Exelixis and Medpace: the 2 top-quality biotech stocks

2026-07-03 · By Lubin Danilo, founder of Lubin Investment

Out of hundreds of biotech stocks I track, only two earn the top score: Exelixis (EXEL), which sells an approved cancer drug and generates real cash, and Medpace (MEDP), which develops no drugs at all but runs clinical trials for pharmaceutical companies. Two opposite models, one shared trait: real, recurring free cash flow.

Why biotechnology is a minefield for most investors

On my site I run a screener that scores hundreds of publicly traded companies against ten financial quality criteria: profitability, the ability to turn earnings into real cash, revenue growth, debt levels, capital allocation. In most sectors I regularly find companies that check eight or nine boxes out of ten. In biotechnology, it is a desert. Out of every biotech and clinical research company I track, only two, Exelixis (EXEL) and Medpace Holdings (MEDP), earn the maximum score of 10 out of 10.

The reason lies in how the sector works. Developing a drug costs hundreds of millions of dollars, sometimes more than a billion, spread over ten to fifteen years of research. A molecule enters phase 1 clinical trials (the first safety tests on a small group of patients), then phase 2 (testing effectiveness on a larger group), then phase 3 (the decisive trial, often involving thousands of patients, meant to prove the treatment works better than an existing drug or a placebo). At every stage the failure risk is enormous: medical literature estimates that barely one drug candidate in ten that enters human trials ever reaches approval. During all that time, the company sells nothing. It burns cash, raises money by issuing new shares, which dilutes existing shareholders, and starts again.

• Out of hundreds of biotechs I track, only Exelixis (EXEL) and Medpace (MEDP) earn the top score in my quality screener.
• Biotechnology typically burns cash for ten to fifteen years before a drug generates any revenue at all, with a very high clinical trial failure rate.
• Exelixis sells an approved drug, cabozantinib (Cabometyx), and turns it into real, recurring free cash flow.
• Medpace develops no drugs at all: it is a CRO (contract research organization) paid by pharmaceutical companies to run their clinical trials for them.
• Both stocks currently trade between roughly 16.5 and 19 times free cash flow, far from the disconnected multiples seen elsewhere in the sector.

The result: the overwhelming majority of publicly traded biotech companies simply do not have positive free cash flow, the figure that measures the money actually left in the bank once every bill is paid, salaries and lab equipment included. My screener needs that real cash to calculate almost every one of its criteria: free cash flow margin, return on capital employed, ability to pay down debt. Without cash, the score collapses automatically. That is why biotechnology is, statistically, the hardest sector to fit into my grid.

My quality scorecard, in plain terms

Before getting into the two exceptions, a word on the method. My site judges the quality of a business against ten objective criteria, independent of its stock price: is it profitable, does it convert earnings into real cash, is its growth solid, does it buy back its own shares rather than dilute them, is its debt manageable relative to the cash it generates? Two indicators come up often in this article. Cash ROCE, return on capital employed calculated on cash rather than accounting profit, measures how much cash a company generates for every dollar of capital tied up in its operations. Free cash flow margin measures what share of revenue turns into cash actually available to the business. A score of 10 out of 10 does not mean best company in the world: it means the business clears every one of my financial soundness filters, with no notable exception.

Exelixis (EXEL): the rare biotech with a drug that actually pays

Exelixis is a biotechnology company focused on oncology. Its flagship product, cabozantinib, sold under the brand name Cabometyx, is an approved treatment for several cancers, including advanced kidney cancer, hepatocellular carcinoma of the liver, and more recently neuroendocrine tumors. Unlike almost all of its peers, Exelixis is not waiting on a hypothetical approval: it already sells a drug, with sales that keep climbing year after year as new indications get approved.

The numbers back that up. Its free cash flow margin reaches 33.7 percent: for every dollar of sales, 33.7 cents end up as cash the company can actually use, after paying all its research and development costs. Its Cash ROCE stands at 56.1 percent, its net margin (accounting profit relative to sales) at 35.1 percent, and its revenue has grown roughly 13.8 percent a year on average over five years. It carries no net debt: its cash pile exceeds its borrowings, with a net debt to free cash flow ratio of negative 0.28. At 52.72 dollars a share, for a market capitalization of about 13.2 billion dollars, the market values it at 16.53 times its annual free cash flow, a reasonable multiple for a business of this quality. The one small flag my screener raised: the share of earnings actually converted into cash comes in just under the ideal threshold, at 0.96 versus a target of 1, a minor point worth watching rather than a real problem.

Exelixis's moat, its durable competitive edge, rests on its cabozantinib franchise, protected by patents and embedded in oncologists' prescribing habits, and on its pipeline. Its most advanced candidate, zanzalintinib, is the subject of seven ongoing or upcoming pivotal trials. A first application, for previously treated metastatic colorectal cancer in combination with atezolizumab, has already been filed with the FDA, the US drug regulator, with a decision expected in early December 2026. If approved, Exelixis could build a second commercial franchise alongside cabozantinib.

The risk is concentration: most of the company's revenue still depends on a single family of molecules. If a competitor launched a superior kidney cancer treatment, or if zanzalintinib failed in phase 3, the thesis would change fast. You can check the full numbers and score on the Exelixis analysis page.

