On any list of biotech plays that might multiply in value in a relatively short period, Cassava Sciences (SAVA 4.24%) is likely to be near the top of the list. It's exploring whether its drug called simufilam is safe and effective to treat early-stage Alzheimer's disease, though its clinical trials have (so far) shed little light on the issue.
But you'd be taking a big risk by buying shares in hopes of this stock going to the moon. And there are three reasons why it's actually a good idea to sell if you're already a shareholder.
1. Cassava's version of reality is different from the market's
The biggest reason to sell Cassava stock: After an open-label phase 2 clinical trial of simufilam, the market reacted quite negatively to the release of new data that management spun as being positive. Cassava shares are down more than 25% over the past year, with a sharp drop on Jan. 24 when it published the data.
Adam Feuerstein of Stat News panned the results, calling out simufilam's "placebo-like efficacy." Such sentiments are very common among biopharma industry experts, with a handful of commentators pointing to potential issues with the study's design and data analysis practices. But those perspectives are in stark contrast to the one expressed by the company's CEO, Remi Barbier, who said he was "very excited about these data" in the press release documenting the results.
Let's take a quick look at the data to get a better understanding of the dispute.
Using a standardized scale called ADAS-Cog-11 that measures the severity of Alzheimer's symptoms, after one year of treatment with simufilam, the average score of the 200 patients in the trial worsened from 19.1 to 19.6. Lower scores on the ADAS-Cog-11 mean that a patient's cognitive symptoms are less severe; the expectation is that without an effective treatment, patients will see their score rise (worsen) each year as the disease takes its toll.
Reading between the lines, Cassava's argument seems to be that without simufilam treatment, the patients would have experienced even worse ADAS-Cog-11 ratings on average. But because there was no placebo group in the trial to test that hypothesis, such a comparison is impossible to make with scientific rigor.
If the data don't support a biotech's hypothesis, and it doubles down instead of changing approaches, that's a major red flag -- and a good reason to sell your shares immediately.
2. Its pipeline is minuscule and nondiversified
Cassava doesn't have too many irons in the fire when it comes to research and development (R&D), and for a pre-revenue biotech, that's a huge problem. Its pipeline comprises only simufilam and SavaDx, a blood-based diagnostic test for Alzheimer's disease that's in early development. Obviously, the idea is for the company to sell SavaDx and thereby onboard more patients for simufilam than it would be able to otherwise. That could ultimately work, but it would require both products to get regulatory approval, which is far from guaranteed.
More concerningly, Cassava hasn't shown any sign of investigating the usefulness of simufilam (or a closely related molecule) in anything other than its pair of late-stage trials for Alzheimer's disease. If simufilam doesn't have a credible mechanism for treating anything other than Alzheimer's, and the drug's development for Alzheimer's fails completely, the biotech has a low chance of trying to repurpose or offload the asset.
Quality biopharma businesses cross-develop their candidates for multiple potential indications in parallel, to the extent that their resources allow. Given Cassava's $174.6 million in cash, its negligible debt load, and its trailing-12-month (TTM) total expenses of only $73.5 million, development resources clearly aren't a major issue. So, until proven otherwise, it's likely that simufilam is a medicine that has limited potential outside of Alzheimer's. That makes its recent stumbles all the more grave.
3. It struggles with criticism to the point where it's a risk to shareholders
The final reason to sell shares of Cassava is that it gets plenty of bad press, which it then exacerbates by responding aggressively.
Late last year, it sued short sellers that it alleges mounted a "disinformation campaign" to crash its stock price. At the center of the campaign was a citizen's petition filed in 2021 with the Food and Drug Administration (FDA) that claimed the company had deceptively manipulated some of its data. The FDA eventually rejected the petition. And a pair of scientific journals that initiated independent investigations of the biotech's claims ultimately cleared it of wrongdoing, though methodological issues were found with its data. That acquittal came months after Cassava's CEO got into a public squabble with the New York Times about its coverage of the saga.
To be clear, the presence of controversy doesn't mean that the company will fail to develop a safe and effective drug. But most biotechs don't generate as much controversy as Cassava does, nor do they bother battling it out with critics. After all, presenting high-quality clinical results is the ultimate way to demonstrate a biotech's value -- and because it doesn't appear to be inclined (or able) to do that, Cassava looks like a candidate for selling.
