Medpace: easing the bottleneck in drug development

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You have likely heard of Moore’s Law, the idea that computing power has grown exponentially as the number of transistors on a chip doubles roughly every two years, while costs fall. Drug development has followed the opposite pattern. Eroom’s Law (Moore’s Law backwards) describes how the number of new drugs approved per billion dollars of research and development (R&D) spending has roughly halved each decade since the 1950s.

Drug development keeps getting harder

One reason is the ‘better than the Beatles’ problem, where new drugs must clear an increasingly high bar by outperforming existing, effective treatments. Meanwhile, the diseases still lacking effective treatments are often more complex, requiring more time, money and scientific insight to address.

The difficulty of clinical trials and regulatory approval is often underappreciated. Although more than 2,000 Phase I drug trials (the first stage of testing a drug in people, focused mainly on safety and dosage) begin each year, roughly 90 percent of drugs never make it to market. Many fail because they are not safe or effective enough, but others stumble because of poor trial design and execution.

Ageing populations and rising healthcare pressures are increasing demand for treatments, while advances in technology, including gene sequencing, which determines the order of the chemical building blocks in DNA, have expanded the pipeline of potential medicines. However, converting promising compounds into approved drugs remains challenging.

This is a type of bottleneck that Global Alpha often looks for in attractive investments – areas where demand exceeds capacity, expertise is scarce, or one essential step determines the pace of progress elsewhere. In this case, clinical trials and regulatory approval have become a critical bottleneck between scientific discovery and commercial success.

Specialist support where it matters most

Medpace addresses this bottleneck. It is a clinical research organisation (CRO), a specialist company that designs and manages clinical trials for drug developers. Most drug developers specialise in scientific discovery, not clinical trials or regulatory approval. Medpace allows them to focus on developing new treatments while it manages a process where poor execution can cause costly delays and postpone access to potentially life-saving treatments.

Before a trial begins, Medpace’s doctors and scientists plan the trial, deciding which patients should be enrolled, what outcomes should be measured and how the study should be structured to produce reliable evidence for approval. Once underway, its operational teams manage the process end to end, from selecting clinical trial sites to supporting patient recruitment to preparing regulatory submissions. This expertise can be valuable to Medpace’s customers.

Scope for sustained long-term growth

Medpace’s operational performance has remained strong, supported by disciplined execution and continued demand for its clinical research services. But the market has focused more on the possibility of weaker near-term demand, which has revived memories of the downturn in funding for biotechnology companies (biotechs) that began in 2022.

However, the evidence so far points more to temporary volatility in contract wins and cancellations than to a lasting weakening in the company’s competitive position. We believe that, over our investment horizon of five years and beyond, Medpace’s growth opportunity remains significant. Despite generating $2.5bn of revenue in 2025, the company addresses less than 10 percent of its core market. Meanwhile, that market should keep growing as clinical trials become more global, specialised and complex, extending Medpace’s scope for future growth.

Why AI can strengthen the proposition

Another reason for the market’s pessimism is the fear that AI could reduce biotech companies’ reliance on CROs like Medpace by helping them manage more trial-related work internally, reducing the amount of work outsourced and, in turn, slowing Medpace’s revenue growth. More automation and easier access to key technologies could also make it more economical for large CROs, typically focused on large pharmaceutical companies, to serve smaller biotechnology companies – Medpace’s core market.

These concerns may not fully reflect Medpace’s market position or the services it offers customers. Smaller biotechs place greater value on a CRO that can provide highly tailored, dedicated service, underpinned by specialist expertise. Many complain that large CROs allocate fewer or less specialised resources to their projects. This pushes them back towards highly skilled and responsive providers such as Medpace. And customers deeply value Medpace’s proposition, with its repeat business rate consistently above 80 percent.

Medpace’s pricing model may also make it attractive to customers and more resilient to AI-related disruption. Its use of fixed-fee contracts, where an agreed price is set in advance, or milestone-based contracts, where payments are tied to specified stages of a trial, gives customers certainty that costs will not spiral during the trial. For Medpace, this model creates both risk and opportunity. Underestimating the complexity of a trial can increase costs and reduce margins. However, if AI can reduce administrative work, identify problems in the trial process earlier and limit overruns or wasted effort, the efficiencies could increase Medpace’s margins and improve cash generation.

Over time, AI could help address Eroom’s Law. By reducing costs and improving the efficiency of exploring new drug targets (the biological molecules or processes a drug is designed to affect) and treatment types, such as small-molecule drugs, antibodies or gene therapies, it creates more potential drug candidates for drug developers to test. Phase I success rates by drug developers that use AI as a central part of discovering and developing medicines are about 80-90 percent, almost double the long-term industry average. Over time, this could drive increased demand for Medpace’s services as more potential medicines enter the drug-development process.

The infrastructure underlying medical progress

Healthcare innovation is one of the major long-term trends of our lifetime. Ageing populations, strained healthcare systems and a deeper understanding of human biology and disease are spurring demand for innovative treatments.

By designing and running high-quality clinical trials, Medpace helps innovative drug developers generate the evidence needed to bring promising treatments to market. This is underpinned by the company’s culture and business model, which prioritise scientific excellence and close working relationships with customers.

Looking ahead, AI could create additional opportunities by accelerating drug discovery, expanding demand for Medpace’s clinical trial services and strengthening the value of its coordinated scientific, operational and regulatory service model.

Risk factors

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As at July 2026, Baillie Gifford held Medpace Holdings. A full list of holdings is available on request and is subject to change.

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