TERN - Madrigal Pharmaceuticals: A Deeper Look At A Looming NASH Play

2024-01-02 11:12:57 ET

Summary

• Madrigal Pharmaceuticals, Inc. stock has rallied 70% since late October due to a decrease in competitive concerns and a large secondary offering.
• The company's candidate resmetirom is expected to be the first approved therapy for NASH in March 2024.
• The NASH market is estimated to reach $20 billion by 2030, but there are concerns about competition and the need for invasive biopsies for diagnosis.
• Can the rally in Madrigal Pharmaceuticals stock continue?  A full investment analysis is provided in the paragraphs below.

Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth ." - Arthur Conan Doyle.

Shares of NASH concern Madrigal Pharmaceuticals, Inc. (MDGL) have rallied some 70% since late October after pressure from a large secondary offering and competitive concerns waned. Previously, its stock had been down 63% since early May, as GLP-1 analogs prescribed for weight loss and type 2 diabetes have been (in many instances) clearing NASH as a "side effect." With its candidate resmetirom likely to be the first-ever approved NASH therapy in March 2024, the recent insider buying by Baker Bros. merited a deeper dive. An analysis/recommendation follows below.

Company Overview:

Madrigal Pharmaceuticals, Inc. is a West Conshohocken, Pennsylvania-based late clinical-stage biopharmaceutical concern focused on the development of therapies for the treatment of nonalcoholic steatohepatitis ((NASH)). The company's one clinical asset (resmetirom) has been assigned a March 14, 2024, PDUFA date, setting it up as the first-ever approved treatment for NASH. Madrigal, as predecessor VIA Pharmaceuticals, in-licensed the rights to resmetirom from Roche (RHHBY) in 2008 and incorporated under its current moniker in 2011. It went public when it reverse-merged into failed oncology concern Synta Pharmaceuticals in 2016, with its first trade transacted at $9.80 a share. The stock trades at just over $2300 a share, translating to an approximate market cap of $5 billion, after giving effect to 2.05 million pre-funded warrants.

NASH

NASH is a severe inflammatory version of nonalcoholic fatty liver disease ((NAFLD)) and is characterized by three components: liver fat accumulation, inflammation, and liver cell damage known as ballooning. NAFLD is believed to burden ~25% of Americans, while NASH is believed to afflict ~25% of NAFLD patients, or ~22 million. Contributing factors include obesity, diabetes, and hypertension. The disease is heterogeneous, with sufferers characterized by the presence or absence of fibrosis (scarring) and those who progress to NASH cirrhosis categorized as either compensated (normal liver function) or decompensated (impaired function). The latter, comprising ~300,000 of the ~2.4 million cirrhotic NASH patients, is an indication of end-stage liver disease. Progression from initial NASH diagnosis to cirrhosis or late-stage complications can transpire in five to ten years. Currently, there are no approved remedies for NASH, with transplantation the only alternative when it progresses into liver failure or cancer.

NASH severity is measured by a 0 to 8 point NAFLD activity score ((NAS)), which assigns values for steatosis (fat retention), inflammation, and ballooning.

The domestic NASH treatment opportunity is currently unknown but is estimated to reach $20 billion by 2030 according to iHealthcareAnalyst with the global market estimated at $108.4 billion by Vantage Market Research. With that large of an unpenetrated market, NASH has been a hotly and unsuccessfully pursued indication for more than a decade.

Resmetirom

Madrigal's entrant into this race is resmetirom, a once-daily, oral selective agonist of thyroid hormone receptor beta (THR-ß), the predominant receptor responsible for metabolic processes in the liver, including lipid absorption. Activation of THR-ß is believed to reduce markers of NASH-related liver inflammation and fibrosis. Based on the results of one Phase 2 and two Phase 3 trials evaluating resmetirom, this thesis appears to have merit. In the Phase 2 study, the therapy achieved a statistically significant reduction in liver fat versus baseline at 12 weeks (p<0.0001). In a Phase 3 trial (MAESTRO-NAFLD-1), 80mg and 100mg resmetirom achieved p<0.0001 scores versus placebo in LDL and apolipoprotein reduction at week 24, as well as proton density fat-fraction decreases at weeks 16 and 52.

These successes were followed on by a 955-patient Phase 3 study (MAESTRO-NASH Biopsy) - the first half of a trial that also includes MAESTRO-NASH Outcomes - in which the same doses of resmetirom achieved statistical significance versus placebo on the dual primary endpoints of NASH resolution - defined as a ballooning score of zero, an inflammation score of zero or one, and a two-point or greater reduction in NAS - and a one-stage improvement in fibrosis with no worsening of NAS, both at week 52. For the former endpoint, resmetirom 80mg and 100mg achieved NASH resolution in 26% and 30% of patients (respectively), while placebo achieved 10% (p<0.0001 and p<0.0001). For the latter, resmetirom 80mg and 100 mg realized defined improvements in 24% and 26% of patients (respectively) versus 14% for placebo (p=.0002 and p<0.0001).

When these data - which paved the way for a Breakthrough Therapy designation from the FDA in March 2023 - were read out in December 2022, shares of MDGL rocketed 268% to $234.83 in the subsequent trading session, eventually peaking at an all-time high of $322.67 - at least since the reverse merger - on May 1, 2023. However, for those with a technical slant, that created a double-top formation with a $322.00 print back in June 2018. Unable to meaningfully burst through its prior all-time high, Madrigal's fell back 63% to $119.76 on October 27, 2023, somewhat precipitated by a $472 million secondary offering at $151.69 a share in late September.

