MADRIGAL PHARMACEUTICALS, INC. - Quarter Report: 2022 March (Form 10-Q)

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Forward-looking statements are subject to a number of risks and uncertainties including, but not limited to: our clinical development of resmetirom; enrollment and trial conclusion uncertainties, generally and in relation to and social distancing measures and individual precautionary measures that may be implemented or continued for an uncertain period of time; our potential inability to raise sufficient capital to fund our ongoing operations as currently planned or to obtain financings on terms similar to those we have arranged in the past; our ability to service our indebtedness and otherwise comply with our debt covenants; outcomes or trends from competitive studies; future topline data timing or results; the risks of achieving potential benefits in studies that includes substantially more patients, and patients with different disease states, than our prior studies; the timing and outcomes of clinical studies of resmetirom; and the uncertainties inherent in clinical testing. Undue reliance should not be placed on forward-looking statements, which speak only as of the date they are made. Madrigal undertakes no obligation to update any forward-looking statements to reflect new information, events or circumstances after the date they are made, or to reflect the occurrence of unanticipated events. Please refer to Madrigal’s submissions filed or furnished with the U.S. Securities and Exchange Commission for more detailed information regarding these risks and uncertainties and other factors that may cause actual results to differ materially from those expressed or implied. We specifically discuss these risks and uncertainties in greater detail in the section appearing in Part I, Item 1A of our Annual Report on Form for the year ended December 31, 2021, filed with the SEC on February 25, 2022, as updated by the risk factors discussed in Part II, Item 1A of this Quarterly Report on as well as in our other filings with the SEC. You should read the 2021 Annual Report on Form this Quarterly Report, and the other documents that we file or have filed with the SEC, with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements.

. We are a clinical-stage biopharmaceutical company focused on the development and commercialization of innovative therapeutic candidates for the treatment of cardiovascular, metabolic, and liver diseases. Our lead product candidate, resmetirom, is a proprietary, liver-directed, selective thyroid hormone receptor-ß, or agonist being developed as a once-daily oral pill that can potentially be used to treat a number of disease states with high unmet medical need, including steatohepatitis, or NASH.

NASH is a serious inflammatory form of nonalcoholic fatty liver disease, or NAFLD. NAFLD has become the most common liver disease in the United States and other developed countries and is characterized by an accumulation of fat in the liver with no other apparent causes. NASH can progress to cirrhosis or liver failure, require liver transplantation and can also result in liver cancer. Progression of NASH to end stage liver disease will soon surpass all other causes of liver failure requiring liver transplantation. Importantly, beyond these critical conditions, NASH and NAFLD patients additionally suffer heightened cardiovascular risk and, in fact, die more frequently from cardiovascular events than from liver disease. NASH and NAFLD have grown as a consequence of rising worldwide obesity-related disorders. In the United States, NAFLD is estimated to affect approximately 25% of the population, and approximately 25% of those will progress from NAFLD to NASH. Current estimates place NASH prevalence at approximately 20 million people in the United States, or five to six percent of the adult population, with similar prevalence in Europe and Asia. The prevalence of NASH is also increasing in developing regions due to the adoption of a more sedentary lifestyle and a diet consisting of processed foods with high fat and fructose content.

For NASH, we enrolled 125 patients in a Phase 2 clinical trial with resmetirom. We achieved the primary endpoint for this Phase 2 clinical trial and reported the results in December 2017, and we reported positive topline results at the conclusion of the Phase 2 clinical trial in May 2018. We also completed a open-label extension study in 31 participating NASH patients from our Phase 2 clinical trial, which included 14 patients who received placebo in the main study.

On December 18, 2019 the Company announced it had opened for enrollment a multi-center, double-blind, placebo-controlled Phase 3 clinical study of patients with biopsy-confirmed or presumed NASH recruited from sites in the U.S. Key endpoints are safety, including safety biomarkers. Secondary endpoints include LDL cholesterol, lipid biomarkers, NASH and fibrosis biomarkers. Except for serial liver biopsies, the study protocol is similar to the MAESTRO-NASH study (discussed belowunder “—Our Ongoing and Planned Studies”), with resmetirom doses of 80 mg or 100 mg or placebo. Enrollment objectives for this study were exceeded, with approximately 1,300 patients enrolled overall. The study will help support the adequacy of the safety database at the time of NDA submission for Subpart H approval for treatment of NASH in patients with F2 or F3 fibrosis. In November of 2021, we reported data from the open label arm of and in January 2022 we announced that we achieved primary and secondary endpoints for the double-blind portion of

