Medpace Investment Thesis

Medpace Investment Thesis: Medpace Holdings, Inc is a provider of clinical and medical development services, and offers a raft of solutions to companies involved in the biotech, pharmaceutical and medical devices industries.

The company offers value to its customers by letting them outsource their development costs to the firm, which, as a Contract Research Organization, has honed its expertise in areas such as bio-analytical services, imaging and clinical pharmacology.

Medpace is also a specialist in regulatory matters and new drug application processes, and can advise clients on how to navigate the clinical development process.

Does Medpace Have A Moat?

As a company that’s been around for almost 30 years, Medpace is already an established player in the clinical services space.

Its President and CEO, Dr. August Troendle, MD, started the company after a career with the FDA, and recognized an opportunity in the market for a company that could provide services and expertise to other therapeutic providers dealing with regulatory bodies.

Medpace might not be a standout example of a company with a unique business moat in the field – as there are plenty of rivals offering similar services – but the firm is innovating in light of the recent coronavirus pandemic to position itself as a leading Contract Research Organization in a world of increasingly virtualized clinical trials with limited patient access.

For instance, Medpace has just announced its collaboration with Washington DC-based consulting firm Greenleaf Health.

Greenleaf’s expertise lies in its special focus on keeping abreast of evolving FDA regulatory changes, and the firm boasts many former and senior FDA individuals as part of its team.

By partnering with Greenleaf, Medpace hopes to leverage this expertise to scale its own regulatory practice and so anticipates and capitalizes on any emerging FDA trends in the coming months and years. 

Are Medpace Revenues Growing?

There’s no doubt that Medpace is a very well-run company from a financial perspective.

The firm is debt-free, has an enviable $287 million of cash on its books, and still enjoys another $50 million of unused capacity in its revolving credit line.

The company is also utilizing its cash reserves to fund an ongoing share buy-back scheme, having just repurchased over 400,000 shares during the last quarter.

Revenue for Q4 2020 increased 13% on a quarter-by-quarter basis to $260 million, and was up 7.5% for the full year at $926 million. EBITDA grew at an even more impressive rate, gaining 46% on its equivalent 2019 numbers to $60 million.

Net income also increased on a quarterly and yearly basis, to $51 million and $145 million, respectively. The improved margins were largely down to employee and out-of-pocket expenses.

Trends in net revenue, net income and net income per diluted share all showed improvements over the last eight quarters. Q4 2020 figures for all three metrics were their highest in the last quarter, suggesting a streamlined business operation that is now yielding more profitable rewards.

Indeed, over the past two years, the worst quarter for each of those measurements came in Q1 2019, with a steady improvement sequentially up until the present.

Medpace’s Customer Base Is Diverse

Unlike many other companies in the services-related sector, Medpace does not rely on just a few clients for the majority of its revenue.

As such, the company has a distinctly diverse set of revenue streams, coming from a large number of customers and from a wide range of therapeutic areas. This protects the business from the downside shock of losing an important customer or related contract.

In fact, Medpace’s top-5 clients combined only account for 17% of its 2020 revenue, and its top-10 clients just 25%. Company analysis also shows that no single client represented more than 10% of its total revenue.

Medpace Management Quality Is Impressive

Perhaps Medpace’s greatest asset is its management team. From founding the company in 1992, August Troendle has remained at the helm of the operation, guiding the business from its early days through its IPO in 2016, to the multi-billion dollar enterprise it is today.

Dr. Troendle’s belief in the company and its mission is resolute. Not only has he remained in place as its CEO and principal visionary, but he has also demonstrated that he isn’t afraid to have his own skin in the game.

While currently owning around a 20% stake in the company, August also put up $20 million of his own money to fund the firm’s stock market float.

Furthermore, his commitment to the company’s ever-increasing fortunes is shown to by his policy of using company cash to buy back debt, strengthening the business in the long-term at the expense of short-term profit taking.

Medpace Burn Rate Is Uncertain

Backlog conversion could be a potential hump in the road for Medpace. During the company’s latest earnings call, its CFO & COO, Jesse Geiger, was a little cagey about committing to concrete quarterly numbers for expected burn rate figures.

When pushed, he did state that there was an up-tick in the fourth quarter, at around 17%, but that, depending on the specific business environment this year, this could drop a couple of percentage points to 16%.

Given that the company acknowledges in its Q1 Report that its operating results are sensitive to quarterly fluctuations, this might not be too worrying.

That said, the converse could also be true; the firm should already have a fairly good insight into these trends, and its lack of clarity on this point could be a red flag.

Again, further to the point about operating trends, as a provider of outsourced biotech services, the specific business environment does play a major role in Medpace’s fortunes.

Given that the company primarily contracts with firms seeking drug or device approval from the FDA, any downturn in the wider innovation space would hit the business hard.

Given the strategic partnership with Greenleaf mentioned earlier, it certainly appears that Medpace is nervous about the clinical trials situation going forward.

If virtualized and remote access trials become the norm, the impact on Medpace’s operations, and, ultimately, its revenues, is not so clear.

This kind of uncertainty could easily manifest in negative catalysts in the future, something that the company has hitherto so far avoided.

Medpace Investment Thesis: Final Thoughts

Medpace is in a strong financial position going into 2021. Its zero debt balance, excellent cash flow situation and share buy-back endeavors all point to a healthy company with good prospects.

But, as with almost all business enterprises today, the specter of the coronavirus pandemic has yet to abate. If the FDA decides to further step-up regulatory reforms in a post-COVID environment, the result will be uncertainty and potential downside for Medpace. But this is still a hypothetical scenario, and, as it is, Medpace remains an attractive buy in the biotech space.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.