Markets

Why Cassava Sciences Is Bolting Higher Today

What happened

Shares of Cassava Sciences (NASDAQ: SAVA) jumped by as much as 26% in pre-market trading Friday morning. The pre-revenue biotech's stock took flight after a positive note from investment bank Cantor Fitzgerald.

Specifically, Cantor Fitzgerald set a $24 per share price target on the biotech's stock Thursday after the closing bell. For those of you keeping score at home, that implies a whopping 172% upside potential from the $8.83 level where Cassava's shares closed on Thursday.

Puzzle of a human brain with a missing piece.

Image source: Getty Images.

So what

Cassava's main attraction for investors is its experimental Alzheimer's disease medication known as sumifilam. Last month, the drug hit the mark in a mid-stage trial, paving the way for a forthcoming pivotal stage 3 study. What's important to understand is that a novel Alzheimer's drug would easily achieve mega-blockbuster status (greater than $5 billion a year in sales) upon approval.

There are two fundamental reasons underlying this healthy sales forecast. First off, more than 5 million Americans currently suffer from Alzheimer's disease. Secondly, the neurological disorder has proven to be a particularly tough nut to crack for biopharma. There are no drugs approved for it that are considered disease-modifying. Viewed within this context, Cantor Fitzgerald's noteworthy price target seems more than reasonable -- that is, assuming the company can succeed where so many others have failed.

Now what

The missing piece of the puzzle with this clinical-stage biotech is its ability to pay for sumifilam's pivotal trial. At last report, the biotech had a mere $25.3 million in cash on hand. That's a woefully inadequate bankroll for a phase 3 trial, which can easily cost several hundred million dollars. That doesn't mean that Cassava can't solve this problem, but investors should keep this key risk factor in mind before buying shares.

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George Budwell has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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