.S. and in Europe.

[Fredrik Ullman, executive]

Now Adela, Fredrik here. So just on the other 3 segments, in MedTech, for instance, again, here, I think it's important to look at last 12 months or last 9 months. If you look at the last 9 months, you see a margin expansion of 100 basis points in MedTech. And so I think that's more representative of how it's going. That said, we continuously look at make or buy decisions to see how we can improve COGS. And of course, we also look at making sure that we are very diligent in any OpEx investments in growth.If we look at diagnostics, we also see here very strong margin expansion. Here, again, we have, as I mentioned before, we have a couple of moonshots in terms of innovation platforms that we are developing. And the first one in parasitology, where we actually see very strong momentum, very, very strong customer feedback. And of course, we want to take that opportunity and launch that in compared animals next year. The other one is a bit further out, but not very further out. So that's where we think that it makes sense for us to invest there and not focus on margin expansion in diagnostics, but we've seen in the core, we've seen margin expansion.And last but not least, in Veterinary Services, we've seen very strong margin expansion again this quarter despite our investment in the new digital platform, Highland, which we are preparing to launch in more geographies in the coming quarters. So I hope that helps you at least to give some color as to what we are looking at.

[Adela Dashian, analyst]

That's great color. And then also on the investments, specifically as it relates to expanding or strengthening your sales force, do you feel like you're satisfied now with those initiatives? Or is there still some more investments there to go?

[Fredrik Ullman, executive]

Of course, I mean, as we grow in new geographies and we expand our product portfolio, it's not that we're going to stop investing in the business in the future. We still see a lot of potential to continue to grow our positions, as I said before, so it's not that we're going to stop investing. But of course, it's a matter of balancing how much you invest in OpEx versus how much you get on the bottom line, and that's the balance we need to strike to show at least stable or improving margins.

[Adela Dashian, analyst]

Of course. That makes sense. And then also on your debt level, which you're continuously improving, kind of in what direction should we see as the organic deleverage improving in Q4 and onwards of next year, should we see the same type of pace that we've seen throughout this year? Yes, maybe some more color on that as well would be great.

[Fredrik Ullman, executive]

Yes. So Adela, and if we start with saying our focus to continuously improve cash flow remains, and that's something that we have worked actively with during the year and that we will continue to work actively with in all segments to improve and especially working capital. And we do expect to see continuous improvements going forward, and hence, the improved cash flow should drive organic deleveraging. So going forward, we expect to see continued improving cash flow and organic deleveraging.And just a reminder that in the first quarter, of course, with the annual order program in MedTech, there is a seasonality in working capital for MedTech as we build up receivables in the first quarter in the annual order program.

[Operator]

The next question comes from Blanka Porkolab from Barclays, please go ahead.

[Blanka Porkolab, analyst]

Good morning and thank you for taking my question. I have got 2 and then just a follow-up. Could you talk about your appetite for M&A given your leverage and whether we should expect less from here? I guess what I'm trying to understand is how you're thinking about the midterm guidance that was given at the time of IPO of organic revenue growth of at least 15% and then the remaining to come from M&A and ApEx to get to at least 30% reported growth. So that's my first question. And then my second question is, how are you thinking about the trends across your different end markets into next year? And how are you thinking about pricing benefits that you can drive and the opportunity to offset wage growth? And then I've just got a follow-up on diagnostics, which we can cover off after?

[Fredrik Ullman, executive]

Thank you. So on the M&A side, we've haven't stopped our M&A efforts. We continuously look at M&A opportunities, of course, but they have to fill our criteria, be it sustainable growth in the long-term growth, no turnaround cases, and we have to do deals at the right price levels. And of course, with increased cost of capital, those price levels need to come down even further from where they used to be. And so I think we're a bit more cautious on that end. But again, we continuously look at it and want to be ready to do something if something great comes up. That said, our focus right now in this environment is to make sure we get the most out of what we own already and drive organic so it continues to drive organic growth and expand our margins and, of course, launch the innovation platforms that we have in the pipeline that are truly exciting as well. Can you just repeat your second question, sorry, how I see the markets?

[Blanka Porkolab, analyst]

Yes, exactly. So how are you thinking about the trends across your different end markets into next year? And also how are you thinking about driving pricing benefits and the opportunity to offset any wage growth?

[Fredrik Ullman, executive]

Yes. So in terms, it's hard to predict the future. I mean every quarter feels like something new that it's game-changing happens macro-economically. But this market has shown very strong resilience to macroeconomic variations in the past. It hasn't been unaffected. But looking 20 years back, you see a very sometimes lower growth, but still growth. And we expect to continue to see growth in this market. But my guess is only as good as yours as to what the world will look like in a year from now. As we entered Q4, we see high single-digit growth in October, and we hope that, that's going to continue in the year to come.In terms of pricing power, which you're pointing to, I think in the last 18 months or 24 months, we have been able to more than push for the cost increases to the customers. And we have seen increased stable or increase in gross profit margins. And so we have actually seen more pricing increase than COGS and salary inflation within Vimian, if you look on a like-for-like basis. And of course, we have to be careful on price increases as some customers might have tougher situations. So that would be a balance we need to strike.

[Blanka Porkolab, analyst]

Okay. Great. And then just a follow-up on diagnostics. You mentioned that part of the cost savings will be reinvested into growth initiatives and that you do not expect margin expansion from here. Is that sequentially into Q4 from Q3 or also into next year?

[Fredrik Ullman, executive]

No, I said we do see very interesting opportunities with new technology in especially companion animal diagnostics that we are investing into. So to your question, we do not foresee a sequential and sort of coming quarters margin expansion in diagnostics as we'll invest in leveraging our new exciting technology and especially Companion Animal Diagnostics.

