Why Madrigal Pharmaceuticals Stock Slumped on Tuesday
Key Points
The bull case wasn't helped by an analyst's recommendation downgrade.
That pundit now feels the biotech's shares only rate a hold.
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The New Year's Champagne turned flat for Madrigal Pharmaceuticals (NASDAQ: MDGL) on Tuesday. Investors traded out of the commercial-stage biotech following an analyst's recommendation downgrade. This resulted in the stock's price eroding by more than 5% that trading session.
A high bar
The prognosticator behind the downgrade was Wolfe Research's Andy Chen. Well before market open, Chen changed his recommendation on Madrigal to peerperform (hold, in other words) from his previous outperform (buy), at a $572 per share price target.
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His main concern, according to reports, is that Madrigal stock is expensive relative to its performance following a significant bull run on its shares.
This was aided greatly by the Food and Drug Administration's (FDA) 2024 approval of the company's Rezdiffra, which, for a time, made the drug the only approved treatment for the liver disorder now known as metabolic dysfunction-associated steatohepatitis (MASH). Several encouraging quarterly earnings reports helped, too.
Chen expressed skepticism that Madrigal could earn the $6 billion in annual revenue some of the more optimistic market professionals anticipate. Even in the unlikely case that it did, he wrote, the stock would still not be a bargain at current levels.
Victim of success
While Rezdiffra is unarguably a huge success story for Madrigal, I'd agree with Chen that its quick rise is essentially priced into the company's stock these days. Given that, I'd probably look elsewhere for biotech and pharmaceutical stocks with more reasonable valuations.
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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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