Madrigal Stock: Fairly Valued At These Levels (NASDAQ:MDGL)

I didn’t have the fortitude to go into the Maestro-NASH read out long Madrigal (NASDAQ:MDGL). I had done my homework, and my conviction was pretty high, but of course there were a number of uncontrollable variables on which the success of the Maestro-Nash study relied on. This, however, must always be the case to generate upside. Dr Taub has delivered outstanding results for resmetirom, hitting both primary endpoints and the drug is poised to become the first drug approved for Non-alcoholic steatohepatitis, or NASH.

In the current article, I lay out my assumptions behind a high-level assessment of the company’s current valuation, based on future performance of resmetirom. I refer readers to other very nice articles in SA for the background on the company and its main asset, resmetirom. For this assessment, I focus on the US market opportunity only, since Madrigal has indicated its intent to commercialize resmetirom in the US with its own resources and to partner the asset ex-US. We can assume of course additional value creation for the company in the form of a partnership ex-US.

Let’s start with the patient population. According to Estes et al, the total prevalent population of Non-alcoholic fatty liver disease or NAFLD, including NASH, ranges from 80 million to 100 million in the US in 2015 to 2030, of which slightly over 20 million patients would have NASH [1]. The Liver Foundation website cites the same figure of 80 to 100 million subjects with fatty liver disease in the US [2]. According to projections from Estes et al, in 2023 there are around 4 million F0 NASH patients, ˜8 million NASH F1 patients, ˜5 million F2 patients, ˜3 million F3 patients, and approximately 2 million F4 patients.[1] Madrigal’s own filings indicate that “NAFLD is estimated to affect approximately 25% of the population, and approximately 25% of those will progress from NAFLD to NASH” and that “current estimates place NASH prevalence at approximately 20 million people in the United States, or five to six percent of the adult population” [3]. So these figures are broadly consistent. Resmetirom has recently shown positive results in the F2 and F3 population in the MAESTRO program (also in a subset of F1 subjects, but I am not counting these for the time being.

For the purposes of estimating the total addressable patient population, I assume that 33% of the approximately 8 million F2/F3 patients would be diagnosed at peak. I assume a relative low rate of diagnosis, because many patients with NASH are currently not diagnosed. I assume a peak treatment rate of 30% in 2033, which I believe is conservative. However, I prefer to be prudent in a market that needs to be developed over time. I assume an uptake curve that assumes peak patient penetration in 10 years, from 2024 to 2033.

Regarding the NASH with cirrhosis (F4 population), this population would only be approved after the read out of the NASH Outcomes study, initiated in August of 2022. This is an event-driven study that will take some time to read-out (late 2025 approximately) and I assume approval of this population in 2027. In this population, I assume a peak diagnosis rate of 66%. According to Heidelbaugh and Bruderly [4], approximately 40% patients with cirrhosis are asymptomatic. I adjust this a little upwards because this reference is from 2006. In this population and compared to the F2/F3 population, I assume a higher peak treatment rate of 45%, given the severity of the condition and higher level of unmet need. I assume a peak penetration curve of six years, from 2027 to 2033. Between 2024 and 2026, I assume some use despite the lack of approval, with penetration of 2% to 4%, given resmetirom’s compelling results observed in the phase 3 program, particularly the fact that resmetirom has demonstrated the improvement of the histology-proven endpoint of fibrosis. While this benefit has been shown in the F2/F3 population, and not in the F4 population, I believe overall there is a relatively strong reason to believe in the benefit of resmetirom in the cirrhosis population when looking at the Maestro Nash results as well as the compensated cirrhosis cohort of the Maestro NAFLD study.

As it relates to market share, I assume a 100% share for resmetirom in the first few years until 2027, with declining share of 60% in 2028, 40% in 2030, and further decline to 24% in 2033. In other words, I assume another drug approval in 2027, with an established 2-drug market in 2028, a 3-drug market in 2030 and further entrants moving forward, with a 5-drug market in 2033.

I assume a round list price of $10,000 per patient, which I believe is reasonable using GLP-1 category as analog and taking into account the fact that, despite the relatively high number of potential NASH patients, diagnosis of NASH requires specialist assessment in my opinion. This may be debatable or may evolve over time, but currently, whether this is via confirmation with biopsy or non-invasive liver tests, I believe for the medium term, management of NASH is and will be reserved to hepatologists. I assume progressive erosion of net price with a gross to net of 67% in 2033 as entrants come into the market. Given the fact that it is a chronic disease, but an oral pill, with relatively good tolerability in principle, I assume a yearly compliance and persistence of 66%. These assumptions lead to peak revenue of $2.7 billion in 2029.

To calculate operating profit, I assume COGs of 15% of revenue, and SGA expenses in the order of 35% to 16% of revenue, as revenue ramps up. This I believe is an overestimation of SGA, given the relatively high sales potential. I assume R&D expenses of $200 million in 2023, and $170 million in 2024 to 2026, given the fact that there is significant clinical research to fund, including the continuation of the Maestro NASH study, which the company has indicated would last for 54 months or approximately four years in addition to the primary read out based on 12 months, the Maestro NASH outcomes study (recently initiated in 2022 and for which the company has guided completion prior to the Maestro NASH study) and the follow up of the Maestro NALFD, for which the company is guiding for an additional 52 weeks in 700 patients. Madrigal has reported R&D expense of $68.3 million and $174.7 million in Q3 and Q1-Q3 of 2022 respectively [5]. Assuming the same rate of expenditure in Q4 as in Q3, this leads to an approximately $250 million full year R&D expense in 2022. So overall, my assumptions indicate some reduction of R&D expenses over time, but still expecting significant expenditure in the next four years (2023-2026) as the clinical program continues. I assume a more moderate $60 million R&D expense as of 2027. Given the revenue projections, these assumptions suggest that Madrigal reaches profitability in 2025. I do not assume any royalty or milestone payment from Madrigal to Roche for the rights and licenses of resmetirom.

Assuming a flat tax rate of 25%, a time horizon of 10 years for this analysis, a discount rate of 10%, and risk adjusting revenues by 5% for the fact that resmetirom is not approved yet (but consensus is that it will be approved), I arrive at a net present value of $4 billion without assuming any terminal value after 10 years. This, again, only includes the US market opportunity.

Madrigal currently commands a market capitalization of approximately $5 billion. This would assume that the ex-US market opportunity is valued at $1 billion if my assessment of the US opportunity is reasonable. I believe that additional value creation in the form of a partnership for Madrigal of that magnitude is not unrealistic given the potential ex-US opportunity.

Overall, I believe that Madrigal is reasonably valued at this stage. The market seems to be efficient.

References:

1. Estes et al. Hepatology 2018 Jan;67(1):123-133
2. Liver Foundation. Available at: How Many People Have Liver Disease? – American Liver Foundation accessed 16^th of January
3. Madrigal 2021 annual SEC filing
4. Heidelbaugh and Bruderly. Am Fam Physician. 2006;74(5):756-762
5. Madrigal Q3 2022 SEC filing