Over the past year or more, the market has soured on unprofitable clinical-stage biotech companies, an understandable development. Investors prefer to put their money in stable and established corporations that generate consistent earnings and cash flow when the going gets rough. However, some clinical-stage biotechs remain highly promising. 

One of them is Madrigal Pharmaceuticals (MDGL -3.06%), a company for which Wall Street has high hopes. Analysts' average price target for the drugmaker currently tops $326, according to Yahoo! Finance, representing an 86% upside from its current share price of about $175. Can Madrigal Pharmaceuticals live up to that potential in the next year?

Targeting a potentially massive market 

Madrigal Pharmaceuticals focuses on developing therapies that treat non-alcoholic steatohepatitis (NASH), a condition characterized by a dangerous buildup of fat in the liver that leads to inflammation, scarring, and liver damage. The liver problems NASH causes aren't due to one of the typical causes: alcohol use. That's where it gets part of its name from -- "non-alcoholic."

Furthermore, while the precise causes of NASH aren't fully understood, obesity is considered a risk factor. So it's not too surprising that NASH has been on the rise along with obesity rates. But developing effective therapies for it has proved elusive -- until now. Some analysts project that the NASH market could be worth as much as $108 billion by 2030 (as of now, there are still no approved therapies).

Where does Madrigal Pharmaceuticals stand in the race to beat NASH? On July 17, the company announced that it had completed a submission to the U.S. Food and Drug Administration (FDA) for accelerated approval of its leading NASH candidate, resmetirom. The health agency set a PDUFA goal date (the latest date by which it should complete the review of the application) of March 14, 2024.

Madrigal's application for resmetirom is supported by 18 clinical studies, including four phase 3 trials. In one late-stage study, resmetirom showed improvement in a range of measures in NASH patients, including a reduction in liver fat and fibrosis (scarring). So resmetirom looks likely to earn the nod from regulators. But what does this mean for investors?

Solid potential, but risks abound 

In the second quarter, Madrigal reported no revenue whatsoever and a net loss of $85.8 million, worse than its $70.7 million loss in Q2 2022. It ended the period with a cash and equivalent balance of $298.4 million, compared to $358.8 million as of the end of 2022. But at this point, these numbers are less important than resmetirom's potential.

Although it is true that other NASH candidates could also earn approval relatively soon, some analysts still hold resmetirom in high regard. The research company Evaluate Pharma puts it as the eighth-most-promising pipeline candidate in the industry, with projected annual sales of $2.2 billion by 2028 and a net-present value of $6 billion. Of note, Madrigal's market capitalization is $3.2 billion as of this writing.

Based on resmetirom's potential, the company looks highly promising. If Madrigal can earn the first FDA NASH approval next year, its shares could skyrocket. Wall Street's lofty predictions aren't out of the question if that happens although it isn't a sure bet either, considering that Madrigal's shares have already more than doubled in the past year due to its progress on its leading program.

Also, it's essential to factor in the risks. If Madrigal fails to earn approval for resmetirom -- or if the regulatory review of its application is delayed -- the company's shares will likely drop off a cliff. In my view, Madrigal Pharmaceuticals could be a decent stock to hold beyond the next 12 months but only for investors comfortable with heightened risk. There is a good chance resmetirom will earn the green light and, in so doing, prove to the world that Madrigal Pharmaceuticals has the tools to develop groundbreaking NASH medicines -- a major selling point for long-term biotech investors.