Is Compass Pathways a Buy?

Psychedelics have been long vilified, and are still illegal. Yet there may be situations where these narcotics are actually helpful to people. Studies have suggested that both MDMA (street name, "ecstasy") and psilocybin ("magic mushrooms") can help people who suffer from post-traumatic stress disorder and serious depression. In both cases the drugs are combined with talk therapy.

Compass Pathways (CMPS -0.24%) is focused on using psilocybin in human trials for people who have treatment-resistant depression. How big is this market opportunity? Corinne Cardina, bureau chief of Healthcare and Cannabis at Fool.com, and Motley Fool writer Taylor Carmichael discussed the stock on Fool Live. This segment was recorded on May 14.

Corinne Cardina: Let's move to Psilocybin or as you said, magic mushrooms. This one actually has some public company tie-in. We're going to talk about COMPASS Pathways, which is a really interesting company. I was reading about this. The leaders of COMPASS Pathways are a wife and a husband team, love to see that. Although [LAUGHTER] in our recommendation we actually say that it's a risk. [LAUGHTER] But sometimes I look at Bill and Melinda.

Taylor Carmichael: [LAUGHTER] They might divorce, you never know.

Corinne Cardina: But I think it's really interesting because their son struggled with treatment-resistant depression for a long time, and so when you see those parents embark on passion projects, that passion does not sleep. It's very personal to them. But let's backup. Tell us about the latest updates in the Psilocybin world for healthcare.

Taylor Carmichael: It's similar to ecstasy in that it requires talk therapy. Both these medications require counseling and require a physician or a psychiatrist or psychologists to talk you through your experiences. They're both looking for, I don't know how to pronounce it, Corinne, is it Psilocybin?

Corinne Cardina: Psilocybin

Taylor Carmichael: Psilocybin.

Corinne Cardina: I think.

Taylor Carmichael: Its target is depression, whereas the other one's target is PTSD. Two different things, but they have a similar -- the importance of the psychologist cannot be overstated. At least in the case of ecstasy, I mean, most of the money is going to the physician or to the person that talks you through it. Because ecstasy is not patent protected, to get back on the patent thing for a second. They have no patent rights. That part, that drug will not be expensive. It will be a fairly cheap part of the therapy. When you see that $20 billion to $80 billion estimate, understand that a lot of that's going not to any drug maker, but to the physicians involved. If you were to think about this in terms of investment, you want to think about training physicians and that would be the possible way you would make money as an investor. I don't think it's going to be from the drug. Although in this case you do have a company involved and they do have patent protections because they say it's a specific kind, they're taking the chemical from magic mushrooms, but I think they've changed it and are targeting a specific place in the human body. They do have patent protections so they may make some money off the drug itself. But I think a good part of this is changing medical practice to get this accepted by doctors and to get doctors trained on it because it's different. They're not teaching this, I don't think in medical schools yet. I mean, this is a niche outsider side of alternative medicine. For investors, you got to think, is this going to be mainstream or not? That would be the big question. The other thing is they're not in Phase III, they're just Phase II. They're still a few years away from this and they need to do a bigger study, but they did have success from their Phase II study, I think if I remember right. Let me check.

Corinne Cardina: COMPASS IPO'd in the past year, I think. Tell us about how its performance has gone so far and what you see as the long-term potential here?

Taylor Carmichael: They doubled from the IPO and then it crashed and now it's back around, I think it's still slightly over the IPO price, but they are slightly underperforming the market. So basically it's a big mountain. If you look at it it's like Mount Everest -- up and then down.

Corinne Cardina: I think that's not too unusual with these kind of IPOs. You unleash the demand, everyone's excited, they buy the hype and then a lot of people have bought in and they realize, wait, this is like a 3-5 year situation. Then that falloff. Let's talk about the long-term prospects.

Taylor Carmichael: Depression is a huge market, it's much bigger opportunity than PTSD, I think.

Corinne Cardina: It is, but this is specifically targeting treatment-resistant depression. That's important. Just because, this probably won't replace that first-line of depression treatments. Whether it's Lexapro, Prozac, that kind of thing. You would probably need to fail those treatments first and then this would become an opportunity.

Taylor Carmichael: It would be like a third line depression.

Corinne Cardina: Right.

Taylor Carmichael: Yeah, I think to me out of the stocks we're talking about today, this would be honestly the scariest one for me. This will be the one I would tread lightly here if you're interested, make a small investment and just see how it plays out and maybe increase as you get better news. There's some major difficulties for the company in that it's not just getting FDA approval. For most drug companies, you get FDA approval, the market's there, you go out and sell your drug. They've got to get FDA approval and they've got to convince major healthcare players that this is valid, that this is important, that this works and they have to train people in this. They have to train people in how you guide people through a magic mushroom experience, that could take a while to do that.

Corinne Cardina: There are a lot of risks, I think you've got the anecdotal issue of people undergoing this treatment and having adverse outcomes and that's going to be headline-worthy as this company's fighting against the stigma, they definitely have a lot of hurdles to jump...