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Should Investors Worry About the Federal Investigation of Cassava?

By Keith Speights and Brian Orelli, PhD – Dec 2, 2021 at 6:55AM

Key Points

  • Cassava revealed that it's being investigated by government agencies.
  • It's too soon to know if the investigations will uncover any wrongdoing by the company.
  • The important thing is whether Cassava's Alzheimer's drug is safe and effective.

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The investigation really isn't the underlying concern.

Cassava Sciences (SAVA 0.46%) has been embroiled in a controversy for several months related to allegations that it falsified data for its experimental Alzheimer's disease drug simufilam. Last month, the company revealed that it's the subject of a federal investigation. In this Motley Fool Live video recorded on Nov. 16, Fool contributors Keith Speights and Brian Orelli discuss whether investors should worry about this development.

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Keith Speights: Brian, we've talked about Cassava Sciences quite a bit in recent weeks, and now there's a new plot twist.

The company revealed an SEC filing on Monday that it's under investigation. What's the story here and is this something for investors to worry about with Cassava?

Brian Orelli: The company said that it's being investigated by quote, "certain government agencies." It doesn't tell you a whole lot.

On one hand, it could just be that the FDA is following up with the citizen's petition that was filed by the short-seller that we know about. But it seems like it would be in Cassava's best interest just giving that information directly saying we're being investigated by the FDA because of a citizen's position, because that won't be a surprise to anybody and it probably wouldn't have any material effect on the stock price.

Maybe it's multiple agencies and they're trying to hide the other one. I don't think this in and of itself is something investors should really be worried about. Either Cassava faked data or it didn't, and whether the government finds out that it faked data shouldn't really matter that much to investors.

If it faked data then that's going to suggest that its drug probably isn't going to work, and that's a much bigger issue than whether it gets in trouble with some government agencies. I think investors are still in wait-and-see mode at this point.

Speights: It's not surprising that a stock is going to fall when the company announces there's a federal investigation of any sort. But it's way too early to know if that investigation is going to become anything, if anything is going to come out of this.

Orelli: Ultimately, I don't think it really matters. If the government finds that they did something really bad, that's worse. The fact that the government figured it out is not the issue, the issue is that they did something really bad.

It's not like they're selling a drug and then they paid off somebody. That wouldn't have a long-term material effect but it would have a short-term material effect, because the government would find them and so they would cost the company a lot of money, but that's not the case; there are no drugs in the market. It's obviously something clinical or pre-clinical, and so that's just going to affect whether their drug actually works and so that's I think the biggest issue here.

Speights: Yeah. If I were a Cassava shareholder (and I'm not), I would hope that the company would disclose as much as it possibly could in the coming days, just to get everything out there so there's as much transparency as possible.

Brian Orelli, PhD has no position in any of the stocks mentioned. Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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