Excellent analysis Rob and I relate with the case here as a founder operator of CRO in the preclinical space that serves clients developing Oncology therapies. Investments in biotechs dropped across the board post COVID and that has exerted extreme pressure on funding risky trials. Under these circumstances, the numbers here are impressive and while I get the owner involvement and even the comments about August's unpopularity, the optics of related party transaction doesn't pass the smell test for me and it fails the first gate. I'd be curious to know how other analysts and large institutional investors view this and if there any big names on the cap table
Thanks for reading and glad you enjoyed it, Mohit! Having an actual CRO founder in the comments is gold.
You are completely justified in failing it at Gate 1 over the governance optics. Institutional ownership is actually massive (~80%), including the likes of Wasatch and Baillie Gifford. But I would be curious of what they think about the founder unpopularity too. I noticed that Terry Smith actually has trimmed his position in Medpace a lot recently (reduced it by 35%), so maybe it's related.
What an awesome writeup, I learned a lot just listening and I'll have to go back and dive into the written work. Curious if a recessionary oullback wouldn't be the best place to step in, it seems like the co is exposed to small biotech payers who would be hit hard in such a case, hitting their book in turn, but on a lag... which I guess gives you time to get in now and get out if you see the triggers hitting that you so eloquently described. Love your counterfactual approach. thanks again!
Thanks for tuning in, Brian! It is awesome to hear the voice feature is getting a real workout. (Maybe it is just me, but I feel this is an undervalued part of Substack, as you can absorb deep dives while out on a walk, on your way to work etc.)
You nailed the exact mechanics. Small biopharma is their biggest macro threat, and you're spot on about the lag. The backlog acts as a thick shock absorber for revenue.
But here is the catch on timing an exit: while revenue drops on a lag, the stock multiple usually compresses the second the market smells a funding freeze. Wall Street prices in the pain early.
That said, your core instinct is 100% right. A deep, ugly pullback where biotech funding washes out is historically the absolute best time to back up the truck on a premium CRO.
The "General Contractor" analogy in this deep dive is a great lesson in risk insulation. Medpace captures the upside of biotech R&D spending without the "binary risk" (success or failure) of the drugs themselves. By focusing on small biopharma (79% of revenue), they achieve higher margins, but they also tether their growth directly to the volatility of venture capital and interest rate cycles.
Medpace is currently using a massive amount of cash to buy back shares—sometimes exceeding its annual free cash flow. Do you see this aggressive "cannibalization" of their own stock as a genius move to reward long-term holders, or a risky strategy that could leave them thin on liquidity if the biotech funding environment suddenly freezes?
Excellent analysis Rob and I relate with the case here as a founder operator of CRO in the preclinical space that serves clients developing Oncology therapies. Investments in biotechs dropped across the board post COVID and that has exerted extreme pressure on funding risky trials. Under these circumstances, the numbers here are impressive and while I get the owner involvement and even the comments about August's unpopularity, the optics of related party transaction doesn't pass the smell test for me and it fails the first gate. I'd be curious to know how other analysts and large institutional investors view this and if there any big names on the cap table
Thanks for reading and glad you enjoyed it, Mohit! Having an actual CRO founder in the comments is gold.
You are completely justified in failing it at Gate 1 over the governance optics. Institutional ownership is actually massive (~80%), including the likes of Wasatch and Baillie Gifford. But I would be curious of what they think about the founder unpopularity too. I noticed that Terry Smith actually has trimmed his position in Medpace a lot recently (reduced it by 35%), so maybe it's related.
What an awesome writeup, I learned a lot just listening and I'll have to go back and dive into the written work. Curious if a recessionary oullback wouldn't be the best place to step in, it seems like the co is exposed to small biotech payers who would be hit hard in such a case, hitting their book in turn, but on a lag... which I guess gives you time to get in now and get out if you see the triggers hitting that you so eloquently described. Love your counterfactual approach. thanks again!
Thanks for tuning in, Brian! It is awesome to hear the voice feature is getting a real workout. (Maybe it is just me, but I feel this is an undervalued part of Substack, as you can absorb deep dives while out on a walk, on your way to work etc.)
You nailed the exact mechanics. Small biopharma is their biggest macro threat, and you're spot on about the lag. The backlog acts as a thick shock absorber for revenue.
But here is the catch on timing an exit: while revenue drops on a lag, the stock multiple usually compresses the second the market smells a funding freeze. Wall Street prices in the pain early.
That said, your core instinct is 100% right. A deep, ugly pullback where biotech funding washes out is historically the absolute best time to back up the truck on a premium CRO.
The "General Contractor" analogy in this deep dive is a great lesson in risk insulation. Medpace captures the upside of biotech R&D spending without the "binary risk" (success or failure) of the drugs themselves. By focusing on small biopharma (79% of revenue), they achieve higher margins, but they also tether their growth directly to the volatility of venture capital and interest rate cycles.
Medpace is currently using a massive amount of cash to buy back shares—sometimes exceeding its annual free cash flow. Do you see this aggressive "cannibalization" of their own stock as a genius move to reward long-term holders, or a risky strategy that could leave them thin on liquidity if the biotech funding environment suddenly freezes?