After an unexpected vote at the Food and Drug Administration (FDA) on June 4, shares of psychedelics companies like Compass Pathways, Atai Life Sciences, and Mind Medicine fell sharply. But none of those businesses have any of their medicines under consideration for approval by regulators. Nor did the FDA or anyone else in the federal government issue a ruling that said therapies derived from psychedelic molecules are prohibited.
Here's what's going on and why it's likely to remain relevant for investors for at least the next couple of years.
What went wrong?
Despite many psychedelic drug candidates in clinical trials right now, there aren't yet any psychedelic medicines on the market since they have been subject to prohibition as a class for quite some time.
Lykos Therapeutics, a public benefit company (PBC), sought to change that by being the first player to commercialize its MDMA-based therapy for post-traumatic stress disorder (PTSD).
If you're not familiar, MDMA is known by the street names ecstasy or molly, and while still a Schedule I drug, psychedelic drug biotechs looking into its promise in addressing difficult-to-treat mental illnesses. The concept of the treatment is for patients to receive the drug alongside psychological support provided by a trained clinician, such that they can use its beneficial effects to help navigate the most emotionally difficult portions of their experiences.
Per the results of its phase 3 clinical trials published in the highly influential Nature Medicine journal, Lykos' approach helped patients to report fewer symptoms and thereby score lower on a few structured questionnaires that are designed to assess the severity of different aspects of PTSD. The cohort of the study that received only a placebo and psychological support did not experience anywhere near as many positive changes. Safety signals were as expected and as described in earlier-stage trials, with most side effects being mild and transient in nature.
In other words, on the basis of the data Lykos published, its therapy looks like it's more than merely promising. It's nearly as close to being proven as a candidate can get before it gets approved for sale by the FDA. In similar situations, the expectation would usually be that any remaining research and development (R&D) work would be related to polishing up the less-important portions of the drug product manufacturing protocols in preparation for commercialization.
However, on June 4, during an FDA's advisory committee considering whether to approve Lykos' program, regulators voted overwhelmingly against it on both of the questions under consideration. The first question was essentially whether the treatment is effective for PTSD; committee members voted 9-2. The second question was whether the intervention is worth the risk to patients; the vote was 10-1.
Despite their votes, committee members signaled that they weren't opposed to an MDMA-based therapy for PTSD in principle; only that more clinical research needed to be done to clarify a handful of efficacy, safety, and risk mitigation issues that they outlined. Many seemed to believe that Lykos' program was valuable and that it would probably eventually pass their standard.
The real test lies just ahead
The advisory committee's vote isn't binding, and the FDA will hold a binding vote with different committee members on whether to approve the medicine on Aug. 11. But it is rare for the members of the binding committee to disagree with the vote of the advisory committee. The balance is that Lykos will probably not succeed with this attempt at commercialization, though it could still make another attempt in the future.
So where does this leave the other psychedelic biotechs? In a word, nervous.
Compass Pathways, with an ongoing phase 3 clinical trial testing a different psychedelic molecule, psilocybin, in combination with psychological support, is the next-closest competitor to going before the FDA and asking for approval. Its candidate, COMP360, intended to help with treatment-resistant depression (TRD), is likely to face just as much scrutiny from regulators as Lykos' entrant was, and it is very probable that their focus issues will be similar. Studying regulators' objections to Lykos' application could help to reduce the risk of getting rebuffed.
Still, it's undeniable that psychedelics stocks are now on much thinner ice than they were before. The prospect of getting regulatory approval for their interventions is even more uncertain, and, as psychedelics are not yet a part of mainstream psychiatric medicine, the odds were already dicey. Furthermore, management teams are now doubtlessly questioning the significance of the FDA's seemingly positive commentary on psychedelic therapies in recent history.
What does this mean to psychedelics stocks?
The takeaway here is that psychedelics stocks are, unfortunately, even riskier than before, when they were the riskiest group in the world of highly risky pre-revenue biotech stocks. Conservative investors or those nearing retirement should steer clear until there is more clarity on how regulators' concerns are effectively addressed.
For the bravest, stick to the most mature players like Compass, as they're more likely to have the resources to react to the new information about what regulators are looking for.
