3 Biotechs Compete for the Same $108-Billion-Dollar Market. Are They a Buy?

By some estimates, the market for nonalcoholic steatohepatitis (NASH) medicines will be worth a startling $108 billion by 2030, even though no drugs are yet on the market for it. That makes it a juicy target for small biotech companies looking to develop the next big drug. It also makes those biotechs potentially lucrative investments, for those who are daring.

But which businesses have the best chance at success in a field where many, including big pharmas, have tried and failed? Let's take a look at three of the myriad of competitors to figure it out.

Who's working on NASH?

There is a trio of popular pre-revenue biotechs angling for the NASH market that you may have heard of: Madrigal Pharmaceuticals (MDGL -0.54%), Terns Pharmaceuticals (TERN 5.82%), and Viking Therapeutics (VKTX 7.92%). Terns has a program that's anticipated to enter phase 2b/3 in 2024. Viking's phase 2b trial is already in progress.

Madrigal's candidate is already done with phase 3 trials, so it's currently awaiting the final call from regulators at the Food and Drug Administration (FDA) on whether it can be commercialized. That would make it the first company to reach the market with a medicine for NASH, which would likely send its shares to the moon. But the picture is a bit more complicated than simply buying shares of Madrigal for the upside, for several reasons.

The first reason is capital. Take a look at this table:

Source: Yahoo Finance. TTM = Trailing 12 months. *Cash on hand includes equivalents and short-term investments.

As you can see, Madrigal's trailing-12-month (TTM) expenses mean that its cash will be tight over the coming 12 months whether or not its candidate gets approved. If its program is commercialized, Madrigal will almost certainly need to raise more money to spin up manufacturing and distribution operations. And once it does, its considerable debt load will mean that it will pay a higher rate on its borrowing than either of the other two companies. Shareholders could be on the hook if management opts to issue more stock to raise additional capital, which is also likely within the next couple of years no matter what happens.

While it's true that the other two biotechs are roughly a year or two behind in terms of finishing clinical trials and seeking regulatory approval, their balance sheets are far stronger than Madrigal's. They can still borrow a significant amount of capital at relatively low interest rates, too. And that means if their NASH programs don't deliver the results they're looking for, or if regulators ultimately give them the thumbs-down, they'll almost certainly have enough resources to make another attempt at commercializing something.

What's the best move for investors?

There's an additional wrinkle that's critical to understand before buying shares in any of these companies. The NASH therapies in development by all three use the same scientific approach, targeting the thyroid hormone receptor beta (TR-beta), with the medicine delivered via a once-daily pill. That implies several things, most importantly that the market will almost certainly react positively to all three stocks at once if any one company succeeds in commercializing its candidate. It also suggests that a failure by any of them has a high risk of punishing the others.

Furthermore, aside from their potential usefulness in treating NASH, TR-beta-targeted drugs could also potentially be beneficial in certain disorders of the central nervous system. Developers could chase alternative indications for their candidates soon after scoring an approval (or a rejection), which would be beneficial for their share prices. However, such drugs could also be detrimental to the health of patients' hearts, bones, and muscles in some circumstances, including in the treatment of NASH. So if any of the three competitors can contain the side effects of their medicine more effectively than the others -- and there isn't any evidence of that just yet -- it would be a huge competitive advantage.

Something else to know about NASH is that there is some disagreement about its name and it won't actually be called NASH for much longer. Per a new scientific consensus on nomenclature in late June of this year, NASH is to be more accurately referred to as metabolic dysfunction-associated steatohepatitis (MASH) moving forward. But for now, nearly all biopharma companies are still calling the condition NASH, and shifting everyone to using the new terminology will probably take some time.

Which option should you go with?

What should you do with all of this information? It depends on your temperament and patience. At the moment, Madrigal is the stock with the highest risks, but also the highest reward potential in the near term. With a price-to-book (P/B) multiple of 31, however, its valuation indicates that the market's hopes for its performance are quite high; that means a downside surprise would be particularly painful.

The other two options are, while still highly risky pre-revenue biotech stocks, somewhat safer: They have enough money to do something different if their plans don't work out. And their valuations are more reasonable, with P/B ratios under 4. But their shareholders will need to wait a while to see how their candidates fare.