Mental health/psychedelic drugs: mushrooming investor interest fuels research

Investors are tuning into psychedelic stocks. A succession of market newcomers is raising funds to explore the use of mind-altering drugs for mental disorders. It is a controversial area of research. But given the need for better treatments, the nascent market could grow rapidly.

Atai Life Sciences, a Berlin-based company backed by tech investor Peter Thiel, announced plans in late April to raise $100m in an initial public offering. New York-based MindMed, which already trades on the Canadian and German exchanges, moved on to Nasdaq last week. They will join London-based Compass Pathways, also backed by Thiel, which joined Nasdaq last September.

The quoted psychedelic companies, which also include Canadian companies Cybin, Field Trip Health and Numinus Wellness, together have a market value of more than $3.5bn. Compass and MindMed are the biggest pure-plays, though drug giant Johnson & Johnson also figures. Its ketamine-derived depression treatment Spravato was designated a breakthrough therapy by US regulators in 2019.

Compass’s formulation of synthetic psilocybin, the psychedelic ingredient found in magic mushrooms, also secured that designation. A small trial by British scientists found in April it was at least as effective as a leading antidepressant drug. Peak sales could be more than $2.5bn, says Berenberg. After adjusting for the probability of success and discounting the potential cash flow, it reckons the shares, now trading at $36, could be worth 40 per cent as much again. 

The global market for psychedelic drug treatments will nearly triple to $7.6bn in the eight years to 2028, predicts Data Bridge Market Research. But there could be obstacles ahead. The last era when psychedelic drugs were used to treat depression ended with new legal restrictions in the early 1970s. There could again be a backlash if patients, encouraged by the research findings, take risks with non-pharmaceutical versions of the drugs.

Last November, Washington DC and Oregon pioneered the decriminalisation of the ingredient found in magic mushrooms. The news lifted shares in MindMed and Compass by nearly a tenth. But it could blur the distinction between naturally occurring hallucinogens and the compounds synthesised and tested to high regulatory standards. 

Yet the move also suggests growing acceptance of the use of psychedelic drugs for treating mental health problems. There is a large unmet need, exacerbated by the Covid-19 crisis. New treatments, if effective, would find a large market.

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