Stocks that can generate 400% returns in less than a decade are a rare breed. However, they do exist.

Over the last decade, for instance, the pharmaceutical space churned out a disproportionate number of ultra-high-growth equities, relative to other industries. Pharma stocks have been an unusually fruitful area for growth investors during this period due to the rapid innovation of groundbreaking treatments in areas of high unmet medical need. 

In 2023, the next big domino that might fall in healthcare is the increasingly common liver ailment known as nonalcoholic steatohepatitis (NASH). NASH has proven to be an extremely difficult condition to drug, despite several top-tier biopharmas pursuing the indication with a variety of pharmaceutical interventions. In fact, there are currently no Food and Drug Administration (FDA)-approved NASH medications at the moment. What's astonishing about this fact is that NASH is poised to become the leading cause of liver transplants in the U.S. as a direct result of the out-of-control obesity epidemic. 

A doctor fanning out U.S. currency.

Image source: Getty Images.

There is some good news on this front, however. Last December, Philadelphia-based Madrigal Pharmaceuticals (MDGL 0.21%) announced that its selective thyroid hormone beta-receptor agonist, resmetirom, hit the mark in a pivotal trial as a NASH treatment in noncirrhotic patients with moderate-to-advanced fibrosis. Madrigal plans to use these positive data, along with a bevy of other trial results, to file for the drug's approval on an accelerated basis by the middle of 2023. 

A NASH approval is a very, very big deal

Although Madrigal might not be the first to get a NASH approval from the FDA, resmetirom stands an excellent chance of quickly becoming the standard treatment in the space, thanks to its top-shelf safety and efficacy profile. What's key to understand is that the total addressable market for resmetirom probably exceeds 10 million adults in the U.S. alone.

Now, there is a fair amount of uncertainty regarding the exact size of this market due to the enormous logistical challenges involved in accurately diagnosing NASH at present (an invasive liver biopsy is currently the gold standard). But Wall Street analysts think this drug could generate a whopping $8.5 billion in sales at peak

That being said, this sales forecast could be ridiculously low. Basic mathematics underscore this point. With an exceedingly low market penetration rate of 5% and a highly conservative annual net list price of $19,000 (per a recent placeholder price issued by the nonprofit Institute for Clinical and Economic Review), resmetirom would haul in a staggering $9.5 billion in U.S. sales on an annual basis. Internationally, the drug has a similar commercial opportunity, putting it in contention to generate Humira-like sales ($18 billion to $20 billion per year).

What's more, the same nonprofit watchdog group noted in its draft assessment that resmetirom would still be cost-effective, on a quality-adjusted life-year basis, at an annual price of $39,400. In short, Madrigal has a lot of wiggle room on the price point for this drug.   

Another noteworthy aspect of this story is that the advent of less-invasive NASH diagnostics -- which are being developed right now -- could lead to a more typical market penetration of approximately 28% for a nonpersonalized metabolic-oriented therapy. In that case, resmetirom would easily set records from a sales standpoint, regardless of how aggressively Madrigal decides to go on the pricing front. 

What does this all mean for Madrigal's investing thesis?

Although Madrigal's stock price has gapped up in response to these positive late-stage results, Wall Street may still be seriously underestimating this stock's growth potential.

Based on the company's current market cap of $4.8 billion, the market appears to think one of three rather bearish scenarios will ultimately play out:

  1. Resmetirom's peak sales will top out at well under $2 billion due to either a poor penetration rate and/or a lower-than-expected net selling price on par with, say, a brand-name statin ($5,000 per year).
  2. An extremely slow commercial ramp-up due to the problems inherent in diagnosing NASH patients, giving some of the more formidable competitors under development time to catch up. 
  3. A rejection by the FDA, causing a significant delay in the drug's commercial debut. 

What the market clearly isn't considering is the possibility that resmetirom goes on to become a megablockbuster product (sales in excess of $5 billion per year) before the end of the decade. Of course, this bullish outcome isn't guaranteed by any stretch of the imagination, but it certainly isn't a "blue sky scenario," either.

NASH is a global epidemic, and effective new treatments are desperately needed right now. And as the basic math done here demonstrates, this drug only needs to capture a small sliver of this enormous market to become one of the best-selling medications of all time. 

Madrigal's stock may be absurdly undervalued at current levels. That being said, there are substantial regulatory and commercial risks associated with this NASH play at this critical point in its life cycle. But this developmental-stage biotech stock definitely has the potential to turn an initial investment of $200,000 into a million-dollar payday by the end of the decade.