SAVA - The Steep Climb Ahead For Cassava Sciences' Alzheimer's Drug

2024-01-09 02:10:50 ET

Summary

• Cassava's Market Position: Despite a $1 billion valuation, concerns about simufilam, its lone Alzheimer's drug, cast doubt on its prospects.
• Clinical Development Challenges: Simufilam faces rigorous Phase 3 trials, critical due to its unconvincing prior studies and the low success rate in AD drug development.
• Financial Health Analysis: Cassava shows strong liquidity with a solid cash runway, but future stability is heavily reliant on simufilam's clinical success.
• Investment Recommendation: "Strong Sell" due to high risks in simufilam's development and a valuation that doesn't align with its bleak clinical prospects.

At a Glance

As I return to Cassava Science's ( SAVA ) stock to begin the new year, I notice that its market capitalization is exactly $1 billion at the time of writing—up 60% since my last update in October. This puzzles me, as nothing has changed fundamentally. Cassava's pipeline is entirely dependent upon the success of their lone Alzheimer's [AD] drug, simufilam. As of today, the company has not produced a single rigorous (e.g., large, placebo-controlled, blinded, randomized) clinical trial statistically demonstrating that simufilam has any benefit in AD. Moreover, the historical clinical success rates for AD drug candidates are no more than 2%. Simufilam is now undergoing two rigorous and registration-enabling Phase 3 trials. When you consider the facts above, as well as the scientific integrity concerns about simufilam's preclinical work, you have to wonder why the market gives the drug even a sliver of a chance of success.

The following article discusses the limitations of previous simufilam' data, Cassava's current financial standing, and the difficult road ahead, culminating in a "Strong Sell" recommendation due to poor clinical prospects for their lone asset and a high valuation relative to these prospects.

Cassava's Alzheimer's Drug Simufilam: A Rigorous Journey Ahead

With the exception of the cognitive maintenance trial, all of simufilam's research ( pages 21-30 ) has been open-label, small in size, and short in duration, all of which are notoriously unreliable features, whereas Cassava's lone study [CMS] approaching robustness (double-blind, randomized, placebo-controlled) failed to reach statistical significance in its pre-specified cognitive endpoint, which the company attributes to "sample size" ( page 24 ).

Phase 2a Study Limitations:

• Small, open-label design
• Absence of placebo group
• Short Duration: 28 days
• Reliance on "Research Use Only" biomarkers

Phase 2b Study Limitations:

• Small ("the first 50 subjects"), open-label design
• Limited duration and dosage range: 28 days, two dosage levels
• Reliance on "Research Use Only" biomarkers

Open-Label Study Limitations:

• Open-label design
• Absence of placebo group
• Long-term study but non-comparative
• Variability in cognitive score interpretation

Cassava carefully points out , "Data results from our open-label safety study do not constitute, and should not be interpreted as, regulatory evidence of safety or efficacy for simufilam in Alzheimer’s disease. Rigorous evidence for drug safety and efficacy is derived from one or more large, randomized, placebo-controlled studies."

Cognition Maintenance Study [CMS] Limitations:

• Relatively small sample size: 157 patients
• Short duration of randomized phase: 6 months
• Prior treatment with simufilam

Again, Cassava cautions , "The CMS is a proof-of-concept study involving a small number of patients and limited data. Top-line clinical CMS results do not constitute, and should not be interpreted as, regulatory evidence of safety or efficacy for simufilam in Alzheimer’s disease. Rigorous evidence for drug safety and efficacy is derived from one or more large, randomized placebo-controlled Phase 3 studies."

Cassava recently announced that, unlike existing AD medications, simufilam does not generate treatment-emergent amyloid-related imaging abnormalities; nevertheless, this property is also shared by non-therapeutic substances such as vitamin C.

Interestingly, simufilam appears to be as safe as vitamin C, which is a key criterion for any common or chronic ailment, and its oral administration is convenient, which would set simufilam apart from other players in the AD market.

For their Phase 3 trials, there will be no doubt regarding whether or not simufilam is truly active in AD. Both trials are rigorous—blinded, randomized, placebo-controlled, and with nearly a thousand patients each. Cassava did an excellent job, as both trials were completely enrolled last fall, which is no small feat for a small company on a limited budget.

