Just as the idea of using psychedelic medicines to treat mental illnesses is gaining traction in society, psychedelics-focused biotech companies are becoming legitimate and lucrative investments that could help your portfolio in the future.
Before you can appreciate which psychedelics players are worth investing in, you'll need to get a feeling for where the industry is going and how it's changing. On that note, there are three trends that are particularly important to sharpen your psychedelic stock-picking chops, so let's take a moment to appreciate each of them.
1. Capital is getting (a lot) harder to come by
Perhaps the most frustrating trend for investors considering psychedelic stocks is the rising cost of borrowing money. As inflation surges in the U.S., the Federal Reserve is trying to stop it by hiking the federal funds rate, which ultimately determines how much interest companies need to pay when they take out fresh debt. Higher rates equal more expensive borrowing costs, which in turn contributes to the market's fierce dislike of growth stocks since they are most likely to need extra capital to compete.
Businesses that aren't profitable face an especially difficult fundraising environment. That's true for all of the existing public psychedelic biotechs engaged in drug development, including such industry leaders as Compass Pathways (CMPS -1.32%) and Atai Life Sciences (ATAI 5.35%). Atai's new term loan facility, worth up to $175 million, has an interest rate above 10% -- and it could rise even higher if the Fed keeps hiking.
Neither company has significant debt, but they're still in a weaker position financially than before the bear market. After all, Atai's shares are down by 74% in the last 12 months, whereas Compass' are down by 69%. Doing another public offering of shares to get cash doesn't look very appealing after such a sharp downturn, and many other psychedelic businesses are in exactly the same boat.
The trend of decreasing access to capital will likely reverse sometime after the Fed stops its rate hikes. But for now, the takeaway is that investors should prefer competitors with plenty of cash relative to their annual expenditures, especially money spent on research and development (R&D), as they may need to make their limited quantity of dollars last for a while.
2. The legal status of psychedelics is shifting
Full legalization of psychedelics for medicinal use -- or any use -- is still quite far off, but there are a few recent steps and a few ongoing discussions that suggest things are moving in the right direction. Specifically, since 2020, Oregon has decriminalized psilocybin, and other decriminalization bills have since been floated in Massachusetts, Florida, Georgia, New York, and elsewhere too.
At the federal level, politicians on both sides of the aisle in the House of Representatives have proposed amendments to the National Defense Authorization Act that would make it easier for veterans to get treatment with psychedelics for mental health issues like post traumatic stress disorder. The same proposed amendments also called for the Department of Defense to investigate the merits of psychedelics for treating such conditions.
While it's too early to say exactly what will happen and when, it is very likely that at some point in the near future there will be psychedelic companies working in concert with the government on therapy development and clinical trials. And competitors that get a government contract will probably ultimately be better investments.
3. Clinical protocols and technologies are evolving
Psychedelic medicines don't yet have a long history of use within the Western medical establishment, and that means the ongoing development of certain technologies and the discovery of the most effective clinical practices will have a big impact on how effective those medicines are.
For example, Atai is running early-stage clinical trials that aim to shed light on how effective technologies like a mobile phone app might be for potentiating the pharmacological components of its psychedelic medicines. It's also making a machine-learning enabled drug discovery platform and investigating whether an intranasal drug delivery system might be useful.
Other companies are developing neuroimaging headsets to measure signals from patients' brains in real time during treatment, which could help to assess which therapeutic approaches are working and which aren't. For its part, Compass is working to improve its training program for therapists, which could prove to be a crucial factor for their efficacy.
Expect clinical practices to be a competitive differentiator moving forward. After all, figuring out the safest and most efficient way to deliver therapy with psychedelics will require a lot of experimentation, and at the moment, it looks like only the larger companies have enough resources to investigate in enough detail.
