MDGL - Madrigal: Setting The Pace In The NASH Market (Rating Upgrade)

2023-05-30 01:19:54 ET

Summary

• Madrigal Pharmaceuticals' drug, resmetirom, for non-alcoholic fatty liver diseases, received FDA's Breakthrough Therapy designation. The company is now focused on the MAESTRO-NASH-OUTCOMES trial.
• Madrigal's Q1 2023 financial reports show a decrease in cash holdings, and an increase in operating and R&D costs due to Phase 3 trials and workforce expansion.
• Competitor Intercept Pharmaceuticals faced a setback for its NASH drug, obeticholic acid, emphasizing the FDA's stringent safety and efficacy standards for NASH treatments.
• Phase 3 trial results showed resmetirom's efficacy in treating NASH. ICER analysis suggests resmetirom is more effective than Intercept's drug.
• Madrigal could be the first to market an FDA-approved NASH treatment, potentially earning revenues upwards of $3 billion, contingent on several factors.

Introduction

Madrigal Pharmaceuticals ( MDGL ) is a clinical-stage company pioneering novel small-molecule drugs to tackle pressing needs in cardiovascular, metabolic, and liver diseases. Leading the company's research is resmetirom, a compound focused on non-alcoholic steatohepatitis and non-alcoholic fatty liver disease, both prevalent in individuals with metabolic diseases. From 2019, Madrigal initiated multiple Phase 3 studies and announced key results from the MAESTRO trials in 2022, with a third study launched in August 2022.

Recent developments: Madrigal's drug, resmetirom, has recently been awarded Breakthrough Therapy designation by the FDA for treating NASH with liver fibrosis, allowing for more intensive guidance on its development. The MAESTRO-NASH trial enrollment is completed, with focus now on the MAESTRO-NASH-OUTCOMES trial for further indications in NASH cirrhosis. Additionally, an updated report by ICER suggests that resmetirom could be a cost-effective treatment for patients with at-risk NASH.

The following article will discuss Madrigal's prospects in NASH, particularly in light of Intercept Pharmaceuticals' ( ICPT ) recent ADCOM setback .

Q1 2023 Financials

Taking a closer look at the company's most recent financial report , we can see that Madrigal's cash, cash equivalents, and marketable securities stood at $329.5 million as of March 31, 2023. This shows a decline from the $358.8 million at the end of 2022, with the primary reason being an expenditure of $84.1 million on operations. This expenditure was slightly balanced out by the cash influx from financing and option exercises.

There was a noticeable increase in operating costs, which grew to $78.3 million in the first quarter of 2023, a jump from $57.6 million during the same period in the previous year. R&D expenses followed a similar trend, escalating to $62.2 million from $47.9 million. This surge was mainly attributable to increased activity in Phase 3 trials, an expanded workforce, and the expenses related to the MAESTRO-NASH Outcomes trial.

General and administrative expenses also saw a significant increase, growing to $16.2 million from $9.7 million. This was primarily due to the ramping up of commercial preparation activities and an increase in the size of the team.

Interest income saw a considerable jump, reaching $3.8 million from a mere $0.1 million, thanks primarily to more favorable interest rates and a larger principal balance. However, the interest expense also rose to $2.3 million, a reflection of a loan facility that the company initiated in May 2022.

According to data from Seeking Alpha, Madrigal carries a market capitalization of $5.21 billion. The company has total debt worth $84.62 million, and its cash reserves come to about $329.48 million. When we take into account its debt and cash holdings, Madrigal's enterprise value works out to be $4.97 billion.

Setback for Intercept's NASH Drug Raises Stakes for Madrigal's Resmetirom Development

In a significant setback for Intercept, 12 out of 16 members of the Gastrointestinal Drugs Advisory Committee (GIDAC) voted against the benefits of its NASH treatment drug, obeticholic acid [OCA], outweighing its risks, casting a shadow over its FDA approval prospects. Moreover, 15 members urged to defer approval until further data from the 747-303 trial is available, indicating concerns about the drug's safety profile. While a deferral is not a rejection and positive future trial data could still lead to approval, this decision could affect Intercept's commercialization plans and stock prices.

This scenario is noteworthy for Madrigal. The rigorous scrutiny faced by Intercept underscores the FDA's stringent safety and efficacy expectations for NASH treatments. It places Madrigal's recent success with resmetirom and its FDA Breakthrough Therapy designation into perspective, highlighting the significance of strong safety and effectiveness data in securing approval. Therefore, Madrigal must ensure it adequately addresses all FDA concerns as it progresses with its NASH treatment development and trials.

