Medpace

Medpace's shares jumped nearly 15% on July 23 after second-quarter revenue grew 17% year over year to $707 million. Management raised its 2026 revenue outlook by 143 basis points at the midpoint to nearly $2.85 billion and boosted EBITDA guidance by 161 basis points to $630 million at the midpoint.

Why it matters: A meaningful improvement in biotech funding conditions, higher-quality opportunities, and rising requests for proposal activity contributed to Medpace's record net new business awards of $796 million in the quarter. These positive indicators suggest demand strength is becoming more broad-based across the biotech market. Pass-through costs remained elevated at roughly 43% of revenue, largely driven by metabolic studies, which boosted reported revenue growth. While management expects this mix to moderate in the second half of 2026, potentially creating tougher revenue comparisons, we view this as a mix-driven headwind rather than a sign of weakening demand. Oncology is emerging as a growth engine for Medpace's new business and accounted for over half of the firm's overall bookings in the quarter. This should help diversify Medpace's long-term revenue mix as the cardiometabolic market matures and new award notifications are expected to decline.

The bottom line: We are increasing narrow-moat Medpace's fair value estimate to $370 per share from $329, reflecting an improved near-term outlook thanks to stronger booking trends, healthier client funding conditions, and reduced cancellations. Despite our improved outlook, we see shares as very overvalued, trading 63% above our valuation. We expect revenue growth to normalize to high single digits as the cardiometabolic market matures and pass-through costs moderate. We view customer concentration as an underappreciated risk, as it continued to build rather than ease in the quarter. The top five customers now represent 31% of trailing 12-month revenue, up from 20% a year ago.

We increased Medpace's fair value estimate to $370 per share from $329, reflecting an improved near-term outlook driven by stronger booking trends, healthier client funding conditions, and fewer cancellations.

A meaningful improvement in biotech funding conditions, higher-quality opportunities, and rising requests for proposal activity contributed to Medpace's record net new business awards of $796 million in the second quarter. These positive indicators suggest demand strength is becoming more broad-based across the biotech market. Management raised its 2026 revenue outlook by 143 basis points at the midpoint to nearly $2.85 billion and boosted EBITDA guidance by 161 basis points to $630 million at the midpoint.

While macroeconomic challenges can put greater pressure on Medpace's primarily small and midsize biopharma customers, we continue to have a positive long-term outlook for the company. Medpace's small biopharma customers, which account for 84% of the company's revenue, are very dependent on outsourced clinical trials since these small companies do not have the capacity to run trials in-house.

Pass-through costs remained elevated at roughly 43% of revenue, largely driven by metabolic studies, which have boosted reported revenue growth. Oncology is emerging as a growth engine for Medpace's new business, and it represented over half the firm's overall bookings in the quarter. This should help diversify Medpace's long-term revenue mix as the cardiometabolic market matures and new award notifications are expected to decline.

We forecast demand for outsourced clinical trials from Medpace’s small and midsize biotech and pharma customers will drive long-term revenue growth in the high single digits. We forecast gross margins will gradually improve as the company leverages fixed costs over a larger revenue base. We assume midcycle capital expenditures will be about 2% of sales.

We award Medpace a narrow moat rating due to its late-stage clinical trial exposure, proprietary technology, expertise, and strong client relationships that are supported by intangible assets and high switching costs. We believe exposure to late-stage clinical trials is crucial for moats in the CRO space as late-stage trials are larger in scope, more complex, often multinational, and have higher risks of failure, which enforce switching costs, compared with early-stage trials. As more complex trials evaluating novel therapeutics provide room for differentiation, CROs like Medpace leverage their expertise to shorten the clinical trial time frame while ensuring accuracy and precision for their clients.

The drug-development process is quite lengthy, as the process from discovery to registration with the US Food and Drug Administration takes 10 years-15 years for a typical drug and the average length of time from the start of clinical testing to marketing is 7.5 years. Drugs typically have a 20-year patent lifespan, which begins at the time of discovery. This means that clinical trials consume a significant portion of what could otherwise be patent-protected profits before generic drugs come to market.

