MEDPACE - Fundamentally Different
A Great Way To Play AI In The Biotech and Pharma Industry
DISCLAIMER & DISCLOSURE: The author holds no position in Medpace at the date of publication but that may change. The views expressed are those of the author and may change without notice. The author has no duty or obligation to update this information. Some content is sourced from third parties believed to be reliable, but accuracy is not guaranteed. Forward-looking statements involve assumptions, risks, and uncertainties, meaning actual outcomes may differ from those envisaged in this analysis. Past performance is not indicative of future results. All investments carry risk, including financial loss. This analysis is for educational purposes only and does not constitute investment advice or recommendations of any kind. Conduct your own research and seek professional advice before investing.
Why Should I Be Interested In Medpace?
Medpace Holdings (Nasdaq: MEDP) is a Contract Research Organization (“CRO”) headquartered in Cincinnati, Ohio. It presents a compelling investment case as a highly differentiated and well-managed business operating within the resilient and growing pharmaceutical and biotech research and development sector.
Readers familiar with my investment style know that I look for rare high quality companies possessing the ‘golden threads running through the fabric of success’1. Medpace has them in abundance.
While not a household name, Medpace has quietly carved out a significant niche for itself, demonstrating remarkable financial performance and a sustainable competitive advantage that sets it apart from its peers.
A useful way to conceptualize why Medpace is an attractive investment is through the classic “picks and shovels” analogy:
The pharmaceutical and biotech sector is inherently risky. The pursuit of a new drug or treatment involves years, if not decades, of research and clinical trials - all of which consumes enormous amounts of capital, with absolutely no guarantee of success at the end. Even if successful, patents only last for a few years before generic drug manufacturers are legally permitted to copy the recipe, which inevitably slashes margins - so it becomes a race against the clock to generate satisfactory returns on investment before the flood-gates open. While pharma companies are able to spread their bets across a wide array of research projects turning it into a numbers game, small biotech companies may be betting the farm on a single treatment. That’s a high stakes capital intensive game - a process fraught with scientific and regulatory uncertainty that leads to a binary outcome - making it inherently difficult to calculate risk adjusted returns on any particular investment. In many respects it’s often closer to speculating than it is to intelligent investing.
Rather than attempting to pick individual winners among the myriad of pharma and biotech companies developing new drugs, investors can gain exposure to the overall growth of the industry by investing in the companies that provide essential services to all participants. Medpace, as a CRO, supplies the expertise and infrastructure required for clinical trials, making it a critical enabler of drug development. This positioning allows Medpace to benefit from the rising volume and complexity of clinical research, regardless of which specific drugs or companies ultimately succeed. Better still, the clinical trials run for years, sometimes decades and CROs enjoy years of uninterrupted recurring revenue. There are four phases of clinical trials before a drug or treatment is approved and while each is put out to tender, the incumbent from the prior phase has a clear advantage.
The pyramid diagram below shows that out of every 100 drugs that enter clinical trials, approximately 9.7 will eventually receive regulatory approval. That’s a very high failure rate and a capital intensive endeavour at that - a cost born by the biotech and pharma companies which then need to generate enough of a return on the winners to compensate for the 90.3% of treatments that didn’t make it. However, CROs are not only capital light enterprises, but they generate revenue on the full 100% of drugs entering clinical trials.
"The best business is a royalty on the growth of others, requiring little capital itself."
Warren Buffett
So now I hope you better understand why you should be interested in Medpace, you will naturally want to learn more about this company. So let’s delve into the intricacies of its business model, its unique strategic positioning, the cultural drivers of its success, and its long-term growth prospects. This analysis will also address the current market dynamics, potential risks, and the valuation of the company, ultimately providing a comprehensive overview upon which you may formulate your own opinion.
The CRO Industry
The CRO industry serves drug development companies to manage their clinical trials, a critical and complex part of the FDA approval process in the U.S. and equivalent processes in other jurisdictions.
Back in the 1970s, major pharmaceutical companies managed most clinical development in-house themselves, but over time the industry has gradually shifted toward an outsourced model where specialized third-party providers handle the complex, time consuming work that is clinical research.
