2023-08-10 12:49:41 ET
Summary
- Madrigal's declining share price may be justified by external developments relating to the NASH market.
- Insurer and FDA commentary suggest an uphill battle to commercialize Resmetirom.
- The advent and widespread usage of GLP-1 weight loss drug threaten to reduce the NASH patient pool and could even become a competing therapy to Resmetirom.
- Coupled together, these developments merit a downgrade to sell from my original buy-rating.
Introduction
Madrigal Pharmaceuticals ( MDGL ) was trading at about ~$289 a share near the end of 2022 when I issued my buy rating for the stock . The stock jumped in the low $300 range following publication shortly thereafter, and now shares have slumped to the ~$170 level as of the time of writing. Much has changed since I last wrote about Madrigal.
After a slight delay, Resmetirom's NDA has finally been submitted and is under review by the FDA. Another important development which slid under the radar is that Baker Brothers Advisors' Julian Baker has been appointed as the chair of the board. Both of these changes are positive milestones for Madrigal, but it does not outweigh an overwhelmingly negative development in the NASH landscape.
Most notably, the incredible popularity of new obesity treatments coupled with speculation that the drug class has the potential to change the NASH landscape presents Madrigal with a poor hand. It may be true that in the near future that the weight loss spurred by Ozempic - and the next generation of GLP based drugs to follow - will end up significantly reducing the total addressable market for NASH. At the present moment, this risk is too high to stomach; the present conditions merit my downgrade of Madrigal from a buy to a sell rating.
Why The Change In My Original Thesis
The mark of any successful investor is their willingness to admit they are wrong and change their mind when presented with new information. And the situation Madrigal finds itself in today is very different than where they were last December. Although I still believe that the FDA will eventually approve Resmetirom, I no longer have full confidence that the drug will sell well.
Three new main developments buttress my thinking that Resmetirom faces commercial hurdles. In order of least to most significant, the following concerns stand tall: the ICER vote only narrowly went in Resmetirom's favor, new FDA commentary suggests that they are skeptical of the use of non-invasive tests and recent data point to the possibility that obesity drugs will dramatically shrink the NASH patient pool. These three factors are a triple threat that make commercializing Resmetirom dramatically more difficult.
ICER Report and FDA Commentary May Foreshadow Insurer Resistance
First, the independent Institute for Clinical and Economic Review (ICER) recently published their review of Resmetirom's cost effectiveness. Their findings showed that the expert community is far more divided than it seems about the cost-effectiveness of Resmetirom in treating F2 and F3 stage NASH patients. The vote itself narrowly went in Madrigal's favor -- with 8 out of 15 panelists deeming that the "current evidence is adequate to demonstrate a net health benefit for Resmetirom when compared to lifestyle management alone." In doing so, the ICER also decided to issue an access and affordability alert for Resmetirom as a NASH treatment.
ICER findings and recommendations are important to take into account because they offer a glimpse into how insurers will cover certain drugs. Although their policy recommendations are non-binding, insurers (who are sure to fight against covering any expensive drug with uncertain benefits) may use ICER conclusions as ammunition during coverage negotiations.
Specifically, the ICER recommends that public and private payers should hold off on covering NASH-specific drugs until all other therapeutic options are exhausted.
Payers should integrate coverage of drugs for NASH with coverage for obesity management, and may want to consider step therapy with lifestyle management efforts prior to providing coverage for NASH-specific drugs given that the advent of GLP-1 treatments for obesity may offer a new opportunity for many patients to achieve significant weight loss. If step therapy is required, then payers should cover intensive weight management programs that include nutritionists and drug therapy.
-Source: ICER Final Evidence Report
Insurers will encourage providers to use NASH drugs sparingly, considering the alternative treatment options available that are much cheaper. Moreover, the ICER sees that GLP-1 based treatments have the potential to fundamentally shift the NASH treatment paradigm by making obesity management (the first line of defense) much easier for patients. In their own words:
Although there is a tremendous need for disease-modifying treatment for NASH, given the lack of clinical outcome data, the spontaneous improvement of histology in 25% of untreated patients, the lack of long term safety data, and that it takes an average of seven years to progress one fibrosis stage, it will be reasonable for payers to use prior authorization as a component of coverage for NASH therapies. Payers should cover intensive weight management programs that include nutritionists and drug therapy given that resolution of NASH has been observed in up to 84% of patients within one year of bariatric surgery. Lifestyle interventions with a sustained body weight reduction of at least 10% lead to NASH resolution in up to 90% and regression in fibrosis in up to 45% of patients.
