In my experience, it's often the trickiest company projects that create the most value for a business (and its investors). When it comes to a company like Cassava Sciences (SAVA 0.24%), which is working on therapies for Alzheimer's disease, that little rule of thumb feels like it could be truer than ever.
The biotech's main project is its drug simufilam, which is intended to treat mild to moderate Alzheimer's. The candidate recently wrapped up its phase 2 clinical trials, in which it was shown to be safe, and appears to help patients recover their spatial working memory significantly more than when given a placebo. Simufilam could be the game-changing treatment for Alzheimer's disease that the world has been waiting years for. What's more, the company's stock is already one of the year's hot performers -- but does it have what it takes to make average investors, millionaires?
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Sorry, aspiring millionaires, this isn't the right pick
As is frequently the case with stocks that have gained enough traction to be potential millionaire-makers, Cassava's explosive growth in the last 12 months is highly unlikely to happen again anytime soon. Even if simufilam sails through its upcoming phase 3 clinical trials, new investors would need an even larger surge than before to turn a hefty principal of $100,000 into $1 million. Given that the market has already priced in the drug's current level of development, another massive price movement would be shocking. In short, the train has already left the station.
But what about in the long run, when the company's revenue from a possible simufilam approval could start to consistently support higher stock prices? Could Cassava ostensibly capture a significant portion of the market for Alzheimer's therapeutics, which is estimated to reach $13.57 billion in value by 2027? Let's do some quick math to get a bit more clarity.
Why investing in Cassava now could still be a brilliant move
As of last year, there are 29 Alzheimer's therapies in phase 3 clinical trials. Simufilam will be ready to begin its own phase 3 trial this year.
Alzheimer's drugs are notoriously difficult to make, and many have failed. In a best-case scenario, we can assume that the chance of proceeding to commercialization for an Alzheimer's therapy is the same as the chance of other central nervous system medications. According to the American Council on Science and Health, the probability of a central nervous system therapy in phase 3 development making it to commercialization is 51%. If that estimate holds true, we can expect about 15 surviving products to be commercialized after trials conclude. If Cassava and its surviving competitors made equally effective drugs and thereby captured an equal share of the market, they'd each have a 6.7% portion.
Holding 6.7% of the 2027 Alzheimer's therapeutics market could bring in up to $895.62 million in yearly revenue for the company. If we assume that Cassava will trade at the biotechnology industry's average price-to-sales (P/S) ratio of around 8, and that it doesn't issue any more shares than the 39 million that it has today, its share price could be about $185. That's a massive amount of growth compared to its price of around $52 today, even if it isn't surefire millionaire-maker material. And, given that the price we calculated doesn't include any other revenue from drug development collaborations or the intangible value of any pipeline projects that the company starts between now and 2027, it might even be a bit on the low side.
The verdict
Given that its stock price was around $3 about six months ago, it's safe to say that Cassava Sciences has already made a few millionaires. While it could still be a great growth stock to buy, it probably won't make anyone who invests now into a millionaire anytime in the next decade. Still, don't let that dissuade you from purchasing Cassava stock in the near future. There's no guarantee that the company will succeed with simufilam, but if it does, your initial investment could still triple in value.