FDA's Draft Guidance for NASH Development and Safety Measures

The FDA's draft guidance recommends that pharmaceutical companies conducting NASH development, like Madrigal, should conduct double-blind, placebo-controlled clinical trials and aim to improve clinical outcomes. They should use histological improvements as endpoints, propose specific degrees of improvement, and initiate trials to verify clinical benefit for drugs approved under the accelerated pathway. The FDA also advises using biomarkers to potentially replace liver biopsies and having pre-trial discussions about phase 3 and post-approval trials. For safety, an individualized approach is suggested, alongside specific liver monitoring, expert committees for case adjudication, and adequate cardiovascular safety monitoring.

Madrigal's Resmetirom Shows Efficacy in Phase 3 Trial for NASH Treatment

Madrigal recently shared topline results from their pivotal Phase 3 MAESTRO-NASH trial of resmetirom, demonstrating the drug's efficacy in treating non-alcoholic steatohepatitis [NASH]. The trial involved randomized patients taking 80mg, 100mg of resmetirom or a placebo daily, revealing that both dosages met their primary endpoints compared to the placebo. Specifically, significant improvements were observed in NASH resolution and fibrosis stage, with a secondary endpoint of LDL-C lowering also achieved. This high compliance trial remained minimally affected by COVID-19 restrictions.

All biopsies were independently read by two central pathologists, and improvements were seen regardless of the baseline fibrosis stage or diabetes status. Additionally, reductions in liver enzymes, fibrosis biomarkers, and imaging tests were also noted. Resmetirom was well-tolerated at both doses, with adverse events aligning with expectations for the patient demographic. The most common adverse events were generally mild and transient diarrhea and nausea.

In alignment with FDA guidance, Madrigal utilized a double-blind, placebo-controlled design, and demonstrated disease progression improvement, making use of histological improvements as endpoints. The company also incorporated the recommended safety measures, such as monitoring liver function and cardiovascular safety. This indicates that Madrigal's trial design and results appear to comply with the FDA's draft guidance for NASH.

Resmetirom vs. Obeticholic Acid: ICER Analysis Points to Potential Favor for Madrigal's Drug

The Institute for Clinical and Economic Review [ICER] has provided a comparative analysis between Madrigal's drug, resmetirom, and Intercept's drug, obeticholic acid, both under development for the treatment of NASH. According to ICER, the evidence for resmetirom's effectiveness is on par or superior to the standard of care, earning it a rating of "C++". On the other hand, the evidence for Intercept's obeticholic acid in treating NASH with F2 fibrosis was deemed insufficient, while for NASH with F3 fibrosis, the evidence was considered promising but inconclusive.

From a cost-effectiveness standpoint, neither drug has been approved by the FDA or priced by the manufacturers, but ICER's health-benefit price benchmark [HBPB] places resmetirom between $39,600 and $50,100 per year, and obeticholic acid between $32,800 and $40,700 per year.

Considering this analysis, it's plausible to suggest that the FDA and its advisory committee [ADCOM] may favor Madrigal's resmetirom over Intercept's obeticholic acid. This notion stems from ICER's comparatively higher rating for resmetirom's effectiveness and the suggestion that resmetirom may provide better value for money.

Madrigal's Resmetirom: Pioneering the NASH Treatment Market with Potential Billion-Dollar Revenue

With the New Drug Application [NDA] filing for resmetirom scheduled for Q2 2023, Madrigal is well positioned to potentially become the first company to bring an FDA-approved drug for the treatment of NASH to the market.

NASH, a severe form of non-alcoholic fatty liver disease, affects approximately 1.5% to 6.5% of adults in the United States, according to the National Institute of Diabetes and Digestive and Kidney Diseases. With no currently approved treatments and a high disease prevalence, the market potential for an effective NASH treatment is significant.

MarketsAndResearch.com, for instance, projects that the NASH market will reach $15 billion by 2027. If we consider a conservative market share of 20% for resmetirom, assuming competition from other NASH therapeutics under development, the revenue potential for Madrigal could be upwards of $3 billion per annum.

A key driver of this revenue potential will be the pricing of resmetirom. ICER's health-benefit price benchmark [HBPB] for resmetirom is between $39,600 and $50,100 per year. While this gives an idea of the price range, the final price will be determined by Madrigal and may be influenced by factors such as payer negotiations, the competitive landscape, and market dynamics.

The first-to-market advantage also provides Madrigal with a unique opportunity to shape the market and establish resmetirom as the standard of care for NASH. This could drive higher market share and potentially higher revenues, especially in the early years of launch.

