Otsuka Holdings (OTSK.Y -0.90%), one of the biggest pharmaceutical companies in Japan, is getting into the business of psychedelic therapies. On Sept. 1, it announced that one of its U.S. subsidiaries plans to acquire Mindset Pharma, a Canadian biotech specializing in psychedelics, for roughly $58 million in cash.
The deal marks the first serious entry of a major global pharmaceutical player into the psychedelics market. The boards of both businesses have given the green light to proceed, and the transaction is expected to close in the fourth quarter.
But even if you're interested in capturing some of the possible growth that Otsuka could derive from this deal, it would be better to hold off on purchasing this stock for now.
Waiting to see what the clinical trials reveal
Otsuka and Mindset first initiated a collaboration on psychedelic drug development in early 2022, seeking to find a therapy for treatment-resistant depression (TRD) and post-traumatic stress disorder (PTSD). Those two indications are popular targets for other psychedelics developers, such as Compass Pathways, which currently has two late-stage clinical programs, one for TRD and one for PTSD. The fact that an established pharma conglomerate calculated that those indications were the ideal ones to target with its first attempt to compete in psychedelics is a vote of confidence in Compass' approach. It also means that Otsuka won't be venturing into wholly unknown territory, which somewhat de-risks the endeavor.
The company will also continue with Mindset's lead program in phase 2 trials, which is also seeking an indication for major depressive disorder (MDD). There's no knowing precisely how clinical trials will go, and it'll be at least a couple of years before they are concluded and the data is revealed. But, investors can rest assured that Otsuka has more than enough money to throw at the program, even in the event of a setback. It has $3.6 billion in cash, equivalents, and short-term investments, and in 2022 its free cash flow (FCF) was $909 million.
There isn't much riding on commercializing psychedelic therapies for Otsuka, either. Last year, its top line was more than $13 billion, up 14% from five years prior. And therein lies the biggest reason not to buy this stock right now. Otsuka simply isn't growing very quickly whatsoever, and this acquisition won't change that for at least a few years. A lot could happen between now and then in the psychedelics space, and in fact, a lot will need to happen for it to ever make a dime from these specific efforts.
Key regulatory barriers remain for Otsuka
Perhaps the largest thing that would need to happen for Otsuka to have a chance of realizing even a dollar in sales from its psychedelics programs is a massive shift in the legal and regulatory landscape. Psychedelics aren't legal for medicinal use in the U.S. or Japan, and their use as therapeutic drugs is strictly limited in Canada. It won't be possible to commercialize any drug of this type until that changes in at least one major market.
As of now, it does not seem likely that Japan will be the country to loosen its psychedelics laws first, though the U.S. and Canada could be. There isn't much reason to hope that Otsuka's clinical trials will be done contemporaneously with legal barriers easing. So it's entirely possible that it could wind up sitting on a candidate with proven efficacy, but be unable to submit it to regulators for approval until (and unless) the laws are changed.
There's simply not much that's worth investing in Otsuka right now to risk that outcome, even if it would be no more than a minor inconvenience to a business of its size. And while it's true that the pharma company has a full pipeline of programs outside of psychedelics that might yield results sooner rather than later, including a bevy of traditional candidates aiming to treat psychiatric diagnoses, the same could be said for many other pharma sector investments.
But do keep an eye on this stock for the longer term. If clinical trial data comes out that makes it clear that Otsuka's psychedelics programs offer dramatically better results than its competitors' TRD and PTSD treatments, and if legislators can be convinced to open a path for psychedelics' medical use, then within the next few years, Otsuka could become an attractive purchase.