Executive Summary / Key Takeaways

• Biotech funding stabilization and the GLP-1 boom are driving explosive revenue growth (23.7% in Q3 2025), but a surge in pass-through costs to 42% of revenue is creating a critical analytical challenge: headline growth obscures margin pressure and makes true earnings power harder to assess.

• The "pre-backlog" bucket—awarded work not yet in backlog—has grown 30% year-over-year to nearly $4 billion, providing superior revenue visibility and making MEDP's growth trajectory more durable than reported backlog figures suggest, but conversion timing remains uncertain.

• Operational excellence is being tested by a strategic imperative to accelerate hiring in 2026 after flat headcount in 2024; the company must scale its workforce to capture metabolic disease opportunities while maintaining the productivity gains that have protected EBITDA margins around 22.5%.

• Competitive positioning as a high-growth, biotech-focused CRO yields superior growth rates compared to large peers like IQVIA (IQV) and ICON (ICLR), but dependence on funding cycles and increased pricing pressure from larger rivals competing for metabolic studies creates vulnerability.

• Valuation at 30.7x EV/EBITDA and 7.0x EV/Revenue prices in continued strong growth; investment success hinges on the company's ability to convert pre-backlog efficiently while managing pass-through dynamics and scaling headcount without diluting productivity.

Setting the Scene: The CRO Industry's Biotech Dependency

Medpace Holdings, founded in 1992 in Cincinnati, Ohio, operates as a mid-tier contract research organization (CRO) in a $60 billion global industry dominated by giants. The company provides full-service Phase I-IV clinical development services to pharmaceutical, biotechnology, and medical device companies, with a strategic focus on scientifically complex trials requiring deep therapeutic expertise. Unlike its larger competitors who pursue massive scale across all customer segments, Medpace has deliberately built its business around small- and mid-sized biopharmaceutical companies, creating a differentiated model that prioritizes agility and specialization over breadth.

This positioning defines the company's entire risk profile. Approximately 70% of Medpace's revenue comes from biotech clients, making the company a leveraged play on biotech funding cycles rather than the more stable, diversified big pharma R&D budgets that sustain competitors like IQVIA and ICON. When venture capital flows dry up, as they did throughout 2024, Medpace feels the pain immediately through elevated cancellations. When funding returns, as it has in 2025, the company captures disproportionate upside. This cyclicality explains why Medpace's revenue growth swung from flat in early 2025 to 23.7% by Q3, while IQVIA's growth remained steady at 5.2%.

The CRO industry sits at a critical inflection point. Complex oncology trials continue driving baseline demand, but the explosion of GLP-1 and metabolic disease programs has created a new growth vector. These studies are fundamentally different: they burn through revenue faster due to higher investigator site costs, they concentrate in the U.S. market, and they attract intense competition from both large and mid-tier CROs. For Medpace, this shift represents both opportunity and threat. The opportunity is capturing share in a high-growth therapeutic area; the threat is margin pressure from pass-through costs and pricing pressure from larger competitors who can afford to be aggressive on price to win volume.

The Therapeutic Mix Shift: GLP-1s and the Pass-Through Paradox

The most significant development in Medpace's business is the dramatic shift toward metabolic disease studies, which grew 59.7% in Q3 2025 to become the company's largest therapeutic area at $199.3 million. Management estimates that GLP-1 related studies constitute about two-thirds of the company's obesity work, spread across multiple clients. Metabolic studies are "faster-burning" and carry a higher concentration of reimbursable costs—expenses that Medpace pays to investigator sites and passes through to clients with minimal markup.

The pass-through cost dynamic creates a critical analytical challenge. In Q3 2025, reimbursable costs reached 42% of revenue, up from historical levels in the mid-30% range. For 2026, management expects pass-throughs to remain between 41% and 42% of revenue. This structural shift has two opposing effects: it accelerates revenue recognition because costs are incurred and billed more quickly, but it compresses EBITDA margins because these costs generate minimal profit contribution. The company's EBITDA margin held steady at 22.5% in Q3 despite this headwind, which implies genuine operational leverage in the core business, but the pass-through trend masks the true underlying margin expansion.

