Cassava Stock Is a Bold Play That Could Pay Off Soon

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Cassava (NASDAQ:SAVA) stock is making the news after its wild rally from a $2.88 low to a $146.16 high.

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SAVA stock backed off suddenly when a law firm betting against it questioned its clinical data quality.

Investors may easily interpret both sides of the controversy surrounding Cassava.

A government website posted a lawyer’s letter that urged Billy Dun, Food and Drug Administration director, to pause Simufilam clinical trial. As the controversy takes prominence, it’s easy to forget the work Cassava is doing.

Cassava’s Simufilam is a potential drug that treats Alzheimer’s patients. It works by stabilizing a critical protein in the brain. It does not work the same way as Biogen’s (NASDAQ:BIIB).

Biogen’s Aduhelm is an amyloid beta-directed monoclonal antibody. Scientists worry about Biogen’s efficacy and safety profile, but because Biogen’s study limited the number who qualify. Real-world data will give scientists a better idea of its safety.

This will increase the importance of the data from Cassava’s safety study. This fall, the company will start two Phase 3 trials.

One study will examine a 100 mg Simufalam dose with 750 participants with AD getting the treatment or placebo. The trial will run until October 2023.

In a parallel trial, Cassava will enroll 1,083 patients. The randomized study will evaluate subjects in placebo, 50 mg, or 100 mg simufalam twice a day for 18 months.

Allegations and SAVA stock

On Aug. 25, Cassava responded to each fictional point claimed against its Alzheimer’s disease study. For example, it said that the biomarker data is not falsified.

Quanterix is an independent company that generated its plasma p-tau data. Furthermore, the company never claimed the patient’s plasma p-tau increased by 235% in a scatterplot. Instead, this value increased by 38%.

Cassava could have offered a point-by-point rebuttal to stop the decline in its share price. Yet that lengthy press release would take too much time and energy. Instead, Cassava is better off spending its resources in moving forward with the Phase 3 study.

It needs to continue engaging with potential partners. That would create near-term catalysts unlocking the value of its share price.

Cassava faces a short float is 14.4%. Many bearish investors benefit from the stock’s decline. The company may squeeze the shorts by keeping the upcoming studies on schedule.

It has plenty of cash on hand (of $278.3 million) and a low cash burn rate. While it could buy back stock, Cassava is better off preserving its cash instead of watching the fluctuations in its stock price.

Risks

Investors should treat any biotech investing with caution. Since the downside risks depend on clinical data reliability and results, stocks like Cassava could fall unexpectedly.

The FDA could respond to the petition to delay the study. That would send Cassava stock sharply lower. Fortunately, the FDA agreed to a Special Protocol Assessment for both of Cassava’s pivotal Phase 3 studies of oral simufilam. Chief Executive Officer Remi Barbier said, “The SPAs underscore our alignment with FDA on key scientific, clinical and regulatory requirements of our Phase 3 program of simufilam in Alzheimer’s disease.”

Fair Value

On Wall Street, Tipranks reported an average price target of around $155. In the last few weeks, four analysts reiterated or assigned a “buy” rating on the stock.

Investors could wait on the sidelines for now. Instead of getting swept up in the bearish news that benefits short-sellers, investors could wait for the upcoming studies to begin. The stock might settle down soon, finding support at the 200-day moving average at around $50.

Conservative investors could wait for the volatility to ease before starting a position in this biotech firm.

Conversely, growth investors unfazed by the bears could take advantage of the wild volatility. Option premiums increased, so investors selling calls or puts would get a bigger compensation.

The biotech sector has very few companies growing in the neurodegenerative space. Biogen is the only company recently launching a drug for Alzheimer’s. The health community needs Cassava to become the next firm offering a drug to treat this disease.

On the date of publication, Chris Lau 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.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.