After a sharp rally in 2021, most stocks in the biotech industry's psychedelic segment are a shadow of their former selves. Thanks to a brutal bear market and a lack of attention-grabbing successes among the drug developers, investors who held on to their shares have largely lost their shirts in the process -- including yours truly.
Nonetheless, there's still a possibility of psychedelic therapies for tough-to-treat mental illnesses eventually making it out of the clinic and onto the market. That'd make their daring investors of today quite a bit richer (fingers crossed). And, as a result of a recent regulatory change to the nitty-gritty bureaucracy of how the U.S. healthcare system tracks procedures and therapies, one of the sector's many obstacles to success has now been removed. Here's what you need to know.
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What changed and why it matters
On May 2, COMPASS Pathways (CMPS -1.32%) announced that the American Medical Association (AMA) has given the green light for three new current procedural terminology (CPT) codes for psychedelic therapies. In case you weren't familiar with that particularly obscure tidbit of the U.S. medical system, healthcare providers use those codes to classify what treatments they administer to their patients.
Therefore, the three new CPT tags are a key piece of the framework that will be necessary for drug developers to bill insurance plans for therapist-monitored psychedelic treatments. After all, without securing the bureaucratic details that insurers need to process claims for coverage, the cost of psychedelic therapies might well be unapproachable for most of the patients who would benefit.
COMPASS had lobbied for the addition of the new codes in conjunction with a subsidiary of the Multidisciplinary Association for Psychedelic Studies (MAPS) nonprofit, a well-known advocacy and research organization within the psychedelics space. It'll be some time before the details surrounding the codes are finalized and won't be published in full until July of this year. Moreover, it won't go into effect until January 2024.
There are still barriers before these stocks are safe enough to be investable
While the fresh CPT codes won't exactly supercharge COMPASS' stock, or any other company's, its competitors, like Atai Life Sciences, will probably benefit from the additions too, assuming they can ever get regulators at the U.S. Food and Drug Administration (FDA) to approve their medicines for sale. Businesses in the space might not even have regulatory approval to commercialize their therapies until well after that deadline, assuming they ever attain it.
Still, if you're looking for an investment, COMPASS Pathways remains the most advanced company in psychedelics in terms of the maturity of its flagship pipeline program. Its psychedelic treatment called COMP360 is based on a combination of psilocybin and guided talk therapy, and it's being investigated in a pair of phase 3 trials for its usefulness in treatment-resistant depression (TRD).
Per the data from COMP360's phase 2b trial, it appears to be quite effective at reducing patients' symptoms of depression for at least 12 weeks after treatment, and there doesn't appear to be a high prevalence of severe side effects. In other words, it's highly promising, and it could be a revolutionary treatment for TRD. The first analysis of the data from one of those trials will be reported in summer 2024, with the second to publish in mid-2025.
Of course, even though COMP360 is designated as a breakthrough therapy by the FDA, the active ingredient, psilocybin, remains federally prohibited and highly restricted for all purposes. That'll need to change if COMPASS or any other company is ever going to make a dime from sales of their therapies. Plus, as pre-product biotech companies running clinical trials that are at a significant risk of failure, all psychedelics stocks are inherently highly risky even before considering the additional hurdles that they need to overcome to commercialize anything.
So don't go rushing to buy shares of a psychedelic stock as a result of the new CPT codes. And unless you have a tolerance for risk that's so high it's in the stratosphere or perhaps even low-earth orbit, you probably should look elsewhere for exposure to upside for at least the next year or so.
