Not only are biotech stocks subject to the boom-or-bust nature of their therapeutics, but they also operate in a cyclical industry exposed to the broader market's whims. One less stressful way to take part in the booming industry is to invest in "picks-and-shovels" companies that support biotech stocks but aren't reliant upon any single clinical trial outcome to profit.
A successful company that fits this billing is Medpace(NASDAQ: MEDP), a leading clinical contract research organization. Medpace offers a full suite of development services for small to medium-sized biotechs, helping them get from phase I to phase IV (and beyond) in the clinical trial process. Serving this niche, Medpace has been an 11-bagger since its initial public offering (IPO) in 2016 -- quintupling the S&P 500's total returns over the same time.
Despite this promising run, however, funding in the cyclical biotech industry declined over the last year, causing Medpace's growth to slow and its share price to plummet 34%. Though this share price drop may seem alarming, I believe Medpace is positioned to rebound -- just as it has in the past -- and makes for a spectacular growth stock to buy after its recent sell-off.
Medpace: A one-stop shop for smaller biotechs
Since Medpace offers its solutions on a full-service basis rather than a la carte, it tends to be the perfect solution for small and medium-sized biotechs with limited funding or little clinical trial experience. Its suite of solutions include:
clinical trial management and study start-up processes
patient recruitment and retention
clinical monitoring and risk-based monitoring
regulatory guidance and pharmacovigilance (prevention of adverse events)
biometrics and data collection
laboratories and clinics to operate in
quality assurance to help with compliance and protocols
Offering these solutions to its upstart biotech customers, Medpace acts as a guide or mentor of sorts, providing the "picks and shovels" needed to create tomorrow's most promising therapeutics. With numerous leading-edge technologies such as CRISPR gene editing poised to propel the biotech industry to new heights over the long haul, Medpace should thrive when we look decades out.
However, the last year was not a good one for the company. Hit by a confluence of adverse events such as rising interest rates, a weak IPO environment, and investors seeking less risky investments (not the upstart biotechs Medpace serves), the company saw sales "only" grow 8% in the fourth quarter. After management guided for flat to 5% sales growth for 2025, the market sold off Medpace's stock heavily.
I believe this may prove to be an overreaction, though, as none of these factors are within the company's control and merely highlight the cyclicality involved with investing anywhere adjacent to the biotechnology industry. With longer-term (one-plus year out) performance obligations up 25% in Q3 and rising another 9% from that figure in Q4, Medpace's revenue shouldn't plummet anytime soon.
While the next year or so may be somewhat turbulent for Medpace, its long-term future remains bright, with Grand View Research projecting the biotech industry to grow by 14% annually through 2030.
Robust cash generation funds hefty stock buybacks
Despite facing an array of shorter-term challenges, Medpace's 27% free cash flow (FCF) margin and 77% cash return on invested capital (ROIC) remain near all-time highs.
This lofty cash ROIC would rank in the top 10 of the S&P 500 if the company were in the index and shows that it generates immense cash flows relative to its debt and equity. What makes this stat noteworthy to investors is that stocks with high cash ROICs like Medpace's have a history of outperforming their lower-ranked peers.
Furthermore, its high FCF margin allows the company to be debt-free and hold a cash hoard of over $600 million. Generating nearly $600 million in FCF annually (a figure that has grown by 24% annually over the last five years) and armed with its cash on hand, Medpace has begun buying back its own shares hand over fist while its share price is down.
By buying back $170 million worth of shares in Q4, management aims to recreate the magic it delivered to shareholder value when it spent over $700 million in 2022 buying back shares while its share price was down around 40%.
In simplest terms, if Medpace's stock goes up, that's great for investors. If it dips, management has proven willing to buy back shares at a discount -- which is also great for investors. This notion is especially true right now, with the company's price-to-FCF ratio at its lowest level since 2020.
After management announced a new $600 million share repurchase plan in February, Medpace's share count should continue declining while its shares remain at this sub-market valuation. Lowering the company's share count by 3% annually over the last decade, management has a proven track record of capitalizing on the biotech industry's cyclicality by utilizing well-timed buybacks -- and is doing so again.
This combination of Medpace's leadership in its smaller biotech niche and management's ability to thrive amid cyclicality have me more than happy to buy shares of this spectacular growth stock alongside the company's own share repurchases.
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