Why Madrigal Pharmaceuticals Stock Is On Fire Today

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What happened

Shares of Madrigal Pharmaceuticals (NASDAQ: MDGL) are rocketing higher today after the company announced positive mid-stage results for its experimental non-alcoholic steatohepatitis (NASH) drug, MGL-3196. Turning to the specifics, Madrigal said that patients treated with MGL-3196 experienced a significant decline in the amount of fat in the liver, assessed by magnetic resonance imaging, compared to those receiving a placebo.

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As of 1:21 p.m. EST, the drugmaker's shares are up by a healthy 75% on over 20 times the average daily volume in the wake of this encouraging clinical outcome.

So what

NASH is forecast to become of one of the most valuable drug markets over the next decade. This deadly liver disease, after all, presently lacks any form of pharmaceutical intervention approved by the Food and Drug Administration, and its incidence rate is only expected to grow in lockstep with the out-of-control obesity epidemic. In other words, Madrigal may have a potential blockbuster drug on its hands with MGL-3196.

No what

The downside risk for investors, though, is that numerous companies are racing to bring a NASH drug to market right now. Put simply, there's no way to know which company will ultimately grab the lion's share of this emerging, high-value market. Madrigal, for its part, is well behind the leaders in this heated contest, and it also lacks the formidable resources of some of the top dogs in the NASH race like Allergan and Gilead Sciences.

Bottom like: While this clinical update is encouraging, the most likely near-term outcome will be a sizable secondary offering designed to shore up Madrigal's balance sheet. Investors may therefore want to hold off on buying this shooting star today to wait for a more attractive entry point.

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George Budwell owns shares of Allergan. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has a disclosure policy.