In a little over one year, the psychedelics industry has experienced exponential growth.
With more than 40 public companies and 6 listed on the Nasdaq, investors looking to bet on the “psychedelic renaissance” have a host of alternatives from which to choose.
“In this industry. If you miss a day, you miss a year,” said Sa'ad Shah, co-founder and managing partner of Noetic, a venture capital firm that invests in emerging and early-stage psychedelic-based wellness and pharmaceutical companies.
A rapidly-growing sector can mean great news for investors, but it can also make it difficult to navigate within the sector, as new companies and lines of business pop up like mushrooms after a summer rain.
Is The Industry’s Potential Still Held In The Private Sector?
For Matias Serebrinsky, partner at PsyMed Ventures, virtually every trend that moved the industry a year ago has intensified. “More companies, more funding, established biotech and healthcare players [are] playing a bigger role in the space.”
However, as an early-stage investor who also co-hosts the Business Trip podcast,
Serebrinsky said there’s still a lot of innovation in the space that has not necessarily reached retail investors.
Recent developments in the psychedelics sector may lead some to believe that the market is reaching some kind of stability.
But experienced investors say today’s public companies are just the tip of the iceberg.
“I think that the best companies out there are still private, they're not public,” said Shah, whose VC fund raised over $120 million in the last year alone.
Steve Hawkins, president and CEO of Horizons ETFs and manager of the first psychedelics ETF, said more IPOs from larger, well-funded companies are on the horizon.
There are many reasons why companies in the psychedelics space will choose to delay their IPOs. Shah encourages companies in Noetic's portfolio to remain in the private space for as long as they can afford to.
“A large part of the decision to go public versus staying private is about access to capital,” Shah explained. “For companies that are stirring strong, positive results with a compelling value proposition, it’s easy to raise private capital, so it’s in their best interest to delay an IPO for a more opportune time, avoiding operational costs of going public and guarding the flexibility that remaining private offers.”
Today there are well over 45 publicly traded entities between the Canadian and the U.S. exchanges, Shah pointed out. When it comes to private companies, there could be “well over 400 or 450 private companies, maybe even more than that.”
Jeff Siegel, a managing partner at the JLS Fund and co-founder of Green Chip Stocks, said most investors are still in the dark about just how profitable this industry is going to become.
“We’re talking about a potential disruption of the mental health market that hasn’t been seen since the 1970s. Hundreds of billions of dollars are up for grabs, and if these psychedelic molecules prove to be successful, which I believe they will, this industry, and those who invested early, are going to make a lot of money,” Siegel said.
How Long Will The “Mush Rush” Last?
As companies in the psychedelics space move up their clinical research pipelines, the most anticipated inflection point will come with the regulatory approval of psychedelics currently under research, Horizon’s Hawkins noted.
But while the industry waits for MDMA to become the first psychedelic to receive approval sometime in late 2022 or early 2023, could the slow pace of the drug development process usher in a loss of excitement for the sector?
Hawkins said he believes we’ll see a number of milestones that will propel positive market trends. He advises investors not to write-off opportunities because of a loss of “novelty.”
Whether in the form of more major IPOs, drug stage advancements and approvals, NYSE and Nasdaq cross-listings, positive earnings and increased investor interest, new events can lead to short-term lifts and long-term growth.
“One thing to consider is that not all of these companies will have to make it through Phase III clinical trials to be successful,” JLS’ Jeff Siegel said.
“If the IP is strong and earlier trial data is promising, a company could easily be acquired for a very nice premium. It happens all the time in the biotech space, and really, this is how investors should look at the psychedelics space, anyway. More of a biotech play than anything else,” he added.
What Could Drive A Bear Market In Psychedelics?
As far as Siegel is concerned, the psychedelics space is still far from market stabilization.
“For one, a number of the early, pre-IPO shareholders in this space are still in a lock-up period, so we don’t yet know if there’s going to be massive dumps of cheap shares when those lock-ups expire, or if those pre-IPO investors are going to stick it out over the long-term.”
That uncertainty feeds into instability, which for Siegel means that in the foreseeable future we will likely see far more traders than long-term investors.
Shah agreed. “At some point, we may see a shoe drop," said Noetic’s Shah. “We may see the market take a big correction. It may be led by one or two stocks in the industry that perhaps are not able to continue to really show efficacy or perhaps run into some issues.”
However, Shah noted that such an event could benefit the market as it will “separate the wheat from the chaff.”
Companies with the strongest cash positions will be the ones best fit to endure a dry spell in the market. However, in Shah’s view, the biggest thing that will allow companies to continue to raise capital in the private markets is the quality of the science being done and the consistency of the management team.
What To Look For In A Winning Company?
PsyMed’s Serebrinsky encourages investors to go back to the basics. “Is there strong data to back a company’s claims? Is the founding team experienced and capable of taking these medicines through clinical trials? Do they have a realistic plan and the means to secure funds to make it happen?”
JLS’ Siegel highlights good management, significant cash reserves and strong IP as the winning formula.
“Management is the most important. We’re seeing a lot of people come into the space who don’t know the first thing about psychedelics or what it takes to get any kind of medicine or treatment through FDA trials. They’re good at raising money, but that’s about it. And those are the companies that will make management a lot of money but offer no value to shareholders or the industry,” Siegel said.
Different Ball Game From Cannabis
“As opposed to cannabis, which is a retail play, psychedelics are a biotech play and a pharma play. It's about clinical trials and new chemical entities,” explained Shah, who added that investors need to “be very, very careful,” because psychedelics are a case of buyer beware.
“This is an industry that requires domain expertise. And so you either get that advice from outside or you do your own homework and just make sure you understand the space really well. It’s a knowledge-based industry,” Shah concluded.
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