Here’s what you need to know about investing in Psychedelic stocks

Biotech companies are pushing magic mushrooms from counterculture to main culture — in what could become the first legalized treatment of depression using psychedelics.

Investors are euphoric and psychedelic stocks have surged in 2020:

• Mind Medicine ($MMED) grew 1,000%
• Compass Pathways ($CMPS) grew 120%
• Numinus Wellness ($NUMI) grew 94%

Psychedelics are mind-expanding drugs (e.g. LSD, MDMA, and magic mushrooms) that induce states of altered perception and thought.

Treating the $100b depression market

Over the past few, the growing focus on treating mental illness surfaced old research on the curing effects of psychedelics.

What was once a hippie stereotype has now become a potential depression treatment — which is estimated by Canaccord Genuity to be a global $100b market.

Key events have accelerated the industry:

• In late 2018, the FDA gave “breakthrough therapy” status to Compass Pathways’ psilocybin treatment, speeding up the drug development for depression treatment.
• In Nov. 2020, Oregon became the first US state to legalize the medical use of psilocybin, the active ingredient in magic mushrooms.

In 2020, dozens of companies have taken advantage of the opportunity to go public and raise money for R&D. Over 20 psychedelic companies are trading on the Canadian Securities Exchange.

Expanding minds, but not profitability

One of the biggest challenges for psychedelic companies is becoming profitable:

• Legal drugs are expensive… According to Quartz, the cost to acquire psilocybin legally can be 13x more.
• No protection… Psychedelics have been around for decades and do not qualify for a patent.

Big pharma companies rely on patents that give them 20-year market exclusivity — allowing them to profit and recoup their development costs.

Without these patents, competitors could flood the psychedelic market and drag prices down.

For investors… Stocks in an altered state of mind

FDA approval of a psychedelic-based depression treatment could still be years away…

• With most psychedelics in phase 1 of development or earlier, it could take over 5 years to bring the drug to market.
• Psilocybin is still classified as a Schedule I drug and can’t be used for medicinal purposes until the drug is reclassified.

Once a drug enters phase 1 clinical trials, it has less than a 10% chance of final FDA approval. Drug development is highly volatile and event-driven — results could send a stock up or down 50%.

Similar to the early days of cannabis when stocks surged and crashed between 2017-2019 — many of the early companies you see today aren’t likely to stick around.

Learn more: Investing in the highly volatile biotech industry — how COVID kickstarted the US $100b industry.