Madrigal Pharmaceuticals, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

A biopharmaceutical company focused on developing and commercializing novel therapeutic solutions for nonalcoholic steatohepatitis (NASH) with the lead drug candidate Resmetirom.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Madrigal Pharmaceuticals (MDGL) is a clinical-stage biopharmaceutical company focused on developing and commercializing novel therapeutic solutions for nonalcoholic steatohepatitis (NASH). The company’s primary focus is on its lead drug candidate, Resmetirom, a liver-directed thyroid hormone receptor β (THR-β) agonist.

The company’s business is centered on the clinical development and regulatory approval of Resmetirom, and, if successful, its eventual commercialization. The company has no other sources of revenue at the moment, and is heavily reliant on the success of its primary candidate. This is a very concentrated risk.

Industry and Competitive Landscape:

NASH is a progressive liver disease characterized by fat accumulation and inflammation in the liver, which can lead to cirrhosis, liver failure, and liver cancer. It is becoming increasingly common as the rates of obesity and diabetes continue to rise. There are currently no FDA-approved therapies for NASH, making it a major area of unmet medical need and thus an attractive, yet competitive, sector.

  • Competitive Intensity: The NASH market is highly competitive with multiple companies pursuing various therapeutic approaches, meaning competition is fierce. Madrigal faces competition from both larger pharmaceutical companies with more resources and smaller biotechnology firms.
  • Regulatory Hurdles: The regulatory approval for NASH drugs is complex. Clinical trials are extensive, often requiring large sample sizes, and long durations. Moreover, the FDA may impose additional risk mitigation requirements.
  • Market Opportunity: Despite the competition and challenges, the opportunity in the NASH market is very large. An effective treatment for the disease is likely to be a blockbuster drug, with substantial potential revenue. Madrigal has a headstart on the NASH market. The company estimates that there are around 14 million U.S. adults with diagnosed and undiagnosed NASH and estimates that there would be 22 million cases by 2025, with 53% of patients being untreated.

Key Differentiators:

Madrigal’s differentiation comes from its novel approach with Resmetirom, targeting the thyroid hormone receptor β in the liver. It aims to address multiple factors underlying NASH simultaneously, including hepatic fat content, inflammation, and fibrosis. Other therapeutic candidates focus on only one or two of those factors. Also, data shown is so far pretty impressive, so it should have an edge.

  • Resmetirom’s Target: The liver-directed, thyroid hormone receptor-beta (THR-β) agonist is a new approach with potential to be superior.
  • Phase 3 Clinical Trial Results: Madrigal has reported positive results from its Phase 3 MAESTRO-NASH clinical trials of Resmetirom, which have shown significant reductions in liver fat and improvements in fibrosis, with an acceptable safety profile.
  • FDA Breakthrough Therapy Designation: The company has received Breakthrough Therapy designation from the FDA, allowing the drug for an expedited path to approval. The FDA has also granted priority review for Resmetirom.

Financial Deep Dive

  • Revenue: The company does not have any recurring revenue for the last few years, and it is a clinical-stage company.
  • Operating Expenses: The company has been consistently spending a lot of money on R&D and SG&A which has resulted in big losses for the last few years. For 2021, total operating expenses are around 246 million, for 2022, 272 million and for the nine months of 2023 ending September were about 286 million.
  • Net Losses: It is a company that has had very big losses, for the period ending September of 2023 their losses were 382 million, for 2022 the loss was 324 million and for 2021 they had a loss of 411 million.
  • Balance Sheet: The company has over $700 million in cash and marketable securities which is mostly enough for near future activities but it is also using a lot of the same for its R&D activities. It has a healthy amount of equity that is approximately $1.1 billion, but it has more liabilities than assets.

Moat Analysis

While Madrigal is working on bringing a great molecule to market and it has a headstart, the company’s moat is narrow at best. First, the data of its main competitor could be equal if not better. Second, new competitors can enter the field and take the market leadership.

  • Intangible Assets
    • Patents: The patents protecting Resmetirom are important, but patents have a finite life and are subject to challenge. Moreover, drug patents are very specific, they can often be designed around by competitors. They have numerous patents on different aspects of the drug.
    • Regulatory Approvals: FDA approval (if obtained) could be a barrier to entry, giving the company exclusivity for a time. However, that exclusivity will eventually be over as well. While FDA fast tracking is beneficial it does not make the moat stronger.
  • Switching Costs: There are no switching costs for the treatment.
  • Network Effects: There are no network effects in this business.
  • Cost Advantages: Madrigal is not a low-cost producer, but instead invests heavily in R&D for future prospects.

Moat Rating: 2/5 - The company has a promising lead, and its drug has performed well in phase 3 trials, but the company lacks sustainable competitive advantage.

Risks to the Moat:

  1. Clinical trial failure or delays: Any setback or delay in the development or regulatory approval process can destroy the value of the company. It was delayed to obtain the recent FDA approval, which resulted in large market cap losses.
  2. Competition: Given the intense competitive environment within NASH, a company can still be knocked out of leadership if other companies or other drugs prove more promising. For example, it is still not clear whether Resmetirom would hold an edge over other drug candidates when they get to the end of clinical testing.
  3. Commercial Challenges: Even if Resmetirom wins FDA approval, the company might fail in its sales or management of market share. It is entirely plausible that another company with better sales structure could take away sales and market share.
  4. Regulatory hurdles: FDA and other regulatory approvals may not come when, and how they should come. If the drug does not pass all regulatory standards, the business would become worthless. The FDA has also stated that there is no “guaranteed” timeline for their approval process, so a surprise rejection or a long waiting period is plausible.
  5. Financing difficulties: the company is still not profitable and has massive R&D and SG&A expenses. A capital raise could always lead to dilution of the existing shareholders.

Business Resilience:

Madrigal currently has no sales and if Resmetirom fails the company would have to shut down. While Resmetirom has looked good so far, these are a lot of risks present, which makes it not particularly resilient to the volatility of the industry.

  • Limited Revenue Streams: Currently, Madrigal is entirely dependent on Resmetirom’s success. This lack of revenue diversification is concerning and a big threat.
  • High Operational Risks: Clinical-stage companies operate with high operational risk as they are dependent on regulatory approval and if that does not come their business would cease to exist.
  • No Product Diversity: The company currently only has one candidate which is their main focus. Any potential disruption in the development, or potential competition to that will materially affect its future success.

Understandability: 3/5 - Though the company operates in a complex industry, its overall strategy and core business is easy to understand: developing a drug for NASH. However, details on clinical trials, regulatory processes, and company finances requires some level of medical and financial knowledge.

Balance Sheet Health: 3/5 - The company has a good amount of cash which provides a buffer, but it is also consistently hemorrhaging money with its business. It relies heavily on equity raises or debt to keep the business going. It also carries a lot of liabilities on the balance sheet.

Overall, MDGL appears to be a high-risk/high-reward play with the potential to be a market leader in the treatment for NASH. However, the company’s business carries a lot of challenges and potential pitfalls. Its success is largely dependent on the performance and approval of its only drug candidate, which makes it a highly risky investment, and it’s not something you should invest in blindly without knowing the full situation at hand.