Medpace Earnings: Healthy Outsourcing Demand Drives Growth and Supports Narrow Moat

Medpace MEDP reported strong second-quarter results highlighted by revenue of nearly $461 million, representing a 31% increase from the prior-year period. Medpace is tracking our expectations, and we maintain our fair value estimate of $227 per share. Strong intangible assets and high customer switching costs support the company’s narrow economic moat. We continue to have a positive long-term outlook for Medpace, and we forecast low-double-digit to high-single-digit revenue growth over our 10-year forecast period.

Medpace reported net new business wins of nearly $575 million during the quarter, representing a more than 27% year-over-year increase and a healthy net book-to-bill ratio of 1.25 times. Medpace’s backlog grew to $2.57 billion, representing an increase of nearly 19% from the prior-year period. Investors reacted favorably to Medpace’s results and sent the stock up 4%. Despite our positive outlook, we view shares as currently overvalued, trading at a 13% premium to our fair value estimate.

We forecast 2023 revenue will reach about $1.86 billion, representing over 27% growth thanks to continued outsourced clinical development work from Medpace’s small and mid-sized biotech and pharma customers.

Our narrow moat rating is due to Medpace’s full-service phase I-IV clinical trial expertise and strong client relationships, which are supported by intangible assets and high switching costs. Late-stage clinical trials are crucial for moats in the CRO space as these trials are larger in scope, more complex, often multinational, and have higher risks of failure, which enforce switching costs, compared with early-stage trials.

We forecast gross margins will gradually improve as the company leverages fixed costs over a larger revenue base. Over our 10-year forecast period, we expect a modest haircut on its main operating expense—selling, general, and administrative cost—as the company continues to scale. We model Medpace’s operating margin will reach about 22% in 2032.