- With $500 million in fresh capital entering the sector in Q4 and more on the way, psychedelic drug stocks are capitalized to outperform
- New research into “novel” psychedelic compounds will provide the industry with home-run potential
- Expansion of psychedelics-assisted clinic operations can be a major driver of 2021 stock performance
As 2020 began, the psychedelic drug sector was a big question mark for investors: a new (public) industry about to be born.
As we move into 2021, the picture looks dramatically different. The question mark has been replaced by an exclamation point. The psychedelic drug industry has arrived.
A great year for psychedelic drug stocks
Success for these public companies in their first year can be measured in various ways. Psychedelic Stock Watch has produced our own Report Card for the industry’s performance, in several key categories.
Many of these companies generated strong returns. This was backstopped with the large infusions of investment capital that psychedelic drug companies were raising in 2020.
Research and formal clinical trials of psychedelic drugs continues to gather momentum. Media coverage of the industry has been both plentiful and positive.
Progress on legalization/decriminalization of psychedelics and regulatory reform was seen in both the United States and Canada. We’re now seeing limited legal (medicinal) use of psilocybin – in the state of Oregon and via Health Canada medical “exemptions”.
In short, 2020 was a great year for the psychedelic drug industry as well as psychedelics investors.
Psychedelic Stock Watch sees 2021 as being an even bigger and better year for the industry. Why? While there will be multiple drivers of (potentially) higher stock prices next year, we are focusing on three factors.
- Capital. The ~$500 million the industry raised in just the last 15 weeks of 2020 can drive a lot of operational growth for these companies in 2021. We expect the huge capital flows into the industry to continue – if not increase.
- New psychedelics-derived compounds. Research into “novel” (and patentable) psychedelic drug compounds will be a huge driver of future stock performance and thus a major focus for these companies in 2021.
- Expansion and growth of psychedelics-based medical clinics will become an important investment driver in the year ahead.
Money makes the world go round.
For some people, that thinking is a little too mercenary. But certainly, when it comes to launching a new industry, capital-raising is of vital importance.
The best business model can’t succeed without the funding to drive operations.
For life sciences companies doing pharmaceuticals research, we can attach an exclamation point to this thinking. Drug development costs can range into the $100s of millions.
But even at this early stage, we have already seen several nine-figure financings in the psychedelic drug industry.
Altogether, roughly $500 million in fresh capital flooded into this sector in just the last 3 ½ months of 2020. This has already pushed the market caps of the two industry leaders – Compass Pathways (US:CMPS) and MindMed Inc (CAN:MMED / US:MMEDF) – above $1 billion.
Other public companies have much smaller market caps, but have also been successfully raising capital. And virtually all financings by psychedelic drug companies in the fourth quarter were oversubscribed.
This puts these smaller companies in a good position to outperform the industry leaders as we move into 2021.
New psychedelics-derived compounds
Most psychedelic drugs have been around for (at least) the better part of a hundred years. This is good and bad.
It’s good in that there was already a large existing body of clinical research on the medicinal uses of these substances. This is expediting the new R&D on these drugs that has been taking place in recent years.
It’s also bad that these drugs have been around for a long time. It means they cannot be patented (in their original form).
“Drug repurposing” can provide some patent potential for these drugs – as method of use patents. But for full patent protection of this intellectual property, companies need to develop new compounds.
In 2021, the phrase “novel molecules” will rapidly become part of the vocabulary of investors in psychedelic stocks.
Novel molecules (in this context) are derivatives of existing psychedelic drugs. They exhibit similar medicinal properties. But they are developed with enough of a molecular twist that they are deemed to be chemically unique, and thus patentable.
First a novel molecule is engineered (and a patent is applied for). Then that novel molecule is incorporated into a drug designed to treat a particular medical condition – in preparation for formal clinical trials.
Opportunities exist with both the creation of novel molecules and the (subsequent) drug development.
Some companies will choose to only create novel molecules and then farm them out for drug development. Other companies will acquire these novel molecules and then pursue the actual drug development on their own.
Over the long term, this is where the “home runs” will come from psychedelic drug companies.
With the large (potential) revenue streams from a drug patent, even a single drug success can deliver a payoff in the $100s of millions. Larger M&A deals in the pharma sector run into the billions.
While a few private players are already advancing research in this area, most of the public companies have just been making preparations for such research in 2020. Expect to see a lot more concrete announcements from pubocs in this area in 2021.
