Betting on turnarounds in companies that others are too scared to touch can be a successful strategy for some investors. That's because the market often overreacts to bad news. Farsighted investors who recognize the enduring potential of a business -- even during its most vulnerable hours -- can sometimes (but of course, not always) get outsize returns if they're right.
One biotech stock that could be ripe for exactly that kind of play is Cassava Sciences (SAVA -1.30%), which is down over 70% from its high in July of last year as a result of a parade of misfortunes. Its flagship candidate is a drug for Alzheimer's disease called simufilam, and it's currently enrolling patients in phase 3 clinical trials.
But given the company's recent past, it's remarkable that the trial is proceeding at all. Let's explore why.
What went wrong in 2021?
2021 was a rough year for Cassava. In July, it reported preliminary results from a non-blinded study investigating simufilam's impact on biomarkers associated with Alzheimer's disease.
The stock soared at first on what seemed to be moderately positive results, only to crater shortly afterward due to a highly publicized report by a short-selling firm that picked apart the findings. And, the short-selling group filed a petition with the Food and Drug Administration (FDA) requesting to halt the trial. The collapse deepened when one of the company's collaborators for laboratory services appeared to distance itself from the study's results.
Though Cassava offered an extensive rebuttal to the short sellers' claims shortly afterward, the stock has yet to recover to its prior highs. Later in the year, the company's shares got hammered yet again on reports that the Securities and Exchange Commission (SEC) was investigating the matter.
Critically, the scientific journal that published two of the papers containing some of the data that the short sellers found issue with later found no evidence of impropriety after conducting a review. While the issue isn't necessarily fully settled, this helps set the stage potentially for investors to start regaining confidence in the stock.
Furthermore, in February of this year the FDA rejected the short-selling firm's petition to halt the trial. So the trial's final results, whatever they may be, will eventually be disclosed upon its completion.
A comeback could be in the cards
At this point, investors would do well to remember that nothing has changed about its ability to perform its core business function of developing drugs for Alzheimer's disease despite the stock's numerous periods of free fall. And that's a major point in favor of its prospects of bouncing back.
As a biotech company without any medicines on the market, Cassava is in a race against time to get its first drug commercialized before its funds (and ability to raise more funds) run out. Even if it experiences severe setbacks in clinical trials or other obstacles that end up demolishing its stock price, there's still a credible chance of recovery so long as there's money in the bank.
Right now, Cassava has $233.4 million in cash. Last year, its total expenses were only $32.8 million, $24.8 million of which went to research and development (R&D). Furthermore, it has a negligible $236,000 in debt. So there's little chance of it going bankrupt anytime soon, and its runway to do more work on simufilam is around seven years long at its current rate of spending.
Furthermore, simufilam isn't the only Cassava project worth paying attention to these days. Cassava's SavaDx diagnostic aims to detect Alzheimer's disease with a blood test before patients experience symptoms of memory loss. That could be a very valuable asset if it's proven to be clinically useful, and it's arguably a shorter path to generating revenue than any drug development program could ever be.
So with the support of its academic publisher and the FDA rebuffing the short-seller's requests, I'm of the opinion that this company's future is looking a bit brighter than it did last year although it remains a long shot. Its chances of success are still slim since it's a biotech trying to develop drugs for a disease that's notoriously difficult to treat. So I wouldn't necessarily buy the stock today.
As of February, the stock has four analysts rating it as a buy, which should give those who dare to purchase it at least a little bit of comfort with their decision. At a minimum, Cassava is no longer uninvestable like it was at the apex of the controversy -- and when paired with its strong cash position, it should have many more chances to bear fruit for investors.