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Introduction
When Madrigal Pharmaceuticals (NASDAQ:MDGL) first announced their phase two trial results showing Resmetirom as an effective NASH treatment in 2018, the stock melted upwards from ~$100 a share to the $300 range. Today, after Resmetirom’s therapeutic benefits were fully vindicated in a larger and longer phase three trial, the stock trades at only ~$250 a share. Questions lingered following the positive results in 2018 regarding how Resmetirom would perform in a larger and longer clinical trial designed with statistical power to detect efficacy. Those questions have been answered. And the path forward for NDA submission is clear. But that does not explain the valuation discrepancy.
In my view, the price action of Monday’s trading session misses the sheer commercial opportunity at hand for Madrigal. Desensitized by consistent disappointments in the NASH sphere, it may take time for the market to digest how truly impactful this development is for the NASH landscape. But opportunity beckons regardless of the current price action.
In my estimation, Madrigal is trading nowhere near its fair value given Resmetirom’s immense commercial potential. With even the most modest assumptions, peak sales comparable company analysis suggests that Madrigal is fundamentally undervalued.
Resmetirom Just Made History
How momentous Resmetirom’s success is cannot be understated. This is the very first wholly successful phase three NASH trial – no other treatment has demonstrated statistical efficacy in both NASH resolution and fibrotic reduction. Even more impressive is how Resmetirom has demonstrated zero safety issues throughout its clinical testing. This clean safety profile is remarkable and will prove itself to be incredibly conducive to commercial success down the line.
Madrigal’s success comes amid a graveyard of high-profile clinical failures – Gilead’s (GILD) Selonsertib, Genfit’s (GNFT) Elafibranor, Intercept’s (ICPT) Ocaliva, NGM’s (NGM) Aldafermin and so many others failed before Resmetirom succeeded. NASH has proven itself to be a particularly tricky indication to treat over time, reflecting the heterogenous nature of the patient pool and poor outcomes associated with the disease.
The two generally accepted surrogate endpoints which are used to evaluate the efficacy of NASH treatments are NASH resolution (without the worsening of fibrosis) and NASH fibrotic reduction (without the worsening of steatohepatitis). FDA official guidance holds that efficacy in one or both of these endpoints is reasonably likely to predict the clinical benefit needed to support an accelerated approval. The EMA, on the other hand, believes that both endpoints need to be hit in order to predict a clinical benefit.
Both dosages of Resmetirom achieved statistical significance against placebo in both the NASH resolution and NASH Fibrosis endpoints.
| Primary Endpoints | Resmetirom 80 Milligram (n=316) | P-Value | Resmetirom 100 Milligram (n=321) | P-Value | Placebo (n=318) |
| NASH Resolution w/ no worsening of fibrosis; and ≥2-point reduction in NAS | 26% | <0.0001 | 30% | <0.0001 | 10% |
| ≥1-stage improvement in fibrosis with no worsening of NAS | 24% | 0.0002 | 26% | <0.0001 | 14% |
Source: Madrigal’s Phase Three Press Release
No other biotech company has produced such clear and strong efficacy data as Madrigal. Viking Therapeutics (VKTX) – the only other biotech with a clinical asset targeted to treat NASH with the same mechanism of action – is years behind Madrigal and has not even finished their phase two testing. Moreover, what makes Madrigal uniquely apt for regulatory approval and the NASH population overall is its strong safety data.
No red-flag safety discontinuations or patterns were noted. And the frequency of serious adverse events stayed consistent across all treatment arms.
| 80 Milligram Arm | 100 Milligram Arm | Placebo | |
| Serious Adverse Event Rate (SAE) | 11.8% | 12.7% | 12.1% |
| SAE related Study Discontinuation Rate | 2.8% | 7.7% | 3.7% |
| Generally Mild Diarrhea | 28% | 34% | 16% |
| Generally Mild Nausea | 22% | 19% | 13% |
In fact, the placebo arm of the trial reported a greater percent of serious adverse events and SAE related discontinuations than the low-dose Resmetirom arm. The most commonly reported adverse events in the trial were mild diarrhea and mild nausea, nothing too serious. On top of this body of data, Madrigal also has safety data from MAESTRO-NAFLD, a 52-week long phase three safety trial that included over 1,200 participants. MAESTRO-NAFLD evaluated patients suspected of having NASH but without biopsy confirmation, and it was a major success. Not only did the trial show Resmetirom as safe and well-tolerated at both the low and high dose, but key secondary endpoints relating to biomarkers indicating liver health and cardiovascular health were also met.
The importance and value of this safety data cannot be understated. Although efficacy is critical, having a stronger safety profile increases the chance of approval and will ultimately improve Resmetirom’s market penetration. Every patient counts, and Resmetirom’s clean safety profile mean that more NASH patients – even the sicker ones – can be eligible to take the drug.
Madrigal’s Valuation
From a valuation perspective, Madrigal can be easily valued insofar that Resmetirom is its only product. However, there is a layer of complexity which throws models off: no one really knows how large the NASH market truly is.
The total percentage of the population afflicted with NASH is unclear; the NIH estimates that about three to twelve percent of the population is afflicted with some stage of NASH. Further complications arise when you factor in the heterogenous nature of the NASH patient pool. Some patients have severe end-stage NASH which requires immediate treatment. Others could remedy or halt the development of their NASH with simple lifestyle changes. Many more go decades longer without knowing they are afflicted by the condition.
