As a psychedelic therapy developer, Compass Pathways (CMPS 1.99%) is on the cutting edge of innovation in treating mood disorders. That makes it an exciting, if quite risky, investment.

But a lot of that risk burden could be alleviated soon, thanks to a pair of upcoming catalysts. If that happens, the stock has a high chance of skyrocketing. Let's take a moment to understand both of these two looming key events.

This biotech's momentum could soon pick up tremendously

Compass' lead program is called COMP360, and for now it's being investigated in late-stage clinical trials for its utility in helping people with treatment-resistant depression (TRD), post-traumatic stress disorder (PTSD), and anorexia.

COMP360 is a therapy system that involves treatment with the company's formulation of the drug psilocybin, the active ingredient found in psychedelic mushrooms, with concomitant in-person psychological support from trained therapeutic staff, as administered at a qualified treatment facility with therapy spaces that are constructed to certain specifications. The idea is that, by facilitating the patient's treatment with a stable therapeutic environment and supportive staff, COMP360 will be more durably effective at reducing symptoms than simply administering psilocybin alone would be.

In that vein, Compass is running two phase 3 trials testing its candidate for TRD. One of those trials will report its top line results in the fourth quarter, with the other trial reporting in mid-2025. If it publishes positive results later this year, it'll be building on an increasingly large and solid base of evidence that its therapy is actually safe and effective at addressing previously intractable cases of depression.

That would be a major catalyst for the stock.

External developments could have big implications

The second catalyst is a bit different in nature.

Compass isn't the only biotech working on developing psychedelic medicines. Lykos Therapeutics is a for-profit public benefit corporation (PBC) that aims to commercialize psychedelic therapies with an eye toward the greater good, rather than shareholder returns. On June 4, it will meet with an advisory committee from the U.S. Food and Drug Administration (FDA) about whether its lead program, a combination of MDMA and psychological support that's intended to treat PTSD, should be approved.

The advisory committee's vote is non-binding, but a favorable outcome would bode well for the next, more important vote. On Aug. 11, a different committee at the FDA will issue a binding vote about whether to approve its program. Given that the FDA has already granted Lykos priority review of its application, the odds of an approval are looking good right now.

If Lykos gets the final approval, it will then proceed to commercialize the very first psychedelic therapy using MDMA, as well as the first for PTSD. The implications are massive, including for Compass Pathways.

Every psychedelic medicine program in development will face less regulatory risk than they carry at the moment, when it is unclear whether the FDA will be willing to actually allow any psychedelic therapy to reach the market. In other words, getting an approval will prove to investors that the entire class of medicines is more than something theoretical, and that they may have real economic value.

It may also be the case that Lykos' therapy will compete with Compass' PTSD program for market share. But given that psychedelic therapies, in general, are not considered first-line treatments for any conditions as of yet, there is still a good chance that Compass will be able to secure a slice of the market, as adoption of any approved therapies will probably be slow at first.

Take care if you decide to invest

Compass Pathways is the least risky psychedelics stock because it's the closest to commercializing a therapy program and reporting sales revenue for the first time. With that being said, it is not the right stock for everyone, and if you don't usually prefer to invest in highly risky biotech stocks, it probably isn't for you.

The company is essentially in a race against time to bring in sales before it runs out of money to spend on research and development (R&D). As of the first quarter, it had $263 million in cash, equivalents, and short-term investments. Its trailing 12-month (TTM) operating expenses are just over $132 million. Therefore, the company should have enough money to survive long enough to conclude the phase 3 trials and submit its approval packet to regulators.

If something goes wrong along the way, or if regulators rebuff its approval request in a couple of years, it can probably raise more money via debt financing to address their concerns and try again. So if you can stomach the risk, it's worth buying if you're in the market for a stock that could grow significantly over the next few years.