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Breakthroughs in the biotech industry sometimes come from relatively small drugmakers. Competing with the largest companies in significantly crowded areas, such as oncology, can be difficult. That’s why relatively unknown biotechs often opt to develop medicine where there are few (if any) approved therapies.

Madrigal Pharmaceuticals (MDGL -3.44%), a mid-cap biotech, has followed this blueprint. The company was recently awarded the first approval from the U.S. Food and Drug Administration (FDA) for a treatment for non-alcoholic steatohepatitis (NASH). Let’s look deeper at this important milestone and determine whether it makes Madrigal’s shares attractive.

Madrigal’s product boasts exciting sales potential

First, a primer on NASH. It is caused by a buildup of fat in the liver. As its name suggests, patients don’t owe it to excessive alcohol abuse, although the liver damage the illness causes is similar to that of heavy alcohol users. Instead, obesity and diabetes are thought to be some of the major risk factors. NASH can cause serious, life-threatening problems. That’s why the approval of Madrigal’s Rezdiffra to treat NASH is such a big deal.

The commercial opportunity looks attractive, too. Madrigal will go after 315,000 U.S. patients. Importantly, the FDA is not requiring a liver biopsy before prescription — a somewhat invasive procedure that likely would have limited the number of patients willing to take the medicine.

Rezdiffra will cost $47,400 per year although insurance will pick up most of the tab for most patients. The point, though, is that Rezdiffra’s potential vastly exceeds the $1 billion mark, so things are looking good for Madrigal Pharmaceuticals.

A few things to consider before buying

Rezdiffra is the only approved NASH medicine for now, but how long will that last? Analysts expect this area to rise rapidly in the coming years as more drugmakers join the fray. Several of the largest pharmaceutical companies in the world are on Madrigal’s trail. That includes Eli Lilly, Novo Nordisk, and Pfizer, just to name a few.

While earning the first approval might be an advantage to Madrigal, facing fierce competition from these larger companies with deeper pockets, stronger footprints and connections in the industry, and bigger sales teams won’t be easy. Will funding be an issue for Madrigal? The company conducted a secondary offering following Rezdiffra’s approval. The biotech expects gross proceeds of about $600 million from this move.

Before that, it ended 2023 with about $634 million in cash, equivalents, and marketable securities. So, the company should have in the neighborhood of $1 billion in cash after its latest round of financing. In my view, Madrigal Pharmaceuticals will no longer need to resort to dilutive forms of financing. It shouldn’t take too long for Rezdiffra to gain significant traction given its positive phase 3 results, convenient once-daily tablet dosing, and the fact that, for now, it is the only game in town for NASH patients who do not have to undergo a live biopsy to get access to the medicine.

Does all of this make Madrigal Pharmaceuticals stock a buy? On the one hand, the company displayed its innovative qualities, but it has no other products in development. Long-term biotech investors will want that to change with time; relying on a single medicine to drive growth over long periods is a somewhat dangerous, although not unprecedented, strategy. So, Madrigal Pharmaceuticals certainly boasts massive potential, although its overreliance on Rezdiffra is a risk.

In my view, somewhat aggressive investors should seriously consider initiating a position in the stock, whereas more conservative ones should look elsewhere.