Analyzing the Potential Risks of Cassava Sciences

Cassava Sciences (NASDAQ:SAVA) is one of the year’s biggest winners. Even after its recent sell-off, SAVA stock is still up 1,600% so far this year, and it’s up more than 4,000% over the past 12 months. Even by growth stock standards, those are simply incredible figures.

Cassava has gone straight from penny stock to the big leagues due to promising clinical trial results. The company is working on a drug to fight the progression of Alzheimer’s disease. In a trial, Cassava’s drug has shown favorable results at the nine months of treatment mark, which puts it well beyond most competing drug candidates from other biotech firms.

However, SAVA stock sold off sharply over the past two weeks. The bulls argue that the sell-off is without merit and that shares could be worth as much as $900. If the drug indeed works and gets FDA approval, that sort of price target could well be within reach.

However, it’s worth considering the bearish counterpoints as well.

Alzheimer’s: A Tricky Disease

A key issue for Cassava is that Alzheimer’s is a notoriously difficult disease to treat. Biotech companies have long sought to come up with a breakthrough but repeatedly have run into failure instead.

One academic study from 2017 noted that only four drugs were approved as of that time for Alzheimer’s treatment. On the other hand, far more had failed. “[O]ver 100 compounds tested as potential therapies were identified that were either abandoned in development or failed in [clinical trials],” the study found.

This slow progress isn’t due to a lack of creativity or innovation in the Alzheimer’s space, either. “The classes of drugs that have failed to date include the monoclonal antibodies, the gamma secretase inhibitors, dimebon, neurochemical enhances and one tau drug,” the academics noted.

Simply put, Alzheimer’s is a notoriously tough nut to crack. So investors should always use an extra degree of caution with drugs aimed at that condition.

Cassava’s Current Study Is Tiny

It’s common for biotech companies to get good results in early-stage trials. But, as you get closer to approval, the trials get bigger and the quality control more rigorous.

In Cassava’s case, the current excitement is over an open-label trial with just 50 patients worth of data so far. Open label means that patients know they’re receiving the drug rather than a placebo. Without a placebo control group, it’s more difficult to know if the drug is working or people simply feel better because they believe they are being treated. Both of these factors raise questions about how the drug will fare in a larger and more rigorous trial.

Indeed, SAVA stock recently sank as Alzheimer’s researchers criticized Cassava’s trial design. Well-known biotech journalist Adam Feuerstein of StatNews reported that critics of the study labeled the results as, “overblown, inappropriate, [and] uninterpretable.”

There’s room for disagreement here. However, do be aware that it’s far from a sure thing that Cassava’s results in a small open label study will be replicable in a true Phase 3 clinical setting.

SAVA Stock Verdict

It’s one thing to take a speculative flier on a clinical stage biotech company at a reasonable price. It’s another to put a multi-billion market capitalization on one that hasn’t even completed its Phase 3 trial, let alone gotten FDA approval. The biotech investing graveyard is full of traders that got excited about an Alzheimer’s drug based on preliminary clinical results.

Someday a cure or at least major preventative drug will be found. However, the odds of any one particular treatment getting FDA approval are fairly low.

If you do want to participate in SAVA stock, consider waiting for a dip or use options strategies to get an entry point at a lower price. It will take several years for Cassava’s drug to get FDA approval should things progress favorably for the company. Along the way, there will be tons of volatility.

This is a drug aiming to deal with a difficult-to-treat disease whose early clinical results are controversial. And the operating company, Cassava, has become a meme trader favorite. You basically couldn’t dream up a better scenario if you want volatility and uncertainty.

So, if you are going to be involved, definitely consider this as a trading stock rather than something to buy-and-hold for years to come.

On the date of publication, Ian Bezek 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.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.