On March 28, 2019, the Company announced that it had initiated MAESTRO-NASH, a Phase 3 trial in NASH with its once daily, oral thyroid hormone receptor beta selective agonist, resmetirom. This double-blind, placebo-controlled study is being conducted at more than 230 sites in the United States and the rest of the world. Patients with liver biopsy confirmed NASH with stage 2 or 3 fibrosis are being randomized 1:1:1 to receive a single oral daily dose of placebo, resmetirom 80 mg or resmetirom 100 mg. A second liver biopsy at week 52 in the first 900 patients will be the basis of filing for accelerated approval under subpart H of applicable FDA regulations, which we refer to as subpart approval. Historically: the primary endpoint pertained to the percent of patients treated with either dose of resmetirom as compared with placebo who achieve NASH resolution on the week 52 liver biopsy, defined as the absence of hepatocyte ballooning (score=0), and minimal lobular inflammation (score associated with at least a reduction in NAS (NAFLD Activity Score), and no worsening of stage; and two key secondary endpoints pertained to reduction in and a or more improvement in fibrosis stage on the week 52 biopsy with no worsening of NASH. In May 2022, the Company announced that it determined to move the 1-point fibrosis endpoint up the hierarchy in our MAESTRO-NASH trial to a primary endpoint along with NASH resolution, as dual primary endpoints. The dual primary endpoint design allows for a successful outcome of the study, which can be filed for subpart H approval, if either the NASH resolution or 1-point fibrosis reduction endpoint is met. Patients will continue in the study for a total of approximately 54 months, and will be evaluated for a composite clinical outcome including cirrhosis on liver biopsy, or a liver related event such as hepatic decompensation. The total anticipated enrollment currently is approximately 2,000 patients, and will include up to 15% high risk F1 fibrosis stage NASH patients whose efficacy responses will be evaluated as exploratory endpoints. On June 30, 2021 we announced our achievement of the requisite enrollment of patients to support the planned Subpart H (Accelerated Approval of Drugs for Serious or Life-Threatening Illnesses) submission to the US Food and Drug Administration (FDA).

On July 13, 2021 we announced first patient dosed in a plannedopen label active treatment extension study ofnamed MAESTRO-NAFLD-Open Label Extension (OLE). The OLE study allows patients who completeto consent to 52 weeks of active treatment with resmetirom, making this treatment available to both patients who were assigned to placebo inand patients who were on resmetirom in

We have secured a $250 million term loan facility with Hercules Capital, Inc (“Hercules”). The committed capital strengthens Madrigal’s balance sheet, providing an additional source of funding both to support the expanded clinical program andfor a potential launch of resmetirom in the U.S.

Under the terms of the loan agreement, $50 million was drawn at closing. Madrigal may also draw an additional $125 million in two separate tranches upon achievement of resmetirom clinical and regulatory milestones. An additional $75 million may be drawn by Madrigal, subject to the approval of Hercules. The loan facility has a floor interest rate of 7.45% and adjusts with future changes in the prime rate, subject to the floor rate. The loan bears initial interest at a rate of 7.95%. We will pay interest-only for a period of 30 months, which may be extended to 60 months upon the achievement of certain milestones. The loan matures in May 2026 and may be extended an additional year upon the achievement of certain milestones. Additional details of the loan agreement will be filed with the Securities and Exchange Commission on a Current Report on Form

We expect to continue to incur substantial expenses related to our development activities for the foreseeable future as we conduct our clinical studies programs, manufacturing and toxicology studies. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later stage clinical trials, additional drug manufacturing requirements, and later stage toxicology studies such as carcinogenicity studies. Our research and development expenses have increased period over period in each of 2022 and 2021 and we expect that our research and development expenses will increase in the future, including as a result of our planned MAESTRO-NASH Outcomes study discussed in –“Key Developments” above. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time consuming. The probability of success for each product candidate is affected by numerous factors, including preclinical data, clinical data, competition, manufacturing capability and commercial viability. Accordingly, we may never succeed in achieving marketing approval for any of our product candidates.

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities as of the date of the financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued research and development expenses and stock-based compensation expense. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions. There have been no material changes in our critical accounting policies and significant judgments and estimates during the three months ended March 31, 2022, as compared to those disclosed in our Annual Report on Form for the fiscal year ended December 31, 2021 filed with the SEC on February 25, 2022.

Our research and development expenses were $47.9 million for the three months ended March 31, 2022, compared to $45.8 million in the corresponding period in 2021. Research and development expenses increased by $2.2 million in the 2022 period due primarily to the additional activities related to the Phase 3 clinical trials, increase in head count, and an increase in stock compensation expense. We expect our research and development expenses to increase as we advance our clinical and preclinical development programs for resmetirom, including as a result of our planned MAESTRO-NASH Outcomes study.

