Exciting growth stocks are highly coveted, but some fly under the radar for various reasons. And this gives astute investors the opportunity to pounce before their shares rise significantly.
Mid-cap biotechs Madrigal Pharmaceuticals (MDGL 4.00%) and Axsome Therapeutics (AXSM 2.76%) seem to fit the bill. Both drugmakers look highly promising, and there could be plenty of upside at their current market values. Let's find out more.
1. Madrigal Pharmaceuticals
Madrigal Pharmaceuticals recently earned approval from the U.S. Food and Drug Administration (FDA) for Rezdiffra, the first therapy on the market for non-alcoholic steatohepatitis (NASH), a severe liver disease affecting about 5% of adults in the U.S., according to some estimates.
Though plenty of pharmaceutical giants with much bigger budgets tried to develop therapies for NASH, Madrigal -- a small-cap biotech -- beat them all to the punch. And patients will have access to Rezdiffra without needing a liver biopsy first, a requirement that would have limited its sales potential. The company will target a market of roughly 315,000 patients.
Rezdiffra will almost certainly exceed $1 billion in annual sales at its peak. Still, despite the milestone of launching its first medicine on the market (and an important one at that), Madrigal has substantially underperformed the market over the past year. Perhaps investors thought the company's success with the new drug was already baked into its stock price -- the market capitalization is $5.2 billion as of this writing.
That seems on the overvalued side, considering it has just one product on the market, which likely won't reach blockbuster status within the next year. There are other risks associated with Madrigal. For one, other drugmakers look close to joining the NASH market. And the biotech has no other pipeline candidate on which it is working.
So Madrigal isn't without its share of risks, but aggressive investors should still consider adding a small position in this stock. Given the company's innovative potential and first-mover advantage in a large market, it could deliver outsize returns.
2. Axsome Therapeutics
Axsome Therapeutics has made significant clinical and regulatory progress in recent years. Most notably, it earned approval for a depression medicine called Auvelity in late 2022.
The biotech has one other product on the market, Sunosi, which treats excessive daytime sleepiness associated with narcolepsy. The drugmaker's sales are growing fast but aren't impressive yet. However, it has exciting possibilities in its pipeline that should help transform its lineup in the next few years.
The company is going after 10 new indications and currently has five products in pivotal studies, including Auvelity and Sunosi. The former is being studied in Alzheimer's disease agitation -- when patients become anxious and restless. With an aging population and an increasing number of Alzheimer's patients, the need for medicines to address this disease will only grow.
Axsome recently started a phase 3 study for Sunosi in binge-eating disorder. The biotech is developing other medicines for migraine, narcolepsy, and fibromyalgia.
Some of these programs might not pan out, which is always a significant risk for biotech stocks. But the company can afford a rejection or two given the breadth of its pipeline.
Currently, Axsome Therapeutics' market cap is only $3.4 billion. Although it has lagged the market over the past 12 months, it has performed pretty well. In my view, there is substantial upside for the stock at current levels. Long-term investors would do well to seriously consider investing in the company.
