The companies we follow in the biotechnology industry tend to be Contract Research Organizations (CROs) instead of pharmaceutical developers, explains Doug Gerlach, editor of SmallCap Informer.
CROs tend to provide lower business risk when compared to firms involved in research and development, but still offer good upside potential.
This month, we introduce Medpace Holdings, Inc. (MEDP) — a small CRO that offers Phase I-IV clinical development services to the biotechnology, pharmaceutical, and medical device industries.
Medpace’s expertise extends to all major areas including oncology, cardiology, metabolic disease, endocrinology, central nervous system, and anti-viral and anti-infective, with both regulatory and therapeutic expertise. Small biopharma companies are Medpace’s biggest customers, making up 79% of clients year-to-date. Its five biggest customers only make up 17% of revenues.
Medpace went public in 2016, and since then has grown revenues at an annual 23.7% and EPS at an annual 63.6% rate, reaching total revenues of $1.1 billion in 2021. The company forecasts 2022 revenue of $1.405-$1.435 billion, representing growth of 23.0% to 25.6% over 2021 revenue. EPS is forecasted in the range of $6.07 to $6.36.
In its latest earnings call, August Troendle, Medpace’s CEO, pointed out that the company noted a marked weakness in initial contract award notifications in the quarter. On the other hand, actual contract cancellations have not signaled any problems, and the company is continuing to hire. These candid comments were enough to rile nervous investors, though, punishing the stock’s price.
In our view, this kind of short-term slowdown, if it does materialize, will not adversely affect the company’s operations long-term, and so the price decline provides a good entry point for Medpace stock. Analysts have already ratcheted back their long-term EPS growth expectations to 14.2% a year over the next five years. We see the company being able to support that growth as well, on top of 9% annual revenue growth and margin improvements.
Medpace’s pre-tax profit margins have steadily expanded, reaching 18.1% in 2020 and 17.6% in 2021. Return on equity is healthy and also trending up, while debt-to-equity is trending down and was a manageable 13.9% at year-end 2021.
Free cash flow is very strong, and the company has been aggressively buying back shares in 2022. In the first six months of the year, the company purchased 15.2% of its common stock and exhausted its share repurchase authorization. Management indicates it expects to pay down its short-term debt with its cash flow.
If Medpace can reach a high P/E ratio of 34.9 in five years, a high price of $387 is indicated. On the downside, if the stock's P/E falls to 16.5, a low price of $95 could be reached.
From the current P/E of 28.4, the stock could deliver an average annual 18.8% return over the next five years. From the current price, the projected high price is 3.3 times greater than the selected low price.
