Investing in a new and rapidly expanding industry is a great way to bolster your portfolio, and it's also quite fun. Of course, we can't always know in advance which areas are going to be big, so it's hard to know where to invest before the crowd shows up. That's roughly what I tell myself when I'm trying to come to terms with missing out on investing in the cannabis industry's boom before valuations skyrocketed over the last few years, at least.

Luckily, there's another new industry that's gaining traction right now, and sharp investors are already starting to take note. Psychedelic medicines are in their early stages of testing and adoption, but once they make it to the mainstream in the pharmaceutical market, early shareholders could end up rich.

Person uses tweezers to transfer small doses of magic mushrooms into pill container marked with days of the week

Image source: Getty Images.

Psychedelics aren't on the fringe anymore

Investors are right to be skeptical of the concept of psychedelic medicines. After all, the only reason that most people know anything about psychedelic drugs is that they are illegal in the U.S. Medical research into psychedelics is tightly restricted, not to mention socially stigmatized and financially risky. But these longstanding trends are shifting rapidly. 

These shifts start with the advent of highly promising scientific research. Recent studies have shown that very ill cancer patients experience less existential distress, depression, and anxiety for as long as six months after getting psilocybin ("magic mushroom")-assisted psychotherapy. Similarly, MDMA (ecstasy)-assisted psychotherapy has been shown to be highly effective at helping people with post-traumatic stress disorder (PTSD).

Regulators are finally getting on board, too. Several psychedelic treatments have been granted breakthrough therapy designations by the U.S. Food and Drug Administration (FDA). Plus, magic mushrooms have been decriminalized in Oregon as well as several municipalities across the U.S. in recognition of their low potential for addiction and social harm.

In summary, psychedelics are rapidly gaining in legitimacy and legality. Soon, investors could get the proof they need to be confident in the financial merit of developing psychedelic therapies.

Spravato breaks new ground in psychopharmacology

Some of the largest companies in the world are starting to dabble in psychedelics. While many of the substances being investigated as psychedelic medicines are still illegal or strictly controlled in the U.S., that hasn't stopped Johnson & Johnson (JNJ 0.35%) from getting a psychedelic-derived therapy approved for sale. In early 2019, the company's Spravato nasal spray got the go-ahead from regulators to be commercialized for treatment-resistant depression.

Spravato is closely related to ketamine, a dissociative drug known for its original role as a horse tranquilizer and later as a street drug. Last year, it earned another approval for people experiencing acute suicidal intent, a notoriously difficult-to-help and also difficult-to-study population of patients.

So far, Spravato is making waves as the first new depression treatment modality since 1987. Importantly, Johnson & Johnson didn't just adapt ketamine into a pill and hand it off to patients. Instead, the company developed a treatment center certification system and a risk management program so that patients are looked after by accredited and specially trained healthcare professionals during their therapeutic two-hour psychedelic experience.

In doing so, it paved the way for other drug developers to make integrated psychedelic treatment plans which help patients to stay safe and maximize the positive benefits of the therapy. Furthermore, adding a clinical support component to the treatment ensures that developers can make a profit even if they can't patent the naturally occurring chemicals taken by the patient.

What's next for the industry?

Public psychedelic medicine companies are paving the way for new therapies to hit the market, but many are still early in the clinical trial process. MindMedicine (MNMD -3.78%) and Compass Pathways (CMPS 5.64%) are just two examples out of a plethora of small and micro-cap companies exploring the space as their main line of business. While investing in these stocks is risky -- and you should consider them as roughly equivalent to early-stage biotech companies in that regard -- they do have large pipelines which could soon bear fruit. 

In the long term, if the currently ongoing clinical trials prove that drugs like MDMA, psilocybin, ibogaine, LSD, and ketamine are more effective than the mental health interventions currently on the market, the industry could explode. Given the current state of pharmacotherapies for mental illness, I believe that the success of psychedelics is inevitable. The only questions that remain are which company will make the most, and which will be the next major pharma giant to follow Johnson & Johnson into the space.