The psychedelic industry is maturing after the investment boom of 2020/2021, and patient long-term investors looking for opportunities to diversify their portfolios have some options when it comes to psychedelic stocks.
‘Compared to the market fervor in 2020-2021, like (2022), 2023 was a quieter and colder year in the psychedelics marketplace,” he stated. “This past year, no major catalysts emerged and there was continued consolidation in the industry — a trend that will likely continue. That being said, clinical trials take time and participants and analysts have known that the psychedelic opportunity is ultimately a long-game that requires public policy progression, alongside pharmaceutical advancement and innovation. Ultimately, a watershed moment could lead to a waterfall effect across the industry.”
According to Research Nester, the psychedelic drugs market was worth US$3 billion in 2022. At the estimated compound annual growth rate (CAGR) of 14 percent, the market will be worth more than US$12 billion by 2035. The rising demand for mental health treatments and services has spurred research into the potential benefits of PAT.
Regulatory developments
As more people struggle with mental health and the addiction crisis worsens, a growing body of evidence suggests that psychedelic substances may offer much-needed relief. Researchers have continued to demonstrate that these treatments can be used to treat the symptoms of a variety of mental health disorders. Analyses have shown them to be effective in reducing healthcare costs as well. This has sparked a shift in the US legislative landscape, with increasing bipartisan support for psychedelic drug reform.
At the federal level, President Joe Biden has expressed his expectation that psychedelic therapies would be approved, and in 2023, the US Food and Drug Administration (FDA) took steps to facilitate the development of psychedelic therapies when it released a comprehensive guide for clinical investigations.
Meanwhile, at the state level, Oregon and Colorado have emerged as pioneers in the regulated use of these substances, with Oregon granting its first license for a healing center in March after officially legalizing PAT in January. Likewise, Colorado passed its Regulated Natural Medicine and Legalization Act in July, which will be followed by a progressive implementation of various PATs.
While some states have introduced legislation to legalize or decriminalize psychedelics, the legislative process can be slow and outcomes uncertain. For example, while some states have made progress, such as Oklahoma approving HB3414 to increase research, others are still working their way through the system, such as the Psychedelic Law Enforcement Reform Act in New York. In October, California Governor Gavin Newsom even vetoed Senate Bill 58, which sought to decriminalize the possession and personal use of a selected group of psychedelics and had already passed through the Senate and Assembly. Newsom stated that his reason for vetoing the bill was that it failed to meet guidelines that would criminalize possession outside of medical clearance. It also didn’t satisfy the criteria for treatment guidelines, such as dose information.
In addition to the developments in the US, other countries have also been taking steps to regulate and explore the therapeutic potential of psychedelics, including Canada. On a provincial level, at the start of 2023, the province of Alberta enacted a new policy that regulates psychedelic drugs for mental health treatment.
Federally, most psychedelic therapies remain illegal. Canadians continue to lobby for increased access to the treatments, and in rare cases, can be approved for PATs that are undergoing clinical trials through the country’s Special Access Program. Last year, the Senate’s Subcommittee on Veteran Affairs published a report calling on governments at all levels to perform a large-scale research program on PAT, as the treatments have the potential to greatly help military veterans, an underserved demographic for whom mental health struggles are common.
One company making this a focus is the veteran-founded Apex Labs, whose psilocybin product APEX-90 was recently approved for a 160 macro-dose clinical trial starting in Q1 2024. However, ahead of the trial, a Canadian military veteran with treatment-resistant depression was approved for the treatment through the Special Access Program, and received a dose on November 2 in Vancouver accompanied by psychotherapy.
Meanwhile, Australia has taken a different approach; on July 1, legalization took effect for MDMA and psilocybin for the medical treatment of post-traumatic stress disorder (PTSD) and depression, respectively, in tandem with therapy.
“Time will tell but the Australian announcement is likely the biggest ‘positive’ event for the space and could provide a model for other jurisdictions to emulate,” Husain said. “If a major country like Australia is able to successfully administer psychedelic medicines, that could prove a catalyst for Canada and other commonwealth nations.”
Clinical trials
The momentum behind the use of psychedelics for therapeutic purposes continued to build in 2023 as clinical trials investigating the efficacy of these substances for treating a range of mental health conditions reached new milestones and gained more support from the medical community.
One of the more notable trials of 2023 was funded by Compass Pathways, which was an investigation of the effectiveness of its product, COMP360, in treating bipolar II depression. This was the first study of PAT on bipolar disorder. The results, which were published in JAMA Psychiatry on December 6, suggested that psilocybin combined with psychotherapy could be an effective and safe treatment for bipolar II depression. The company is also studying the use of COMP360 to treat mental health disorders such as anorexia, PTSD and treatment-resistant depression (TRD), among others.
