What happened

Shares of clinical-stage biotech Madrigal Pharmaceuticals (MDGL -0.54%) rose by a noteworthy 20% over the first three and a half days of trading this week, according to data provided by S&P Global Market Intelligence. The biotech's stock took flight for two reasons:

  1. On April 18, 2023, Madrigal announced that the Food and Drug Administration (FDA) had awarded the coveted Breakthrough Therapy designation to its nonalcoholic steatohepatitis (NASH) candidate, resmetirom. This designation is intended to accelerate the regulatory process for drugs indicated for serious or life-threatening conditions. There are currently no FDA-approved therapies for this leading cause of liver transplants in the United States.
  2. Merck sent the entire biotech space into rally mode this week with its $10.8 billion buyout of Prometheus Biosciences for its irritable bowel disease treatment. As a result, investors piled into biotech stocks like Madrigal that are viewed as strong takeover candidates.

So what

Madrigal is preparing to submit a regulatory filing for resmetirom to the FDA. Breakthrough Therapy status ought to shorten the agency's review process, putting the drug on track to hit the market by the end of the year (assuming it gets an OK from the FDA). An approval in NASH should make Madrigal a top buyout candidate. This indication, after all, is easily one of the most valuable untapped drug markets in the world right now.

Now what

Is Madrigal stock still a buy after this latest uptick? I think so. Even with a market cap of $5.2 billion, Madrigal is arguably significantly undervalued in light of resmetirom's immense commercial potential.