However, Madrigal's revenue potential will be influenced by factors such as the success of the NDA filing, FDA approval, the competitive landscape, market penetration, and the evolution of the NASH market over time. It will be crucial for Madrigal to demonstrate not only resmetirom's efficacy and safety but also its value proposition to patients, providers, and payers in the NASH market.

My Analysis & Recommendation

In the increasingly crowded and high-stakes field of NASH therapeutics, Madrigal Pharmaceuticals shows an encouraging trajectory. Their lead candidate, resmetirom, has successfully cleared multiple regulatory hurdles and clinical trials, demonstrating promising efficacy and safety profiles. Of particular note is the FDA's Breakthrough Therapy designation for resmetirom, a significant testament to its potential value.

Furthermore, the setback experienced by Intercept, a potential competitor, emphasizes the stringent regulatory landscape for NASH treatments and illustrates the competitive edge that Madrigal could have in the market, especially considering the FDA's rigorous expectations on safety and efficacy.

Moreover, the market potential for NASH treatments is significant, owing to the high prevalence of the disease and the absence of approved therapeutics. If Madrigal successfully navigates the final stages of resmetirom's development, approval, and launch, it could capitalize on a potentially lucrative market, estimated to be worth $15 billion by 2027. Even a conservative market share of 20% for resmetirom implies significant revenues for Madrigal.

The financial strength of Madrigal also appears commendable, although rising R&D and operating expenses are areas to watch. The firm holds a solid cash position and maintains a manageable debt level, providing it with financial leeway for its ongoing development endeavors.

However, while the future appears promising, it's not without its risks. The successful commercialization of resmetirom hinges on numerous factors, including regulatory approval, the competitive landscape, market acceptance, pricing negotiations, and the effective execution of marketing and sales strategies. The company's current valuation, with an enterprise value of $4.97 billion, seems to have priced in much of this potential upside, leaving limited room for error.

I think it's plausible and judicious for the FDA to seek an ADCOM review before evaluating resmetirom's application, given its unfamiliar mechanism of action and its potential to transform liver disease management. This added uncertainty might prompt a negative response from investors, leading to a chance to add shares at reduced prices. I view such an event as routine, and I believe that most of the panel would likely favor the risk/benefit profile of resmetirom. However, if Madrigal's enterprise value drops below $4 billion following such news, it may necessitate an upgrade (rerating).

At present, I recommend a cautiously optimistic position on Madrigal ('Buy'). For investors with a higher risk tolerance and a long-term investment horizon, this stock could offer a compelling opportunity to capitalize on the potentially massive NASH market. However, considering the inherent uncertainties in drug development and approval, and the competitive dynamics of the pharmaceutical industry, it would be prudent to maintain a diversified portfolio to mitigate potential risks.

Risks to Thesis

When the facts change, I change my mind.

While there's a solid case for optimism based on Madrigal's recent developments and the potential size of the NASH market, some risks could potentially derail my 'Buy' recommendation:

1. Regulatory Risks: The main driver of Madrigal's value is the successful development and approval of resmetirom. Any delays or issues in obtaining FDA approval would severely impact Madrigal's prospects and share price. The recent setback experienced by Intercept demonstrates the FDA's rigorous safety and efficacy expectations for NASH treatments. While resmetirom has so far demonstrated favorable safety and efficacy profiles, there is no guarantee that it will receive FDA approval.

2. Clinical Trial Risks: Clinical trials inherently come with a degree of uncertainty, and negative results can significantly impact a company's stock price. While the Phase 3 MAESTRO-NASH trial has shown promising results, the success of the drug is not guaranteed until all trials are completed and the data is reviewed by the FDA.

3. Commercialization and Market Penetration Risks: Even if resmetirom receives FDA approval, Madrigal still faces challenges in commercializing the drug, ensuring high adoption rates among clinicians, and achieving sufficient market penetration. This is especially pertinent given the high costs associated with developing and marketing new drugs.

4. Competitive Risks: Although resmetirom may be the first drug to market for NASH, there are numerous other therapies being developed by other companies. If another company were to develop a more effective or better-tolerated treatment, it could limit the market share that resmetirom is able to capture.

5. Pricing and Reimbursement Risks: The ultimate pricing of resmetirom, negotiations with insurers, and potential price pressure from policy changes or competition could significantly impact Madrigal's revenues and profitability.

6. Financial Risks: While Madrigal currently has a solid cash position, the company is also seeing rising R&D and operating expenses. If these trends continue, the company may need to raise additional capital which could lead to dilution for existing shareholders.

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