Editor's Note: This article was updated on Aug. 31 to reflect that Labaton Sucharow was representing clients with short positions in Cassava Sciences when it filed the citizen petition filed with the FDA.

Investing in pre-product biotech companies often feels like gambling. Financial analysis might not deliver meaningful conclusions for businesses without revenue, and the risks inherent to the drug development process are often discouraging. But buying biotech stocks doesn't need to actually be gambling, provided that you're willing to dive into the details on clinical trials and drug efficacy. 

That's exactly what I'll be doing today with Cassava Sciences (SAVA 0.20%) and Annovis Bio, (ANVS -1.49%) which are both developing drugs for Alzheimer's disease. Neither company has significant revenue, and it'll likely be years before they do, if ever. Risk-averse investors should probably look elsewhere for biotech stocks. But for the daring, one of the pair is shaping up to be appealing.

Two scientists discuss data on a tablet while standing inside of their laboratory.

Image source: Getty Images.

The case for Cassava

Cassava's lead Alzheimer's project is simufilam, which will likely be entering phase 3 clinical trials before the end of this year. It's the company's most advanced program, so there's a lot riding on that trial's success.

Per the latest interim update from the simufilam clinical trial in late July, the drug looks extremely promising. Patients treated with simufilam experienced a 10% improvement to their cognition as measured by standardized cognitive tests for Alzheimer's. And the levels of biomarkers associated with Alzheimer's disease dropped precipitously. That bodes extremely well for the drug's future prospects of approval, considering that Biogen's drug Aduhelm was essentially given the green light by regulators on the basis of its biomarker efficacy data alone. 

Importantly, Cassava is also developing SavaDx, which is an investigational blood-based diagnostic test for Alzheimer's. With SavaDx, it hopes to diagnose Alzheimer's long before symptoms appear. Then it might be possible to initiate treatment early on, when the chances of successful intervention are the highest. Eventually, SavaDx could provide an objective method for segmenting the patient population, thereby opening the door to developing different interventions for each subpopulation and targeting existing interventions more effectively.

The next big step for Cassava will be in September, when the company will announce interim results documenting simufilam's efficacy after 12 months of treatment. Beyond that, investors should also be on the lookout for the recently concluded phase 2b trial results to be published in an academic journal. 

Can Annovis recover from its stumble?

Unlike Cassava, Annovis has a handful of clinical-stage programs, some for diseases other than Alzheimer's. In particular, its Parkinson's disease trial in phase 2 may end up outshining its Alzheimer's project. For both diseases, Annovis is investigating the merit of its lead candidate, ANVS401. That's important, because it gives the company more than one chance to make a successful drug -- and at the moment, it's looking like it's going to need the margin of error.

Annovis' worse-than-expected interim phase 2 results with ANVS401 for Alzheimer's caused its stock to fall off a cliff in late July, dragging Cassava's stock along for the ride.

ANVS Chart

ANVS data by YCharts

Still, the interim results were far better than the stock chart would have you believe. ANVS401 appeared to improve the cognition of Alzheimer's patients across a handful of the standardized cognitive tests, though not all of them. It also led to an improvement in the levels of Alzheimer's-associated biomarkers, which is the primary goal of the trial. 

Annovis plans to publish the full results of the study before the end of August. That could reinvigorate investors' confidence in ANVS401, or it could erode it further if the data remain largely the same. Either way, ANVS401 could still be useful to treat Parkinson's disease, as the preliminary data indicate. So even if it chalks up another miss in its aspirations of an Alzheimer's indication for the drug, shareholders might still be in good shape in the long run.

There's a clear winner, but investors should hedge their bets

At the moment, Cassava Sciences looks like a better biotech stock than Annovis Bio because its lead program appears to be more successful at treating Alzheimer's disease.

But beware: A mere month ago, Annovis was the company that appeared to be leading the pack. Its stock soared on optimism for a favorable preliminary data update. Then it published more data that promptly diminished the market's confidence in its drug, not to mention its share price. The exact same thing could still happen to Cassava, though it's already a bit further along in the process than Annovis was. 

In fact, Cassava is already facing a similar problem that’s in the process of tanking its stock. On August 25, the litigation firm Labaton Sucharow was retained by clients who have short positions in Cassava Scienes and the firm submitted a petition to the Food and Drug Administration (FDA) documenting allegations of inconsistencies in the company’s recent crop of simufilam efficacy data. If the petitioners get what they are demanding, Cassava will be forced to halt its simufilam clinical trial. But, the company has already pushed back against the allegations from short-sellers, and it could eventually release new data that defuses them entirely.

To address this type of risk, investors should diversify their biotech holdings such that their portfolios are not too concentrated in any single high-risk stock. If you decide to buy shares of Cassava, it probably makes sense to buy a few shares in other Alzheimer's disease drug developers too.