When a company is developing a novel therapy, sometimes good news takes an unusual form. For Compass Pathways, (CMPS 1.02%) whose COMP360 program aims to address treatment-resistant depression (TRD) with a combination of psilocybin and clinician-led psychological support, that's doubly true.

So when it reported some unexpected and positive data from an exploratory phase 2 clinical study on July 17, it's no surprise its shares jumped more than 6%. Let's take a moment to digest what the study found, and why it's yet another green flag for this biotech's future.

One less barrier to getting treated

Psychedelic therapies for treatment-resistant depression like COMP360 don't work via precisely the same biological mechanisms as first-line antidepressant medications, which are selective serotonin reuptake inhibitors (SSRIs). That's part of the reason why they may be a more effective treatment. But it's also a bit of a problem. 

Traditionally, ongoing or past use of SSRIs as well as some older antidepressant drug modalities is thought to diminish the subjective effects of psychedelic drugs. Furthermore, with simultaneous administration of SSRIs and psychedelics there is a risk of patients experiencing serotonin toxicity, a diffuse side effect that can range in intensity from barely noticeable to lethal depending on the doses and individuals involved. And by targeting treatment-resistant depression instead of merely major depressive disorder (MDD), COMP360 is intended for people who are very likely to be under current or historical treatment with antidepressants like SSRIs.

In other words, it's a huge risk for Compass that COMP360 is rendered less effective, or perhaps useless altogether, as a result of the other medications that its target patient population are taking. Plus, the risk of serotonin syndrome could be sufficient to discourage patients from trying to get a referral from their practitioners in the first place, not to mention making prescribers more leery about recommending the therapy. 

So when the biotech reported on July 17 that its exploratory open-label phase 2 study of 19 TRD patients had found that SSRIs did not actually reduce the effectiveness of COMP360, at least some investors breathed a sigh of relief. What's more, per the study's results published in the Neuropsychopharmacology journal, co-administration of an SSRI and COMP360 didn't lead to serotonin syndrome. In fact, the combination appeared to actually slightly reduce the severity of the side effect profile typically associated with psilocybin treatment.

That's great news for Compass, because it means patients on SSRIs can still get the full benefits of COMP360. Clinicians now have another assurance that the combination is safe to use. In total, this development paves the way for an expansion of the addressable market beyond what was previously assumed. 

Quite a few hurdles before the finish line 

Despite the favorable study results, buying Compass stock isn't the right move for everyone.

It's a pre-revenue biotech that still has substantial clinical testing to do with COMP360 before it has a chance to be approved for sale. Though it had $117 million in cash and equivalents as of the first quarter, with negligible debt, it could still eventually run out of money for research and development. Beyond that, in the U.S. psilocybin remains illegal at the federal level and either tightly restricted (even for medicinal use) or illegal at the state level.

Therefore, even if the company succeeds in proving that COMP360 works and is safe, it could still slam into regulatory barriers that preclude it from making any money. And its business model, which requires patients to get psychological support from trained clinicians on multiple occasions, including during their treatment with psilocybin at a specialized site, is not guaranteed to be profitable given all of the overhead costs. This is a very risky investment, even in light of the new data.

But if Compass can keep turning out good data like it's done so far, and if its efforts to work with regulators continue to succeed, it could make shareholders wealthier over the next few years. And commercializing COMP360 for any indication would be a massive step that'd cement its place as a leader in the psychedelics space, too.

So if you're willing to buy shares of a biotech that's a bit riskier than the average member of its class, now is a good time to do so, but be sure not to bet the farm just yet.