[Operator]

[Operator Instructions] The next question comes from Rickard Anderkrans from Handelsbanken. Please go ahead.

[Rickard Anderkrans, analyst]

Good morning and thanks for taking my questions. So first one, getting back to the sort of structural margin potential you see in the mid to longer term in conjunction with the IPO, you hinted at potentially achieving a 35% adjusted EBITDA margin in sort of a midterm perspective, but there's obviously been some structural changes to the mix and the business since the IPO. So maybe if you could elaborate a bit on how you're thinking in terms of the structural margin potential in the sort of midterm perspective from these levels?

[Fredrik Ullman, executive]

Yes, morning, Rickard. I think from that perspective and still our sort of long-term financial targets are unchanged. And yes, there are some, call it, mix effects or structural changes that impacted the margin through this quarter and throughout this year. As discussed before, we do see opportunities to make sure, one, so taking out a few efficiencies in the business, improving margins and especially we see continued good momentum in the business, where continued growth over the same cost base or at least a cost base that's growing significantly at a lower pace than our revenue and our gross profit will drive improving margins over time and in the coming quarters and in the coming years.So we are confident that we can deliver improving and growing margins, as I said, over the coming quarters, over the coming years, and that's what we will focus on making sure that, that number will be, you could say, as good as possible, but still investing in building dining and expanding and strengthening our market position mid-to-long term as well.

[Rickard Anderkrans, analyst]

Okay. Perfect. So your internal assumption is still that you'll be able to achieve 35%, let's say, in a 5-year or so time horizon?

[Fredrik Ullman, executive]

I said our long-term financial targets are not changed, and we are committed to making sure that we drive margin improvements and margin expansions. Then on the exact time frame, it's difficult to say. But as I said, we're committed to making sure that we continuously will improve our margins.

[Rickard Anderkrans, analyst]

All right. Perfect. So getting on to some market dynamics, we heard some peer commentary out there around lower foot traffic to vet clinics. Is that anything you've been seeing any incremental weakness there? And could you perhaps also remind us of the group exposure to the veterinary sales channel, just to get a sense of the sort of sales footprint there? That would be very helpful.

[Fredrik Ullman, executive]

Yes. Yes, we've read the same comments as you have read, have we seen it in our numbers, we haven't seen it yet. Could we see it Yes, I mean I think we at least have to have plan for scenarios where we might see lower growth, not negative growth, but lower growth. And that's what we harvest 4 verticals to make sure we have backup plans. Sorry, your second question was?

[Rickard Anderkrans, analyst]

Just the group sales exposure to the [indiscernible]?

[Fredrik Ullman, executive]

Yes, sorry. That is, so MedTech is 100% vet channel. Veterinary Services is 100% vet channel. Specialty Pharmaceuticals is 65% vet channel and Diagnostics is 95% lab channel, but it's really life is a different market. It's only 5% that is more driven by the vets, so I would say take it or leave it, 75% to 80% is vet channel related for the whole group.

[Rickard Anderkrans, analyst]

Very clear. And just to put a fine point on the previous question around pricing. So how should we think about the group impact on sales in terms of price increases for '23? And it sounds like we should expect a lower level than for 2024?

[Carl Johan Boudrie, executive]

You mean a low level of 24% compared to '23. As Fredrik said, and of course, what we're starting to see now at least, not only in our business, a general sort of macro-economical outlook, we do see inflation is starting to come down, while we expect, of course, price increases to maybe be slightly less in 2024 compared to 2023 because, of course, we do not see the same pressure on our end, maybe as we did 9 to 12 months ago.But as Fredrik said, we definitely believe that we will continue to have a strong position to push forward the price increases that we get from our suppliers and to offset any inflationary impact that we have on wages and other costs back to the previous questions. But to cash, yes, pricing will be part of what we expect in terms of revenue growth for next year. But it's likely to be less than what we've seen in 2023 given that inflation is coming down.

[Rickard Anderkrans, analyst]

Okay. But if the price increase for '23, should we think sort of 7%, 8% level impact or just to get a sense of the tailwind this year?

[Carl Johan Boudrie, executive]

No, I wouldn't say that the price increases have, if we look at overall business have supported our growth to that high extent. Typically, we are looking around maybe 5% price increase. Of course, differing a little bit on geographies on segments. But if you take an average, it's around that 5 to 6 percentage mark.

[Rickard Anderkrans, analyst]

Very clear. And just a final one on Nextmune, Magnus a very helpful deep dive, so a question on the 65 new product launches to date. Does launch activity add a meaningful margin headwind in the short term as you sort of market and roll out the product? And maybe if you could comment on the gross margin profile of the newly launched product sort of roughly compared to the existing mix, just so we can get a sense of the sort of accretiveness on new launches in the margin profile?

[Unknown Executive]

Sure. Thank you. I mean if we look at gross margins across our [indiscernible] areas and also with respect to these 20 trusts that have been launched. And generally, we have 70% to 80% gross margins on our products. In certain products, we have 85 and even a bit more. And we get that to contribute to bottom line from day 1. Now clearly, we have made certain investments in our sales forces to ensure that we can get full potential from the 65 plus that we have launched this year. So there's clearly a positive gross margin contribution from new products. That said, in terms of OpEx, we do invest in commercial operations to ensure that we get full potential.

[Rickard Anderkrans, analyst]

Very clear. That's all for me. Thanks for taking my questions.

[Unknown Executive]

Thank you Rickard.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Fredrik Ullman, executive]

Yes, so no more questions. Thank you very much, everyone, for attending the call today. Thank you, Magnus, for joining us, and thank you for the last few years. And all the best to everyone on the call. Have a great day, and thanks. Bye-bye.