EXCLUSIVE: Insider's Peek At Mammoth Of Psychedelics VCs, Palo Santo: Investment Focus

(Part three of a four-part series)

See previous stories in this series: 

Insider's Peek At Mammoth Of Psychedelics VCs, Palo Santo's Investment Fundamentals & Specificities 

Insider's Peek At Mammoth Of Psychedelics VCs, Palo Santo, Public Market Valuations & Private Investment

The Palo Santo VC fund is invested in several Europe-based companies. Regardless of where they are located, these companies will often try to market their products in US and EU jurisdictions. So, from the prescriber and patient perspective, their exposure will be US, Canada, EU, Britain and Australia.

“We haven’t looked a ton beyond that,” said Palo Santo co-founder and life sciences expert Tim Schmidt. “Australia is certainly burgeoning, as well as jurisdictions where psychedelics are kind of in a gray area, but that’s not a corner of the market we really play in.” 

Both founders agree that, in the near future, effective antidepressants with fewer negative side effects will eventually emerge. They are also known as New Chemical Entities (NCEs): “Basically, there’s been this shift in our fund in the last year to really concentrate on NCEs, second or third-gen psychedelics where you’re improving upon the qualities of drugs to target indications to have fewer side effects and less neurotoxicity. And that’s something that, again, is a big differentiator for us, going that route”, said co-founder and long-time investor Daniel Goldberg.

As for percentages, Palo Santo’s portfolio focuses 80% on biotech but they look at the entire ecosystem and believe non-biotech investments are starting to become relevant. For instance, Journey Clinical, which is in the ketamine therapy business with a developed model including an open therapists’ network that allows patients to undergo ketamine treatment with their own therapist by having their doctor join.

This, Goldberg says, is a big differentiator, considering telemedicine. “They’re growing quickly because the need for that legal, current solution is big, but how you deliver that solution is key to efficacy, and also from an ethical standpoint –not having a company that’s just setting up ketamine therapy. We think there could be a long-term legal problem with some of those businesses.”

Immediate investment plans for the remaining 20% include emerging or pre-emerging ancillary services, which Schlidt says will have biotech exposure despite the fact that their business models are not traditional. 

On the biotech side, the kind of companies the founders are now considering investing in are usually later-stage, pre-clinical ones. “Hit to lead”, or “lead optimization” stages, where they have a drug candidate, there is some data on that candidate, and they've started to develop a pharmacological, pre-clinical profile.

The fund’s approach implies diving deep into the fundamentals of companies and assessing the pharmacology of the compounds.

“We do like to see that data. We see some companies kind of screening, they’re very early, they don’t really have a candidate, and that has tended to be a bit too early for our appetite at this point,” Schlidt explained.

“And then we’ll look at some that are in a clinical stage. We’re looking at one now which has generated Phase 1 data, for example. I think what’s interesting about anyone who’s in the clinic right now, anyone who’s generated clinical data, is working with some sort of a generic compound. When I say generic I use that loosely, it’s a molecule where there’s a lot of the primal drug: psilocybin, mescaline, DMT.”

Palo Santo founders say they are finding the space to be quite crowded, so they're shifting their focus toward NCEs. 

“And this model’s more defensible, where the mechanism of action has been tremendously de-risked. So some of those companies have entered the clinic, filed an IND with the FDA, and they’ll be advancing but haven’t generated clinical data yet. That’s sort of where we think our sweet spot is as a fund,” Schlidt concluded.

Next up: EXCLUSIVE Insider’s Peek At Mammoth Of Psychedelics VCs, Palo Santo: Market Subverticals & Some Informal Guidance

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