Under WSA’s IPO Scanner: Medpace Holdings Inc.

Medpace raises $173.6 million, to use IPO proceeds to partly repay debts

m1The U.S. IPO market has picked up pace during 2Q FY16, with the momentum continuing during 3Q FY16. So far in 2016, there have been 59 IPOs priced and 76 IPOs filed, raising a total of $9.8 billion. Of the total number of IPOs filed, 30 have been in the Healthcare sector, raising total proceeds of $2.6 billion. During the 2nd week of August 2016, the market witnessed the IPOs of three companies: Medpace Holdings Inc., Protagonist Therapeutics, and Airgain. These three IPOs together raised $263 million, with contract research organization (CRO) Medpace leading the pack with a 21% gain on its maiden market entry. Read more about Medpace’s IPO below.

m2Medpace Inc., which operates as a subsidiary of Medpace Holdings Inc., is a CRO that provides research-based drug and medical device development services. The company offers a range of integrated and customized services that include clinical operations, such as regulatory submissions, investigator selection, clinical monitoring, and clinical trial management; medical writing and reviewing services, such as marketing approval and new drug applications; biometrics services, including data management, electronic data capture, and biostatistics; and regulatory support services. It also provides quality assurance services, laboratory services, and bioanalytical laboratory services. Founded in 1992, Medpace is headquartered in Cincinnati, Ohio, and has additional offices and laboratories in Europe, Asia, the Middle East, Australia, Africa, and the Americas, with approximately 2,200 employees across 35 countries.

m3With its focus on small and mid-sized biopharmas, Medpace was looking to raise $151 million on a market cap of $863 million, banking on its industry-leading EBITDA margins and strong free cash flow generation to draw potential investors. By focusing on the faster-growing portion of the $23 billion Phase I-IV CRO market, Medpace has been able to grow revenue at a 22% CAGR from 2012-2015. Another of its large CRO peer inVentiv Health Inc. withdrew its IPO plans in early August 2016 after receiving a significant equity investment. Medpace’s other peers PRA Health Science (NASDAQ: PRAH) and INC Research (NASDAQ: INCR) are currently trading up well over 100% since their respective 2014 IPOs. Medpace reported $332 million in sales for the 12 months ended March 2016.

IPO details

Medpace confidentially filed its IPO paperwork with the U.S. Securities and Exchange Commission (SEC) in March 2016. On August 10th, 2016, Medpace announced the pricing IPO of 7,000,000 shares of common stock at a public offering price of $23.00 per share. All of the shares of common stock were being offered by Medpace. In addition, Medpace had granted the underwriters a 30-day option to purchase up to an additional 1,050,000 shares of common stock from Medpace at the IPO price, less underwriting discounts and commissions. Medpace’s stock began trading on the NASDAQ Global Select Market on August 11th, 2016 under the ticker symbol “MEDP”.

Jefferies LLC and Credit Suisse Securities (USA) LLC were the joint lead book-running managers for the offering. UBS Securities LLC and Wells Fargo Securities LLC also acted as joint book-running managers for the offering. Robert W. Baird & Co. Incorporated and William Blair & Company L.L.C. were the co-managers for the offering.

As per its IPO filings, Medpace announced the closing of its IPO of 8,050,000 shares of common stock at a public offering price of $23.00 per share on August 16th, 2016. The number of shares issued at closing included the exercise in full of the underwriters’ option to purchase 1,050,000 additional shares of common stock from Medpace. Medpace, which received about $173.6 million in net proceeds from the IPO, intends to use the net proceeds to repay a portion of its outstanding borrowings under its senior secured term loan facility.

Currently, investment firms Cinven owns around 75% stake in Medpace, with MPI owning the remaining 25% stake. Cinven bought stake in Medpace from private equity firm CCMP Capital Advisors in 2014 for around $900 million.

Key strengths

m4Medpace’s full-service operating model, which entails partnering with customers from the beginning of the clinical trial process and navigating through all subsequent processes, is its main differentiating factor. In contrast, other leading CROs provide only functional or partial outsourcing services as a core component of their business. Medpace’s full-service approach enables the Company to deliver timely and high-quality results for its customers, particularly small- and mid-sized biopharmaceutical companies. For the year ended December 31st, 2015, Medpace generated 55.7% of its net service revenue from small- and mid-sized biotechnology companies, 29.3% from mid-sized pharmaceutical companies, and 15.0% from large pharmaceutical companies.

Medpace has robust financials to support its long-term growth. For the year ended December 31st, 2015, Medpace generated total net service revenue of $320.1 million and adjusted EBITDA of $101.2 million, with a loss of $8.7 million. Over the last 15 years, Medpace has maintained average adjusted EBITDA margins of approximately 34%, while significantly scaling our business organically and expanding globally. As of March 31st, 2016, Medpace had total long-term debts of $378.5 million.

m5Medpace’s therapeutic expertise encompasses areas including Oncology, Cardiology, Metabolic Disease, and Endocrinology as well as Medical Devices. Collectively, these areas constituted 82.7% of Medpace’s backlog as of March 31st, 2016. Additionally, its operating model utilizes the Company’s proprietary ClinTrak clinical trial management software, which is customized and streamlined to its standard operating procedures (SOPs).

