As a pre-revenue biotech company that's approaching decisive clinical and regulatory milestones, Anavex Life Sciences (AVXL 6.93%) isn't an investment for the faint of heart. It has no products on the market, and its share price is, for now, entirely dependent on how much the results of its clinical trials can impress investors. 

And that makes it a speculative investment -- at best -- before even considering anything more substantive about its chances of success. But if that doesn't frighten you off, it's entirely possible that investors who buy the stock now may see an impressive run-up, and perhaps quite soon. So let's explore how realistic that possibility is to figure out whether the company is a good play or not.

There are at least a couple of good reasons why Anavex might be more worthy of investment than a lottery ticket. First, its pipeline focuses on drug development for neurological disorders like Alzheimer's disease, Parkinson's disease, and Rett syndrome. Five of its programs are in the later stages of clinical development, meaning that it could theoretically commercialize multiple medicines before the tail end of the decade if its data impresses regulators. 

Succeeding with more than one of its candidates would almost certainly cause its market capitalization of around $600 million to multiply in value. It'd also help to secure the company's long-term survivability, which isn't guaranteed at the moment. 

Positive clinical results did not impress investors

In the near term, its Alzheimer's work is likely to be the most relevant for the value of its stock, and recent data update constitutes another reason to buy it. On Dec. 1, the biotech reported the results of a phase 2b/3 clinical trial investigating the efficacy of its candidate ANAVEX 2-73 for treating mild cognitive impairment associated with early-stage Alzheimer's disease. While further clinical investigations and analyses of the data are ongoing, the initial findings are favorable, and Anavex aims to publish the information for third-party review in a scientific journal relatively soon. 

Patients treated with the drug exhibited improvements on cognitive ratings scales, and they also had a 167% increased chance of their cognitive functioning improving over the 48-week treatment period. Prior testing of the medicine in a phase 2 clinical trial for dementia in Parkinson's disease patients were similarly positive.

But the market was hardly impressed with the new data. Though its stock did shoot upward on the day of the announcement, it's still down by 33% in the last 30 days and more than 59% over the last 12 months.

One explanation for this lukewarm reception is that investors are tired of getting burned by high-profile failures of other companies doing Alzheimer's drug development wherein strongly positive clinical results fall apart when elucidated further or when submitted for regulatory approval, destroying shareholder value in the process.

Either way, investors will probably need to wait for more confirmation of the company's results (or perhaps even a nod from regulators) before seeing a return on their shares.

A strong balance sheet should give it time to succeed

While the future outcomes of its clinical trials are unknown, Anavex does have a few more concrete advantages for investors, starting with the fact that it can afford to fail to commercialize at least a couple of its pipeline programs before  the company's existence is threatened.

Presently, it has $149.1 million in cash and equivalents, and in its fiscal year 2022, it only burned around $24.2 million, so it has a very long runway before it needs to worry about going out of business. It also has zero debt, which means that it has plenty of leeway to borrow money in the event it's necessary. In sum, its balance sheet is strong enough to mitigate some of the risks associated with a pre-revenue biotech stock -- for now. 

Regarding its valuation, Anavex looks to be trading at a bargain price, trading at 4.2 times book value versus the biotech industry's average price-to-book value (P/B) multiple of 8.4. Additionally, compared to Cassava Sciences and Axsome Therapeutics, two other early-stage biotechs developing therapies for Alzheimer's and other neurological conditions, Anavex stock looks inexpensive, as shown below:

AVXL Price to Book Value Chart

AVXL Price to Book Value data by YCharts

Note that the P/B ratio is apt to change significantly depending on what clinical results these companies report. The value of intangible assets, like designs for investigational therapeutic molecules, isn't reported on the balance sheet, but it's precisely the effectiveness of those assets that are the most likely to make or break a biotech's chances. So while Anavex's P/B valuation may be cheap compared to its industry and its peers, it isn't enough on its own to justify buying the stock.

What's the right move?

Unless you're in the market for something to round out the speculative portion of your diversified portfolio, it's better to skip Anavex. It's true that its Alzheimer's medicine could be commercialized and make the business billions. But until its data stands up to scrutiny in the scientific community, the company's low valuation and cash hoard simply aren't enough to justify a purchase when there are safer investments elsewhere.