Are we witnessing the rise of a new market leader in biotechnology? Madrigal Pharma (MDGL 2.58%)a medium-sized company, might have just as good a chance of becoming as significant in its field as most of its competitors of similar size.

Earlier this year, the company received Food and Drug Administration (FDA) approval for Rezdiffra, a drug for the liver disease nonalcoholic steatohepatitis (NASH). This milestone is impressive for a simple reason: many pharmaceutical companies, including some with far more experience and resources than Madrigal, have tried to develop drugs for NASH and have failed.

Madrigal is first to market, but is that enough to make the stock a buy? Let’s find out.

The story of Rezdiffra has more to offer

NASH is caused by the accumulation of fat in the liver. As the name suggests, it is not due to heavy alcohol consumption. However, it is associated with obesity and type 2 diabetes. NASH can lead to scarring of the liver (fibrosis), among other serious health problems.

The approval of Rezdiffra was a welcome development considering that, along with diabetes and obesity, the prevalence of NASH is increasing. There is an urgent need for treatment options and Rezdiffra will help meet that need. So far, so good.

However, the drug was released under accelerated approval, meaning it must produce more positive efficacy data in confirmatory trials to receive full approval. Otherwise, the FDA could take it off the market.

But if that doesn’t happen, Rezdiffra’s potential looks promising. Madrigal plans to focus the launch of its crown jewel on 315,000 NASH patients treated by specialists. Some analysts are forecasting peak sales of over $4 or even $5 billion.

There is competition along the way

Although Madrigal was the first drug to be launched in the field of NASH, many well-known pharmaceutical companies are now hot on its heels. The list includes Eli Lilly And Novo Nordisktwo leading pharmaceutical companies that no one in the pharmaceutical industry wants to compete with. These two have far more resources than Madrigal and therefore will likely be able to address a much larger market than the smaller biotech company.

Here, Madrigal Pharmaceuticals could have benefited from a licensing agreement with a larger company with more money. The company almost certainly could have reached far more patients in the U.S., where there are an estimated 1.5 million diagnosed NASH patients.

And there is a sizeable and growing global NASH market. It is estimated that 26.5 million people will suffer from the disease by 2032 in some major markets, including the United States, several of the largest European economies, and Japan. In 2022, that number was just over 22 million.

Madrigal Pharmaceuticals likely lacks the resources to dominate the global NASH market. One way the company could maintain its leadership position, at least in the U.S., is to gain enough market share before another drug is approved and hope that Rezdiffra passes its confirmatory tests with flying colors.

Is the stock a buy?

Madrigal’s work in treating NASH has been impressive so far, but is it enough to pave the company’s path to fame in the biotech industry? The company’s stock will plummet if Rezdiffra proves ineffective in further trials.

The risk of other pharmaceutical companies outpacing it is also real – and significant. Madrigal has no other drug on the market and (as far as we know) no other in development. Being a one-trick pony is not necessarily a deal-breaker, especially for a relatively small biotech company (its market cap is currently $5.3 billion).

And its innovative successes in NASH suggest that the company’s research team could achieve further success in the future. But for now, the stock looks relatively risky, even though there is plenty of upside potential. So I’d recommend playing it safe here. Risk-tolerant investors could consider opening a small position in the company and adding to it as it makes clinical and regulatory progress. This approach could lead to above-average returns over the long term, assuming all goes well for Madrigal Pharmaceuticals.

If anything goes wrong – especially if something goes wrong with Rezdiffra – investors could be left with virtually worthless shares. Therefore, the stock is not attractive to risk-averse investors.