Each of these companies is developing a drug for a deadly form of fatty liver disease known as non-alcoholic steatohepatitis (NASH). The big deal here is that NASH is forecast to become one of the fasting-growing drug markets over the next decade, thanks to a surge in innovation in the space that's led to over 20 compounds entering the clinic, as well as the soaring rates of both obesity and diabetes across the globe. Obesity and diabetes are both strongly associated with NASH formation, according to the peer-reviewed literature.
With this theme in mind, I think now is the perfect time to consider whether investors should start to take profits in these high-flying stocks or if a buy-and-hold strategy is the best strategy going forward. Let's dig in to find out.
The initial spark
On May 31, Madrigal kicked off the NASH hypergrowth party by reporting overwhelmingly positive midstage trial results for its thyroid receptor beta-selective agonist, MGL-3196, in patients with biopsy-proven NASH. In brief, patients receiving MGL-3196 exhibited a highly significant reduction in liver fat compared to those on placebo (p < 0.0001). Liver fibrosis was also resolved in roughly half the patients in the treatment arm, which is key because fibrosis resolution is an FDA-approvable endpoint. As a result, Madrigal said it's planning on advancing MGL-3196 into a pivotal late-stage study soon.
While this midstage trial result was stunning in its own right, Madrigal's valuation was further boosted by rumors of takeover interest from top biopharmas like Bristol-Myers Squibb. Madrigal's management even openly admitted this week that they are, in fact, entertaining overtures from potential suitors. The obvious problem with a buyout scenario, however, is that Madrigal now sports a hefty market cap of $4.77 billion. That valuation might prove to be an insurmountable hurdle in buyout talks -- especially since there are other promising companies in play in this emerging space that could be had for far less.
A questionable valuation
On June 12, Galmed followed in Madrigal's footsteps by reporting encouraging midstage results for its fatty acid bile acid conjugate called Aramchol in patients with biopsy-proven NASH who were overweight or obese and had pre-diabetes or type 2 diabetes. The big takeaway from this study is that Aramchol's 400 mg dose arm significantly reduced liver fat (p = 0.045) when pitted against patients receiving a placebo. However, the drug's higher-dose arm of 600 mg failed to achieve statistical significance on the primary endpoint of liver fat reduction (p = 0.065).
That said, Galmed did highlight in its press release that a post-hoc analysis of a subset of patients that exhibited 5% or more absolute change from baseline liver fat measurements did achieve statistical significance in the higher-dose wing of the study. Galmed thus believes Aramchol is worth advancing into the next stage of development and investors apparently felt the same way. The biotech's shares, after all, gained an eye-popping 250% immediately following this top-line data release.
Despite Wall Street's newfound fondness for Galmed, however, I'm personally not convinced this radical revaluation is entirely warranted. While Aramchol did show some clinically meaningful results in its latest midstage trial, the drug doesn't seem to stack up well against the leaders in this field based on the data presented so far. This situation could change as these drugs enter pivotal-stage trials, but it's exceedingly rare for a drug to perform even better in a larger, more comprehensive trial. In fact, the exact opposite is the norm.
Best in class?
Viking is developing a thyroid receptor agonist called VK2809 as a treatment for fatty liver disease and hypercholesterolemia. Because of the overall similarity between VK2809 and Madrigal's MGL-3196, Madrigal's positive midstage outcome triggered a massive surge in Viking's shares at the end of last month. And this stock has continued to edge higher ever since, making it one of the best-performing biotechs halfway through June.
The long and short of it is that investors are clearly optimistic that VK2809's forthcoming midstage results will mirror those of Madrigal's promising NASH drug, thus catapulting Viking into the upper echelon of NASH players later this year. If so, Viking could transform into a hot buyout target as well.
Is this optimism warranted? I believe so. The reason being is that VK2809 and MGL-3196 both work by increasing the expression of LDL receptors and increasing mitochondrial fatty acid oxidation in liver tissue. As such, VK2809 should -- at least in theory -- produce broadly similar results in its ongoing midstage trial, which is expected to read out in the second half of 2018.
Time to buy?
Turning to the question of which stocks are worth holding onto for the duration, I think Viking is the only compelling long-term buy and hold here. Madrigal's drug is clearly the real deal after its stellar midstage results, but the company's valuation is now a bit too rich for my taste. Galmed, on the other hand, seems to have benefited mainly from this rising tide phenomenon. This biotech's NASH candidate, after all, actually failed to meet some of its critical endpoints.
So why is Viking a buy? Despite sporting a drug highly similar to Madrigal's NASH candidate, Viking's market cap is only $652 million right now. A positive readout later this year should thus spark a jaw-dropping rally in Viking's shares. That scenario is far from guaranteed, but there's no doubt that Viking has the most upside potential remaining at this stage in the game.