Resmetirom faces an uphill battle against insurers and physicians who may prefer less costly treatments options. Adding fuel to the fire is recent guidance from the FDA pointing to their view that non-invasive tests (NITS) alone are ineffective at diagnosing and tracing the development of NASH. Liver biopsy, in their view, remains the only sure-fire way to ascertain NASH stage and progression.
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
-Source: FDA Briefing Document, Page 51
The risk associated with a liver biopsy is high. Recall that the vast majority of NASH patients are asymptomatic and that the disease slowly progresses. Few will see their disease progress to the latest stage; fewer will ultimately pass from the disease. If the FDA or insurers require a biopsy prior to starting treatment, it could greatly limit the commercial potential of Resmetirom.
Liver biopsy carries risk. Historical data indicate a 1.1% incidence of serious complications, including severe bleeding (1 in 2,500) and mortality (1 in 10,000) (Seeff et al. 2010). Pain is a common complication, and patients may be unwilling to undergo a liver biopsy.
-Source: FDA Briefing Document, Page 51
These two viewpoints from two credible institutions alone raise alarm. A potential biopsy requirement, coupled with concerns about cost, may present a significant hurdle in any effort to commercialize Resmetirom. Even more concerning is that the future sales potential of Resmetirom is already threatened by the advent and widespread popularity of GLP-1 weight loss drugs.
The GLP-1 Revolution
New GLP-1 drugs aimed at treating obesity and diabetes have the potential to seriously reduce the number of prospective NASH patients. NAFLD and NASH are consequences that largely arise from obesity and/or diabetes. Simple lifestyle changes that result in significant weight loss can halt and even reverse NASH liver damage. GLP-1's, although still relatively new to market, have smashed sales expectations and are proving themselves to be efficacious outside the clinical setting .
Beyond reducing obesity and thus reducing the number of those afflicted with NASH, there is evidence to suggest that GLP-1 can directly treat NASH. Already, there are several different GLP-1 assets being evaluated as a treatment for NASH itself in the clinical setting. Mounjaro has already demonstrated strong and statistically significant reductions in liver fat among NASH patients. Current academic literature suggest that GLP-1's have a role to play in the fight against NASH.
GLP-1 receptor agonists have been shown to be effective in reducing body weight, liver injury indices, and liver fat content. Several evidences also suggest that these drugs are able to promote the resolution of steatohepatitis in a non-negligible proportion of patients with NASH and to reduce progression of hepatic fibrosis. No evidence is currently available on the efficacy of GLP-1 RAs in improving pre-existing liver fibrosis in patients with NAFLD. However, data after long-term treatment with GLP-1 RAs are not yet available. Additional benefits are expected from double and triple agonists, but specific human clinical trials are needed.
More clinical trials are needed to reach concrete conclusions. But there exists a palpable sense that GLP-1's have the potential to change the paradigm of treating NASH. Where Resmetirom fits in this new landscape is uncertain.
The Positive Side
The addition of Julian Baker and his associate, Raymond Cheong, on the board of directors in June was a very positive development that largely flew under the radar. Both are affiliated with the Baker Bros fund, which is a large institutional biotech investor with a strong track record for closing large M&A deals. Julian's appointment to the Chairman position is a bullish sign, as it signals that he intends to take a more hands-on approach behind the scenes.
With the Baker Bros owning nearly ~10% of Madrigal, it makes sense why Julian himself feels the need to take a more activist approach on the board. It is inherently speculative to assume how he intends on increasing shareholder value, but recent history suggests that he may be steering the ship towards a buyout.
The last time one of the two Baker Brothers was appointed as Chair of a Board was in May 2022 - when Felix Baker was appointed the Chair of Seagen's ( SGEN ) board of directors. Less than a year later, Pfizer announced that they would be acquiring Seagen for $43 billion .
Valuation and Concluding Remarks
The overarching reason why I am downgrading my initial buy rating to a sell is because Madrigal has become impossibly difficult to value. Insurer coverage, FDA skepticism about the value of NIT and the larger health impact of GLP-1 obfuscate Resmetirom's total addressable market. Until more clarity arrives, I am hesitant to even try to value Madrigal.
The most optimistic case would be my original $350 price target (assuming peak sales of $2 billion), but there is little reason for optimism in the present moment. Applying a rounded down sector price to sales multiple of 6 to Madrigal and assuming a more modest peak sales of $250 million would yield a market capitalization of just ~$1.5 billion; this represents a near 60% decrease from the current market capitalization of $3.55 billion.
Since Resmetirom is Madrigal's sole product, any changes in pricing or patient volume would produce seriously volatility in Madrigal's market capitalization. My newly bearish outlook reflects this sensitivity and takes into account the increased uncertainty of the future.
For further details see:
Madrigal Pharmaceuticals: The NASH Market Is No Longer Guaranteed