2023-08-20 10:27:39 ET
Summary
- Madrigal Pharmaceuticals is developing resmetirom, a drug for non-alcoholic steatohepatitis and fatty liver disease, with promising trial results.
- Madrigal has a strong cash position and manageable debt, but faces rising R&D costs and competition in the NASH therapeutics field.
- My recommendation remains a "Buy" for risk-tolerant investors, despite concerns about weight loss drugs reducing NASH market potential.
Introduction
Madrigal Pharmaceuticals ( MDGL ) is a clinical-stage company developing small-molecule drugs for cardiovascular, metabolic, and liver diseases. Their lead compound, resmetirom, targets non-alcoholic steatohepatitis [NASH] and fatty liver disease, with ongoing Phase 3 studies and recent results from MAESTRO-NAFLD-1 and MAESTRO-NASH studies.
In my previous analysis , I highlighted Madrigal Pharmaceuticals' promising trajectory in the competitive NASH therapeutics field. Their lead candidate, resmetirom, has demonstrated promising efficacy and safety in clinical trials, and received the FDA's Breakthrough Therapy designation. The setback of a competitor underscores Madrigal's potential edge in this market, which could be worth $15 billion by 2027. Financially, Madrigal has a solid cash position and manageable debt, but rising R&D costs are a concern. The success of resmetirom depends on several factors, and the company's valuation leaves little room for error. I recommended a cautiously optimistic 'Buy' on Madrigal for risk-tolerant, long-term investors, emphasizing diversification to mitigate risks.
Recent developments: In late June, Madrigal Pharmaceuticals initiated a rolling submission of its New Drug Application for resmetirom, seeking accelerated approval and Priority Review status.
The following article discusses Madrigal Pharmaceuticals, highlighting their lead drug candidate, resmetirom, for treating NASH. The company has solid cash positions and promising trial results, but faces challenges in terms of rising R&D costs and the need for additional financing. I maintain a 'Buy' recommendation for risk-tolerant, long-term investors.
Q2 2023 Earnings
Looking at Madrigal's most recent earnings report , the company had cash and marketable securities of $298.4M as of June 30, 2023, a decrease from $358.8M at the end of 2022, largely due to $159.4M used in operations, partially offset by capital raised under a Loan Facility and at-the-market sales. Operating expenses were $86.5M and $164.8M for the three and six month periods ended June 30, 2023, higher than the previous year, with research and development costs increasing to $68.6M and $130.8M, primarily due to Phase 3 clinical trials and increased headcount. General and administrative expenses rose to $17.8M and $34.0M, mainly from commercial preparation activities and non-cash stock compensation. Interest income increased to $3.6M and $7.3M, primarily due to higher interest rates, while interest expense grew to $2.9M and $5.2M, stemming from the Loan Facility with Hercules Capital.
Liquidity & Cash Runway
Turning to Madrigal's balance sheet , as of June 30, 2023, the company held cash and cash equivalents of $77.2M, marketable securities of $221.2M, and no other investments, making their total liquid assets $298.4M. Over the first six months of 2023, Madrigal Pharmaceuticals used $159.4M in operating activities, averaging a net monthly burn of $26.6M. Dividing the liquid assets by the average monthly burn, the company has approximately 11.2 months of cash runway. As Madrigal Pharmaceuticals is unprofitable and has reported a net loss of $162.7M for the first six months of 2023, it may need to secure additional financing or cut costs to sustain operations. However, these estimates are my own and may differ from other analyses. The company has a total of $99.2M in long-term debt and $99.7M in current liabilities, indicating moderate debt levels relative to assets and equity.
As of June 30, 2023, Madrigal Pharmaceuticals had drawn $100.0 million from its $250.0 million Loan Facility with Hercules Capital and other lenders. The initial $50.0 million tranche was drawn at closing, and an additional $50.0 million was drawn under Tranche 2 after achieving a Phase 3 clinical milestone. Madrigal can still draw the remaining $15.0 million available under Tranche 2 by September 30, 2023, following the amendment to the Loan Facility. The company also has the option to draw a third tranche of $75.0 million upon obtaining FDA approval for resmetirom. A fourth tranche of $60.0 million is available subject to Hercules' discretion. As of June 30, 2023, the interest rate was 10.70%. The outstanding principal under the Loan Facility was $100.0 million, and the company was in compliance with all loan covenants and provisions.