Competitive Landscape

For the avoidance of doubt, there are reasons other than plots on a company's stock price chart for the pullback. In addition to other THR-ß agonists and fibroblast growth factor 21 (FGF21) analogs in the clinic - more discussion on them shortly - the rapid rise of the wildly popular glucagon-like peptide-1 (GLP-1) receptor agonists for weight loss and type 2 diabetes, such as Novo Nordisk's ( NVO ) Ozempic (semaglutide), has led many to resize expectations for the NASH market, considering that obesity and diabetes are two of the largest contributors to NASH.

Also worthy of note are comments proffered by the Institute for Clinical and Economic Review ((ICER)) in its assessment of resmetriom's cost effectiveness. The non-binding review stated that experts narrowly saw a net health benefit to resmetirom versus lifestyle changes alone, but suggested payers should consider GLP-1 treatments for weight loss first, before providing coverage for NASH-specific therapies, "given that resolution of NASH has been observed in up to 84% of patients within one year of bariatric surgery."

Another consideration is the FDA's dour commentary on NASH diagnosis using non-invasive tests (NITs) prior to its Gastrointestinal Drugs Advisory Committee's May 2023 meeting with Intercept Pharmaceuticals ( ICPT ) over its now-discontinued candidate, farnesoid X receptor agonist obeticholic acid. It stated that:

"NITs cannot accurately identify NASH nor differentiate fibrosis stage 1 from 2 or stage 3 from 4. Therefore, liver biopsy is the only way to accurately identify patients qualifying for treatment."

If the FDA requires an invasive biopsy for NASH diagnosis as hinted at in those comments, it is likely that a meaningful portion of the patient population would be unwilling to endure the procedure, further shrinking the opportunity for resmetirom.

With all those potential headwinds to NASH-specific therapies, Madrigal's potential first-mover advantage may be short-lived with north of 40 candidates in Phase 2 or Phase 3 studies for the suddenly uncertain NASH market. Like Madrigal, Viking Therapeutics (VKTX) and Terns Pharmaceuticals (TERN) are advancing THR-ß agonists through the clinic with Phase 2 data anticipated from VK2809 in 1H24, while TERN-501 produced strong Phase 2a data in August 2023. 89bio's (ETNB) subcutaneously injected FGF21 analog pegozafermin successfully advanced through a Phase 2 trial that was first read out in March 2023. Additionally, there are a plethora of other approaches, including Hepion Pharmaceuticals' (HEPA) cyclophilin inhibitor rencofilstat that hit its primary endpoint in a Phase 2 study, Galmed Pharmaceuticals' (GLMD) SCD1 modulator aramchol, as well as several GLP-1 receptor agonists.

That said, the indication has been a graveyard, the latest victims being compounds from the aforementioned Intercept and Akero Therapeutics ( AKRO ), whose FGF21 analog efruxifermin flunked a Phase 3 study in October 2023.

Balance Sheet & Analyst Commentary:

With its own Phase 3 trial still to complete and management anticipating resmetriom's approval in March 2024 - precipitating the need for a large sales effort - the aforementioned secondary offering was conducted on October 3, 2023, putting cash and marketable securities on that date at ~$704 million against debt of $114.7 million. Madrigal also has in place an ATM agreement, under which it has $174.8 million remaining.

Since third-quarter results came out in early November, nine analyst firms including UBS and Jefferies have reissued Buy/Outperform ratings on the stock. Price targets proffered range from $275 to $383 a share. B.Riley Financial maintained its Hold rating and $154 price target. On average, they expect resmetirom to generate net sales of $161 million in FY24.

It is certainly worth noting that Julian Baker of famed biotech investment house Baker Bros. is Madrigal's Chairman of the Board. His firm added 116,166 shares since mid-November, bringing its total ownership interest to a shade under 10%. The last time a Baker Bros. assumed chairmanship of a biotech, it resulted in Pfizer's (PFE) recent $43 billion acquisition of Seagen (SGEN) .

Verdict:

It is obvious that the GLP-1 class of therapy, whether directly through FDA approval for NASH, or indirectly through NASH clearance as a consequence of treating obesity and/or type 2 diabetes, is going to eat into resmetriom's total addressable market ("TAM"). In a Phase 2 study, semaglutide achieved NASH resolution with no worsening of fibrosis in 44% of patients at 72 weeks versus 20% for resmetirom at 52 weeks. That said, a mid-2022 survey conducted by Madrigal stated that 49% of NASH specialists, defined as those managing at least 20-30 patients per month, expect to prescribe resmetirom immediately after launch.

However, if insurance companies essentially get behind the GLP-1s by making their failure a precondition for prescribing resmetirom for payment, Madrigal's market will shrink considerably. The same can be said concerning the possibility of the FDA's requiring a biopsy for NASH therapy. Based on its recent closing price, the market is assigning blockbuster status to resmetirom, which seems fair. However, given the recent 70% two-month surge, the recommendation is to stay on the sidelines for Madrigal Pharmaceuticals, Inc. until a better risk/reward entry point presents itself in the $160 - $170 a share range, at which time we will re-evaluate.

Cherish those who seek the truth but beware of those who find it ."? Voltaire.

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