For investors in search of a volatile, battleground stock, they need to look no further than Cassava Sciences (NASDAQ:SAVA), which has been developing a drug, simufilam, to treat Alzheimer’s disease. A group of short-sellers has recently filed a brief with the FDA to try to halt the drug’s Phase 3 trial due to allegations about prior data being falsified or misleading. A lot has been written on Seeking Alpha recently addressing these allegations, and I would suggest C.C. Abbott, Edmund Ingham, and Joe Springer for bear, neutral, and bull cases regarding the allegations that were useful in getting me up to speed on the situation. CEO Remi Barber has also weighed in.
(Source: Cassava Investor Deck)
Cassava Sciences, and CEO Remi Barber, have a colorful history. For some background on SAVA (formerly known as Pain Therapeutics), there’s an article by Utopia Capital discussing them and prior investor CVI Investments. As you can see, a 20-year investment in SAVA would not have paid off particularly well, but buying and selling the spikes could have been quite profitable with a crystal ball.
(Source: Seeking Alpha)
Management has a vested interest in the eventual outcome of SAVA’s efforts, based on their meaningful share ownership.
(Source: Mar-21 Proxy)
Utopia Capital had concerns regarding Management compensation in the past, and at first glance, the proxy summary compensation table appears entirely reasonable for a company of this size:
(Source: Mar-21 Proxy)
However, Management has created tiered “valuation milestones” that pay out to certain executives that incentivize maximizing the share price:
The Company’s market capitalization was $89.4 million at the inception of the Cash Incentive Plan on August 26, 2020. The Cash Incentive Plan triggers a potential cash bonus each time specified market capitalization levels are achieved, up to a maximum $5 billion in market capitalization. The Cash Incentive Plan specifies 14 incremental market capitalization levels between $200 million and $5 billion (each increment, a “Valuation Milestone”). Each Valuation Milestone triggers a potential cash bonus award in a pre-set amount defined in the Cash Incentive Plan, subject to satisfaction of the additional payout conditions noted below. Each Valuation Milestone must be achieved and maintained for no less than 20 consecutive trading days for Cash Incentive Plan participants to be eligible for a potential cash bonus award. Source: Company 10-Q
The maximum amount payable to the three NEOs totals around $300m, which they just missed when they briefly eclipsed a $5.0B valuation recently (not for the full 20 consecutive days). None of the milestones have actually been paid out despite 10/14 being achieved ($81-195m potential payout per the 10-Q), as the board has determined it is not in their best interest to pay the bonuses at this time given their financial condition.
Cassava has 40M outstanding shares as of August and another 2.6M options, no debt, and $278M of cash at Jun-21. SAVA has no revenues, just R&D and G&A expenses. Cash burn was $7.4M through the first six months of FY21, and their investor deck estimates $25-30M for FY21, so beyond the potential incentive payments to management, there isn’t much in the way of cash burn compared to their current reserves. SAVA also has a $100M ATM program in the event they need to raise additional cash.
At $42/share, SAVA trades around a $1.5B enterprise value. Since there are no earnings or revenue stream to use to value the business, investors are forced to assign a valuation based on future revenue streams if SAVA’s treatment is approved. I don’t feel comfortable valuing potential future payments years out, but for now, I’d suggest $120+ as a reasonable price range if things go well in Phase 3 -> management seems to have settled on this range given they set their top incentive payment at a $5.0B valuation, so it’s good enough for me as an upside target.
(Source: Cassava Investor Presentation)
For a downside valuation, if simufilam ends up not being viable, SavaDx is their other pipeline product, a blood test to detect Alzheimer’s. They disclose they have no patents on this product yet and it remains early stages. I’m not comfortable assigning much value to this effort if simufilam flops. Their cash balance should provide a bit of a floor, but would likely be spent on litigation around simufilam or new development efforts. All told, SAVA could easily trade down to $10/share if simufilam doesn’t pan out.
I’m going to be clear, I’m not an expert on clinical stage drugs, but looking at the “expert” takes, I expect the FDA will allow the Phase 3 trial to continue. The allegations against the company are primarily related to prior trial data, not dangers or side effects from simufilam. Given this, it seems reasonable to proceed with a Phase 3 trial to determine if the drug is effective. Maybe regulators will take a different view, but from the reading I have done, I would expect the trial will proceed.
To get some downside protection for the next six months if owning common shares, investors could buy a $45-strike Jan-22 put for about $17/share, limiting downside to $28 if things go poorly as current issues are straightened out. A Jan-23 $45-strike put would cost about $25, limiting downside to $20. The option premiums are quite expensive due to the recent volatility in the stock.
One option trade that nevertheless intrigues me is going long both Jan-22 $45 calls and puts (known as a straddle). At current prices, this is about $30/share and would be profitable if SAVA were to be below $12 or above $72 by Jan-22. I expect some resolution to the current uncertainty by then, and given the stock traded above $100 prior to the recent allegations and could be close to worthless if the drug is scrapped, this seems to offer investors good exposure to either outcome. The worst outcome would be a $45 share price in January that results in no payout on either option.
For investors looking for a shorter term, speculative play, going long the stock or shorter-dated calls with a small part of their portfolio may be attractive, as I expect the next share price reaction will be to the upside, but some may not want to risk too much capital on the outcome of the trials.
Lastly, as I was looking at the space, I ran across Synaptogenix (SNPX), trading below a $50m market cap with an Alzheimer’s drug under development (Phase 2). DeepValuePlay has profiled the stock for those looking for more background. They have also hit some roadblocks recently, but it might be a nice stock to add to a basket of Alzheimer’s drug options in the space at a fraction of Cassava’s valuation.
Cassava Sciences has been one of the most volatile stocks I have followed recently, especially given their valuation in excess of a billion dollars. The company has a feel-good story in their effort to alleviate the devastation caused by Alzheimer’s, but also has overhangs due to accusations from short sellers attempting to halt their Phase 3 trial. Due to the recent challenges being primarily directed at the efficacy of the drug, I would expect the FDA to allow trials to go ahead in an attempt to settle the argument. Due to volatility and my lack of expertise on biomedical investments, I don’t plan to invest a material amount in the stock.
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Disclosure: I/we have a beneficial long position in the shares of SAVA, SNPX either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.