Cassava Sciences (NASDAQ:SAVA) has been on a hot streak lately. SAVA stock got a boost in the last month when several brokerages came out with buy recommendations. As a result, it is up 657% year-to-date and 125% in the last month.
Part of the exuberance around SAVA stock has to do with the successful completion of an End-of-Phase 2 (EOP2) for its Alzheimer’s drug simufilam. This was announced on Feb. 22 along with an agreement with the Food and Drug Administration (FDA) on proceeding with a Phase 3 study.
The Phase 3 study is designed to evaluate disease-modifying effects of simufilam in Alzheimer’s disease. Cassava Sciences says its goal is to demonstrate a slower rate of decline in cognition and health function in subjects treated with simufilam compared to placebo.
The Phase 2 study showed that simufilam improved cognition in subjects with Alzheimer’s disease. The study, funded by the National Institutes of Health, showed a “10% mean improvement from baseline to month 6.” It also improved dementia-related behavior, such as anxiety, delusions and agitation by 29% over the six-month study period.
What Analysts Say About Cassava Sciences
If the Phase 3 results confirm the Phase 2 results on a wider scale, this would be groundbreaking. It could indeed make simufilam a blockbuster drug if the Phase 3 clinical trials are successful.
This is why Maxim analyst Jason McCarthy raised the target price on SAVA stock to $80 on Feb. 16. He cited the data that the company released on Feb. 2 as the basis for his optimism.
In addition, Wainwright analyst Vernon Bernardino increased the price target to $66 per share on Feb. 16, up from $20. Moreover, Tipranks.com indicates that there are three analysts who cover the stock. Their average price target is $67, with $97 being the highest target price.
However, Barron’s poured cold water on these analysts’ projections. They cited comments by Cantor Fitzgerald analyst Charles Duncan published on Feb. 2. He said it was an “open-label study that can be confounded by variables, such as expectation bias.” This is where the tester’s expectations can influence the test participant’s actions, even on a subconscious level.
How this analyst can claim that criticism is valid in this study, as opposed to other studies of Alzheimer’s participants’ actions, is baffling to me. I cannot really see why he feels this way. As a result, the Cantor Fitzgerald analyst kept his target price at $24 per share.
Barron’s went on to imply, using another analyst, that the moves in SAVA stock were due to the “Reddit effect.” This is similar to what pushed up GameStop (NYSE:GME).
What to Do With SAVA Stock
Recently Cassava Sciences very wisely took advantage of its higher stock price by issuing common stock at $49 for a net amount of $189.7 million. This should allow the company to fund its Phase 3 study and, once approved, start marketing simufilam.
As a result, SAVA stock now has a market capitalization of about $2 billion. According to Yahoo! Finance, which uses data gathered by Refinitiv, the average revenue estimate for next year is $50 million. However, the high estimate is $150 million. This implies that the price-to-sales multiple is somewhere between 13.3 and 40.
If you believe the analyst from Maxim the stock could be worth as much as $80. If Cantor Fitzgerald is right, SAVA stock is not worth more than $24. Let’s put some probabilities on these estimates.
For example, if we say there is a 70% chance that the stock will hit $80, or 58.1% higher, the expected return (ER) is 40.67%. Next, if we say there is a 20% chance it is worth $24, or -52.1%, the ER in this scenario is -10.42%. However, assuming it stays the same, the expected return is 0%.
Therefore, the total ER is 30.25% (i.e., 40.67% – 10.42% + 0%). That implies that the expected price for SAVA stock is $65.33 per share. You can change your probability scenarios to fit your inclination, but this is where I feel it should be. For most investors, a 30% return on investment (ROI) is a great return.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.