Are Psychedelics Stocks In Trouble Or Is The Market Reaching Maturity?

Long gone is the heyday of investor enthusiasm and easy access to capital that marked the launch of the psychedelics industry into the public markets.

In recent months, psychedelics stocks entered into a period of turmoil characterized by declining valuations and a generalized capital dry spell.

However, what might be seen as a period of struggle for psychedelics companies can also be interpreted as a market correction toward a more stable and less volatile period for the industry.

A setback for individual stocks could be a positive step forward for the sector as it moves towards the consolidation of its most powerful players, with less hype and more realistic expectations.

The Reasons Behind The Psychedelics Market Correction

Microdose’s Psychedelic Market Leaders Index, which tracks the 30 largest public psychedelic companies by market cap, began showing a steady downward trend in stock prices and company valuations in early November 2021.

Explanations for the general price decline of psychedelics stocks are multiple and complex, but one thing is for certain: the ongoing market volatility is not indicative of psychedelics’ ultimate and fundamental thesis.

The therapeutic potential of psychedelics continues to hold promise regardless of the market’s ups and downs.

In other words, “the volatility is explained by how young the market is, and not because the market is not going to succeed,” says Matias Serebrinsky, co-founder and general partner in PsyMed Ventures, a VC fund focused on psychedelics and other innovative mental health technologies.

Serebrinsky notes that most psychedelics companies went public less than one year ago and that valuations normally take time to settle regardless of the industry’s developments and external forces affecting it, which include a state of permanent global crisis that has led retail investors away from high-risk markets with a potential for the long-term growth.

“I don't have a reason for the downturn per se, exactly. But I can say people should be very long-term-focused and comfortable with extreme volatility,” said Dan Ahrens,COO of AdvisorShares Investments and portfolio manager of AdvisorShares Psychedelics ETF PSIL, an actively-managed ETF tracking the psychedelics sector.

“We're talking about companies that have only gone public in the last year or so. We're talking about very small, very volatile and very often companies that haven't had revenues yet,” says Ahrens, arguing that “these companies need to be judged on their pipelines and their intellectual property rather than balance sheet and revenue.” 

Striking A Balance

The core group of companies in the psychedelics sector is currently pushing psychedelic chemical entities through FDA approval. As opposed to traditional pharmaceutical companies that use their existing revenue to finance additional drug development, psychedelics companies were created from scratch, thus their revenue will not materialize until the first drugs receive approval. 

This puts the balance sheets for psychedelics companies in an almost permanent state of loss for the first few years of their existence.

Though PsyMed’s Serebrinsky points toward a broader trend affecting the entire biotech sector, of which psychedelics is only a small subset.

“What happened with psychedelics in the public markets, in my opinion, is not related so much with psychedelics themselves, but with a broader trend in biotech. If you see that all psychedelics stocks are down you might think ‘that’s because of psychedelics,’ but there’s a bigger story there. That’s something the retail psychedelics investor needs to understand.” 

The S&P Biotechnology Select Industry Index and Nasdaq Biotechnology Index, two indexes that track the biotech sector, showcase bear runs beginning in late October that follow a close path to that of psychedelics companies.

Survival of the Fittest

In a January interview, AdvisorShares’ Ahrens said he expected 2022 to mark a higher degree of separation between the companies that will lead the space in years to come and those that might get left behind, “as compared to 2021 when they simply traded on hype, potential and name.”

“Not every single company that goes public is going to be the top performer,” Ahrens told Benzinga, making reference to the IPO run of late 2020 and 2021, where at least 50 different psychedelics companies went public.

This prediction has already started to come true. On March 16, Mind Cure Health MCURF announced it was shutting down operations due to an inability to harness the capital required to execute its business plan.

MindCure’s decision involved the immediate dismissal of its entire staff, including all employees and C-suiters, with the exception of the CFO.

At the time of the announcement, MindCure’s cash position was CA$10.57 million ($8.33 million), with a market cap closing in on the $10 million mark.

Josh Hardman, founder and editor of Psilocybin Alpha, said he was expecting 2021 to be the year of consolidation in the psychedelics space, though his prediction never came to pass with the exception of isolated cases like Enveric’s ENVB acquisition of MagicMed Industries.

“I think that the public companies that are well-capitalized at the moment, that have a lot of cash on hand are in quite a good position to start acquiring smaller companies,” Hardman said in an interview earlier this year.

These include Atai Life Sciences ATAI, MindMed MNMD, Compass Pathways CMPS and GH Research GHRS.

But for those who are not in the select group that holds hundreds of millions in cash reserves, Hardman says, the motto for 2022 is “pivot or perish.”

Hardman pointed to the “huge amount of overlap at the moment in terms of companies looking at the same molecules or very similar molecules,” an overlap, he noted that also exists around indications.

“There's going to be a situation for a lot of these companies where they’re going to have to either pivot to a new molecule or a new indication, or a new value chain location or perish,” Hardman said.

Yet, as 2022 progresses, the market is showing that for many companies, there might not be anywhere left to pivot. As such, “be acquired or perish,” could be a more accurate description of the state of affairs for many small-cap psychedelics companies.

For the select group of publicly-traded psychedelics companies that managed to raise substantial amounts of cash before the winds turned headward, this period could be a storm they'll survive.

But given the objectively heavy costs of bringing any drug to market with the FDA (averaged at $985 million between 2009 and 2018), the ongoing capital dry spell could have a number of low-cap companies in the sector going the way of MindCure and closing their doors.

Photo by Marco Allegretti on Unsplash, Edited by Benzinga.