Are we witnessing the rise of a new biotech leader? Madrigal Pharmaceuticals (NASDAQ: MDGL) , a mid-cap company, might have as decent a shot at becoming as prominent in the field as most of its similarly sized peers.

Earlier this year, the company earned Food and Drug Administration (FDA) approval for Rezdiffra, a therapy for the liver disease non-alcoholic steatohepatitis (NASH). This milestone is impressive for one simple reason: Many drugmakers, including some with far more experience and resources than Madrigal, have tried and failed to develop medicines for NASH.

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

There is more to the Rezdiffra story

NASH is caused by the buildup of fat in the liver. As its name suggests, it isn't due to heavy alcohol consumption. It is, however, tied to obesity and type 2 diabetes. NASH can lead to scarring of the liver (fibrosis), among other serious health problems.

Rezdiffra's approval was a welcome development considering that, along with diabetes and obesity, the prevalence of NASH has been rising. There is a dire need for treatment options, and Rezdiffra will help fulfill this need. So far, so good.

However, the drug was launched under the accelerated approval pathway, meaning it will have to produce more positive efficacy data in confirmatory trials to earn full approval. Otherwise, the FDA could take it off the market.

But provided that doesn't happen, Rezdiffra's potential looks exciting. Madrigal plans to focus the launch of its crown jewel on 315,000 NASH patients who are being seen by specialists. Some analysts predict peak sales above $4 billion or even $5 billion.

There is competition on the way

Although Madrigal was first-to-market in NASH, many prominent drugmakers are now hot on its heels. The list includes Eli Lilly and Novo Nordisk , two pharmaceutical leaders no one wants to compete with in the drug industry. These two have far more resources than Madrigal, so they will likely be able to target a much larger market than the smaller biotech.

That's where Madrigal Pharmaceuticals could have benefited from a licensing agreement with a larger company with deeper pockets. It almost certainly would have been able to go after far more patients in the U.S., where it estimates a diagnosed population of 1.5 million NASH patients.

And there is a substantial and growing worldwide NASH market. According to some estimates, 26.5 million people will suffer from the disease by 2032 in some key markets, including the U.S., several of the largest European economies, and Japan. That number was just a little over 22 million in 2022.

Madrigal Pharmaceuticals likely lacks the funds to dominate the global NASH market. One way the company could maintain its lead, at least in the U.S., is to capture enough market share before any other drug earns approval and hope that Rezdiffra passes its confirmatory trials with flying colors.

Is the stock a buy?

Madrigal's work in treating NASH has been impressive so far, but is it enough to grant the company a path to prominence in the biotech industry ? The company's shares will fall off a cliff if Rezdiffra fails to prove effective in subsequent studies.

The risk that other drugmakers will eat its lunch is also real -- and significant. Madrigal has no other drug on the market and no other drug (that we know of) in development. Being a one-trick pony isn't necessarily a deal-breaker, particularly for a relatively small biotech (its market capitalization is currently $5.3 billion).

And its innovative achievements in NASH suggest the company's research team could produce more successes in the future. But for now, the stock looks relatively risky even as there is plenty of potential upside. That's why I would advise hedging your bets here. Risk-tolerant investors might consider initiating a small position in the company and adding more as it makes clinical and regulatory progress. This approach could lead to outsize returns over the long run, provided enough things go right for Madrigal Pharmaceuticals.

If anything goes wrong -- in particular, if anything goes wrong with Rezdiffra -- investors could be left owning practically worthless shares. So, the stock isn't attractive for risk-averse investors.

Before you buy stock in Madrigal Pharmaceuticals, consider this: