Shares of clinical-stage biotech Cassava Sciences (SAVA 0.92%) soared in 2021 for a couple of reasons. First, the company produced strong results in clinical studies for its potential therapy for Alzheimer's disease (AD), Simufilam. The other reason is the result of Biogen, a competitor, receiving regulatory approval in the U.S. last year for its novel AD treatment -- the first such therapy approved for AD since 2003.
However, the approval of Biogen's therapy, called Aduhelm, came as a surprise since a panel of experts had recommended against it, but it helped raise Cassava Sciences' profile in the eyes of investors. 2022 promises to be an eventful year for Cassava Sciences, but what exactly can investors expect from the biotech in the coming 12 months?
The best-case scenario
Simufilam works by restoring the normal shape and function of a protein in the brain called filamin A. In its altered form, filamin A is thought to be one of the causes of AD. In a phase 2 clinical trial, Simufilam was shown to improve several biomarkers of AD -- something that had never been observed in a clinical trial for any investigational AD therapy, according to management.
Further, in an open-label study, Simufilam successfully improved patients' cognition and behavior. Cassava Sciences will look to confirm these results in late-stage studies. It initiated a pair of a phase 3 clinical trials for Simufilam late last year. Both studies will evaluate the safety and efficacy of various oral doses of the medicine in AD patients for a duration of at least 52 weeks. Investors can expect the company to reveal some results from these trials before the end of the year.
Should Simufilam once again hit it out of the park in the late-stage studies, it will only serve as yet another catalyst to send the company's stock price soaring. A regulatory submission for Simufilam doesn't seem likely to happen this year, but as 2022 comes to a close, Cassava Sciences could already have a substantial amount of data in hand to support a regulatory application for Simufilam.
Beware of these risks
However, despite the optimism, investors should remain cautious. Things could still go wrong. And Simufilam wouldn't be the first potential AD medicine to flunk late-stage studies after delivering encouraging results in phase 2 trials.
Failure to deliver in clinical trials and unforeseen regulatory headwinds are par for the course for biotech companies, but these risks seem even higher in this case. And as a clinical-stage biotech whose shares have skyrocketed in the past year thanks to Simufilam, failure to deliver results that are up to investors' standards will swiftly result in a sell-off.
Even if Simufilam is successful in clinical trials, Cassava Sciences could face stiff competition in the market for AD drugs, and not only from Aduhelm. Last year, Eli Lilly initiated a rolling submission with the U.S. Food and Drug Administration (FDA) for the accelerated approval of its investigational AD drug, donanemab.
However, both donanemab and Aduhelm work by targeting the buildup of a protein called beta-amyloid in the brain, which some experts believe is linked to AD. Eli Lilly's AD candidate produced underwhelming results in a phase 2 study, but the pharma giant plans on pitting it against Aduhelm in a phase 3 trial that will help confirm donanemab's efficacy.
It isn't easy to predict how the market will look like by the time Cassava Sciences' Simufilam is approved, if it goes that far. But investors should keep in mind that a year from now, there could be at least one more AD therapy launched in the U.S.
It is also worth noting that Cassava Sciences was able to fend off a citizens petition sent to the FDA in August by Labaton Sucharow, a New York-based law firm.
The citizen petition requested that the health agency halt the planned phase 3 studies for Simufilam on the grounds that the results the drug had delivered in clinical trials were questionable, and there may have been some foul play involved in producing these results.
Labaton Sucharow filed this citizens petition on behalf of some of its clients with short positions in Cassava Sciences, so the move may have been motivated by financial incentives.
In November, Cassava Sciences announced that it had started a second Phase 3 study of Simufilam to treat those with Alzheimer’s disease.
Lastly, in mid-November, Cassava Sciences announced that unnamed government agencies are investigating it, but there isn't much information for investors to make much of this development.
Is this biotech stock worth buying?
What Cassava Sciences has already been able to accomplish with Simufilam is commendable. With that said, the road ahead will be even more challenging. The company does not have any other pipeline candidates anywhere close to reaching phase 3 studies, and as a clinical-stage biotech, it does not generate any sales. Cassava Sciences ended the third quarter with roughly $241.5 million in cash and cash equivalents, and the company had no debt.
Cassava Sciences' cash used in operations in 2021 amounted to between $25 million and $30 million, but with a pair of ongoing late-stage clinical studies, we can expect the company's expenses to rise this year. That means funding may become an issue, and Cassava Sciences may resort to a secondary offering to raise additional capital within the next 12 months. What does all of this mean for investors?
There is a considerable amount of risk associated with this company. With a market cap of $1.93 billion, Cassava Sciences could certainly soar significantly higher if Simufilam proves safe and effective in phase 3 clinical trials, but if that doesn't happen, investors would be left with worthless shares of a company. That's why only those with an above-average tolerance should even consider purchasing shares of Cassava Sciences, and even then, it'd be best to initiate a small position.
For risk-averse investors, there are lots of other promising biotech stocks to consider.
Editor's note: This article has been updated. The citizens petition has not been rejected by the FDA.