Based on industry sources, the overall biopharmaceutical market is expected to grow its outsourced development expenditures for Phase I-IV clinical development and laboratory services at a 6% CAGR from 2014 to 2019, with small- and mid-sized biopharmaceutical outsourced development expenditures will grow at a 10% CAGR during this period. Medpace is well position to take advantage of this growing market.

m6Medpace is the partner of choice for biopharmaceutical customers. On March 3rd, 2016, Actinium Pharmaceuticals Inc. (NYSE: ATNM), a biopharmaceutical company developing targeted payload immunotherapeutics for cancer treatment, selected Medpace as its CRO partner for its pivotal Phase 3 Iomab-B clinical trial.

On June 13th, 2016, Medpace and announced a non-exclusive strategic alliance with International Health Management Associates Inc. (IHMA), a full service central microbiology laboratory, under which IHMA will partner with Medpace for clinical studies that require microbiology laboratory services to support Phase I-IV global clinical studies.

Stock performance

Source: Yahoo Finance
Source: Yahoo Finance

Medpace’s stock stood at $28.53, gaining 2.74%, at the close on Friday, August 19th, 2016, having vacillated between an intraday high of $28.90 and a low of $27.60 during the session. The stock’s trading volume was at 267,814 for the day. The Company’s market cap was at $931.28 million as of Friday’s close.

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CRO Market – Industry Overview

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The global biopharmaceutical industry is experiencing many challenges, including regulatory and pricing pressures resulting from healthcare reforms, growing generic competition, pipeline failures, and the need for continued innovation for newly discovered diseases. In the face of these challenges, biopharmaceutical companies are seeking clinical expertise and outsourcing clinical services to CROs to quicken the pace of clinical development and maximize commercialization success. Moreover, clinical trial design and structure has become more complex over the years with the usage of more complicated protocols and a growing focus on developing new cutting-edge drug therapies. This growing complexity has added new challenges in study feasibility, site selection, patient recruitment, and retention, which requires massive investments on the part of the biopharmaceutical companies. Hence, by outsourcing a core part of the clinical development and drug development process, biopharmaceutical companies are increasingly looking to moderate their investments and thereby maintain revenue growth and operating margins.

CRO Market Size

Based on industry sources, the overall global biopharmaceutical clinical development costs were approximately $100 billion in 2014. Of the total costs, Phase I-IV clinical development services accounted for roughly $44 billion, of which an estimated $23 billion was outsourced to CROs. The CRO market is expected to grow at a CAGR of about 6% from 2014 through 2019, growing to nearly $31 billion in 2019, as pharmaceutical companies steadily grow their clinical development expenditures and are increasingly outsourcing their clinical development function combined with increased outsourcing penetration.

CRO Market Trends

Increase in development costs: Biopharmaceutical development costs are expected to grow from roughly $100 billion in 2014 to about $114 billion in 2019, at a CAGR of almost 3%. The increase in development costs is mainly due to the growing pace of biopharmaceutical innovations, pressure on companies to discover drugs for recently discovered diseases, favorable regulatory environment, and the growth in funds raised by biotechnology and pharmaceutical companies over the last few years.

Increase in clinical development outsourcing: In recent years, there has been an increase in outsourcing penetration, that is, the percentage of biopharmaceutical clinical development costs that are outsourced to CROs. Approximately 52% of Phase I-IV clinical development costs were outsourced in 2014. On account of the increased clinical trial complexity, the need for regulatory and therapeutic expertise, and global access to patient populations, the outsourcing penetration is expected to reach approximately 62% by 2019.

Growth driven by small- and mid-sized biopharmaceutical segment: Over the next few years, the CRO market growth is expected to be driven by small- and mid-sized biopharmaceutical companies. Mid-sized biopharmaceutical companies are emerging as the hotbeds of innovation, developing new, cutting-edge therapies for niche or previously untreatable diseases, which require sophisticated clinical trials. However, these companies have limited capability to conduct global clinical trials independently, and are increasingly seeking strategic partners that can provide the infrastructure and expertise required for the timely completion of complex, global clinical trials. It is predicted that outsourced development costs for these companies would grow at a CAGR of 10% from 2014 to 2019, far more than the estimated overall biopharmaceutical market CAGR of 6%. In 2014, small- and mid-sized biopharmaceutical companies outsourced approximately 69%, or roughly $7 billion, of their development costs, to CROs. The outsourcing penetration is forecast to increase to approximately 76%, or about $11 billion, by 2019.

All these factors have contributed to the heightened CRO and service company deals in 2016. BioClinica Inc., a U.S.-based pharmaceutical CRO owned by buyout firm JLL Partners, is exploring a sale that could value it at as much as $1.3 billion, as reported by Reuters on May 26th, 2016. Capsugel Inc., another large CRO, is also exploring an outright sale or an initial public offering. On June 1st, 2016, WCCT Global and Medelis have agreed on a merger deal aimed at offering international clients an expanded depth of clinical research offerings. In March 2016, Precision for Medicine acquired ACT Oncology, while in May 2016, equity firm Amulet Capital Partners acquired CRO SynteractHCR.

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