Medpace (MEDP): not a drugmaker, a research service provider

Here is the most important distinction in this article. Medpace Holdings does not invent, manufacture, or sell any drug. It is a CRO, a contract research organization: a services company paid by pharmaceutical companies and biotechs to design and run their clinical trials on their behalf, from phase 1 through phase 4. In practice, when a drugmaker wants to test a new treatment, it often outsources the trial logistics (patient recruitment, medical monitoring, data management, lab testing, imaging) to a provider like Medpace rather than building all of it in house.

That difference changes everything about the risk. A biotech that develops its own drug is betting its future on a binary outcome: the product works or it does not. Medpace gets paid for its work regardless of how the tested drug ultimately performs, much like an architecture firm bills for its plans whether the building sells well or not. Its revenue depends on the number and size of clinical trials running across the industry, not on the success of any single molecule. It is a recurring B2B services model, spread across hundreds of programs at once, the opposite of a biotech's isolated, all-or-nothing bet.

The model is also remarkably light on capital. Medpace's Cash ROCE reaches 563.2 percent, a figure that looks enormous but has a simple explanation: unlike a pharmaceutical company that must fund years of research on its own molecules, Medpace ties up very little capital in its operations, no factory, no patent to fund, so every dollar of cash it generates represents a huge share of the capital actually employed. Its free cash flow margin comes in at 25.7 percent, its net margin at 17.2 percent, and its revenue has grown roughly 21.9 percent a year on average over five years, noticeably faster than Exelixis. Like Exelixis, it carries no net debt, with a ratio of negative 0.95. At 454.27 dollars a share, for a market capitalization of about 13.0 billion dollars, the market values it at 18.85 times its free cash flow.

Medpace's moat comes from its therapeutic specialization (oncology, cardiology, metabolic disease, central nervous system, among others) and its integrated model: central labs, a bioanalytical lab, imaging, all done in house rather than outsourced, which lets it hold deadlines that more generalist competitors, such as Parexel or PPD, often struggle to match. That reputation for fast, reliable execution matters a lot to biotechs that often get only one shot at their pivotal trial before running out of cash.

The main risk is not a molecule failing, it is cyclicality: when biotech venture funding tightens, as it has in recent years, smaller biotech clients delay or cancel trials, which weighs on Medpace's bookings. My screener also flags a few points worth watching, none serious enough to change the score: an average collection period of 48 days on its invoices, a capital allocation mix of buybacks and acquisitions judged value creating but monitored closely, and a chief executive with substantial personal wealth invested in company shares, an alignment signal I view fairly positively. Full detail is on the Medpace analysis page.

Drug developer versus service provider: why the distinction changes everything

If you take away one thing from this article, make it this one. A typical biotech, like almost every one I track, sells a bet: it puts everything into a handful of molecules and hopes at least one crosses the regulatory finish line. Exelixis already won that bet once with cabozantinib, which sets it apart, but it still depends on zanzalintinib succeeding for its next chapter. Medpace does not play that bet at all: it sells its expertise to hundreds of biotechs that are the ones placing it. Whether the tested molecule succeeds or fails, Medpace has already been paid for the work. It is the difference between betting on a horse and running the racetrack.

The numbers side by side

What these two exceptions teach me

Exelixis and Medpace barely resemble each other: one sells a drug, the other sells a service. But they share the trait that matters most to me: real, recurring free cash flow, manageable debt, and growth that does not depend on the next funding round. That is exactly the kind of filter I wanted to be able to run in a few seconds on any stock, in any sector, however hostile it looks at first glance, and it is what pushed me to build my scoring method into my site.

FAQ

What is a CRO (contract research organization)?

A services company that designs and manages clinical trials on behalf of pharmaceutical companies and biotechs: patient recruitment, medical monitoring, lab testing, data management. It gets paid for that work regardless of whether the tested drug ultimately succeeds.

Why do so few biotech stocks pass my quality criteria?

Because developing a drug takes ten to fifteen years with no revenue at all, and clinical trial failure rates are very high. Almost every publicly traded biotech therefore lacks positive free cash flow, which automatically drags down its score on my profitability and cash generation criteria.

Are Exelixis and Medpace expensive stocks?

They trade at 16.53 times and 18.85 times their annual free cash flow respectively. Those are reasonable multiples for businesses of this quality, far from the disconnected valuations found elsewhere in speculative biotechnology.

What is the main risk for each of the two companies?

For Exelixis, dependence on a drug franchise still concentrated around cabozantinib, before zanzalintinib can take over. For Medpace, cyclicality: when biotech funding tightens, its clients delay or cancel clinical trials, which weighs on its business.

Is Medpace's 563% Cash ROCE really a good sign?

Yes, but it needs the right context: it is a figure inflated by a very capital-light services model, with no factory or patent to fund. It reflects an efficient business rather than an accounting miracle, and should be read alongside the other criteria in my screener, not in isolation.

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About the author

Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I find fundamental analysis fascinating, and it has delivered excellent results. For three years now, my performance has beaten the S&P 500. But analyzing every stock took too much time: sites with incomplete data, calculation methods and criteria never aligned with mine. And spotting the best stocks was just as time-consuming, even with my own well-defined checklist. So I put my software development background to work to build this software, base my investment strategy on its results, and share it with people who share the same passion as me. It judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).