Based on historical data for Phase 2/3 trial success rates and accounting for the particular difficulty in CNS and AD, I would assign the odds of both trials succeeding at no more than 1%. Thus, a $1 billion valuation is only rational, in my opinion, if you believe simufilam is worth well over $100 billion (also accounting for regulatory risks), assuming Phase 3 success.

Q3 Earnings

Cassava Sciences' latest financials reveal intriguing dynamics. R&D spending increased to $23.6 million from $18.5 million in the September-ending quarter, highlighting the company's commitment to advancing its research pipeline. Administrative costs also increased, rising to $4.3 million from $2.8 million. These increases pushed the operating deficit to $27.9 million, a significant increase from $21.3 million.

Financial Health

Now, let us look at Cassava's balance sheet . Their assets, primarily cash, total $142.35 million. Liabilities are unusually low, at $17.414 million. This results in a current ratio of 8.63, a marker of strong liquidity.

In a nine-month span, they used $59.709 million in operations. Monthly, that's about $6.634 million. Given their cash reserves, Cassava's runway extends to roughly 21.45 months. Remember, these figures are historical and might not predict future trends.

Their cash position and burn rate suggest a low likelihood of needing extra funds within a year. This assumes stable operational expenses and no unexpected costs.

In summary, Cassava's near-term financial health looks robust, thanks to a solid current ratio and ample cash runway. Yet, their long-term stability hinges on simufilam's success.

Market Sentiment

Seeking Alpha reveals a $1 billion market cap for Cassava. Its growth prospects seem bright. Analysts predict revenues will skyrocket to $200 million by 2024, a stark rise from 2023's near-nil figures. Yet, stock trends tell a different tale. Compared to the S&P 500, SAVA lags. In a year, it dropped 18.82% while the SPY soared by 23.35%.

A glaring 32.12% short interest, with 12.76 million shares shorted, hints at market doubts. This could spell volatility or anticipation of a price drop. About 30.06% of the company is institutionally owned . Noteworthy is the net uptick in positions. New holdings total 609,524 shares; sales are only 347,922. Major players like Blackrock, Vanguard, State Street, and Bank of America are key. Insider trading over a year leans positive. Insiders bought 81,988 more shares than they sold, a sign of confidence in the firm's future. Overall, market sentiment towards this company, amidst these diverse signals, ranks as "adequate."

My Analysis and Recommendation

Cassava is resilient in finance and operations, but significant concerns remain about its AD drug, simufilam, necessitating a "Strong Sell" recommendation. Despite the hope pinned on simufilam's Phase 3 trials, its clinical development path is riddled with problems. Notably, AD drug candidates typically have a success rate of less than 2%. This dismal statistic, combined with doubts about the integrity of simufilam's preclinical work, casts a large shadow over its odds of Phase 3 success. Additionally, Cassava's market value of $1 billion appears exorbitant, given the tiny chance of clinical and regulatory success.

Investors should reduce their exposure to Cassava by diversifying their portfolio and implementing stop-loss orders. It is critical for investors to constantly monitor Cassava updates, particularly concerning clinical trials and regulatory news. Those considering hedging strategies may find short positions in Cassava appealing, given the stock's high short interest.

However, the "Strong Sell" recommendation is not without risk. Should simufilam show positive Phase 3 results, it could significantly boost Cassava's stock value. The company's entry into strategic partnerships or acquisition interests from larger pharmaceutical entities could also boost its stock price. Changes in market sentiment towards the biotech sector or AD drug market could positively influence Cassava.

In essence, the high-risk nature of Cassava's pipeline necessitates a cautious approach, as the potential benefits of simufilam do not fully offset the substantial risks associated with its development, prompting the recommendation of a "Strong Sell."

Investment Visualization Table

The following table represents my visualization of three possible scenarios for Cassava's stock over the next three years.

My calculated price target is $8.44 per share, based on the probabilities and share prices provided for the scenarios above. Given the prior data for AD candidates, I most likely inflated the odds of positive or ambiguous data. Subsequently, I believe my price target is actually optimistic. However, I believe Cassava would be fairly valued at that price. Because Cassava's stock trades nearly three times my target, I have rated it a "Strong Sell". However, it is possible that a rare event (the blue sky scenario) can materialize and prove me wrong.

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