Medpace Holdings, Inc. (MEDP) Earnings Call Transcript & Summary

Welcome. Thanks, everybody. This is Erin Wright. I cover Life Sciences Tools, Diagnostics at Crédit Suisse, and welcome to our 2020 Crédit Suisse Health Care Conference. Obviously, this will be in virtual format this year, so a little bit different. But if you do have questions for the company, you can e-mail me at erin.wright@credit-suisse.com. And with this particular presentation in fireside chat, it will be audio only. So there's nothing wrong with your video, but this one will be uniquely in audio format only. And with that, I'd like to introduce Medpace. With them, we have President and CEO, August Troendle; Jesse Geiger, CFO and COO of the Laboratory Business; and then also -- I think we also have Kevin Brady on, the Executive Director of Finance, as well. So with that, I think I'll get it started with the Q&A.

First off, August, could you kind of give us a few highlights, what you thought were sort of the 2, 3, 4 major takeaways from the most recent quarter, in your view? And maybe what you would want investors to overall take away from the most recent results.

Okay. This is August. Yes, highlights last quarter, I think were one off recovery, rather strong recovery and the willingness of certainly biotech clients to move forward with programs. That's despite a continued difficulty with site access and still recruitment headwind. There is still a little bit of friction in getting patients into sites and getting patients enrolled into trials. So that has remained challenging. It improved a fair amount in the quarter, but it's still a bit more difficult than usual. And -- but despite that, really, I think the funding environment and just the impression that things aren't going to change soon, but they're on a -- at least a path to getting things done, maybe a little bit slower, but the workarounds have been effective. So there is no major disruption of trials in that way, stopping of trials or significant problem with data and keeping patients in the trials. So I think that, that perception that things won't get worse in those terms that we've been able to mitigate the difficulties with virtual visits, et cetera, a lot of technology, I think gave confidence to a lot of clients to move forward with programs. So I think that things are are ramping up and should see continued traction into the new year.

Okay. Great. And then you noted the COVID backlog less than $45 million year-to-date with wards, I think in -- of $10 million most recently. And I guess your COVID-related work is relatively limited. But how should we think about contributions or the magnitude of revenue associated with that COVID-related work?

Yes. I'll take that. It's Jesse. Yes, the COVID work we have is relatively small. It represents about 3% of our third quarter revenue. It represented about 3% of third quarter backlog. We do expect this to roll out over the next year or so and not really have a meaningful impact on revenue in any given period relative to other non-COVID work, which has been very strong and continues to to build. So it is small. And just for the benefit of the audience, our COVID work is primarily therapies and treatments as opposed to vaccine work, but we expect that to continue on here for the next year or so.

Okay. Great. And then August, I think you touched on this earlier, but how have the physical monitoring of visits progressed? I think in the -- it kind of hit that low point in the second quarter, obviously, down 20% to 30%. What are your expectations for a recovery? And where does that stand now?

Yes, it's Jesse. I'll speak to that one, Erin. The physical monitoring visits across our portfolio are still below pre-COVID levels. They have been increasing and beginning to recover, as August mentioned. These do represent the majority of monitoring activities now when combined with the virtual visit activity that we're performing. We do expect things to be relatively steady and stable here in the remainder of the fourth quarter and begin to progress here as we head into 2021.

Okay. And then in terms of the increase in remote monitoring as well as virtual concepts, how sticky is that in a post kind of COVID world? Do you anticipate that being a larger portion of your kind of business going forward?

Yes. I think we'll continue to see some amount -- or increased amount of virtual activity for quite some time. As we've adapted and sites have adapted to this environment with the ability to get electronic access to records or source documents uploaded into our portal, we've been able to do more remotely than we have in the past and sites have been able to accommodate that as well. So I do think that the industry has been evolving for quite some time, and I think this pandemic has maybe boosted the speed of some of these changes. But I do think there will continue to be some mix of virtual monitoring activity continuing on into the future. I don't think it goes back to 100% or a lot of on-site activity. I think there'll continue to be some mix of virtual activities.

Okay. And how does that impact you from a cost perspective?

From a cost perspective, there's -- the activities that we're performing, a lot of those are the same, whether we're there or remote. The one area that would be absent in remote activity would be the cost of the travel to the site and the travel time to the site. So those are lower or nonexistent in a virtual approach. But many of the same activities we're performing one way or another, whether we're physically there or not physically there.

Okay. Great. And then in terms of what you're seeing kind of quarter-to-date, is there anything you would point to as being relatively strong, whether it be kind of continued robust momentum in RFP flow? Obviously, we're seeing a strong biotech funding environment. Where do some of those metrics stand now on a quarter-to-date basis, is there anything that you would highlight?

Yes. Nothing really to highlight. The funding environment and RFPs continue to be good here as we progress into the fourth quarter. I won't speak to -- specifically to metrics on an inter-quarter basis, but the environment continues to be strong.

Okay. Great. And then in terms of update on any sort of cost mitigation efforts, just generally speaking, what was temporary, what was more structural in nature in terms of how you've adopted in this sort of more underlying kind of volatile environment?

Yes. We did take some head count actions back in the second quarter. We're back to hiring now, hiring aggressively. So those costs are beginning to ramp, employee-related costs. There were other discretionary costs like internal travel and training and different types of business meetings that continue to be suppressed. Many of that -- those are taking place virtually now. We do expect some of this to come back as we head into 2021, but the primary ramp in cost and investment in the business is in head count and hiring.

