Thinking of Buying Madrigal Pharmaceuticals Stock? Eli Lilly Would Like to Have a Word. | The Motley Fool (2024)

If you're eyeing an investment in Madrigal Pharmaceuticals(MDGL 3.97%), now's the time to imagine a representative of Eli Lilly (LLY -0.24%) interrupting your train of thought by saying something along the lines of, "Not so fast." While the biotech is undeniably ascendant after getting its first medicine approved for sale in mid-March, the pharma juggernaut is hot on its tail with a bid to compete in the same market.

And now, there's some new information that suggests the bigger player might win out in the end. Let's start by setting the stage for this looming competitive showdown and explore what it means for investors.

This blockbuster drug could have an edge

For those unaware, the United States Food and Drug Administration (FDA) has already approved tirzepatide for treating type-2 diabetes and obesity, which Eli Lilly commercialized under the trade names Mounjaro and Zepbound, respectively. Mounjaro is already a textbook example of a blockbuster drug, bringing in more than $1.8 billion in sales during Q1 alone, and Zepbound is practically guaranteed to reach blockbuster status within a few quarters.

On June 8, the company published data from a phase 2 clinical trial investigating whether tirzepatide might be helpful to treat metabolic-associated steatohepatitis (MASH, formerly called non-alcoholic steatohepatitis, or NASH) in the prestigious New England Journal of Medicine (NEJM). Per the study, after 52 weeks of treatment with tirzepatide, 55% of patients in the lowest-dose cohort experienced an improvement in their level of fibrosis (liver scarring) of at least one stage. In the highest-dose cohort, 62% of the patients experienced a resolution of MASH without any worsening of their fibrosis.

While there's still a phase 3 trial to be conducted, these data support the idea that tirzepatide could one day pick up an additional indication to treat MASH. Preliminarily, the drug's ability to somewhat reverse fibrosis is key, as it helps patients to avoid a progression of their disease to cirrhosis. It's also the factor that should make Madrigal investors a bit nervous.

Madrigal's only product on the market, Rezdiffra, is for MASH, and it just launched in mid-March of this year. There hasn't been a full quarter of sales data yet, so investors won't know how the rollout is going until the Q2 earnings release.

Per its phase 3 clinical trial data also published in NEJM in February, just 25.9% of patients taking the highest dose of Rezdiffra experienced fibrosis improvement of at least one stage after a year of treatment. The takeaway here is that for patients with significant fibrosis, if Eli Lilly's medicine gets an expanded approval to treat MASH, it'll probably be the go-to option that clinicians prescribe, as it's dramatically more effective at promoting healing of the scarring.

And while it is distinctly possible that the next clinical trials for tirzepatide will fail to replicate the previous results, it isn't wise to bet on that outcome. The odds are that Eli Lilly is coming to try to eat Madrigal's lunch.

Don't sell this stock if you hold it

The threat that Eli Lilly poses to Madrigal is significant, and, in due time and with the necessary regulatory approvals, could result in the biotech experiencing difficulty in expanding or maintaining its market share.

There is little chance of Madrigal being able to increase its spending on marketing in a way that would enable it to outcompete Eli Lilly's entrant, especially if it is actually the case that the pharma giant's medicine is more effective at addressing a key symptom of MASH. And that's before even getting into a discussion of the other powerful competitors like Novo Nordisk that are also trying to expand the indications of their already-approved medicines to include MASH.

Still, Madrigal's shareholders shouldn't rush to sell the stock or fall into a pit of despair over the prospect of competition in the medium term. After all, it almost certainly has at least a year or so of uncontested access to the market for MASH medicines. That will be more than a sufficient amount of time to dramatically grow its top line, which was nil as of the most recent quarter. In other words, this stock has good odds of rising, and a competitor entering the scene won't immediately change that.

So for now, the best move is to hold on to your shares if you have them, and, if you're thinking about making an investment in this stock, make it a small one. It's also important to appreciate that this biotech will need to do considerable work in the near term if it's going to be an investment worthy of holding for the long term. Furthermore, that additional work in the clinic will need to convincingly generate some great data if Rezdiffra is to maintain its ground against competing options that, for the moment, look like they might be superior.

There's a risk that might not actually happen, so be aware that Madrigal has some palpable risks that'll take a handful of years to either play out or be successfully defused.