The demand for clinical research from each pharma or biotech company ebbs and flows depending on the pace of drug development and which stage in the approval process the company finds itself. So having a permanent in-house clinical research division is inefficient. Instead, the trend towards outsourcing is driven by cost efficiencies, access to specialized expertise and the ability to scale resources as needed – a pay as you go model, rather than enduring inhouse redundancy. Either way, it is captured as Research and Development (R&D) operating expenditure, but that cost line on the income statement is now lower than it used to be.
Large pharmaceutical companies are increasingly focusing on their core competencies of intellectual property (IP) acquisition and commercialization, viewing the management of clinical trials as a non-core, and at times, a commoditized function. There is growing pressure on these companies to improve their return on R&D spending, which has historically been quite low, making the outsourcing proposition even more attractive.
For smaller biotech companies, particularly the wave of new firms spun out of universities and leveraging technologies like AI for drug discovery, partnering with a CRO is not just an option but a necessity. These smaller entities lack the in-house expertise, resources and infrastructure to navigate the rigorous and lengthy clinical trial process on their own.
So, over time, outsourcing has been a secular tailwind for the CRO industry. In the U.S. alone, the pharmaceutical R&D market was estimated at approximately $125 billion last year, with about $65 billion of that being outsourced, with these numbers, and proportions, both trending up and to the right over the medium- to long-term.
Medpace's Strategic Focus
Medpace’s unique full-service, vertically integrated model positions it as a key player in this market capturing a growing share of industry activity as outsourcing penetration increases.
To properly appreciate the Medpace advantage, it is first necessary to understand how others in the CRO industry operate.
The industry is characterized by a “big four” group of leading firms: IQVIA (NYSE: IQV), ICON (Nasdaq: ICLR), PPD Inc (Nasdaq: PPD), Fortrea (Nasdaq: FTRE). These work primarily with the large pharmaceutical companies.
Then there’s Medpace, with several points of differentiation from the big four - it is a mid-sized CRO by revenue and headcount, its customers tend to be the mid to small size biotech companies with little customer exposure to large pharma, and it exclusively offers full-service outsourcing (more on this shortly).
Collectively, the big four plus Medpace (~7% of the market) control approximately half of the market. The remaining half is highly fragmented, comprising numerous smaller providers with limited scale or specialization.
So what does it mean that Medpace is a ‘full-service’ provider?
There are two types of operators in the CRO space:
Functional service providers handle only specific parts of a clinical trial, such as medical writing or site management.
Full-service providers, as the name suggests, manage every aspect of a clinical trial from beginning to end.
Among the five dominant players in the industry, Medpace stands out as the only company to have strategically chosen to operate exclusively as a full-service provider. This is a key differentiator that has profound implications for its business model and financial performance.
The focus on full-service offerings means that Medpace becomes an indispensable partner for its primary customer base - the small to mid-sized biotech companies that most need a comprehensive, end-to-end solution for their clinical trials. These clients typically lack the internal resources and expertise to manage complex clinical trials independently, making them highly dependent on full-service CRO partners.
“full service outsourcing… has the best margins and frankly, a lot of growth potential in biotech… we really want to grow the full-service clinical business… and so we're still focused on that.”
Medpace Investor Call, 2024
For this reason, approximately 79% of Medpace's clientele falls into the small biopharma category, 17% are mid-sized companies, while large pharma only accounts for 4%.
It is happy to let the big four slug it out to win the big pharma contracts, while it quietly prospers in its own niche with far less competition.
In fact, the large multinational pharma companies generally have existing large volume partnerships that have been defined with the big-four. It’s a bureaucratic process, more political than transactional. Those making the decisions are more concerned with safeguarding their own career, than they are in saving money for the pharma company that they work for. If you are familiar with the saying “no one ever got fired for hiring McKinsey”, a similar dynamic is at play here.
In contrast, smaller biotech companies are much more cost sensitive, they don't have pre-arranged partnerships with CROs, they may be dependent on venture capital and private equity funding and they make choices in a very transactional manner - this is where Medpace is able to shine, both in its full-service offering and its highly competitive pricing.
