The market for psychedelic drugs could be worth $10.8 billion by 2027, growing at an annual rate of 12.4% until then, according to ResearchAndMarkets.com. It's an exciting new sector to invest in, with many people comparing it to the early days of the cannabis industry, and Mind Medicine (MNMD -0.21%) is one investable company at the forefront.
The biotech, also known as MindMed, is in early stages of working on multiple drugs that could potentially hit the psychedelics market. But with no revenue, mounting losses, and a ton of risk, should investors take a chance on the stock?
The opportunities are massive
MindMed is developing drugs that can treat many different areas, including depression, addiction, ADHD, and anxiety. And those are some big markets to tap into. The depression drug industry alone is worth an estimated $9.6 billion, followed closely by the ADHD market at $9.5 billion. Anti-addiction medication is a $5.8 billion industry and the anti-anxiety market is worth $4.7 billion.
Currently, the company has multiple clinical trials under way, including its LSD experimental therapy, Project Lucy, which is entering phase 2b trials. It is also entering phase 2 trials for LSD microdosing (Project Flow) and a drug for opioid withdrawal (Project Layla). Last month, MindMed also announced the start of Project Angie, which will look at how effective psychedelics, specifically LSD, are in treating pain.
The company is also working on developing patents and intellectual property. One such example is an LSD neutralizer which aims to stop the hallucinogenic effects of the substance in under 30 minutes. This can help improve the experience for patients while focusing on the medical benefits, not unlike the medical marijuana market where the focus is on wellness rather than achieving a high.
Patience is a requirement for any serious investor
For a company that doesn't generate any revenue, investors need to be prepared to wait years before there's even any hope of profitability. In 2020, Mind Medicine reported total expenses and losses of more than $35 million. As of March 31, it reported that its cash balance was up to $160 million and that for the quarter it burned through just $10 million to fund its day-to-day operating activities. It's a good sign that the business isn't bleeding too much money and that its cash balance is healthy enough to support its operations. But as the company gets larger and gets deeper into development, both its administrative costs and expenses related to research will likely rise. And so while it may look to be in good shape to fund potentially a year's worth of operations (or more), investors shouldn't assume that to be the case.
Even if it can fund a year or two, that still might not be long enough for the company to start generating revenue to curb the cash bleed. Many of the company's phase 2 trials won't be completed until 2022 or later.
And success in early-stage trials isn't a guarantee that a drug will hit the market. The probability that a drug will pass through all clinical stages successfully and obtain eventual approval is just 20.9% for non-oncology drugs. There is a 66.4% likelihood that they will be able to move from phase 1 to phase 2, but only 48.6% of those drugs will move on to phase 3. And even getting to that stage still doesn't make approval a sure thing, as more than 40% of those drugs will still end up failing.
Should you take a chance on MindMed
Investing in a company that isn't generating any revenue is always going to be a significant risk. And while it's great that MindMed is working on medicine that could really help people with depression, anxiety, and other conditions, that alone isn't going to mean the company and its drugs will generate any revenue. Without a product it can sell today, the company is going to remain a risky buy and a long shot. Unless you have a high tolerance for risk and are willing to accept the possibility you could lose your entire investment, you should avoid MindMed. While the potential returns could be significant for the stock, so, too, is the risk.
If you want to bet on the psychedelics market, a safer option would be to invest in the Defiance Next Gen Altered Experience ETF. The fund holds MindMed in its portfolio along with other companies from the cannabis and psychedelic industries, enabling you to diversify your overall risk and ensure you aren't putting everything on one very risky stock.