Few therapeutic areas of focus are as hot as nonalcoholic steatohepatitis (NASH) is right now. NASH currently has no approved treatments. But that could change soon.

Intercept Pharmaceuticals Inc. (NASDAQ:ICPT) and Madrigal Pharmaceuticals Inc. (NASDAQ:MDGL) stand out as two of the most promising small biotechs with NASH candidates. Madrigal stock has more than doubled so far in 2018, while Intercept's share price is up more than 50%. But which of these biotech stocks is the better pick for investors now?

Female scientist in white lab coat looking through microscope with another scientist holding a dropper.

Image source: Getty Images.

The case for Intercept 

Intercept has at least one advantage over its rivals in the race to market a NASH drug: The biotech's lead NASH candidate, Ocaliva (also known as obeticholic acid, or OCA), already won FDA approval for treating primary biliary cholangitis (PBC) in 2016. Like NASH, PBC is a progressive liver disease. 

Initial results from Intercept's phase 3 clinical study evaluating Ocaliva in treating NASH should be available in the first half of 2019. Gilead Sciences appears likely to be the first to file for FDA approval with its NASH candidate, selonsertib. However, assuming all goes well with the Ocaliva study, Intercept shouldn't be too far behind.

How successful could Ocaliva be if it picks up approval in the NASH indication? Some analysts have projected peak annual sales of more than $8 billion. Less optimistic analysts predict sales of $1.6 billion. With Intercept's market cap currently at $2.7 billion, even the more pessimistic projection makes the stock appear to be attractive.

Intercept is also targeting other indications for Ocaliva. The company is evaluating the drug in phase 2 clinical studies for treating primary sclerosing cholangitis (PSC) and biliary atresia, both of which are also progressive nonviral liver diseases. 

The company's financial position appears to be pretty good as well. Intercept reported cash, cash equivalents, and marketable securities of approximately $538.3 million at the end of the second quarter. With growing sales of Ocaliva, the company shouldn't have to raise more capital anytime soon.

The case for Madrigal

Madrigal doesn't have a drug on the market yet. But the biotech's chances of achieving that goal increased significantly after Madrigal announced positive results in May from a phase 2 study of MGL-3196 in treating NASH.

The most important aspect of those phase 2 results was that MGL-3196 met the study's primary end point of statistically significant reduction of liver fat compared with placebo. In addition, Madrigal's drug met several other secondary end points, notably including 39% of patients achieving NASH resolution compared with only 6% for the placebo group. 

Madrigal's next step is to advance MGL-3196 to a pivotal phase 3 study. The company is busy preparing for this study and working with the FDA to finalize plans. Madrigal is also evaluating MGL-3196 in a phase 2 study for the treatment of heterozygous familial hypercholesterolemia (HeFH), a severe genetic lipid disorder. 

Goldman Sachs analyst Salveen Richter thinks that MGL-3196 could generate peak annual sales of $6 billion if approved for both NASH and HeFH. Richter also views the drug as potentially best in class for treating NASH, thanks to its safety and efficacy profile. 

Madrigal had cash, cash equivalents, and marketable securities of $490.3 million as of June 30, 2018 after raising funds via a stock offering. This should fund operations for the company well into the future.  

Better buy

Which of these two biotech stocks is the better buy? In my view, it depends on your time horizon.

Intercept should have more potential catalysts over the next 12 months. Assuming the phase 3 study for Ocaliva in treating NASH goes well, the stock could jump significantly in 2019. The company also should have a good shot at beating expectations for sales of Ocaliva in the PBC indication.

Over the long run, though, I think Madrigal could perform better if MGL-3196 delivers on its promise. Ocaliva had some potential safety issues that led to the drug receiving a black box warning on its label. But the safety profile for MGL-3196 could be cleaner than that of Ocaliva. If so, Madrigal's drug could become the preferred monotherapy for treating NASH.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.