Okay. And in terms of 2021, can you kind of -- I guess, can you kind of go over your expectations there? How that shakes out from both a top line perspective and a margin perspective, given some of the also hiring dynamics that you just mentioned?

Yes. On the top line, our initial guidance range that we came out with on the most recent call for 2021 implies a growth rate of around, I think, 16.7% to 25% off of the midpoint of 2020 revenue guidance, and that represents really our best view of the range of possibilities for 2021. We factored in a number of different opportunities and risk factors. Some of the key drivers that influence this are, one, just how long this robust business environment continues? Also how aggressive we're able to hire to meet the opportunities. And then on the risks side of things, it's elements like what level of COVID disruption from any lockdowns or restrictions might pop up around the world as we continue to work through this current environment. And then also, I would say, another influencer is the investigator site payment activity, which has continued to be down. It had been running roughly 35 or mid-30s percent of revenue kind of pre-pandemic. Most recently, it's around 30% of total revenue on the pass-through and out-of-pocket costs. We do expect that to come back, and that will have some impact on 2021. From an EBITDA standpoint, our guidance does imply a margin range of 18% to 21% relative to recent margins that have been in the, I think, low 20s percent range. As we continue to hire and incur employee-related costs, that will push margins down a little bit. So we do expect that to have a negative impact on margins, but a positive influence on growth.

Okay. And then what have you seen in some of the geographies where there have been further lockdowns or restrictions? And have you seen customers or sites or responses generally different than what we saw kind of in the March timeframe? I'm just curious if the response is inherently different this time around in subsequent waves.

Yes. I think everybody is better equipped to handle it now than we were initially, and speaking for ourselves and also for sites. So where we have seen in certain countries, the restrictions get reimposed or more lockdowns, we haven't seen, I guess, in contrast to what was happening back in March, where, in a lot of cases, sites shut completely down. Many sites, even in some of those restricted areas, have been able to maintain some level of on-site presence and some level of interaction with us digitally. So I think everybody's adapted and learned. And even as things tightened up in different geographies here and there, both the sites and we are able to continue to move things forward at some rate.

And do you think -- I mean, does your guidance assume things generally normalize by like second half of '21? Is that the right way to characterize it?

We haven't really pegged a time point in there, and I don't know what normal is really. But we do...

That's fair. That's fair.

We do expect continued positive momentum and a stable environment in our expectations for 2021.

And I know you've mentioned kind of RFP flow being kind of still relatively strong, but you've also mentioned in the past the quality of RFPs coming through the pipe as being a primary measure kind of CRO health and demand trends. I guess, can you speak to what you're seeing in terms of the quality of RFP flow coming through the pipe now? And what should be coming kind of when things do normalize? Is that inherently different?

Sure. I'll take that, Erin, since I want to kind of comment on that in the past in terms of quality. Yes, look, we do look at -- it is important to look at what type of opportunities we're getting and how well funded our clients are. So maybe in the large pharma environment, kind of all RFPs coming in are likely to move forward in some way or other. But in our biotech area, funding is a critical part of it. How far along they are in their plans, how rational we see that, what type of opportunity there is. So there is a lot of subjective assessment of the opportunity, not just its dollar size, but in terms of its likelihood of getting to operationalized project. So that is important. And like I said that this past quarter, there has been a substantial improvement in the willingness of both the funding level of clients coming in, the willingness to move forward, not just do sort of scenario planning and preparation for the future, but current need, decisions to move forward on projects. So I think that's led to a significant improvement in the quality and a relatively consistent level of RFPs, but improving quality of them, yes.

Okay. Great. And then obviously, you have the focus on the small and SMID biopharma kind of arena, what are you seeing now in terms of the competitive landscape? Are you seeing new competitors at the table when you're bidding for RFPs? I'm curious, just because it's definitely resonated across the industry in terms of the opportunity across small, mid biotech?

Yes. I think the -- we are competing against other public players, and I think that's continued to be what we see. We haven't really seen new players or change in mix. But we'll see over time, but that really hasn't changed.

And then on the flip side of that question, I guess, is there any opportunities potentially with large pharma customers that you would entertain? Obviously, very, very small in terms of your exposure there now and not really the focus, I assume. But is that something that evolves in terms of your strategy over time? Or not on the table?

I think at this point, it's not on the table. We're not really approaching large pharma for preferred provider relationships. And that's just not a market we focus on, and I don't see that changing in the near term.

Yes. Okay. And do you think that, that still focus solely on sort of SMID biotech really resonates with your customers? Is that one of the key selling points? I mean, is that one of your -- still one of your go-to-market strategies is to market yourself as sort of that dedicated full-service biotech-focused CRO?

Well, we do go-to-market with a full-service offering. I do think that clients do understand our focus in the area. I don't know that we -- particularly that is a specifically a selling point, but I do think they like the fact that we are used to working with virtual companies. We are often in that space that we do specialize in providing full-service support and have the depth of processes and infrastructure to support that. So I do think that is an important part of it as differentiating us, yes.

And how do you risk adjust kind of for -- or can you remind us how you risk adjust for your customer base that may be unique? I mean a good component of your customer base is also pre-revenue biotech. You do have a conservative, relatively speaking, bookings policy. And can you remind us on where that stands today in terms of your policies on that front?