By concentrating on this segment of the market, Medpace has built deep relationships and a reputation for high-touch, customer service.
Focusing on small and mid sized biopharma companies also has an added benefit of very low customer concentration risk. The top 5 customers account for 22% of revenue, while the top 10 only account for 29% in total:
This strategic focus on a specific customer segment with a tailored, high-value service offering is the cornerstone of Medpace's success. It has allowed Medpace to build a reputation for excellence and reliability, which is particularly valued by smaller biotech firms that are often betting their entire future on the success of a single drug candidate.
It also positions Medpace to benefit from the ongoing proliferation of venture-backed biotech startups and academic spinouts, many of which are enabled by advances in digital tools and AI-driven drug discovery.
The Golden Threads
The most successful companies are not incrementally better than the competition, but fundamentally different. As mentioned earlier, it is critical to look out for the golden threads woven through the fabric of a company2 as a leading indicator that it is likely to be a great long-term compounding investment.
Medpace's competitive advantages, or golden threads, are not just a matter of strategic differentiation, they are deeply embedded in its operational structure and corporate culture of the business.
1. Technology & AI
One of the most significant differentiators is its complete vertical integration. Medpace owns and operates its entire IT stack, core laboratories and clinical monitoring operations, rather than subcontracting these critical functions.
More particularly, it is actively embracing the AI revolution and leveraging artificial intelligence to enhance the speed, reliability and efficiency of medical imaging analysis in clinical trials:
Its Core Imaging Lab is a recognized leader in using machine learning and AI for tasks such as lesion detection, biopsy scoring, tumor measurement and brain image segmentation. These capabilities reduce variability in image interpretation and accelerate trial timelines.
It has partnered with Medidata to integrate imaging and clinical data into a single platform, streamlining the workflow for sponsors and investigators. For instance, Medidata’s Rave Imaging enables it to build its own quantitative image analysis pipelines directly into its clinical trial workflow and data management systems.
It develops its own technology solutions, such as the proprietary ClinTrak system, which powers all the core data monitoring, collection, and analytics needed to run a clinical trial. It coordinates teams and timelines and is positioned to harness AI for predictive analytics, patient recruitment optimization, and adaptive trial design. ClinTrak has evolved organically through R&D over decades and is not easily replicated - in contrast, most other CROs outsource their technology to expensive vendors, such as Veeva Systems, which not only eats into margins but can never compete with the full integration of ClinTrak.
Beyond the technology, AI is nothing without high quality data. Medpace has a huge data advantage because as a full-service CRO, it manages the entire clinical trial lifecycle, from Phase I through IV, and wholly owns key infrastructure - including central labs, imaging and bioanalytical capabilities. This ensures high data quality, consistency, and seamless integration across all trial phases. Plus, it conducts clinical trials in over 60 countries, providing access to a diverse and expansive dataset that can be used to train and validate AI models. Its approach to data management and its unified Laboratory Information Management System (LIMS) contribute to robust and harmonized datasets, which are essential for effective AI deployment.
2. Scale Economics Shared
As a full-service provider with its own vertically integrated IT stack, Medpace creates a significant low-cost advantage. By not paying a margin to third-party vendors, Medpace can operate more efficiently.
Additionally, unlike many of its competitors that operate out of biotech hubs including New York, Boston, and San Francisco, Medpace operates out of a Cincinnati, Ohio giving it another cost advantage.
This is a well managed business with tight cost control a key part of its operating model.
But frugality alone is never enough - great businesses go one step further and here Medpace also shines. It doesn’t seek to optimize margins, but instead passes cost savings on to its customers. This makes the company more competitive and it drives customer acquisition. It is the best way to grow and is named ‘scale economics shared’3.
Additionally, the bigger and more efficient the business becomes, the lower it drives down its unit costs and the prices it charges its customers, making it very difficult for others to compete. It creates a formidable barrier to entry for would-be competitors.
This model is evident in many of the most successful businesses from Costco and Amazon to TSMC, Southwest Airlines and Geico.
