I have mentioned this company a few times in my previous posts.
There’s a lot to like for MEDP. MEDP is a contract research organization [CRO] that provides clinical development services to the biotechnology, pharmaceutical, and medical device segments of the market in the Asian, European and North American markets. I feel that it is an attractive investment given its growth potential. I take a more in depth look into this company.
Company Overview
Medpace Holdings Inc (NASDAQ: MEDP) is a global contract research organization (CRO) that provides a range of services to the pharmaceutical, biotechnology, and medical device industries. Founded in 1992, the company has a team of experienced professionals who are dedicated to helping clients bring new medical treatments to market.
Medpace’s services include clinical trial management, data management, biostatistics, medical writing, regulatory affairs, and more. The company’s team of experts works closely with clients to design and execute clinical trials that are efficient, cost-effective, and compliant with regulatory standards.
Medpace has a strong track record in the CRO industry, with a reputation for delivering high-quality services and successful outcomes for its clients. As the demand for contract research services continues to grow, the company is well positioned to continue its success in the market.
Contract Research Organization (CRO)
The contract research organization (CRO) industry is a sector of the healthcare industry that provides a range of services to pharmaceutical, biotechnology, and medical device companies. These services include conducting clinical trials, managing data, providing biostatistics and medical writing support, and assisting with regulatory affairs.
CROs are typically hired by companies to help them develop new medical treatments or devices and bring them to market. They offer a range of services to support the clinical development process, including designing and implementing clinical trials, managing data, and preparing regulatory submissions. CROs offer a range of benefits to clients, including cost-effective solutions, expertise in regulatory affairs, and access to a global network of partners. As a result, the industry is expected to continue to grow in the coming years.
The contract research organization (CRO) industry has experienced significant growth in recent years. According to a report by the market research firm MarketsandMarkets, the global CRO market was valued at $45.2 billion in 2019 and is expected to reach $70.5 billion by 2024, at a compound annual growth rate (CAGR) of 9.6% during the forecast period.
Several factors have contributed to the growth of the CRO industry. One major factor is the increasing demand for clinical research services as more and more pharmaceutical, biotechnology, and medical device companies seek to bring new treatments to market. Additionally, the outsourcing of clinical trials to CROs has become more common as companies look to reduce costs and increase efficiency.
In addition to the overall growth of the CRO industry, there has also been an increase in the number of CROs operating in the market. According to a report by Research and Markets, the number of CROs worldwide is expected to reach over 2,600 by 2023.
Overall, the CRO industry is expected to continue to grow in the coming years, driven by increasing demand for clinical research services and the outsourcing of clinical trials by pharmaceutical, biotechnology, and medical device companies.
Business Process
Here is a general overview of MEDP’s business process.
Step one is a request for proposal (RFP). RFP is issued by sponsoring a company of a clinical trial and multiple CROs respond with formal proposals to perform the work.
Step two, the winning CRO is given an award notice, MEDP CEO Troendle calls this an initial award notification (not an official term).
Step three, the company-specific criteria are applied, and eventually the award may be recognized as a backlog booking.
The difference between step two and step three is that in step two, CROs generally require verification of client funding, execution of a contract, etc, prior to recognition of an award into backlog. They also apply subjective and qualitative criteria that may delay recognition, but all are part of an award, such as concern about possible cancellation risk.
Financials
Medpace has seen consistent growth over the years. They reported their highest ever revenue for Sep 22 at $383.7mil. They beat analysts expectations by $26.53M.
According to the company’s most recent earnings report, Medpace Holdings Inc had revenue of $1,142.4 million in 2021, an increase of 23.3% compared to the same period in the previous year. The company’s net income for 2021 was $181.8 million, or $5.06 per diluted share, compared to $145.4 million, or $4.07 per diluted share, in 2020.
Medpace Holdings Inc has a strong financial track record, with a history of steady revenue growth and profitability. The company has a diversified revenue stream, with a range of services that it provides to its clients. In addition, the company has a strong balance sheet, with a net leverage ratio is approximately 0.4 times last 12 months EBITDA. They also have about $31mil cash and cash equivalents.
Medpace Holdings Inc had net cash provided by operating activities of $263.3 million in 2021. This represents the cash generated from the company’s operations during the period.
Earnings Guidance
After a stellar 3Q22, MEDP raised guidance for their full year results. Full year 2022 total revenue is now expected in the range of $1.44 billion to $1.46 billion, representing growth of 26.1% to 27.8% over 2021 total revenue of $1.142 billion. Our 2022 EBITDA is now expected in the range of $302 million to $310 million, representing growth of 35.4% to 39% compared to EBITDA of $223.1 million in 2021. Net income is expected to come in the range of $232 million to $236 million.
Guidance for 2023 includes revenue in the range of $1.68 billion to $1.74 billion. This translates to growth of about 17%. EBITDA is expected to be in the range of $325 million to $350 million.
The next part is the highlight.