Another significant development in the field of psychedelic therapies was the publication of positive results from MindMed’s (NASDAQ:MNMD,NEO:MMED) Phase 2b trial of its LSD-based product MM-120, which was being investigated as a potential treatment for generalized anxiety disorder. According to the company’s website, there has also been evidence to suggest that MM-120 could be effective for treating chronic pain and substance use disorders. MindMed’s stock price rose by 7 percent following the news. The company plans to move on to Phase III trials in 2024.
Meanwhile, Cybin, another player in the psychedelics industry, reported positive topline data from its Phase II clinical trials of CYB003 for major depressive disorder. “(It’s) really unprecedented to see 80% of patients in remission after two doses. I don’t think we’ve ever seen anything like that in depression, ever,” Cybin’s Drysdale commented to INN about the results.
The US Patent and Trademark Office granted the company a patent for its product on December 6.
Finally, MAPS (Multidisciplinary Association for Psychedelic Studies) submitted a new drug application to the FDA in December following positive results from its Phase III trials that studied the efficacy of its MDMA-assisted therapy for treating PTSD.
Investment trends
The market for these therapies is evolving, and with the changing landscape, there will be challenges that must be addressed. In a December 2022 research paper, experts explored the economic considerations surrounding PAT, including the market dynamics and the potential for growth and consolidation in the space.
Bruce Campbell, president and portfolio manager at StoneCastle Investment Management, discussed MindMed in a market call with BNN Bloomberg. “One of the risks they obviously have with a company like (MindMed), they’re going to need to continually raise money over time, much like the cannabis sector has done, to kind of build out their operations. So, they’re nowhere near the point where they’re going to be cash flow positive. So you do have to be aware that if the stock runs up, it could pull back on financing and it’s probably a position that you want to trade around.”
Campbell’s comments specifically address MindMed, but they also speak to some of the broader challenges and risks associated with investing in the psychedelic industry, including the need for ongoing funding and the potential volatility of stock prices. These are important considerations for investors to keep in mind as they evaluate the opportunities and risks associated with this emerging industry.
While the outcomes of the clinical trials are promising, companies must still overcome the complexities of patenting and commercializing their products. Psychedelic compounds are naturally occurring substances that may be difficult to protect under existing intellectual property laws, hindering a company’s ability to turn its therapies into profitable products. However, until these therapies can be brought to market, there isn’t much opportunity for businesses to generate revenue.
How are companies responding to a changing landscape?
To address this challenge, companies in the psychedelic industry are exploring a range of strategies, including developing novel formulations of these compounds, combining them with other ingredients to create proprietary products and leveraging their expertise and data to establish a competitive advantage.
For example, Numinus (TSX:NUMI), one of the leading companies in the industry, made significant changes to its business in 2023 in order to increase its revenue, including launching clinic licensing platform Numinus Network, expanding its practitioner training programs and partnering with Healing Commercial Real Estate to find more clinics for its services. The company also closed operations at its non-revenue-producing Numinus Bioscience research lab. After turning its focus to revenue-generating activities, Numinus reported a significant growth in revenue in Q4 2023, including US$5 million from the company’s wellness clinics.
As part of its focus on practitioner training, Numinus announced a partnership with MAPS in June, for which it submitted a clinical trial application to Health Canada. The purpose of the trial is to study how healthcare practitioners could establish protocols and procedures for MAPS’ MDMA-assisted therapy and identify any potential challenges. If successful, Numinus has plans to incorporate the therapy into its repertoire of PAT education and training programs.
While regulatory considerations are an important factor in the growth and development of the PAT industry, another trend affecting the sector is the increasing consolidation of the market through mergers and acquisitions. “We’ve seen a huge amount of consolidation over the last couple of years, down from maybe 60 reported psychedelic companies to frankly only about a half a dozen now that are really focused on drug developments,” Drysdale noted. Two such examples in 2023 were Cybin’s acquisition of Small Pharma and Otsuka’s (TSE:4578) acquisition of Mindset.
Ethical concerns
As with any industry, there are some concerns in the PAT sector, including those related to efficacy and safety standards and market competition, and companies will need to be mindful of balance in providing affordable and equitable access to treatment as they pursue growth and expansion.
To this end, Beckley Waves, a venture studio that works exclusively with practitioners within the psychedelic space, established The New Ethics Council in June. The council is composed of advisors and experts who would be influential in shaping industry standards and best practices. Among them is Beckley Waves founder Amanda Fielding, who has been an influential presence in the industry for generations, pouring over 55 years of research into the benefits of psychedelic experiences.
Investor takeaway
As we look back on the recent developments in the psychedelics industry, it’s clear that this field has made significant strides in terms of clinical research and some regulatory progress, but uncertainties still lie ahead.
“Despite positive broader market performance across other major indices, risk-off sentiment from 2022 persisted throughout 2023, which has led to a greater gulf between the psychedelic and biotech industries and other sectors,” said Husain.
Securities Disclosure: I, Meagen Seatter, hold no direct investment interest in any company mentioned in this article.