For investors, revenue growth is overstating the company's organic earnings power. A 23.7% revenue increase with pass-throughs at 42% means net service revenue growth is substantially lower. The mix shift toward metabolic studies is likely to persist as long as GLP-1 programs remain hot, meaning margin pressure is structural rather than cyclical. Competitors with larger scale and more diverse therapeutic mixes may be better positioned to absorb this margin pressure, putting Medpace at a competitive disadvantage in pricing negotiations for future metabolic work.

The Pre-Backlog Advantage: Hidden Revenue Visibility

Medpace's reported backlog of approximately $3 billion tells only part of the story. The company disclosed that its "pre-backlog" bucket—awarded work not yet recognized in backlog—has grown 30% year-over-year and is estimated at "somewhere under $4 billion," making it larger than the official backlog. It provides superior forward revenue visibility that isn't captured in traditional CRO metrics. While competitors focus on backlog conversion rates, Medpace has built a pipeline of awarded but uncontracted work that can be rapidly converted to revenue as client funding firms up.

The pre-backlog dynamic emerged from the 2024 cancellation crisis, when funding-constrained clients pulled back on projects before they reached the contractual stage. This created a bottleneck where awarded work couldn't be converted to backlog, depressing reported bookings throughout 2024. The 30% year-over-year increase in Q3 2025 signals that this bottleneck is clearing, but it also reveals a risk: pre-backlog work carries higher cancellation risk than contracted backlog because clients haven't yet committed legally binding funding.

On the positive side, it suggests Medpace's underlying business development engine is firing on all cylinders, with strong award notifications that will eventually flow through to revenue. On the risk side, if biotech funding were to deteriorate again, pre-backlog would be the first area to see cancellations. Investors should monitor the conversion rate from pre-backlog to backlog as a key leading indicator of revenue quality. The company's ability to convert this hidden pipeline efficiently will determine whether 2026 growth meets management's low double-digit targets.

Operational Excellence Under Pressure: Productivity vs. Scale

Medpace's ability to maintain 22.5% EBITDA margins while absorbing 42% pass-through costs demonstrates remarkable operational leverage. This performance was driven by high staff utilization, improved attrition rates, and disciplined cost management. In 2024, the company kept headcount growth flat while growing revenue, creating productivity gains that flowed directly to the bottom line. It shows management's ability to flex the cost structure during downturns, protecting profitability when revenue is under pressure.

However, this productivity-driven margin expansion is reaching its limits. Management explicitly stated that headcount acceleration is expected as the company heads into 2026, targeting mid-to-high single-digit growth after minimal hiring in 2024. The largest staff growth in Q3 occurred in North America (primarily the U.S.) and Asia Pacific (particularly India), directly supporting the metabolic disease opportunity. This hiring surge will pressure margins in two ways: increased personnel costs before new employees reach full productivity, and potential utilization drops if award flow doesn't keep pace with hiring.

The market is pricing Medpace for continued margin expansion, but the company is signaling that future growth requires investment. If hiring accelerates too quickly relative to award flow, EBITDA margins could compress into the high teens, creating a negative earnings revision cycle. Conversely, if the company times hiring perfectly to match the pre-backlog conversion, it could sustain margins while capturing market share. The key variable to watch is revenue per employee, which has been artificially inflated by the flat headcount policy and will likely decline as hiring accelerates.

Competitive Positioning: David vs. Goliath in Metabolic Disease

Medpace holds approximately 6% market share in the CRO industry, positioning it as a mid-tier player dwarfed by IQVIA's 44% and ICON's 23% share. Yet the company's Q3 revenue growth of 23.7% dramatically outpaced IQVIA's 5.2% and ICON's 0.6%. Focused expertise can beat scale in high-growth therapeutic areas. Medpace's deep capabilities in metabolic disease, oncology, and CNS trials create switching costs for biotech clients who value scientific partnership over vendor management.