Biotechnology and pharmaceutical companies aim to shorten the drug development timeline while maintaining the precision and accuracy required for regulatory approval. This is the driving force behind the CRO business model, in which CROs leverage their assets and expertise to design trials tailored to regulatory technicalities, quickly identify target patients at sites around the world for rapid enrollment, and then advise on data collection and analysis for regulatory approvals.

According to Research and Markets, clinical trials conducted by CROs are completed up to 30% more quickly than those conducted in-house by pharma companies. This increased speed results in considerable savings for clients, as drugs can reach commercialization more quickly, leading to longer patent-protected time on the market.

The speed and quality of clinical trials are essential since late-stage trials are expensive and the stakes for a successful outcome are high. There is also a high risk of failure at each step of a drug’s development process, and clinical trials are very expensive. According to a 2020 study released in JAMA, the median cost of developing a new drug was $985 million, with the average cost totaling $1.3 billion. The study was based on data for 63 drugs developed by 47 companies between 2009 and 2018. Additionally, biopharma companies need a CRO not only with strong technical expertise in specific disease areas but also with knowledge of government relations, regulations, and even local country cultures, as most clinical trials are multinational.

Biopharma clients choose top-tier CROs to run their clinical trials for their intangible assets, reputation, and long-standing partnerships. In addition to full-service phase 1-4 clinical development services, Medpace has a wide portfolio of capabilities, including central laboratory, project management, regulatory affairs, clinical monitoring, data management and analysis, pharmacovigilance new drug application submissions, and postmarketing clinical support. In addition, Medpace provides bioanalytical laboratory services, imaging services, and electrocardiography reading support for clinical trials.

Medpace is focused on serving small to midsize biotech companies, which rely heavily on outsourced clinical trial services as they lack the capacity to conduct in-house clinical trials, unlike larger firms. Small to midsize biotech companies tend to select one trusted CRO to run their clinical trials and often need full outsourcing solutions, so they outsource studies on a full-service model, which is the focus of Medpace’s business.

Customers that outsource to full-service CROs have even greater switching costs since the CRO manages the entire clinical trial process. If customers change to a different CRO during late-stage trials, this could delay development by months and erode valuable patent-protected commercial time. Sponsors therefore often remain with the same CRO throughout a drug’s lifetime for the continued study and development of additional indications, such as expanding a drug to patients of different age groups or evaluating booster/combination therapies. Sponsors benefit from the CRO's accumulated expertise and familiarity with their programs and processes.

The scope of late-stage clinical trials is multinational, which emphasizes the need for global infrastructure and extensive knowledge of global regulations. Rather than carrying out a clinical trial in one geography and securing one regulatory approval before moving on to trials and approvals in other countries, biopharma customers tend to initiate large multinational late-phase trials for promising therapies to expedite the process of bringing a drug to market on a global scale. Medpace possesses these intangible assets of global regulatory expertise, as it has submitted drugs for regulatory approval in 60 countries.

Medpace also offers a suite of decentralized clinical trial capabilities, which positions it well to conduct next-generation trials. Decentralized, or remote, trials have seen increased adoption since the covid pandemic. Biotech and pharmaceutical companies are encouraging regulatory agencies to continue building out a framework for evaluating decentralized clinical trials and real-world evidence for the use in regulatory decisions.

Medpace’s moat sources of intangible assets and high customer switching costs support strong demand for its clinical trial services.

Medpace's small and midsize biopharma customers are very dependent on outsourced clinical trials since they do not have the capacity to run trials in-house.

Medpace's operational discipline should support strong long-term earnings growth and high returns as the company continues to expand.

Medpace is poised to benefit from steadily increasing levels of outsourced clinical trials and the greater complexity of novel therapeutics, such as biologics and gene therapies.

Significant pullbacks in biotech funding or declines in outsourcing penetration rates have a material impact on Medpace's growth.

Large cancellations and potential pipeline reprioritizations from its customers could negatively affect Medpace's growth.

Medpace could fail to innovate and keep an edge over regional and global CRO competitors, especially as data and analytics play an increasing role in clinical development.