It’s unusual to find a stock with a three-digit price tag and an upside higher than 100%; such large percentage gains are normally associated with lower-priced stocks. It has less to do with the value of the company than with mathematics. Madrigal Pharmaceuticals, Inc. (MDGL – Research Report) has managed the trick, however, and to make the story more interesting it has done so before getting any medications approved for use.

The medications Madrigal has under development are targeted against nonalcoholic steatohepatitis (NASH), a type of fatty liver disease. The condition causes fat to build up in the liver, leading to inflammation and damage at the cellular level. Complications from NASH can include cirrhosis, cancer, and liver failure. At present, the only effective therapy is a liver transplant.

So nonalcoholic liver disease is a serious problem, one that doesn’t get as much publicity as the alcohol related problems and one which also lacks a simple approach to treatment.

Madrigal’s research pursues a novel approach, examining therapeutic agents that target thyroid hormone pathways in the liver. The thyroid hormone is a key regulatory mechanism for a variety of fatty liver diseases. MGL-3196, currently in Phase 2 clinical trials, has shown promise in targeting this hormone pathway to induce improvement in patients with NASH. A drug treatment for NASH would be a real breakthrough, sparing patients the long wait and complications inherent in transplant surgery. Madrigal is working with the FDA to finalize the protocols for upcoming Phase 3 testing.

A Look at Madrigal’s Recent Stock History

We’ll need some recent background on Madrigal to make sense of what’s going on. In the last year, Madrigal has seen two sharp jumps in share price. The stock stood in the $40 to $50 range just over a year ago, and peaked over $300 this past June. Clearly, something happened.

What happened was two public offerings of common stock, bolstered by good news on the clinical trial front. In December of last year, Madrigal offered for sale $100M of common stock, at $83 per share. The offering came just after news of the successful conclusion of a Phase 2 study of MLG-3196. The study showed the drug to be efficacious in treating NASH; the stock offering raised money to continue research.

In late May and early June, those events repeated, but on a larger scale. A second study, on a greater number of patients over a longer time, showed continued positive results for Madrigal’s primary product. The company responded with a second public stock offering, this time putting up $200M worth of shares with an initial price offering of $305. Madrigal’s stock currently stands at $129, slightly higher than its price before the June offering.

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A Positive Third Quarter

Earlier this month, Madrigal announced its Q3 earnings results, and the effect of the earlier stock offerings was clear. The company reported operating expenses of $11.3 million, R&D expenses of $6.2 million, and a $19.2 million cash burn – but also reported $488.5 million in cash on hand, mostly the result of net proceeds from the stock sales. Offering the sales gave the stock price a couple of shots in the arm, but importantly, filled the company’s coffers.

Industry analysts have taken note, both of the company’s solid cash position and the positive outlook for MGL-3196. In a report released yesterday, Oppenheimer’s Jay Olson (Track Record & Ratings) noted, “We remain confident that MGL-3196 should become the first in class THR β-selective agonist for NASH and dyslipidemia with potential for both monotherapy and combinations.” He set a $200 price target for MDGL, giving a 55% upside.

Earlier this week, Josh Schimmer (Track Record & Ratings) from Evercore ISI looked at both Madrigal’s clinical trials and the applications of MGL-3196, and pointed out their connection to America’s epidemic-level issues with obesity: “[T]here is a tsunami of obesity-related liver complications on the horizon and there is absolutely no sign that society is anywhere close to ready to deal with the weight problem.” Like Olson, he sees a strong potential market for Madrigal’s work, but is more optimistic about the stock.

His ‘Buy’ rating is a major upgrade from Evercore’s previous hold rating, and his price target of $250 is a 93% upside potential.

MDGL is currently priced at $129. The average price target of $303 gives an upside potential of nearly 134%.

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View MDGL Price Target & Analyst Ratings Detail