The competitive environment has intensified, with management noting that RFP processes now include six or more CROs instead of the traditional three to four, reducing win rates for everyone. Large CROs are using their scale to compete aggressively on price, particularly for the large GLP-1 programs that Medpace is targeting. This creates a strategic dilemma: Medpace can maintain pricing discipline and risk losing share, or match aggressive pricing and sacrifice margins. The company's "okay" win rate suggests it's choosing the former, prioritizing profitability over market share.

Medpace's competitive moat—therapeutic expertise and integrated service delivery—is most valuable in complex, high-science trials where clients prioritize execution over price. As metabolic studies become more standardized and larger in scale, they may shift from high-science to high-volume work, eroding Medpace's differentiation. The company's ability to maintain pricing power while scaling will determine whether its superior growth rates are sustainable or merely a temporary advantage in a hot therapeutic area.

Financial Performance: Growth Masking Margin Pressure

Medpace's Q3 2025 results tell a story of accelerating growth underpinned by operational discipline. Revenue increased 23.7% to $659.9 million, driven by metabolic (+59.7%), CNS (+55.9%), and oncology (+16.8%). EBITDA grew 24.9% to $148.4 million, with margins holding at 22.5% despite the pass-through headwind. Core service profitability is expanding, offsetting the margin dilution from reimbursable costs. The company's ability to protect margins while scaling suggests genuine pricing power and cost discipline.

However, the quality of earnings is deteriorating. Net income growth of 15.3% lagged EBITDA growth of 24.9%, primarily due to a higher effective tax rate (22.2% vs. 18.8% prior year) and lower interest income. More concerning, the year-to-date EBITDA margin of 21.8% is down 20 basis points from 2024, even as revenue growth accelerated in the second half. This implies that the pass-through cost pressure is structural and will continue to weigh on margin expansion.

Cash flow generation remains robust, with $520.6 million in operating cash flow year-to-date and $572.3 million in free cash flow over the trailing twelve months. The company has deployed $912.9 million in share repurchases year-to-date, reducing share count and boosting EPS. It shows management's confidence in the business and its commitment to returning capital, but it also reduced cash from $669.4 million to $285.4 million, limiting financial flexibility for acquisitions or investments.

The market is rewarding Medpace for growth, but margin compression and deteriorating earnings quality suggest the valuation premium may be vulnerable. If pass-through costs remain elevated and hiring accelerates, free cash flow conversion could decline, forcing the company to slow buybacks. Investors should focus on EBITDA margin ex-pass-throughs and free cash flow per share as truer measures of value creation than headline revenue growth.

Outlook and Execution Risk: The 2026 Inflection Point

Management's preliminary 2026 guidance calls for low double-digit revenue growth and high single-digit EBITDA growth, a notable deceleration from 2025's 17-20% revenue growth and 13.5-15.6% EBITDA growth. It signals that the company expects pass-through costs to remain elevated and hiring to accelerate, creating a margin headwind that will persist into 2026. The assumption that pass-throughs will "peak in Q4 or so and come down over '26" is critical—if they don't, EBITDA growth could be even lower.

The guidance assumes the business environment remains similar to Q3 2025, with cancellations "well behaved" but potentially higher than the record lows of Q2-Q3. This is a realistic but fragile assumption. The biotech funding environment has stabilized, but it remains "acute for many clients," and any macroeconomic shock could quickly reverse the cancellation improvement. The company's ability to maintain a book-to-bill above 1.15x while scaling headcount will be the key execution challenge.

