You've probably heard of the buy-low-and-sell-high investment strategy, but what about buying high and selling even higher?

After sliding throughout most of 2022, shares of Madrigal Pharmaceuticals (MDGL -2.07%) jumped nearly 300% higher on Dec. 19, 2022. This is a clinical-stage drugmaker, and investors were cheering for its experimental liver disease treatment after it produced surprisingly good trial results.

Despite blowing through the roof already, there's a good chance that this stock could shoot even higher in 2023. Here's why.

Madrigal has what Big Pharma needs

Big pharmaceutical companies are usually depicted as unassailable giants, but in reality, their empires are built on unstable foundations. Patent-protected, market-exclusivity periods for branded drugs rarely last more than 20 years from their launch dates.

New drug discovery is so risky that Big Pharma companies regularly acquire clinical-stage biotechnology companies after they show promise in clinical trials. Madrigal's a one-candidate company with a market cap that has swelled to $4.9 billion.

Madrigal's market value is no small sum, but Big Pharma is flush with cash right now. Pfizer (PFE 0.62%) finished the third quarter with over $36 billion in cash and short-term investments, and it's not the only acquisitive drugmaker with lots of ammunition to fire in Madrigal's direction. Over a dozen companies had enough cash on their balance sheets at the end of September to execute a complete buyout of Madrigal at a 100% premium.

Why everyone expects a buyout

An estimated 24% of U.S. adults are living with non-alcoholic fatty liver disease, and for most, it's a benign condition. For an unfortunate subset of this large population, though, their immune systems begin attacking their liver and limit its function. This condition, called non-alcoholic steatohepatitis (NASH) threatens the well-being of somewhere between 4 and 16 million Americans, and there are no available treatment options.

During the phase 3 Maestro trial, patients given resmetirom were significantly more likely to achieve NASH resolution, which means there were hardly any measurable signs of inflammation. Patients treated with resmetirom were also more likely to show improvement in terms of liver fibrosis or stiffening that occurs in response to frequent damage.

The current lack of available NASH treatments isn't due to a lack of effort from the biotech industry. Ocaliva, a treatment from Intercept Pharmaceuticals (ICPT) that's approved to treat a separate liver condition, came close. In 2020, the U.S. Food and Drug Administration (FDA) refused to grant Ocaliva accelerated approval to treat NASH because it improved fibrosis but failed to resolve signs of inflammation. 

As the first NASH treatment candidate to reduce fibrosis and inflammation, resmetirom has a good chance to succeed where Ocaliva stumbled. Investors will want to keep their eyes open for an upcoming readout from a trial with a similar candidate under development by Viking Therapeutics (VKTX 3.85%). Top-line results from a 337-patient phase 2 study with VK2809 should be ready in early 2023.

Resmetirom sales could soar past $1 billion annually by treating a tiny sliver of the overall NASH population. A truly successful launch, though, could make this a top-selling product for the Big Pharma company that acquires it. Reaching just 5% of the underserved NASH population could lead to roughly $8.5 billion in annual sales according to analysts at Evercore, an independent advisory firm.

A buy now?

Before you run out to buy shares of Madrigal, you should know that we haven't seen all the details from the Maestro study. We know that taking 100 milligrams of resmetirom once daily for a year tripled patients' chance of achieving NASH resolution. Unfortunately, we really don't know if NASH resolution and fibrosis improvements will translate to improved real-world outcomes.

NASH progresses so slowly that the Maestro trial will follow patients around for four and a half years to measure all-cause mortality and liver failure frequency. In the meantime, Madrigal is burning through cash because it doesn't have any approved products to sell.

While a buyout at a premium seems likely, this biotech's $4.9 billion market cap has a long way to fall if it doesn't. Madrigal stock might be worth the risk it presents, but you can probably find better places to put your money to work right now.