Madrigal Pharmaceuticals (MDGL 0.63%) may not be a familiar name to many investors, but the consensus of Wall Street analysts expects its shares to rise by 93% within the next 12 months. That's assuming its lead candidate, resmetirom, is approved for sale. The drug is used to treat a liver disease called non-alcoholic steatohepatitis (NASH), also known as metabolic-dysfunction associated steatohepatitis (or MASH).
If everything goes as planned, resmetirom could be approved on March 14 of next year. That means the analysts are on to something. But its shares are still down by 23% over the last five years. Should you still consider buying this stock?
NASDAQ: MDGL
Key Data Points
Can it win the race to the NASH market?
The first thing to recognize about why Wall Street's forecast could be correct is that NASH drugs will have a huge market, and there are currently no players competing for it. The National Institutes of Health (NIH) estimates there could be between 10 million and 42 million people living with NASH today in the U.S.
Given how many people could have NASH and its precursor condition, non-alcoholic fatty liver disease (NAFLD), the market for treatments could eventually be as large as $108 billion by some estimates, and there are a handful of biopharmaceutical businesses competing to commercialize a medicine first. More-grounded estimates put the market's size between $20 billion and $35 billion by 2030, which still leaves plenty of room for a biotech like Madrigal to earn a sizable share.
Its candidate resmetirom is already done with its clinical trials, so all that remains is getting the green light from the Food and Drug Administration (FDA).
On that front, the data is promising. In its phase 3 clinical trial, 30% of the 321 patients treated with 100 milligrams of the drug had their NASH resolve, compared to 10% of patients receiving a placebo; 26% of treated patients experienced an improvement of one or more stages in their liver fibrosis diagnosis, whereas only 14% of placebo patients did.
Furthermore, while the treatment does carry the risk of severe side effects, many of which are gastrointestinal in nature, resmetirom didn't appear to be so burdensome as to make too many patients discontinue treatment. Regulators will likely find that to be a positive factor.
The company is currently running another phase 3 trial for the treatment to see if it could also be helpful for compensated cirrhosis of the liver. If it succeeds in that effort, it could be a major expansion of its addressable market. But the trial probably won't be done before 2025 or beyond at the earliest, so it isn't a major element for the stock meeting Wall Street's near-term expectations.
A stumble could devastate the shares
On the basis of its clinical trial data, Madrigal looks like it has very good odds of being the first entrant to the NASH market. Still, for investors, it isn't a slam dunk; more than one company has failed in its bid to get a NASH therapy approved.
Investing in Madrigal right now entails significant risks, and its financial position is starting to look somewhat precarious. It has no revenue to speak of, and with nearly $100 million in debt, it probably won't be able to take out more loans if regulators find issues with resmetirom.
That's a problem, as its trailing-12-month operating expenses are $330 million, and it only has $298 million in cash and equivalents on hand. Therefore, a failure with attaining regulatory approval in March would be very bad for the stock, since it would imply the need for significant additional expenditures on research and development (R&D) before reaching revenue, which would need to be financed by issuing new stock. And even if it gets the approval, it might issue new stock anyway if the terms of new debt look unfavorable.
With that in mind, if you're normally comfortable with the risks associated with investing in biotech stocks, Madrigal is a decent pick. On the other hand, if you're a more conservative type of investor, it makes sense to revisit this one after the first quarter of 2024. Either way, this stock isn't a screaming buy so much as an opportunity that looks ripe for the right kind of buyer.