We anticipate continuing to incur operating losses for the foreseeable future. While our rate of cash usage will likely increase in the future, in particular to support our product development and clinical trial efforts, we believe our available cash resources as of March 31, 2022 will be sufficient to fund our operations past one year from the issuance of the financial statements contained herein, and this outlook takes into account circumstances that are currently reasonably foreseeable in connection with the pandemic. For a description of pandemic risks, including risks and uncertainties beyond our control, see Part I, Item 1A, “Risk Factors” of our Annual Report for the year ended December 31, 2021. Our future long-term liquidity requirements will be substantial and will depend on many factors. To meet future long-term liquidity requirements, we will need to raise additional capital to fund our operations through equity or debt financings, collaborations, partnerships or other strategic transactions. We regularly consider fundraising opportunities and may decide, from time to time, to raise capital based on various factors, including market conditions and our plans of operation. This includes, but is not limited to, the use of a $200 million sales agreement entered into in June of 2021, with Cowen and Company, LLC (the “2021 Sales Agreement”), pursuant to which we may, from time to time, issue and sell shares of our common stock up to established limits. We may also draw on additional tranches of debt under our $250 million term loan facility with Hercules based upon achievement of resmetirom clinical and regulatory milestones. Additional capital may not be available on terms acceptable to us, or at all. We also have the ability to delay certain research activities and related clinical expenses if necessary due to liquidity concerns until a date when those concerns are relieved. If adequate funds are not available, or if the terms of potential funding sources are unfavorable, our business and our ability to develop our product candidates would be harmed. Furthermore, any sales of additional equity securities may result in dilution to our stockholders, and any additional debt financing may include covenants that restrict our business.

Net cash used in operating activities was $49.9 million for the three months ended March 31, 2022, compared to $43.4 million for the corresponding period in 2021. The use of cash in these periods resulted primarily from our losses from operations, as adjusted for charges for stock-based compensation, and changes in our working capital accounts.

No significant changes to contractual obligations and commitments occurred during the three months ended March 31, 2021, as compared to those disclosed in our Annual Report on Form for the fiscal year ended December 31, 2021 filed with the SEC on February 25, 2022.

We currently have no product revenues and depend on funds raised through other sources. One source of funding is through future debt or equity offerings. Our ability to raise funds in this manner depends upon, among other things, capital market forces affecting our stock price and the factors described in our “Cautionary Note Regarding Forward-Looking “Statements.” “Liquidity and Capital Resources” and “Risk Factors” disclosures included or referred to in this filing.

Our disclosure controls and procedures (as defined in Rules and under the Exchange Act) are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management evaluates these controls and procedures on an ongoing basis.

There has been no change in our internal control over financial reporting (as defined in Rule under the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Except as set forth below, there have been no material changes to the risk factors included in detail in the “Risk Factors” sections appearing in Part I, Item 1A of our Annual Report on Form for the year ended December 31, 2021, filed with the SEC on February 25, 2022 (the “Annual Report”).

On May 6, 2022, we and our subsidiary, Canticle Pharmaceuticals, Inc. (“Canticle”) entered into the Loan Agreement with Hercules, providing for an aggregate of $250.0 million in term loans that will be available to us in four tranches subject to the conditions set forth in the Loan Agreement (collectively, the “Term Loans”). Our obligations under the Loan Agreement are secured by a security interest in substantially all of our assets, other than intellectual property. Until we have repaid such indebtedness, the Loan Agreement subjects us to various terms, conditions and covenants as described in the Loan Agreement Form 8-K filed with the SEC on May 6, 2022. These include financial reporting obligations, and certain limitations on indebtedness, liens (including a negative pledge on intellectual property and other assets), investments, distributions (including dividends), collateral, investments, distributions, transfers, mergers or acquisitions, taxes, corporate changes, and deposit accounts. Additionally, the Loan Agreement contains affirmative and restrictive financial covenants commencing on January 1, 2023, including maintenance of a minimum cash, cash equivalents and liquid funds covenant of $35.0 million, which may decrease in certain circumstances if the Company achieves both a certain FDA approval for resmetirom and a revenue milestone (the “Minimum Cash Covenant”). The Loan Agreement also includes a revenue-based covenant (the “Revenue Covenant”) that could apply commencing at or after the time that financial reporting is due for the quarter ending September 30, 2024; however, the Revenue Covenant will be waived at any time in which the Company maintains, as measured monthly (i) a certain level of cash, cash equivalents and liquid funds relative to outstanding Hercules debt or (ii) a market capitalization of at least $1.2 billion. The Revenue Covenant, as and when effective on or after November of 2024, would require the Company to maintain a minimum amount of trailing three-month net product revenue. Our business may be adversely affected by these restrictions on our ability to operate our business. If we raise any additional debt financing, as permitted by the Loan Agreement and if pursued and secured by the Company, the terms of such additional debt could further restrict our operating and financial flexibility.

The exhibits filed or furnished as part of this Quarterly Report on Form are set forth on the Exhibit Index, which Exhibit Index is incorporated herein by reference.