Growth in psychedelics-assisted medical clinics
Developing novel molecules and new drug compounds is where the home-run potential exists in the psychedelic drug industry.
But when it comes to near-term revenue streams, the operation of medical clinics offers (by far) the most significant opportunities. This is true even with the limited legal medicinal usage that is currently permitted.
As psychedelic stocks took off in the last quarter of 2020, one of the drivers of higher share prices was news concerning expansion plans for psychedelics-assisted medical clinics.
Spectacular results in clinical trials are motivating both medical practitioners and psychedelic drug companies to move forward on psychedelics-assisted medicine sooner rather than later.
Among the first-movers here for publicly traded companies are Field Trip Health (CAN:FTRP / US:FTRPF), Numinus Wellness (CAN:NUMI / US:LKYSF) and Mind Cure Health (CAN:MCUR / US:MCURF).
Numinus (market cap: CAD$143 million) also has four clinics, located in Vancouver and Montreal. Its Montreal clinic services offer ketamine-assisted therapy. Its Vancouver clinics are currently being used to advance clinical trials for both psilocybin and MDMA.
Mind Cure (market cap: CAD$37 million) is the newest entrant into psychedelics-assisted clinics. On December 10, 2020; Mind Cure announced plans to open its first clinic in Kelowna, British Columbia – scheduled for May 2021.
Proximate to larger population centers in both B.C. and Alberta, Mind Cure’s Kelowna clinic will be able to draw upon a large pool of potential patients. The company plans to offer both ketamine-assisted therapy and psilocybin-assisted therapy (via Health Canada medical exemptions).
The strategic location also provides a convenient hub for regional expansion as the company commences therapist training and seeks other prospective clinic expansion opportunities.
The need for psychedelics-based medicine is extremely acute for two reasons.
b) Existing standards of care for many conditions are totally inadequate.
MAPS has conducted an economic study on MDMA-assisted psychotherapy to treat PTSD. This form of therapy is estimated to result in treatment savings of $103,000 per patient.
With that level of cost-effectiveness, health insurers (public and private) can’t afford not to cover such therapies. Adoption of psychedelics-based medicine by health insurers will likely come sooner rather than later.
Expect growth (and news flow) in this area to a be an important driver of psychedelic stock valuations in 2020.
Market wildcards: new NASDAQ listings
If investors can’t get excited by the major operational drivers of higher stock valuations in 2021, how about some potentially explosive market catalysts?
The Compass Pathways IPO in September 2020 was the catalyst that launched psychedelic drug stocks in 2020.
It didn’t take a crystal ball to predict this impact.
A premier listing for this new industry. Lots of new media attention. And a large infusion of new capital via the IPO financing ($146.6 million).
But consider how dramatic a change this was.
Before September 18th, psychedelic stock prices were flat and well off of previous highs. Trading volumes were anemic across the board.
After September 18th, numerous companies saw at least a double on their share price. Trading volumes exploded and were simply off the charts for a few companies.
Night and day.
Looking ahead to 2021, ATAI Life Sciences has already declared its intention to go public.
ATAI is the biggest private player in psychedelics. It is expected to immediately become the new industry leader when it goes public.
ATAI recently raised $125 million for its Series C financing round and can be expected to raise much more for its own IPO. Plenty of capital to drive not only organic development but also a lot of M&A activity.
Shortly after the Compass IPO, MindMed announced it was seeking to uplist on the NASDAQ. Since that time, the share price has quadrupled (but is well off its high). Trading volumes for both MMED and MMEDF have been rabid. And the company has raised ~CAD$150 million in new capital.
MindMed’s psychedelics IP portfolio is perhaps second to only ATAI. In short, there are many reasons to believe that NASDAQ will approve the uplisting application.
The ATAI IPO is expected in the spring of 2021. But approval for MindMed’s uplisting application could come at any time.
We saw how the Compass Pathways IPO ignited the sector, at a time when investors were still taking a wait-and-see attitude towards this emerging industry.
What sort of bounce will we see with psychedelic stocks with another NASDAQ listing (and perhaps two) in early 2021 – with the sector already red-hot?
Psychedelic drug stocks made a big splash in their first year of public trading.
What will they do for an encore? These companies will likely make an even bigger splash in 2021.
DISCLOSURE: The writer holds shares in MindMed Inc, Numinus Wellness and Mind Cure Health. Mind Cure Health is a client of Psychedelic Stock Watch.