Madrigal Pharmaceuticals: Rezdiffra First-Mover Advantage Gains Traction (Upgrade)

Core Insights - The analysis emphasizes a conservative investment strategy, allocating 90% to stable investments and 10% to growth opportunities for balanced returns [1] - A detailed valuation framework is presented, projecting free cash flows over a 9-year period with a focus on consistent annual growth rates and discounting cash flows using CAPM [1] - The pharmaceutical revenue model outlines market adoption starting at 12.5% and reaching 100% by peak sales, with a significant decline in penetration post-exclusivity [1] Valuation Framework - The base valuation framework projects free cash flows over a 9-year period, starting from a baseline year, applying consistent annual growth rates [1] - Cash flows are discounted using a rate calculated through CAPM, considering both time value and risk factors [1] - Terminal value is calculated by projecting Year 9 cash flows and applying a sustainable long-term growth rate, assuming steady growth patterns [1] Pharmaceutical Revenue Model - The model assumes market adoption begins at 12.5% penetration at launch, growing linearly to 100% by peak sales year [1] - Post-exclusivity, penetration drops sharply by 80% in the first year and declines by 5% annually thereafter [1] - Revenue is calculated by multiplying the number of patients by the annual treatment cost, with costs scaling proportionally with revenue [1]