Medpace(Pending:MEDP) is one of the world’s leading clinical contract research organizations, or CROs, by revenue, solely focused on providing scientifically driven clinical development Phase I-IV services to small- and mid-sized biopharmaceutical companies. Medpace appears to be focused on the right space as companies of that size are the primary centers of innovation, developing new, cutting-edge therapies for niche or previously untreatable diseases, which frequently require sophisticated clinical trials. Contract research organizations have evolved from being a provider of non-core services to becoming an integral part of the drug discovery and development process according to Sapna Rani, senior research analyst at Clincal Research.
Small- and mid-sized pharma companies have limited ability to conduct global clinical trials independently, and as a result, they typically seek a strategic partner that can provide the therapeutic experience and infrastructure required to deliver timely completion of complex, global clinical trials. Based on industry sources, including analyst reports and management’s knowledge, outsourced development expenditures for these companies will grow at a CAGR of 10% from 2014 to 2019, outpacing the estimated overall biopharmaceutical market CAGR of 6%.
It is important to highlight that small and mid-sized drug manufacturers, who do not have the same legacy manufacturing assets as large pharma companies, are more likely to rely on contract manufacturers. From 2013 to 2016 YTD, the percentage of new drug approvals from small and mid sized biopharma sponsors has grown from 37% to 50%. These companies are more likely to outsource, with 65% of small and 45% of mid sized sponsors outsourcing manufacturing or API vs. only 22% for large pharma according to PharmSource. Medpace appears to be positioned in the right segment of a growing industry.
Growing CRO Penetration
Outsourcing penetration is the percentage of biopharmaceutical clinical development costs that are outsourced to CROs. Medpace estimates that approximately 52% of Phase I-IV clinical development expenditures were outsourced between 2014-2016. Driven by increased clinical trial complexity, the need for regulatory and therapeutic expertise and global access to patient populations, management expects outsourcing penetration will reach approximately 62% in 2019.
Evidence of the company’s growth and penetration can be seen in Medpace’s backlog, which increased +10.6% in 1Q16 (y/y) and has been growing at double-digit rates in the past 5 years. MEDP backlog as of March 31, 2016 and March 31, 2015 was approximately $448.1 and $405.9 million, respectively
Medpace competes primarily against other full-service CROs as well as services provided by in-house R&D departments of biopharmaceutical companies, universities and teaching hospitals. The Company major CRO competitors include Covance Inc., ICON plc (NASDAQ:ICLR), INC Research Holdings, Inc.(NASDAQ:INCR), inVentiv Health, Inc., PAREXEL International Corporation (NASDAQ:PRXL), Pharmaceutical Product Development, LLC, PRA Health Sciences (NASDAQ:PRAH), Inc., Quintiles (NYSE:Q) and numerous specialty and regional CROs.
Growth rates appear solid. The company reported +19% (y/y) revenue growth on the fiscal quarter ended on March 31, 2016 and has been growing revenues at +10.4% and +19.5% for FY15 and FY14 respectively. MEDP has a proven track record of strong organic growth and achieved significant revenue and Adjusted
EBITDA growth and robust Free Cash Flow (FCF) over the past several years. Last year (FY15), MEDP reported FCF and EBITDA growth at +10.88% and +24.52% respectively.
The company is exposed to overall funding trends in the biotech industry, which are volatile. There has been a recent slowdown in funding in the biotechnology industry. If small- and mid-sized biotechnology companies become less able to access capital in the future, MEDP may see a decrease in backlog conversion to net service revenue and net new business awards due to project delays or cancellations. These type of companies have contributed materially to the Company’s historical net service revenue. If they cannot commit the same or a greater level of capital to Medpace services going forward, results of operations may suffer
I think it is essential to just focus on Free Cash Flow and estimating how Medpace compares to its peers on this key metric.
First of all, MEDP generated 76m, 68m and 93m of FCF in FY15, FY14 and FY13 respectively. The company has exhibited a very stable level of FCF generation and margins over the years.
In this table we can see that MEDP appears inexpensive compared to peers:
|Free Cash Flow (LTM)||161.7m||38m||130m||158m||469m||83m|
|Enterprise Value (EV)||4.29b||6.42b||2.83b||3.91b||10.8b||1.13b|
|Free Cash Flow Yield||3.76%||0.59%||4.59%||4.04%||4.34%||7.34%|
Medpace currently trades at 7.34% FCF yield compared to 3.46% for the peer group. Assuming a “fair” FCF yield target of ~5.5% (which is still higher or cheaper than peers) it represents a potential +47% upside for the stock.
Medpace shares appear inexpensive on a FCF yield basis and the company offers several interesting items to fundamental investors: proven and experienced management team, high and stable margins and strong overall growth in terms of revenue, EBITDA and FCF. I also feel comfortable with industry dynamics and potential penetration growth going forward.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MEDP over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Unique Finance). I have no business relationship with any company whose stock is mentioned in this article.