Why Cassava Sciences Has Tremendous Upside Potential

Volatility re-emerged when a pair of Wall Street analysts posted buy ratings on Cassava Sciences (NASDAQ:SAVA) stock. The price target of $80 from Maxim Group and $97 from H.C. Wainwright are lofty compared to the recent price.

a doctor looks at a tablet
Source: Shutterstock

So, instead of relying on such opinions, investors should look at why SAVA stock spiked to $117.54 last month only to slump to the low $40s a week later.

Casava is in the clinical stages of finding a treatment for Alzheimer’s disease. It posted favorable trial data on Feb. 2.

Clinical Results Lifted SAVA Stock

Cassava posted clinical results for simufilam, its lead drug candidate for treating Alzheimer’s disease. It reported patient cognition and behavior scores improving after six months of treatment. Cassava did not note any safety issues for the drug.

Funded by the National Institutes of Health, Cassava said that cognition scores rose by 1.6 points. This mean improvement from baseline to the sixth month is based on a study group of 100 patients. Cassava started the study in March 2020. Patients suffering from mild-to-moderate Alzheimer’s disease receive 100mg twice daily.

Based on the positive data and prior clinical results, the company believes it may advance its study to a Phase 3 clinical program. That would put the study on schedule for starting in the second half of this year.

Secondary Offering

Given Cassava’s strong study results and seasonal strength ahead, management, as expected, issued a secondary stock offering.

Sava is amid a strong performance period
Click to Enlarge
Source: Stock Rover

Cassava stock rose for the first four months of the year. It underperformed relative to the S&P 500 in the spring and summer. Performance improved again every September.

At the end of 2019, Cassava had $23 million in cash. The $200 million registered direct offering on Feb. 12 will takes advantage of the strong buying interest. The cash raise involves 4,081,633 shares at a price per share of $49.

Investors should notice that the analyst at H.C. Wainwright & Co. issuing a buy call is the same firm acting as the exclusive placement agent for the offering.

Cassava said it would use the proceeds for working capital and general corporate purposes. That is a generic way to explain that the funds will pay for the development of simufilam.

Though the above seasonality chart suggests outperformance in the near term, the direct offering may break the usual pattern. But after absorbing the stock offering, the stock may trend higher from here. Investors will look at the initiation of Phase 3 as a positive catalyst for the company.

In a five-year discounted cash flow growth exit model, readers may forecast revenue starting in the fiscal year 2022.

Metrics Range Conclusion
Discount Rate 10.5% – 9.5% 10%
Perpetuity Growth Rate 3.5% – 4.5% 4.%
Fair Value $47.87 – $68.38 $56.41
Model courtesy of finbox

The above model uses the Perpetuity Growth formula (also known as Gordon Growth) to calculate Terminal Value after five years.

Edit the interactive model by adjusting the revenue and EBITDA as a percentage of revenue. The fair value depends greatly on the estimated revenue in 2023-2024. The assumption also depends on the company winning approval for its lead drug candidate.

Risks

Cassava left out details for the Mini-Mental State Exam (“MMSE”) even though it measured it. It posted only a mean score and range (of 10-26). As an open-labeled trial and comparison to a patients’ own baseline, investors must interpret the results loosely.

For now, the positive report will enable the company to sell more shares to fund the study. Investors will have a better idea of the drug’s prospects after the company posts Phase 3 results.

Speculators missed the chance to buy the stock before the stock took off in January. Similarly, shareholders had an opportunity to sell the stock at up to $117.54. Though the intra-day high did not last long, the chance to sell shares at $80-$100 proved short-lived.

Cassava has a compelling product. This biotechnology firm looks promising.

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. 


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