Developing medicines for tricky-to-treat conditions like Alzheimer's disease is tough under the best of circumstances, and as investors in Cassava Sciences (SAVA +3.70%) know, sometimes the circumstances are far from ideal. The stock is now down by 23% over the past 12 months although it has gained nearly 2,000% in the last five years, doubtlessly leaving many shareholders much richer despite its nest of troubles last year.
Still, those troubles suggest potentially deep cracks in the scientific foundations that are holding up the business. So let's dissect the company's recent history to get a feeling of its chances to be a good investment today.
NASDAQ: SAVA
Key Data Points
Controversy threatens this company's value
Good biotech companies develop and commercialize medicines that are safe and effective. Good medicines tend to be the result of good science. And while defining good science is beyond the scope of this article, one of the key characteristics of good science is integrity. When questions about the scientific process arise, it can undermine the credibility of the results that follow.
According to reportage from The Wall Street Journal as well as the influential journal Science in mid-October 2023, one of the researchers responsible for a handful of Cassava's foundational scientific publications is accused of scientific misconduct by the researcher's own academic institution, the City University of New York (CUNY).
The gist of the misconduct allegations is that some of the research pertaining to the efficacy of simufilam, a drug that's intended to treat Alzheimer's disease and is the company's only pipeline program, may have been manipulated or fabricated.
However, the university's investigation was placed on hold without resolution on Oct. 27 due to what it called "questions regarding the confidentiality and integrity of this investigation," which likely refers to the fact that the report was leaked to the press before being finalized. It's now unclear if there will be any resolution to the saga in the future.
Management denies all wrongdoing, pointing to the lack of conclusion of the investigation. In essence, the company stands by its researchers and their work, and blames short sellers for deceptively sparking the controversy in an attempt to sink the stock for profit. And it's true that there is a large volume of short interest in the stock.
Whether some or all of the allegations are accurate or not, the situation means that the company will be under particularly intense scrutiny from regulators at the Food and Drug Administration (FDA) if simufilam gets a shot at approval.
The challenges ahead
Is there a chance that Cassava's ongoing clinical trials will demonstrate simufilam's utility and safety in treating Alzheimer's despite everything? Absolutely. If the final data hold up in the face of enduring and intense scrutiny from the scientific community and regulators, it is conceivable that the drug might eventually be approved for sale. Its stock would likely soar as a result.
At that point, the next barriers will be to convince public and private insurers to cover the cost of treatment, and to convince practitioners to actually prescribe it. But getting insurers and doctors on board with a therapy that at least some in the scientific community are skeptical about may be difficult. If regulators have questions of their own, the challenge will only become more dire.
In other words, the tone of the discourse about Cassava somewhat affects the size of its addressable market. So a regulatory approval may not be enough to drive durable long-term returns for shareholders on its own.
Critically, Cassava doesn't have anything else in its pipeline aside from simufilam. Therefore, a rejection from regulators would be devastating for its share price. The company also has a limited ability to change course this late in the game. It has no debt, and just over $142 million in cash, equivalents, and short-term investments, whereas its trailing 12-month operating expenses are $104 million.
The company has two phase 3 clinical trials ongoing for simufilam, with one expected to end in October 2024, and the other expected to wrap up by mid-2025. If everything goes according to plan, it should have enough money to finish both trials. But that leaves little margin of error if regulators ask it to conduct additional studies to secure the drug's approval.
Furthermore, it might have trouble borrowing money to fund that research and development (R&D) work, not to mention funding commercialization activity, as a result of the controversy, regardless of whether the meat of the controversy is factually true or false. So while there is still some hope left for Cassava's stock, it's best to avoid buying it. Most biotech companies aren't burdened by misconduct allegations, and there are plenty of other options that don't have the same baggage.
