THE BURGEONING psychedelic sector is attracting attention from investors as more companies have gone public, and research has increased rapidly due to greater mainstream and government acceptance and decriminalization.
Decades of research have demonstrated that psychedelics, which are hallucinogenic drugs, are effective in treating mental disorders such as depression, suicidal thoughts, PTSD and anxiety. The Food and Drug Administration has approved and fast-tracked several clinical research trials.
Dozens of biopharmaceutical companies are competing against each other since the ones that develop the intellectual property to synthesize the molecules to help treat disorders will likely be profitable and attract more capital.
“There is a smaller subset of investing verticals in the psychedelic space as it is more of an intellectual property race to develop drugs,” says Michael Sobeck, managing partner at Ambria Capital, a San Juan, Puerto Rico-based asset manager.
The psychedelic sector faces some of the same hurdles as the cannabis industry, since many institutional investors are prohibited from investing in Schedule 1, 2 and 3 drugs – federal classifications for substances considered ripe for abuse.
This challenge “opens up an attractive opportunity for retail investors to get in at an early stage,” he says.
Many psychedelic drugs in the U.S. are categorized as Schedule 1, including MDMA (ecstasy), LSD, psilocybin (mushrooms), mescaline, DMT and heroin along with cannabis. Other recreational drugs such as cocaine, methamphetamine and amphetamines – commonly used to treat attention deficit disorder – are considered Schedule 2 drugs. Ketamine is classified as a Schedule 3 drug.
Schedule 1 drugs are notable because they are “heavily controlled and expensive to procure,” wrote Tania Gonsalves, analyst for Canaccord Genuity Capital Markets, in a March research report. “Each of the labs, researchers and manufacturers needs to obtain licenses to produce, store and work with the compounds. This eats into profit margins and materially extends development timelines.”
The FDA granted three psychedelic programs the Breakthrough Therapy Designation, which “shortens the process of drug development and review by about 30%,” Gonsalves wrote.
Prescription drugs currently take more than a decade and $2.6 billion to develop, but the development for prescription psychedelic drugs is estimated to be shorter, she wrote.
“Decades of human consumption and the resultant efficacy – supporting data will expedite clinical trials, reduce cost and improve the probability of success,” Gonsalves wrote.
The total estimated market size could be as high as $100 billion. The companies that will emerge as the winners “will have deep pockets, patentable products and a well-thought-out reimbursement strategy,” she wrote.
There are more than a dozen psychedelic clinical trials underway in the U.S., spearheaded by public companies and organizations, including the Multidisciplinary Association for Psychedelic Studies, or MAPS, a nonprofit research and educational organization that studies psychedelics and marijuana for a drug to treat PTSD; MindMed (ticker: MMED) for adult ADHD and opioid withdrawal treatment; and Seelos Therapeutics (SEEL) for suicidal thoughts and behavior. In 2019, the FDA approved Spravato, a Johnson & Johnson (JNJ) drug that consists of esketamine, which is derived from ketamine and used for treatment-resistant depression.
Canada began its path toward legalizing psilocybin in August, when the minister of health allowed four cancer patients to use psychedelic mushrooms, which are naturally occurring, as part of their end-of-life psychotherapy treatment. Advocacy was conducted by TheraPsil, a nonprofit coalition that works for legal access to psilocybin therapy for palliative Canadians.
Many biopharmaceutical companies listed their companies in Canada because regulators have allowed them to go public. In Canada, LSD, psilocybin, mescaline and DMT are considered Schedule 3 drugs, unlike in the U.S.
A second wave of research for psychedelics began the past few years after being halted in the 1970s globally. In 2017, MAPS received FDA approval for MDMA-assisted psychotherapy for PTSD. The Imperial College opened the Centre for Psychedelic Research in London, and Johns Hopkins opened the Center for Psychedelic and Conscious Research in Baltimore in 2019.
Similar to cannabis, drugs like psilocybin can be legalized by states or municipalities. In 2019, Oakland, California, decriminalized plants and fungi containing psychedelic compounds, while Denver decriminalized the cultivation, possession and use of psilocybin mushrooms. Santa Cruz, California, decriminalized psilocybin mushrooms, ayahuasca, peyote and ibogaine in 2020.
Oregonians will vote on an initiative to decriminalize possession and treatment as well as establish a psilocybin mushroom program in November. In Washington, D.C., voters will decide whether to pass Initiative 81 to decriminalize plants and fungi that contain ibogaine, DMT, mescaline or psilocybin.
Public Psychedelic Companies
Several psychedelic biotech companies became public the past few years to gain more access to capital. This helped ramp up their intellectual property and sell it to larger pharmaceutical companies with the capabilities to conduct phase 3 of clinical trials, which costs millions of dollars.
The nonprofit MAPS is conducting a phase 3 trial of MDMA-assisted psychotherapy for PTSD. The trial is expected to be completed in 2021, with drug approval to occur in 2022, and could reach the market by 2023, Gonsalves said.
Here are a couple of public psychedelic companies.
