Is This Healthcare Stock a Screaming Buy After Scoring a Huge Drug Approval?

If there’s one thing that can quickly send a healthcare stock soaring, it’s the approval of a key drug. Not only can that give investors confidence in a business’s ability to bring products to market, but it also means there’s a new source of revenue for the company. This can reduce risk, especially for smaller biotechs.

One stock that’s been rallying in recent weeks is Madrigal Pharmaceuticals (MDGL 3.18%). In March, the Food and Drug Administration (FDA) granted accelerated approval for one of the company’s drugs. But the stock hasn’t exactly been taking off — it’s up only 10% so far this year. Are investors overlooking this healthcare stock, and has it become a screaming buy?

Rezdiffra gets a green light

On March 14, the FDA announced that it had granted accelerated approval for the first-ever treatment for liver scarring as a result of noncirrhotic nonalcoholic steatohepatitis (NASH), or fatty liver disease. The drug could be useful for an estimated 6 million to 8 million people who have NASH and moderate or advanced scarring.

There’s still an ongoing 54-month trial involving Rezdiffra. However, under the accelerated approval pathway, the FDA can clear the way for a drug before full traditional approval is granted, particularly in situations such as NASH where there’s a serious unmet medical need.

It’s a big opportunity for Rezdiffra to help treat what could become a growing problem. Based on analyst projections, the drug could generate peak annual sales of $5.5 billion. And by 2030, it could bring in $2.6 billion. Those are significant numbers for a company that generated no revenue last year.

Why aren’t investors more bullish on Madrigal Pharmaceuticals?

Generally, when a healthcare company obtains a big approval, especially when it has no revenue, it’s a big deal. While Madrigal Pharmaceuticals stock initially spiked following the news, reaching a high of just under $300, the air was let out of the rally after the company revealed a stock offering.

Madrigal recently announced it would be raising $600 million to aid in launching Rezdiffra and to fund other general corporate expenses, plus ongoing research and development. While Rezdiffra will be a promising revenue-generating asset in the future, it doesn’t solve the company’s challenges today.

Last year, Madrigal used up $324 million during its regular, day-to-day operating activities. It finished the year with cash and marketable securities totaling $634 million. Without a key revenue driver for the company to rely on, there’s going to be a continuous need for the business to raise money.

Another danger that may be keeping investors away is that this could be a hotly contested market. Obesity drugs Wegovy from Novo Nordisk and Eli Lilly‘s Zepbound are already hugely popular for weight loss and are in trials to see how effective they are in treating NASH, as well. If they’re approved for treating NASH, it could negatively impact the potential for Rezdiffra in the long run.

Is Madrigal Pharmaceuticals stock a buy?

Madrigal Pharmaceuticals isn’t a lowly valued biotech stock; its market cap is already over $5 billion. That means it’s trading at around 2 times the revenue that analysts project it will hit in 2030. This seems expensive given how far away that is. There should be much more of a discount for two reasons: the length of time until Rezdiffra starts generating significant revenue and the risk that’s still present in the business, where cash burn could be a problem for years.

At Madrigal Pharmaeuticals’ current market cap, it’s hard to make a case that its stock is a good buy. Investors are better off avoiding the healthcare stock for now as its shares may have already peaked.