Cassava Sciences (NASDAQ:SAVA) is a clinical-stage biotechnology company that is taking on Alzheimer’s disease. In the past several months, short-sellers, law firms and other detractors have attacked the company even though its clinical studies are not yet finished. But while SAVA stock is now well off of its highs, it could become a multibagger in the future.
This could happen over the next two years, especially if Phase 3 clinical studies that recently started turn out well. The problem is that the ride will be very bumpy and probably make SAVA stock highly volatile.
After it peaked at $135.30 on July 28, the stock tumbled to a low of $41.79 as of Sept. 14. However, since then, SAVA stock has drifted up to $55.47 as of mid-day Nov. 3.
Where Things Stand With Cassava Sciences
Cassava Sciences does not make any revenue yet. If its Alzheimer’s disease treatment candidate, a drug called Simufilam, ever gets approved, the impact on the company could be massive.
For example, according to a recent article in Seeking Alpha, sales could start in 2025 at $600 million and rise to $4.2 billion by the end of 2030. The author used S&P Capital IQ data to portray that revenue wall.
SAVA stock has a market value of $1.85 billion according to Seeking Alpha. That puts it on a price-to-sales (P/S) multiple of just over 2 times sales (2.27x) for 2030.
Additionally, according to Seeking Alpha’s own survey of analysts, Cassava will likely lose money up until 2025. That is when it will make $13.36 cents earnings per share (EPS). Then, EPS will rise to $86.90 by the end of 2030. That puts it on a forward multiple of 4.15 times in 2025 and 0.64 times for 2030.
So, SAVA stock has the potential for huge upside over the next five years. A 10- to 15-times jump in the stock is easily possible sometime before 2030, say in five years or so. By then, if the Simufilam drug is approved, the market will move the stock substantially higher assuming a long runway of earnings.
But what are the risks and downsides of SAVA stock? And what is the probability that it will succeed versus fail to produce revenue?
Probability Analysis of Cassava Sciences Stock
Much has already been written, especially in Seeking Alpha, about the reports that Cassava Sciences could have manipulated data in its Phase 2 clinical results.
In addition, a citizen’s petition was submitted to the Food and Drug Administration (FDA) requesting that further clinical studies be halted, citing three areas of concern from a technical standpoint.
However, it does not appear the FDA is likely to act on this, since no safety issues have been identified by Cassava Science’s detractors. Phase 2 involved 50 people, but its Phase 3 clinical studies will involve several thousand.
In fact, the FDA has already agreed on a special protocol for its upcoming Phase 3 studies. It is not likely they would have done this if they were concerned about any safety issues with Simufilam.
Therefore, we can probably put a higher probability estimate on the likelihood of success than that of a complete failure.
For example, assuming SAVA stock makes a 15x gain by 2026, the stock could rise to $832 or higher. Let’s give it a 60% probability this could happen. That means there would be a 40% probability that SAVA stock could have a residual value of $7 or so (based on its cash per share).
So, by multiplying these probabilities and then adding them together, we get a final expected return of $502 per share. For example, 60% times $832 equals $499.20, and 40% times $7 is $2.80. So, their sum is $502.
What to Do With SAVA Stock
However, since this is five years in the future, we need to discount the result to its present value. A fairly high discount rate should be used, such as 20%, in order to allow for an alternative opportunity cost. That results in a discount factor of 40.19%. This means we multiply the $502 target price by 40%.
Therefore, the probability-weighted target price for SAVA stock is $201.75 per share. This is about 264% higher than the price as of Nov. 3, even though it is up significantly already.
Therefore, this stock is likely to do quite well — at least, from a probability standpoint. However, investors should expect the ride to be very bumpy on both the upside and downside.
On the date of publication, Mark R. Hake held a long position in SAVA but not in any other security (directly or indirectly) mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
