While most stocks have struggled under rising interest rates, steep inflation and waning consumer confidence, Madrigal Pharmaceuticals (NASDAQ:MDGL) has generated enormous returns over the past few months.
Madrigal is a clinical-stage company working to develop treatments for non-alcohol steatohepatitis (NASH). The company’s most promising drug, called resmetirom, is currently in Phase 3 clinical trials. Madrigal eventually hopes to commercialize this novel drug to treat those suffering from certain types of fatty liver disease.
What Caused Madrigal to Skyrocket?
Shares of Madrigal Pharmaceuticals shot up on December 19th, rising more than 200 percent in a single day of trading. This coincided with a similarly massive increase in daily trading volume, which rose from the average of slightly over 300,000 to over 2 million. This single-day spike largely accounts for the enormous 52-week trading range of Madrigal stock, which ranges from $57.15 to $315.45.
The primary driver behind Madrigal’s enormous share price increase was the release of data from a recent clinical trial of resmetirom. The data showed significant resolution rates of NASH among participants given 80mg daily of the novel drug. Those given a higher dose of 100mg daily saw slightly higher resolution rates. More participants saw significant improvements in their NASH without full resolution.
Based on the new data, it appears that resmetirom could have significant potential as a clinical treatment for NASH. The extremely positive findings from the trial also open the door to accelerated FDA approval. Madrigal plans to file for the administration’s rapid approval process this year.
Around the same time, Madrigal also raised over $300 million in new funding to continue research and commercialization efforts for resmetirom. This new injection of capital may be necessary for bringing the drug to market and generating initial revenues.
Where Does Madrigal Go From Here?
The next steps for Madrigal as a business will involve securing FDA approval for resmetirom and commercializing the drug. From there, the company’s success will depend on the available market for its products.
While there is still much to be learned about NASH, studies suggest that 2-5 percent of adults in industrialized countries suffer from the disorder. In advanced stages, the only current treatment for severe NASH is liver transplant, an expensive and risky surgical procedure. Resmetirom could substantially change this prognosis and offer treatment to the millions of adults presenting with NASH.
Analysts project that the stock could still have some room to run this year. The target price for Madrigal is $320, 17.5 percent higher than the most recent price of $272.30. The stock maintains a consensus buy rating, with 11 out of 13 covering analysts touting it as a buy.
Eventual revenues and earnings will depend on the price of resmetirom and the profit margin Madrigal can realize on the drug. Given the relatively high prevalence of NASH, however, the company certainly has the potential to realize large profits by offering a superior treatment option for the condition. Once Madrigal wins FDA approval, investors could see a relatively rapid move toward profitability on the company’s part.
Despite extremely positive clinical trial results, investors must keep in mind that Madrigal Pharmaceuticals has yet to generate any revenue from its activities. As such, the stock’s value is entirely based on future revenues and earnings that rely on eventual FDA approval and commercialization of its drugs.
Madrigal’s balance sheet may also be too weak to justify the current level of investor bullishness. As of the end of Q4, Madrigal had $358.8 million in cash and marketable securities.
While this represented a substantial increase over the company’s cash reserve at the end of 2021, this amount may not be sufficient to fund Madrigal’s long-term expenditures. Operating expenses for 2022 totaled $293.6 million, suggesting that Madrigal can fund itself for less than 18 months using its current reserves.
Investors may also find the recent activities of company insiders slightly concerning. Insiders sold over $20 million worth of stock over the past 12 months, with no recorded stock purchases. Madrigal’s insider ownership, however, remains at nearly 30 percent.
Finally, investors must consider the possibility that the recent run has left the stock overvalued. The stock price now reflects the expectation of windfall profits following resmetirom’s success in Phase 3 clinical trials.
Delayed approval, slower-than-expected sales or higher operating expenses could all reduce eventual earnings. As such, Madrigal requires a set of optimistic assumptions to be proven correct in order to justify its current share prices.
Is Madrigal Pharmaceuticals a Buy?
Ultimately, Madrigal Pharmaceuticals is a high-risk, high-reward clinical-phase pharmaceutical stock. While investors could still see substantial gains from this company when its treatments appear on the market, there are still several hurdles Madrigal will need to clear before it can generate earnings. The company may also have to raise further funding through issuing more stock or taking on additional debt, both of which could reduce its value for investors.
To be sure, Madgrial appears to have a great deal of potential. By offering a non-surgical approach to treating NASH, the company could create value for millions of patients and reduce the risks associated with this liver disorder. The resulting profits could be substantial, especially if Madrigal’s treatment is the first to reach the market. More rapid approval by the FDA could also help investors realize a more rapid return on their capital.
Investors who are comfortable with high levels of risk may want to consider adding Madrigal to their portfolios. Based on the recent clinical trial data, resmetirom appears to have the potential to treat a relatively common and potentially deadly disease for which no other pharmaceutical intervention has been developed. This stock is also likely a better option than many clinical-stage pharmaceutical stocks, as Madrigal’s trial data makes approval look very likely.
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