What is certain, however, is that there is a large and untapped market opportunity for treating NASH. Also certain is the growth forecasted ahead for the size of the overall market, since NASH progression is a function of obesity and other obesity-related factors. And the prevalence of obesity in the overall population is only expected to increase in the coming decade. At the moment, estimates place about 1/4 of the United States population as having a fatty liver (precursor to NASH) and about 1/5 of those with a fatty liver as having some form of NASH. NASH is currently the leading cause of liver transplants for women and expected to become the leading cause for men soon too. Commercial forecasts typically estimate the size of the annual market to treat NASH as worth anywhere from $20 to $35 billion.
Analyst estimates of Resmetirom’s peak sales vary considerably, reflecting the uncertainty regarding the size of the NASH market. Goldman Sachs’ Andrea Tan projects $4.1 billion in peak sales, while Evercore ISI “conservatively” believes that Resmetirom could generate over $8 billion in peak sales.
Using comparable company analysis suggests that Madrigal would be vastly undervalued if either of the aforementioned projections are realized. The price to sales ratio of the biotech sector at large is 6.67. To put it simply by rounding down, a price to sales ratio of six coupled with sales of $4 billion and $8 billion respectively would result in Madrigal trading at a market capitalization of $24 billion and $48 billion respectively.
A conservative analysis that assumes Resmetirom generates just $2 billion in peak sales – half of Goldman’s estimate – would still result in a market capitalization of $12 billion, if Madrigal trades at the industry P/S ratio. The bearish world in which the biotech industry’s price to sales ratio craters by fifty percent would still be a world in which Madrigal trades at a $6 billion valuation. (Assuming peak sales of $2 billion). This highly pessimistic scenario implies that the equity can still go 40% higher, pending the value unlock provided by regulatory approval: this valuation would see the stock trade at ~$350.
This valuation is derived from a conservative peak sales estimate. The reason why I believe this conservatism is unfounded is because Resmetirom has demonstrated rock-solid efficacy and no safety issues so far. Madrigal had been preparing for commercialization before the trial was unblinded and has already planned the next steps forward; they expect to launch immediately in 2023 following the FDA’s green light. According to market research conducted by Madrigal (prior to the phase three NASH readout), around 49% of NASH specialists surveyed expect to prescribe Resmetirom upon launch. And there are over a million patients in the United States confirmed already to have some stage of NASH. This provides a solid foundation in a growing market for Madrigal to capitalize upon.
So to be clear, $350 would be my cautious price target. And still, it would represent a substantial premium to the current price of the stock. One clear reason why this discrepancy exists is regulatory uncertainty. People are not 100% certain that the FDA will grant Resmetirom accelerated approval. This moment has drawn comparisons to Intercept’s ill-fated moment when their NASH hopes were suddenly dashed by an FDA CRL in 2020. The wild ride raised Intercept’s stock from $10 to over $400 in just under a year. Now, nearly three years later, their stock trades in the $12 range.
This is an apples to oranges comparison. The truth of the matter is that Intercept’s drug, Ocaliva, had major issues. Most brazen was that Ocaliva’s efficacy itself was a mixed bag, since the drug completely failed to demonstrate statistical significance over placebo in NASH resolution. And the dosage which did demonstrate a statistically significant improvement in fibrosis also raised some safety red flags. Comparing the situations is unfair, since Resmetirom shows stronger efficacy with none of the safety issues which Ocaliva did. It will take time, but the market will come to realize that Madrigal is in a much stronger position than Intercept ever was.
Risks
Other reasons for the price discrepancy are fairer. Shareholders at the moment face a significant dilution risk from Madrigal only having ~$150 million in cash on hand as of late November. And with ~$200 million in long-term debt, Madrigal’s financial flexibility is stunted.
The quick jump in public equity value now gives Madrigal the option to hold a secondary offering of shares, which would dilute the value of the existing shares held by investors. This risk is especially pronounced in the event that Madrigal decides to pursue commercialization alone, which is something they’ve indicated they would rather not do but remains a possibility.
Another risk which has been somewhat muted in recent discourse is the possibility of future competition from other nascent biotechs developing their own NASH treatments. Madrigal has a major first-mover advantage and strong safety and efficacy data to back it up. But that advantage may not be withstood over the long-run if a superior drug emerges. Akero Therapeutics’ (AKRO) is notable among them because their main asset, efruxifermin, demonstrated robust efficacy as a NASH treatment in a phase two trial earlier this year. Backed by Pfizer (PFE), Akero is clipping on the heels of Madrigal, along with several other biotech companies seeking a piece of the market.
This worry is somewhat alleviated by the sheer size of the market, since different drugs will likely work better for different types of patients. Besides, Madrigal will have a hearty first-mover advantage, and the clean safety profile of Resmetirom makes it a suitable candidate for any combination-therapy if other drugs do arise. Nonetheless, the competition cannot be ignored.
There is also the black swan risk of the FDA refusing to grant Resmetirom accelerated approval. If this happens, for whatever reason, it would be catastrophic for Madrigal. At the minimum, it would be costly and delay any Resmetirom launch. This event appears incredibly unlikely to me. But this risk is always present in clinical stage biotech investing, no matter how strong or clear the data seems.
Conclusion
Resmetirom’s data speaks for itself, and Madrigal is just one step away from commercializing it. After the FDA grants accelerated approval, Madrigal will own the only FDA approved NASH drug on the market. By my most conservative estimate, that would result in a fair valuation of ~$350 a share, which is far above the current $250 price range the stock trades at today.
But this price target is my most conservative forecast. Other analysts have much higher price targets than I do, reflecting the truth that no one really knows how large the NASH market may grow to be. No matter what, Madrigal has the envious privilege of being the first to find out.
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