Allegations questioning the ‘accuracy and integrity’ of data from Cassava Sciences’ (NASDAQ:SAVA) Phase-3 clinical studies for Simufilam, its Alzheimer treatment, surfaced on Aug. 25. SAVA stock got pummeled on the news.
SAVA stock, which closed on Aug. 24 at $117.83, is down to $53.64 at the start of Aug. 31.
While it might be tempting to buy on the dip, it’s important to remember that the claims made by a former Securities and Exchange Commission enforcement lawyer are serious in nature. So serious, the FDA (Food and Drug Administration) is investigating the citizen petition.
If these allegations are true, the actions by the company are tantamount to fraud, and by extension, I would think securities fraud. So naturally, the company has vehemently denied these allegations.
“As a science company, we champion facts that can be evaluated and verified,” Remi Barbier, Cassava’s chief executive officer and founder, said in a statement. “This helps people make informed choices. It is important for stakeholders to separate fact from fiction, which is why we wish to address allegations head-on.”
The statement responded to the allegations with its own set of facts. The court of public opinion will now determine if these statements carry water. In the meantime, expect its stock to continue falling.
Here’s why.
B. Riley Thinks SAVA Stock Is a Buy
The B. Riley securities firm stuck to its “Buy” rating on Aug. 25, setting a price target of $145. With the big drop, should B. Riley analyst Mayank Mamtani is suggesting SAVA stock has 75% upside available over the next 12 months.
“To our knowledge, citizen petitions are commonly associated with public endorsement (or lack thereof) of drug effects from experts and medical associations, rather than from law firms representing anonymous clients without disclosing conflict of interest,” stated the analyst in a note to clients.
Other analysts believe the citizen petition has taken data from many years ago and analyzed it in such a way to produce results to its liking, possibly setting up a lengthy legal battle worth millions to the law firm of Labaton Sucharow, the class action attorneys who brought the petition.
As Cory Renauer of The Motley Fool suggested, it does seem like actions straight out of the Muddy Waters playbook.
According to MarketWatch, only four analysts cover the biopharmaceutical company’s stock, and all four give “Buy” ratings. B. Riley’s analyst initiated coverage of Cassava at the end of April with a Buy and a $78 price target. In June, Mamtani raised the price target to $111 and $145 on Aug. 25.
In just four months, the analysts’ price target has increased by 86%. Of course, he’s not going to change his mind; he’ll continue to defend his recommendation until real evidence surfaces, long after the damage has been done.
If You’re Thinking of Buying on the Dip
Have you ever seen an example of a company caught with its fingers in the cookie jar admitting to said allegations? If you have, I’d like to know the name of that stock. I’ll be buying shares immediately.
Even as it trades down well over 50% since the news broke, it is still up 738% in 2021 and over 1,700% over the past year. In Cassava Sciences’ 20-year history as a public company, it’s only traded at its current level on one other occasion in 2000. It had a good run. Now it’s time to look elsewhere for your meme stock profits.
On Aug. 24, my InvestorPlace colleague, Stavros Georgiadis, stated that Cassava Sciences had an admirable goal at too high a price. It’s almost as if he knew what was coming.
Who hasn’t had a relative or friend struck down by Alzheimer’s? Of course, it would be fantastic if the company were to hit a home run with simufilam. But, unfortunately, that doesn’t mean it’s going to happen.
Besides, what could it hurt to sit back and let this play out before buying SAVA stock? If Cassava’s treatment is everything that Mamtani and others say it is, it won’t matter if the stock jumps back to $100+ and you buy off the lows.
That’s because the peak sales generated by simufilam are projected to be greater than $20 billion, according to Jones Trading analyst Soumit Roy. Biogen (NASDAQ:BIIB) recently had its Alzheimer’s drug, Aduhelm, be given accelerated approval by the FDA. It trades at 4.5x sales.
Apply that to Cassava Sciences, and you get a market capitalization of $90 billion, or 40 times its current market cap.
It seems that it makes almost no sense to buy SAVA stock until the smoke clears and the company is vindicated. As for the risk-to-reward proposition, it just got a lot worse, in my opinion.
Sometimes you have to play defense. This is one of those times.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