Insider Share Purchase
As of June 30, 2022, the Company has completed all authorized share repurchases under the repurchase program and authorized another $500m in Oct 2022. During the first half of 2022, the Company repurchased approximately 5.4 million shares for a total of $800.7 million.
In addition, there is a total of $82m worth of insider purchases in 3Q 2022.
The huge buyback and insider activity shows that management is confident in their future success and above industry organic revenue growth over the longer term.
Valuation Ratios
Overall, while Medpace Holdings Inc may be considered expensive on a valuation perspective, its growth prospects and potential for future value creation justify its current valuation. Potential investors should carefully consider the company’s strengths and growth potential when evaluating it as an investment opportunity.
Risk – Funding Slowdown
The one major risk that MEDP faces is the slowdown in biotech funding. The longer the slowdown in funding, the greater the impact it will have on them. Given the lag between bookings and revenue, it will affect both 2023 and 2024 guidance if we see a long disruption.
MEDP has baked in some of this slowdown in their guidance by being conservative.
I mean, we keep expecting that there’s going to be a pretty broad based slowdown in starts and also seek some cancellations, uptick in cancellations that are meaningful, given the funding environment and given the feedback we’ve gotten from clients and what we’re seeing. But we’ve been to work around it largely to date. We do expect that to yet hit us at some point. If it doesn’t, there’s upside in our guidance. If it does, hopefully, we’re not below where we’ve come out on our guidance. You can’t — there’s nothing we can do about a very broad based substantial cancellations situation. We don’t anticipate that. But I do think we’ve put enough conservatism into the guidance that the slowdown we’re kind of expecting will allow us to achieve within our guidance range.
Medpace Holdings, Inc. (MEDP) Q3 2022 Earnings Call Transcript
In Q2 2022, MEDP informed that there is a drop in initial award notifications but in Q3 22, it recovered back to the average levels. Therefore, I will continue to monitor if there will be a broadbased slowdown in the the funding.
Yes. I think it’s sustainable. We didn’t really understand why it dropped. We thought it was the beginning of broad based slowdown, and we have not seen that yet. It did come back and the numbers were consistent with prior quarters, substantially up from Q2.
Medpace Holdings, Inc. (MEDP) Q3 2022 Earnings Call Transcript
Comments on Funding Environment by Peers
According to MEDP’s peers, there is no drastic slowdown in the funding environment. This bodes well for MEDP and it also reinforces the fact that Q2 22’s drop in initial awards notifications is just a blip.
But we are seeing good signs and good companies getting funding and getting an ability to move their projects forward and whether it be in the private markets or in the public markets for that matter from the follow-ons. They seem to be able to get the money they need. So we’re not certainly not seeing in the clinical space, an increase in the cancellation rate around these smaller – that’s where your question is directed. And so overall, as I said, more of the same.
ICON Public Limited Company (ICLR) Q3 2022 Earnings Call Transcript
Industry clinical trials starts continue to trend ahead of last year, rising almost 7% year-to-date. The pipeline of active early stage and late stage molecules are both up 8% from 2019 pre-pandemic levels. EBP funding, which has been a lingering concern since the beginning of the year when one of our smaller competitors raised alarms. EBP funding improved in fact, in the quarter, according to Bio World, third quarter funding was $18.7 billion, the highest of any quarter this year. Year to date, funding is running at about a $60 billion annual rate, which exceeds the average of the last five years pre-COVID.
IQVIA Holdings (IQV) Q3 2022 Earnings Call Transcript
So we’re now 11 months into the year. And every quarter, we have seen the DSA backlog increase sequentially and pretty substantially year-over-year. So we really haven’t seen any slowdown on the DSA backlog that would point to any adjustments or anything being impacted by the biotech funding dynamics, which every quarter I know you all asked about. So we feel good, as Jim said, that we have a substantial portion of the backlog booked already for 2023.
Charles River Laboratories International, Inc. (CRL) Q3 2022 Earnings Call Transcript
Conclusion
In conclusion, Medpace Holdings Inc is a highly attractive investment opportunity for potential investors. The company has a strong track record of performance and a proven ability to deliver value to its shareholders, as demonstrated by its steady revenue growth and profitability. Its financials are strong, with a diversified revenue stream and a strong balance sheet.
Medpace Holdings Inc has a significant growth runway ahead of it. The demand for contract research services is expected to continue to grow in the coming years, and the company is well positioned to capitalize on this trend. With its experienced team and strong partnerships with clients, Medpace Holdings Inc is well positioned to continue its success in the CRO industry.
In addition to its financial strengths, Medpace Holdings Inc has also demonstrated a commitment to maximizing shareholder value through its share repurchase program. The company recently completed a significant share repurchase program when its share price was at its lows, demonstrating its confidence in its future prospects. This, combined with the significant insider buying by company executives, is a positive sign for the company’s future growth.
Overall, while Medpace Holdings Inc may be considered expensive on a valuation perspective, its growth prospects and potential for future value creation justify its current valuation. Potential investors should carefully consider the company’s strengths and growth potential when evaluating it as an investment opportunity.
Cheers.
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