Over the past year, shares of mid-cap biotech Madrigal Pharmaceuticals (MDGL -0.54%) have taken a beating, down by 25%. However, things could change in 2024. The drugmaker is awaiting a major catalyst that could send its stock price soaring. What's more, Wall Street has high expectations for Madrigal. The average analyst price target for the stock currently is $318, representing about 40% upside from its current price.
Will Madrigal Pharmaceuticals justify the Street's optimism in the next year? And more importantly, is the stock worth buying and holding onto for long-term investors?
A breakthrough in the making
Last year, Madrigal Pharmaceuticals submitted an application to the U.S. Food and Drug Administration (FDA) for resmetirom, a medicine for nonalcoholic steatohepatitis (NASH). The agency is expected to complete the review of Madrigal's application next month. There are several reasons why an approval here could be a big deal.
First, there is a significant unmet need in the NASH market. Obesity is thought to be a major contributing factor and with obesity reaching epidemic levels worldwide, the prevalence of NASH could continue growing. Analysts predict the NASH market will skyrocket in the coming years. Some see it hitting as much as $108 billion by 2030.
Second, there are no approved therapies specifically for this disease, which means resmetirom could be the first.
Third, while many biotechs are trying to develop drugs that treat NASH -- including some of the largest in the world, such as Novo Nordisk -- Madrigal Pharmaceuticals could beat them all to the punch and launch a product in this market before them. That says a lot about Madrigal Pharmaceuticals' innovative abilities.
Lots of potential and lots of risk
If Madrigal Pharmaceuticals is racing toward this important approval, why have the company's shares failed to keep pace with the market in the past year? Of course there is the risk that the FDA will decline to approve the treatment, a possibility every biotech company has to deal with. The risk is even greater with smaller drugmakers that have less experience navigating this highly regulated industry, like Madrigal. Still, resmetirom aced clinical trials, so unless something unforeseen happens, it should earn the nod from the FDA.
There is another potential problem with Madrigal Pharmaceuticals: The company's shares might be a bit overvalued, even after the recent sell-off. It's always hard to predict how much revenue new drugs will bring, but some analysts see resmetirom reaching $3.6 billion in annual sales by 2033. Even if we assume the biotech can get there three years earlier, by 2030, that still makes Madrigal stock seem too pricey.
Let's assume the company can generate $1 billion in revenue in the next year -- an optimistic estimate. The company ended the third quarter with about 18.3 million shares outstanding, so that would work out to $54.65 of sales per share if it had $1 billion in revenue.
If you divide the current stock price of $230 by $54.65, you'd get a price-to-sales ratio in this scenario of 4.2 and I'd consider the "undervalued" threshold starting at 2 and under. And again, this analysis isn't adjusted for potential risk. Will resmetirom actually generate $1 billion in sales in the next year? Will other drugs enter the market soon enough to take away some market share? These questions would complicate calculations and likely make Madrigal Pharmaceuticals look far less attractively valued than it already does.
That is, after all, the opinion of some analysts who have estimated a valuation for this company that has notched no sales yet.
MDGL PS Ratio (Forward) data by YCharts
You could argue that Madrigal Pharmaceuticals is worth a premium given the breakthrough it is potentially making in the NASH market. But how much of a premium is the company worth when better-established biotech stocks like Novo Nordisk are hot on that trail in the NASH market and have proven they can deliver solid financial results and stock market performances over long periods?
Madrigal Pharmaceuticals might be the better choice for investors who want absolutely explosive returns in the next few years. On the flip side, the investment also carries much more risk. So, is Madrigal Pharmaceuticals likely to hit the Street's price target in the next year? My view is that there is a decent chance that it will, although it is by no means a guarantee.
But the catalyst from the potential FDA approval for resmetirom could lead to substantial gains for the stock. As a long-term option, however, Madrigal Pharmaceuticals still looks a bit too risky and overpriced. It's worth keeping a close eye on the company given its obvious innovative prowess, but long-term investors should wait for a better entry point.
