Benzinga Global Small Cap Conference: How Do Investors Pick Winners In The Psychedelics Space?

Simeon Schnapper, a managing partner at JLS Fund, took 30 minutes from his busy schedule to share his insights into what makes a winner in the psychedelics space.

“I don’t think a lot of people fully understand what psychedelics are, I know there’s companies going public right now, there’s great investment opportunity, but also great opportunity to bend the arc of history,” said Schnapper, in his presentation at the Benzinga Global Small Cap Conference on Thursday.

JLS Fund, an investment firm that sits at the intersection of psychedelics and technology, holds shares in companies such as MindMed MNMD, Atai Life Sciences and Wesana Health WESA, which went public earlier this week.

New Trends In Psychedelics: Schnapper sees a few trends picking up in the sector. One involves M&A, as smaller companies are acquired by larger public or soon-to-be-public, companies. Another trend is the integration of digital therapeutics into business models.

Electronic devices that can amplify or emulate psychedelic experiences are also something to look at, Schnapper said.

“From the virtual reality side, we’re tracking 38 plays that integrate with some modality of psychedelic psychotherapy. On the wearables side, that’s in the thousands.”

But in order to choose investments, Schnapper said JLS Fund looks at grey markets as a window into the future.

“Decriminalization is one of those signals that we look at. We say, ‘well what’s happening on this side, how is it formulating between the black market and the regulated market?’ That really moves the needle.”

In the past year and a half, a number of jurisdictions within the U.S. approved decriminalization measures for naturally occurring psychedelics, including Oakland, Denver, Ann Arbour and three suburbs of Detroit. Oregon was the first state to remove penalties on the use of all drugs, and launched a program for licensed psilocybin therapy in late 2020.

Patents In The Psychedelics Space: Schnapper referred to the issue of intellectual property, a topic that has become a bone of contention in the sector in recent months.

The investor finds it useful to divide the space in two, in order to address the patents issue.

In one category, Schnapper places classical psychedelics like LSD and psilocybin as these don’t have IP protection since they’re either natural molecules or synthetic compounds discovered decades ago, with expired patents.

“Currently the mindset is ‘we have to have IP to get investors in’,”  Schnapper explained, though he doesn’t fully agree.

In order to get IP for classical psychedelics, companies develop protocols around the therapeutic application of a particular molecule.

This is used to create “either competitive edge, a mote, some might even conjecture a monopoly.”

On the other hand, there are novel molecules, which are newly discovered compounds created by biotech companies working in research today.

These involve “developing entirely new compound entities,” that can offer greater safety, improved dosing or better shelf life.

“That’s the debate, and the jury is currently out...not just figuratively,” Schnapper said.

“As you come into any nascent industry with IP, you get into litigation. Right now it’s contentious, nothing’s public, but it’s something investors should look at very heavily.”

Schnapper recommends that investors review which companies have made patent claims and which actors in the space could litigate against those claims.