Cassava Sciences Is Stock Worth Buying With a High Expected Return

Mark Hake

Nassim Taleb, the philosopher/mathematician came up with the Black Swan theory right before the 2009 stock market crash. He made a lot of money predicting stock market crashes since then.

He once said this to some college graduates about stock market advisers: "One should never do anything without skin in the game. If you give advice, you need to be exposed to losses from it."

I am trying to follow Nassim Taleb's advice. I own shares in the only stock that I like right now. And I will likely buy more. So I am doing what Nassim Taleb says - I am exposed in a major way to losses in what I am recommending.

My view is that most stocks are not worth investing in at the present time except for a few of them. By and large, you will have an opportunity to buy many at much lower prices. However, I do think that cryptos offer some interesting non-correlated opportunities.

The rest of this article will discuss why I like this stock and why I intend to buy more of it.

The Only Stock I Own

The only stock I like now, in which I have put all my stock market portfolio allocation money, is Cassava Sciences (SAVA). This is an Austin, TX-based biotech company that has developed a drug called Simufilam, designed to fight against Alzheimer's Disease (AD).

SAVA stock has gyrated all over the place this past year. Right now Cassava Science's drug is in the middle of Phase 3 clinical trials ( double-blind, placebo studies with many people who have AD taking the Simufilam pill).

This is what I call a double-edged sword stock. It will either go up a lot or crater. For example, there is a reasonably good chance that the FDA might approve the drug early if it continues to show progress fighting AD. Or, it could flop, as many AD drug candidates have done.

This has been an extremely controversial stock. Some short sellers have claimed that the whole thing is a fraud and even petitioned the FDA to stop the trials. The FDA has not done so. Its Phase 2 results were phenomenal. Many articles have been on Seeking Alpha discussing the developments that the company has made as well as the short sellers' attempts to push it lower.

My view is that the stock is worth close to 4 times more than its present price. Here is how I came up with that assessment.

Valuing SAVA Stock

As one author pointed out recently, the market thinks there is only about a 6% chance that the company’s Alzheimer’s drug, Simufilam, will be successful.

But if it is successful, the author believes there is a 66% chance that the stock could rise 11 times before the U.S. Food and Drug Administration (FDA) approves the drug for Alzheimer’s treatment.

The trials conducted up until now involve “the distribution of 147,000 Simufilam to more than 250 Alzheimer’s patients in at least 16 investigator sites.” So far there have been no drug-related serious adverse events.

However, these were open-label studies involving no placebos. The two Phase 3 clinical trials now underway involve a placebo and blind study. In fact, on page 17 of the company’s Jan. 2022 presentation on their website, it says:

“Treatment effects observed in an open-label study are not proof of drug safety or efficacy, nor can open-label data predict clinical success in a Phase 3 program.”

So, the company has been more or less compelled to proceed to a Phase 3 study in order to assure its efficacy. However, on page 23 of the slide deck, the company said that the FDA approved its Phase 3 protocol:

“FDA agrees that the completed Phase 2 program, together with an upcoming and well-defined Phase 3 clinical program, are sufficient to show evidence of clinical efficacy.”

So, you can see that if the Phase 3 trials go well, the FDA could well approve the drug for the treatment of Alzheimer’s disease. Therefore, in a way, it won’t matter what the market thinks about the results. The only issue is whether the FDA will approve the drug. And that alone will make the company.

So Where This Leaves Investing In SAVA Stock

I suspect that before the Phase 3 trials are finished the market will focus on how Simulfilan will be distributed. This assumes that it gets FDA approval - but I think the market will start to reflect this assumption.

For example, Cassava Science’s CEO, Remy Barbier, has made it clear in interviews that the company will likely have to partner with a major drug manufacturer/distributor. This could lead to a revenue-sharing deal.

For example, they could announce a royalty/revenue-sharing deal prior to any results for Phase 3. This could also act as a major catalyst for SAVA stock. I suspect that will happen sometime late in the first quarter and/or in the second quarter. Expect to see analysts begin to project the company’s valuation based on this.

So far, not many observers of the stock have put together cogent models with a major drug partner for Cassava Sciences. However, at today’s price, $47.95, the stock has almost a $2 billion market capitalization.

There are no analyst forecasts for 2023 or beyond. This goes to show that everyone is virtually waiting on the edge of their seat for the results of Phase 3 clinical trials.

Using Probability Theory

Advantage players in professional gambling, such as with the game of Blackjack, use a construct called Expected Value (EV). This is similar to estimating the expected return (ER). An ER is the result of investing given the gambler's probabilistic advantage play.

We can do the same thing here with this stock. Here is the mental process I go through calculating the ER for SAVA stock.

First, I am personally very positive on SAVA stock and indeed have a position in the company. In fact, now that the stock is down off of its highs, I intend to buy more of the stock.

However, I freely admit that this is a highly speculative position to take. For example, as I pointed out above, there are no real estimates for the company’s earnings going forward. Moreover, there is no real assurance that the FDA will approve the drug as a treatment for Alzheimer’s.

Second, let's estimate the odds and the Expected Return.

Expected Return Investing in SAVA Stock

Analysts seem to believe that if the drug is approved, the stock will be worth 11 times its price today. That represents a 10 times gain. But if it is not approved and the trials are a bust, the stock could easily fall 80% to 90%. Let’s call it negative 95%.

Next, let’s give the chance that it is going to be a success a one-third chance or probability. That leaves a two-thirds chance that the stock will bust.

So, here is the expected return (ER) calculation. We multiply 10 x 0.333 and get an ER of 3.333 times. Remember we expect to make a 10 times profit, but there is only a one-third chance of this.

But the downside results in an ER of -63.37%. This is because there is a two-thirds chance (i.e., 1-the one-third chance, or 0.6666, that it succeeds) the stock will fall 95% (i.e., negative 95% x 0.6666 = -0.6337 ).

So, if we add the total ERs together, the result is 2.6996 (i.e., 3.333-0.6337=2.6996) the total ER is still positive or 270% (i.e., rounding up 2.6996).

In other words, SAVA stock is worth 3.7 times (i.e. 1 + 270% return) its price today ($43.38), or $179.00 (i.e., 3.7 x $43.38).

So, despite the risks, SAVA stock has a very good ER. It is worth $179, or almost 4 times today's price.

Investing in SAVA stock will likely (more likely than not - assuming a 2/3rds chance that the company's drug fails) produce a 270% ROI. Here is another way to look at it.

Let's say it takes 2 years for all this to play out - the stock rising 2.7 times. That results in a compound average annual return of 64.3% each of the next two years. (To prove this, just take 1.643 and raise it to the 2nd power - the result is 2.70).

The bottom line is this - SAVA is likely to be a winner and it is cheap now.

Also, don't forget to fully "Follow" me and make sure to download the Newsbreak app to become a Registered Follower. This way you can also see all my articles in the past. Click on the Follow link underneath my profile name.


This is not financial advice and you should not rely on my analysis to buy or sell any stock, security, or crypto, as I am not undertaking to induce you to buy or sell securities.

I am relying on the “publisher’s exclusion” in the Investment Advisers Act of 1940 to provide this information without any personalized or individualized investment advice. This is not financial advice to buy SAVA stock, and I am not advising putting all your money in this stock.

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Mark Hake is a financial analyst, investor, and Chartered Financial Analyst (CFA). He writes about US and foreign stocks as well as cryptos, hedge funds, and private equity. He previously ran his own hedge fund, investment research firm, and acted as CFO for a fintech startup. He focuses on finding value, arbitrage, and hidden asset opportunities.

Phoenix, AZ

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