Janssen (part of JNJ): Janssen’s ketamine-based drug, Spravato, is geared for treatment-resistant depression and was approved by the FDA. The World Health Organization states that depression affects 264 million people globally, including millions who have treatment-resistant depression.
MindMed: Toronto-based MindMed is a neuropharmaceutical company working on 18-MC, a proprietary, orally active, nonhallucinogenic molecule based on the psychedelic ibogaine, used to treat opioid addiction. The company also is conducting a phase 2 trial to examine if LSD can treat cluster headaches and a phase 2A trial for LSD microdosing for adult ADHD. MindMed said it will start an MDMA and LSD phase 1 clinical trial in the fourth quarter in Basel, Switzerland.
“Given 18-MC has lower cardiac toxicity and is not a hallucinogenic nor a Schedule 1 substance, the company believes it has potential to become a superior alternative to ibogaine,” Gonsalves wrote.
The company has high-profile investors including Bail Capital; Bruce Linton, former CEO of cannabis company Canopy Growth Corp. (CGC); and Kevin O’Leary of “Shark Tank.”
MindMed’s strategy is “to not bet on one topic and instead find combinations and derisk,” says Linton, who is also a board member of MindMed. “We are trying to find pathways to turn them into products from ibogaine for addiction to LSD to combo drugs. MindMed is looking at a diversity of molecules and indications. It will cost more money, but will increase the chance of success.”
Private Psychedelic Companies
There are several private companies that could go public in 2020 when their reverse takeover transactions close, including Toronto-based Cybin and Field Trip Health. Field Trip Health is building a network of clinics to administer ketamine to treat depression with psychedelic-enhanced therapy sessions led by trained psychotherapists in Toronto, New York and Los Angeles.
Cybin is developing a dissolvable film with psilocybin that has a faster onset and the potential to act more quickly for patients with depression or addiction disorders. The company plans to start conducting phase 2 trials in Jamaica by the end of 2020, says CEO Doug Drysdale, who has worked at three pharmaceutical companies. By the end of 2021, Cybin hopes to file a commercial product application in Jamaica and plans to leverage the clinical trial data across other Caribbean countries and into more regulated markets such as the U.S. and Canada.
“We are working to develop a formulation that delivers psilocybin into a patient’s bloodstream more rapidly and not have to wait an hour,” Drysdale says. “We are looking at ways to improve the molecules naturally and synthetically, to reduce or remove hallucinogenic effects by synthetically changing the molecules – essentially taking out the bad bits and leaving the good bits.”
Management teams are even more critical for biotech companies because there is a high barrier to entry. A team with a successful track record that has experience with drug development, including clinical trials, FDA approval, manufacturing and relationships with Big Pharma for potential partnership and licensing deals, can make or break a company, says Chris Bogart, managing partner at RainCity Capital Partners in Vancouver, British Columbia.
Tryp Therapeutics, headquartered in La Jolla, California, is developing two drugs that are in preclinical trials using psilocybin to treat Prader-Willi syndrome, a rare eating disorder, and fibromyalgia, a chronic pain condition. The company plans to begin phase 2 clinical trials in 2021 for razoxane, an investigational drug to treat advanced tissue sarcoma, a rare cancer.
The company conducted two rounds of financing, raising more than $830,000, and plans to go public later this year on the Canadian Stock Exchange, CEO James Kuo says.
“We go where the scientific data is most compelling,” he says. “We believe in the strong drug efficacy of psychedelics. The company works with the leading scientists and clinicians in these rare diseases. Their involvement maximizes the chance of regulatory approval.”
Tryp Therapeutics has attracted a lot of “human capital, and we are favorable on the experience that the team has in bringing drugs through the FDA clinical process,” says Michael Berger, founder of Technical 420, a Miami-based cannabis and psychedelic research company.
ATAI Life Sciences, a German company, acquires biotech companies that use psychedelics to treat addiction, anxiety and depression. The company raised more than $100 million from key investors such as PayPal co-founder Peter Thiel.
Why the Psychedelic Industry Is Not Similar to Cannabis
The psychedelic sector is attracting some cannabis investors who are drawing the same parallels. While some psychedelic companies have momentum plays and ones that are the “flavor of the week or month, these companies will have players in a very unique space,” says Jason Spatafora, co-founder of marijuanastocks.com and head trader at truetradinggroup.com.
“Everyone is trying to do psychedelic stocks like pot stocks in 2013,” he says. “You are going to see a massive amount of failures. But there are actual peer-reviewed studies for this industry unlike cannabis.”
Investors should exercise caution since drug approval can take several years.
“You would be foolish to write it off,” Spatafora says. “These companies are not just selling magic mushrooms to the public, but the sector will attract a lot of stupid investors.”
One reason that pharmaceutical cannabis sales have been “lackluster” is because cannabis companies “strategically focused their efforts on the recreational market,” and their “therapeutic scope has so far been narrow,” Gonsalves wrote.
Therapeutic psychedelic companies “should not be compared with the cannabis industry but rather with the biotechnology industry,” she wrote.