The guidance suggests management is being appropriately conservative, but it also highlights the limits of the current business model. Medpace cannot sustain 20%+ revenue growth without sacrificing margins, and it cannot expand margins without limiting growth. The 2026 outlook represents a strategic pivot toward balanced growth and profitability, which may disappoint investors expecting continued hypergrowth. The stock's reaction will depend on whether the market values margin stability over revenue acceleration.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is that pass-through costs remain structurally elevated beyond 2026, permanently compressing EBITDA margins. If metabolic studies continue to dominate the pipeline and investigator costs keep rising, Medpace could be trapped in a low-margin growth cycle that destroys value. This risk is amplified by competitive pressure from larger CROs who can absorb these costs more easily due to scale and diversification.

Biotech funding concentration remains a critical vulnerability. While the environment has improved, Medpace's 70% exposure to biotech clients means any VC slowdown would hit the company disproportionately hard. The pre-backlog bucket, while large, is the first place clients would cut if funding tightens. A return to Q1 2025 cancellation levels (which management described as "horrendous") could quickly erase the growth narrative.

Execution risk around hiring is substantial. Accelerating headcount growth into a potentially slowing award environment could create utilization problems and margin compression. The company's productivity gains in 2024 were achieved through flat headcount—a strategy that cannot be repeated. If new hires don't achieve target utilization quickly, EBITDA margins could fall into the high teens, triggering multiple compression.

On the positive side, an asymmetry exists if pass-through costs decline faster than expected and the company achieves better-than-anticipated operating leverage. If metabolic study designs become more efficient or investigator cost inflation moderates, Medpace could see margin expansion while maintaining growth, driving significant earnings upside. Additionally, if the pre-backlog converts to backlog faster than the 12-18 month typical cycle, revenue acceleration could surprise to the upside.

Valuation Context: Pricing in Perfect Execution

At $587.98 per share, Medpace trades at 30.7x EV/EBITDA and 7.0x EV/Revenue, a significant premium to larger peers. IQVIA trades at 17.8x EV/EBITDA and 3.3x EV/Revenue, while ICON trades at 11.2x EV/EBITDA and 2.1x EV/Revenue. The valuation assumes Medpace can sustain superior growth and margins indefinitely, despite operating in the same industry with similar competitive pressures.

The company's 41.2x P/E ratio and 24.5x P/FCF suggest the market is pricing in continued strong earnings growth and robust cash generation. The 73.7% ROE and 16.5% ROA demonstrate exceptional capital efficiency, supporting the premium valuation. However, these metrics are backward-looking and may not reflect the margin pressure and investment cycle ahead.

The valuation leaves no room for execution missteps. If 2026 revenue growth falls below 10% or EBITDA margins compress below 20%, the stock could re-rate toward peer multiples, implying 30-40% downside. Conversely, if the company maintains 15%+ growth with stable margins, the premium may be justified by superior capital returns. The key metric to watch is free cash flow per share, which has been boosted by buybacks but could decline if margins compress.

Conclusion: The Pass-Through Puzzle

Medpace stands at a critical inflection where biotech funding recovery and the GLP-1 boom have created a revenue acceleration story that masks underlying margin pressure from structural pass-through cost increases. The company's ability to maintain 22.5% EBITDA margins while absorbing 42% pass-through costs demonstrates operational excellence, but this performance is reaching its limits as hiring must accelerate to capture the metabolic disease opportunity.

The investment thesis hinges on three variables: the persistence of pass-through costs, the conversion rate of the $4 billion pre-backlog bucket, and the company's ability to scale headcount without diluting productivity. If pass-throughs decline as management expects and pre-backlog converts efficiently, Medpace can justify its premium valuation through superior growth. If not, margin compression and competitive pressure could drive a painful re-rating toward peer multiples.

For investors, the key insight is that headline revenue growth is misleading. True value creation will be measured in EBITDA margin stability, free cash flow per share growth, and pre-backlog conversion rates. The stock's 30.7x EV/EBITDA multiple prices in perfect execution of this complex balancing act, making it a high-conviction play on management's ability to navigate the pass-through puzzle while scaling for the GLP-1 gold rush.