Valuation, Growth, & Momentum
According to Seeking Alpha data: Madrigal's capital structure consists of a small amount of debt relative to its market capitalization, with the company holding significant cash. The enterprise value stands at $3.02 billion. In terms of valuation, Madrigal's P/E ratios are not meaningful, as Madrigal remains at least a couple of years away from profitability. The company's growth profile is strong, as evidenced by the projected YoY earnings growth of +24.12% for FY2024 and a massive jump to positive earnings in FY2025. Revenue is also expected to grow substantially by +220.72% in FY2025. Madrigal's stock momentum is mixed, with a sharp decline over the last 3-6 months, but a strong performance over the 9-12 month period, showing a +133.40% increase.
Unjustified Concerns: NASH Market Still Holds Potential for Madrigal Despite Weight Loss Drugs
The concerns over Madrigal's valuation due to the growing popularity of weight loss drugs seem unwarranted, primarily because the NASH market still presents a significant opportunity despite the increasing use of weight loss drugs. While weight loss drugs such as tirzepatide (Mounjaro) show promise in reducing NASH-related biomarkers, as evidenced by Hartman et al.'s study , it is essential to recognize that such drugs have limitations.
Firstly, the study conducted on tirzepatide indicated a decrease in NASH-related biomarkers, but these results are not conclusive evidence of the drug's efficacy in treating NASH. The study had limitations such as unequal patient distribution between groups and incomplete data assessments, which necessitate further evaluation.
Moreover, reducing body weight and implementing proper diet and exercise therapies remain superior treatments for NAFLD and NASH. Therefore, even if weight loss drugs may be effective in some cases, they should not be viewed as standalone solutions. It is likely that a comprehensive approach to NASH treatment will be needed, and Madrigal's resmetirom could play an integral role in addressing this unmet medical need.
The NASH market remains significant, considering the high prevalence of the disease and the absence of approved therapeutics. The potential for drugs like resmetirom to address this need should not be overshadowed by the popularity of weight loss drugs, which have not yet proven conclusively effective in treating NASH. Hence, the pressure on Madrigal's valuation is likely unwarranted given the considerable market opportunity that still exists for NASH treatments.
My Analysis & Recommendation
Madrigal Pharmaceuticals' stock is down 37% since my initial "Buy" recommendation in late May. This decline is an opportunity for investors to capitalize on the company's promising prospects. Resmetirom, Madrigal's lead drug candidate for NASH, is on the cusp of potential commercialization with a rolling submission of its New Drug Application. It's crucial for investors to watch for any developments regarding the FDA's review process, including the possibility of an advisory committee (ADCOM) meeting prior to the Prescription Drug User Fee Act (PDUFA) decision. An ADCOM meeting could introduce volatility in the stock as it may sway market sentiment based on the committee's feedback.
Madrigal is well-capitalized to navigate the path to commercialization, boasting a robust cash position and manageable debt. As of June 30, 2023, the company had $298.4M in liquid assets, offering an approximately 11.2-month cash runway. The available tranches from the $250.0 million Loan Facility with Hercules Capital further strengthen the company's financial position, providing the necessary capital to support the anticipated marketing and distribution of resmetirom.
In the coming weeks and months, investors should pay close attention to the FDA's decision on the Priority Review status for resmetirom, as well as any subsequent ADCOM meeting or PDUFA date. If Madrigal receives accelerated approval and Priority Review, it could be a turning point for the company and a potential catalyst for the stock.
Despite the concerns around the growing popularity of weight loss drugs, the NASH market's significant unmet medical need remains. With resmetirom's demonstrated efficacy and safety in clinical trials, coupled with the FDA's Breakthrough Therapy designation, Madrigal is well-positioned to capture a substantial portion of the projected $15 billion NASH market by 2027.
In light of these factors, I maintain my "Buy" recommendation for Madrigal Pharmaceuticals, emphasizing the stock's current undervaluation and the company's strong prospects. Risk-tolerant, long-term investors stand to benefit from Madrigal's potential market leadership in NASH therapeutics and the substantial upside it offers.
Risks to Thesis
When the facts change, I change my mind.
While I maintain my "Buy" recommendation for Madrigal Pharmaceuticals, there are risks to consider. First, the FDA's approval process is uncertain. If resmetirom fails to secure approval or faces delays, it could impact the company's prospects and stock performance. Second, Madrigal is facing rising R&D costs and has reported a net loss, potentially necessitating additional financing. The company's valuation is under pressure due to concerns that weight loss drugs may reduce the market for NASH treatments. Third, the NASH therapeutic field is competitive, with several companies developing promising drug candidates. If a competitor gains approval before Madrigal, it could affect resmetirom's market share. Lastly, the success of Madrigal hinges on resmetirom's performance, meaning the stock's performance could be volatile based on drug development news.
For further details see:
Madrigal's Resmetirom Nears Commercialization Despite Market Concerns