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Cassava Sciences: Fine Trading Stock, Terrible Investment

InvestorPlace logo InvestorPlace 10/11/2021 Ian Bezek
Cassava Sciences Inc logo visible on display screen © Source: Pavel Kapysh / Shutterstock.com Cassava Sciences Inc logo visible on display screen

Cassava Sciences (NASDAQ:SAVA) is a clinical stage biotech company attempting to commercialize a drug for the treatment of Alzheimer’s. SAVA stock surged more than 1,000% earlier this year. Then it was hit by fraud allegations and lost more than half its value. Even still, it’s up sharply overall as traders continue to hope that the Alzheimer’s drug will work in upcoming clinical trials and obtain Food and Drug Administration (FDA) approval.

Cassava Sciences Inc logo visible on display screen © Provided by InvestorPlace Cassava Sciences Inc logo visible on display screen

This combination of events has brewed up a great mix of volatility, short sellers, rumors, and all you could wish to see in an active day trading name. However, looking further under the surface, there is remarkably little reason to hold SAVA stock for anything other than a quick flip.

Cassava: A Small And as of Yet Unsuccessful Company

Cassava spent most of the past five years a penny stock. It traded as low as $1 a few years ago, and was still at just $7 each heading into 2021. It’s not hard to see why. The company hasn’t generated any meaningful revenue since 2013. It also changed its name at one point after winding down other unsuccessful operations. To fund its ongoing losses, Cassava has diluted shareholders endlessly.

It didn’t seem like any big success was right around the corner, either. After all, Cassava hasn’t spent more than $9 million on research and development any given year in the past decade. What are the odds that a disease as complicated as Alzheimer’s is cured by a company with a shoestring budget? For context, consider that Merck (NYSE:MRK) spent $16 billion on R&D over the past 12 months.

For another data point, Cassava had 11 full-time employees as of year-end 2020. It’s almost unbelievable that the market slapped a $5 billion market capitalization on this 11-person science experiment earlier this year. Even after the fraud allegations hit and SAVA stock tanked, it still has retained a $2 billion market capitalization for a remarkably thin set of fundamentals.

Was Cassava’s Huge Run Boosted By Manipulated Data?

SAVA stock surged from $7 to greater than $100 at one point this year. That came on what appeared to be great news about the company’s lead drug simufilam.

However, a complaint soon surfaced suggesting that Cassava had played fast and loose with the data. Here’s a securities class action lawsuit that highlights the details of the allegations.

Not surprisingly, the company denied the charges. It is pressing on with its plans to launch Phase 3 trials for the drug and try to put the controversy behind it. However, Cassava shares remain sharply lower since the allegations surfaced, and short interest has climbed. Bears seem increasingly certain that Cassava’s drug won’t hold up under the challenge of a rigorous Phase 3 trial.

The Path Ahead

Cassava appears set to begin enrollment of Phase 3 trials for simufilam. It announced this week that it will be launching 52-week and 78-week trials measuring performance and safety of the drug in patients suffering mild-to-moderate symptoms of Alzheimer’s. Assuming enrollment takes a few months to complete, these trials should head to conclusion during 2023.

As of last quarter, the company had $278 million of cash on hand. Given that it spends a very modest sum of money on research and development, it should be able to fund itself for quite awhile. That’s good news, as one of the biggest enemies in biotech investing can be dilutive funding spirals.

Still, most Phase 3 clinical trials fail, and that’s doubly true for Alzheimer’s, which is a persistently frustrating disease on which biotech companies have spent billions to little avail. It’d generally be wise to steer clear of a tiny biotech company with a nano-sized research budget anyway. Throw in the fraud allegations and lawsuits and this is a most speculative company.

SAVA Stock Verdict

Cassava has absolutely everything you could possibly want out of a stock for day trading. It is huge on social media and Reddit. The short interest is elevated and on the rise. The company generates media attention and is targeting one of the world’s most pressing health crises out there. Daily trading volume and volatility is through the roof. If you want to play the swings, SAVA stock looks perfect.

For long-term investors, however, this thing couldn’t be a clearer avoid. Clinical-stage biotech is a hard game at the best of times. It’s near impossible when the company has disputed data and is aimed at a disease as tricky as Alzheimer’s.

The biotech investing graveyard is full of people that bet too heavily on a long-shot Alzheimer’s drug. Don’t let yourself end up in the same place once the volatility ends and SAVA stock heads back toward the single digits.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

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