How to Invest in the Psychedelic Stock Sector

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Contributor, Benzinga
May 25, 2021

Almost out of the blue, psychedelics jumped into the investment scene as one of the most promising revolutions in mental healthcare.

Scheduled molecules like MDMA, psilocybin, LSD, DMT and 5-MeO-DMT are showing extremely positive results in the treatment of a wide array of mental health conditions including depression, anxiety, substance addiction and post-traumatic stress disorder.

Following the cannabis boom from 2014 to 2018, few investors thought there’d come another chance to get in early on a novel industry created almost from scratch. Yet, as psychedelics follow a steady path towards legalization, they appear to offer a second opportunity for those who got left behind in the green rush.

Disrupting Mental Health: The Future In Sight

As opposed to cannabis, the main potential in psychedelics lies not in their recreational value but in their ability to disrupt today’s mental health treatment landscape. 

The last few decades showed few improvements in drug development for those struggling with mental health conditions.

Antidepressants like SSRIs, which today remain the most used pharmacological response to depression, still carry a number of risks and in many cases, show no efficacy at all. Couple that with an alarming increase in mental health suffering propelled even further by the Covid-19 pandemic, and you get the perfect setting for a new revolution in mental healthcare.

Psychedelics-assisted psychotherapy is a newly-introduced paradigm in psychiatry that uses psychedelic drugs in combination with psychological therapy to provide healing insights that can accelerate a patient’s progress in ways never imagined.

MDMA, a compound praised for its empathogenic effects, is closer than ever to receiving FDA approval in the treatment of PTSD. Psilocybin, the active ingredient in magic mushrooms, is being researched in phase II clinical trials for the treatment of depression.

A number of other compounds are currently undergoing clinical research, and patents for new molecules and treatments are being filed every week.

If the industry flourishes without any major inconveniences, within the next 5 to 10 years the western world should see the establishment of a successful industry of medicinal psychedelics.

In a mature industry, physicians and mental health professionals will be able to prescribe and administer psychedelic drugs for the treatment of an array of mental health indications.

Pros and Cons of a Growth Industry

At the time of this writing, the greater part of psychedelic substances remain scheduled in most countries including the U.S. and Canada. Since the start of the “shroom boom,” no new psychedelic substances have crossed into legality so far.

The slow pace means that the industry still needs to put in a lot of time, effort and capital to get these compounds approved for human treatment. For this reason, psychedelic companies can routinely present negative balance sheets.

Large net losses do not necessarily mean that a company is not performing well. In many cases, it means that it has invested in research, real estate, infrastructure or in the expansion of its team and advisory board.

Some companies in the space are nonetheless exploring revenue-generating alternatives like offering treatment with ketamine, which is a legal psychedelic-type substance, previously used as an anesthetic. 

While the psychedelics sector is expected to boom in future years, it still presents a great deal of risk, given the fact that the future is always uncertain and psychedelics still need to overcome many barriers to become mainstream psychiatric treatments.

For these reasons, the psychedelics sector is often regarded as a long-term bet by some investors. Many companies in the space still have not outlined specific plans to break profitability in the near-term.

MDMA is expected to become the first FDA-approved psychedelic around 2023, with psilocybin following along by 2025, though these dates could be pushed further into the future.

Still, short-term profit is also possible for investors, as stock prices are routinely shifting due to regulatory developments, individual company news and variations in demand.

How to Invest in Psychedelics Stock

Before choosing a company, make sure you understand its role in the sector. Companies encompassed in the psychedelics movement span across a number of verticals.

Those involved in drug R&D can pursue research on existing psychedelics for specific indications or develop new, improved versions of these drugs. 

Other players are focused on building a scalable supply chain for psychedelic drugs. This process is by no means easy, as even a legal industry would be highly regulated and the jury is still out on the best methods for producing some of these compounds on a commercial scale.

Psychedelic clinics are also a strong arm in this space. Some companies are already establishing an infrastructure of clinics that’ll hold key real estate and brand power for when more psychedelic substances become legally regulated.

Other verticals being explored are therapist training, digital therapeutics and psychedelic retreats in nature.

Step 1: Research the company.

Before investing in a company, make sure to understand its business and how it plans to scale as the sector opens up. Most companies show their value as a projection once the first regulatory hurdles have been overcome.

You can start by looking at SEC filings and other documents required by regulatory agencies.

Stay up to speed on the latest news from the company by reading financial news outlets like Benzinga.

Twitter or Benzinga Pro can provide quick, short tips on breaking news from the sector.

Step 2: Determine your strategy.

As a rule of thumb, never invest more than you can afford to lose. While good research will often lead to strong returns, this outcome will not necessarily be the case. Stocks are volatile, and contingencies are sometimes unpredictable.

Are you looking at a good buy-and-hold company or are you aiming to turn a quick profit in the short-term?

You can reduce risk by establishing rules beforehand. For instance: “If the stock falls below X or surges above Y, I will sell.”

Step 3: Pick a broker.

Once you’ve gone through the initial steps, you’ll be ready to actually buy your shares. 

For that, you’ll need a broker. Today most brokers operate online, offering comprehensive platforms where you can buy and sell stocks from your computer or mobile device.

You’ll be able to buy and sell stocks once you’ve registered and funded your account.

Many companies in the psychedelics space are listed in Canadian exchanges like the Canadian Securities Exchange, the NEO Exchange or the Toronto Stock Exchange.

While NYSE and NASDAQ are becoming more friendly with psychedelics companies, exposure to Canadian exchanges can be a perk if you want to dive deep into this sector.

You might want to look into a broker that allows operations in foreign exchanges like Interactive Brokers or Fidelity.

Step 4: Buy the stock.

This step might seem obvious. However, there are several methods of buying a stock, depending on the type of order you want filled.

Most common order types are “Market Orders” and “Limit Orders.” Market orders buy the stock at the current market price, which can vary very quickly if the stock is volatile. 

Limit orders place a ceiling on how much you want to spend on a particular stock. While this provides more safety for your capital, it can leave you with an unfilled order if the stock rises above your established limit before the broker can execute the order.

Step 5: Sell the stock.

You can sell the stock once you feel it has generated enough profit. Knowing when to sell is as important as knowing which stocks to buy.

Order types for selling work in a similar way to buy orders. You can sell at market price, set  a limit or use a stop-loss order to automatically sell your stock once it has reached a certain price.

Step 6: Check out Benzinga’s extensive psychedelics coverage.

Benzinga provides daily news on the psychedelics sector at Benzinga's Cannabis Newsdesk.

Here you’ll find articles on the latest developments in the psychedelic sector, with expert commentary, in-depth research and financial analysis on the different verticals and companies that make up this promising sector.