Medpace Holdings Facing Some Challenges To A Model That Has Worked Well

Medpace (MEDP) had some challenges in its first year as a publicly-traded company, as this full-service contract research organization (or CRO) saw revenue growth and margins weaken through 2017. Compounding those issues is a greater effort on the part of Medpace's larger rivals to target its core business - smaller biotechs that have historically been ill-served by the larger players in the CRO market.

Valuation is an interesting dilemma right now. It would seem that Medpace could generate high-single-digit to low-double-digit annual returns to shareholders even if it can't reaccelerate growth beyond peer/industry norms and has to absorb some additional margin pressure. While I don't expect it to be a quick (or certain) process, if management were to succeed with its efforts to reignite revenue growth there would be enough incremental return to make this a more interesting idea.

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Medpace Holdings Facing Some Challenges To A Model That Has Worked Well

INC Research Looks Like A More Focused, Higher-Risk CRO Option

As I said in a recent piece on PRA Health Sciences (NASDAQ:PRAH), there's a lot to like about the contract research organization (or CRO) sector as trial complexity increases, R&D budgets continue to grow, and drug companies look to shift toward their specialties and more variable-expense models. Within this competitive space, INC Research (NASDAQ:INCR) has looked to stand out with an intense focus on Phase II-IV support, a greater skew towards smaller companies, and a more intense focus on a few specific therapeutic indications.

Whether this differentiated strategy will work is (and/or how well), in my mind, the key question for the stock. What INC Research is doing makes sense, but it's a riskier strategy given how much spending is accounted for by larger companies and the reliance of smaller companies on market-based funding. Performance has been more erratic here of late, with soft trends in new bookings (although the company tends to be conservative here). That said, if INC can navigate through this tough stretch and drive long-term revenue growth in the high single digits, with FCF growth in the double digits, the shares look undervalued below $50.

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INC Research Looks Like A More Focused, Higher-Risk CRO Option

PRA Health Sciences' Special Mix Could Have More To Offer

It's hard enough to find undervalued stocks today, and a stock that is already up more than 40% over the last year and within a few percentage points of its 52-week high is not initially the most promising candidate. To be sure, PRA Health Sciences (NASDAQ:PRAH) is not conventionally cheap on backward-looking multiples and there are valid concerns that the CRO market could be in for a harder stretch as biotech funding dries up and Big Pharma pushes another round of consolidation. On the other hand, PRA's strong foundation in clinical trial management and its growing capabilities in strategic outsourcing and data/analytics shouldn't be ignored, and I believe there are opportunities here for the company to outgrow its addressed market.

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PRA Health Sciences' Special Mix Could Have More To Offer