3. Recruitment & Promotion From Within
Headquartered in Ohio, far from the biotech hubs of Boston and San Francisco, Medpace has cultivated a distinct approach to talent management. The company exclusively hires individuals directly out of college and promotes from within, creating a strong sense of loyalty and a deep understanding of the Medpace way of doing things.
Medpace doesn’t like to hire people from other CROs because it does things differently. Bringing in people from competitors would require retraining them and breaking any bad habits that they had formed.
This strategy not only reinforces its low-cost advantage by hiring early-career professionals, but also results in significantly lower employee turnover compared to the industry average. The consistency of the teams working on multi-year contracts is a major selling point for clients and a testament to the success of this cultural model.
The result of this unique culture and operational model is a demonstrable outperformance in key performance metrics - Medpace's revenue per employee is significantly higher than its competitors, a clear indicator of its superior efficiency and productivity. In 2015, with just over 2,000 employees, Medpace generated an average $172k per person - today the headcount is around 6,000 employees generating an average of over $350k each. So, in a decade they have increased their workforce by a factor of 3x and the average revenue per head has doubled.
4. Organic Growth & Capital Allocation
Medpace adopts a disciplined approach to capital allocation. Its aversion to value-destructive M&A and its focus on organic growth have created a more stable and predictable business. While others in the industry grow through acquisition and mergers, all of which are disruptive during the subsequent integration stage and may result in synergistic cost savings including potential redundancies in overlapping roles, Medpace continues without any such disruption. For a pharma or biotech company committing to a multi-year clinical trial with a CRO, that kind of stability is invaluable.
The company has eschewed dividends and instead capital allocation decisions are made opportunistically focusing first on internal reinvestment and then surplus capital is utilized for opportunistic share buybacks, a strategy that has served its shareholders well. This kind of approach is exceedingly rare - it puts the CEO of Medpace in an elite club joining the likes of Singleton, Branson, Malone, Buffett and Bezos - all of whom understand the folly of paying dividends4.
Medpace has taken advantage of the recent downturn in the capital cycle, not through aggressive M&A, but by leveraging its operational discipline, financial strength, and customer-centric approach to win market share from weaker competitors.
Its disciplined approach to growth, together with its reputation for consistency and operational excellence, has made it a preferred partner for sponsors wary of larger CROs undergoing frequent M&A or restructuring, which can introduce uncertainty and operational disruption.
5. Customer-Centric Approach
Its vertical integration leads to a superior and more consistent customer experience. With a unified IT system and a single team managing a project from start to finish, Medpace can offer a seamless and highly coordinated service. The ability to customize its in-house technology for specific projects further enhances its value proposition.
In contrast, most of its rivals which pursue an aggressive M&A strategy find themselves facing issues associated with the integration of disparate businesses, fragmentation of systems and high employee turnover, leading to a less than satisfactory experience for their customers.
Furthermore, Medpace's go-to-market strategy is also a reflection of its customer-centric and disciplined culture. The company is known for offering fixed-price contracts, a rarity in an industry where cost overruns and change requests leading to add-on costs are common pain points for clients.
“We are not going to nickel and dime you if it turns out that we need more remote visits than we originally anticipated, or if there are more CRF pages than we originally anticipated, we're not going to go back and start doing amendments.”
Medpace pricing policy
Medpace will never overpromise and underdeliver. If the customer asks for something that isn’t feasible, perhaps due to budget, timelines or maybe it would be difficult to find patients willing to participate in trials, it will simply decline and not engage. But if it commits to a price and timelines, it stays true to its word on both. This approach provides clients with predictability and transparency, building trust and a strong reputation for delivering on time and on budget.
Before any response to a ‘request for proposal’ is submitted an approval committee comprising the executive team (including the CEO) and senior clinical operations people and medical directors are all engaged.
Awards
Recognized by Forbes as one of America's Most Successful Midsize Companies in 2021, 2022, 2023 and 2024, Medpace is also continually recognized with CRO Leadership Awards from Life Science Leader magazine based on expertise, quality, capabilities, reliability, and compatibility.
Market Opportunity and Growth Trajectory
