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Psychedelics Companies Could Look Different by End of Biotech Rout

A lab worker processes psilocybin mushrooms.Photographer: James MacDonald/Bloomberg

July 31, 2023 at 7:00 AM EDT

Edgy biotechs?

Investors in the psychedelics industry have long said its companies are like biotech stocks, but with an edge.

Here’s how the thinking went: Due to decades of underground use of LSD, magic mushrooms, MDMA and other substances, there was a body of anecdotal evidence that spoke to the safety and efficacy — or at least appeal — of such drugs. But as psychedelic stocks slump and the industry braces for a shakeout and consolidation, it’s not clear they’re all that different from classic biotech companies. Read More: The Psychedelics Stock Universe Is Shrinking, Despite the Hype

Clinical trials are expensive, and it turns out that anecdotes about all the tripping on ’shrooms you did with friends in your backyard don’t exactly hold muster with the US Food and Drug Administration. Companies now need the agency to review their studies on those drugs’ ability to treat conditions such as PTSD, depression and addiction.

In fact, psychedelic stocks have an extra hurdle to clear with the regulator, since many studies show that the drugs’ true effectiveness comes in conjunction with therapy. This means that companies may need the FDA to do something it’s never done before: Approve not just a drug, but a behavioral treatment to go with it.

“The bubble valuations got squeezed out last year, and now the leading names trade like any other small-cap biotech stock,” said Chris Yetter, founder of Dumont Global, a fund that invests in cannabis and psychedelics.

That’s problematic, because biotech companies overall aren’t doing well.

RA Capital estimated in a July 1 report that 25% of all development-stage public biotech companies trade below their cash value, while 72% will likely need to finance in the next year. Just like with psychedelics, a shakeout is underway as companies fail or consolidate. The report found there were 40 fewer “core biotechs” (those owned by at least one biotech specialist fund) at midyear than there were at the start of 2023.

The investment management company, which specializes in healthcare and life sciences, predicts that 2023 is on track to become one of the biggest years on record for the number of deals carried out, as well as the total value of companies acquired and the transaction premiums.

As more psychedelic companies fail, it will be interesting to see if the industry diverges from traditional biotechs. The cannabis industry — often compared to psychedelics given its trajectory from illegal party drug to pharmaceutical hopeful — has seen an interesting dynamic due to the still-thriving underground market. As illicit trade continues in California and other states, struggling companies have sold “legal” out the back door into the black market. In New York, legal companies are suffering from competition with the illicit market, too. Ketamine has seen a black-market dynamic, as well.

If psychedelics fail to win FDA approval and no industry materializes, it’s possible the cultural movement continues. Oregon has been training “facilitators,” or those licensed to administer the drugs, and therapists have been taking courses in “psychedelic-assisted therapy” for treatments that aren’t authorized or legal. Even if such drugs are never proven effective at treating serious mental health ailments, if research shows they’re not serious health risks, the interest is bound to continue.

Number of the week

  • 25% The percentage of cannabis users in 2023 who used the drug with low frequency, according to a recent study by New Frontier Data.

Quote of the week

“As the cannabis industry matures and consumers get to know and trust good names, our brand Good Supply has done well. Canadians know it’s like buying Coke Zero or Diet Coke.” Irwin Simon Chief executive officer of Tilray Brands Simon spoke on a phone call discussing the company’s quarterly results.

What you need to know

  • Mastercard Inc. has told payment processors and banks to stop allowing marijuana transactions on debit cards — a blow to the struggling cannabis industry and a boon to transparency in the banking system.

  • Prime Movers Lab has raised $245 million to back young startups working on an unconventional range of technologies, including psychedelics-related therapies and space infrastructure.

  • Senate Majority Leader Chuck Schumer outlined a busy fall agenda, saying he wanted action on items including marijuana legislation.

  • Tilray reported quarterly results that beat sales estimates, sending its stock up to the highest level in two months. It also renewed a distribution pact in Canada.

  • Marijuana looks set to become legal in Minnesota on Tuesday, though legal sales might not begin until 2025. The Associated Press published a guide on what to expect.

  • A small study has shown synthetic psilocybin developed by Compass Pathways appears to help those with anorexia.

  • A proposed ballot initiative in California would create a $5 billion state psychedelics agency to fund research in the hopes of accelerating legalization, according to Marijuana Moment.

  • A study of cannabis-induced-psychosis emergency-room visits in Canada, published in Nature, concluded that while legalization itself doesn’t increase the number of visits, commercialization does.

  • A proposal in Ohio to legalize recreational cannabis fell short of making the ballot, but there’s time to gather more signatures, the AP reported.


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