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Using psychedelic substances is nothing new. In fact, psychedelics have their roots in ancient culture where the super or ‘magical’ mushrooms from which they are derived were worshipped. In the 1950s and ‘60s, there were a number of people experimenting with them for recreational purposes, and for treating alcoholism and other conditions, mainly in informal situations.
And although the more formal trials were many (more than 40,000 people took part in them), they weren’t of the same standard that the FDA approval process currently requires. Additionally, their association with the counterculture led to their condemnation and stigmatization.
By 1968, LSD was banned in all states and with the passing of the Controlled Substances Act in 1970, there was also pressure on psilocybin, the safest psychedelic so far, because of limited accepted evidence of its efficacy and its potential for abuse. This meant that institutional funding for research wasn’t available and it was left to individual donors to take it forward.
In 2004, the University of California (UCLA) started clinical trials of psilocybin on advanced-stage cancer patients with pain, anxiety and depression. In 2006, Johns Hopkins University, which has been researching psilocybin since the 1970s, issued a publication that led to the establishment of a separate research unit for the purpose. In 2020, the university established the Center for Psychedelic & Consciousness Research that has published over 27,000 articles on psychedelic drugs, including a thousand on psilocybin, the most-researched psychedelic substance.
Pharma companies also tasted some success around then. In 2018-2019, two companies, Johnson & Johnson (JNJ) and Compass Pathways (CMPS), got FDA approval for their therapeutics for treatment-resistant depression. JNJ’s Spravato was a ketamine analog while Compass’s was a psilocybin treatment. The interest in alternatives has increased over the past decade as existing lines of research aren’t yielding the desired results.
In fact, 30% of depression patients don’t respond to currently available treatments. Companies have dramatically reduced their research budgets in these areas. So most of the nearly 550 grants received for psilocybin research have been for its efficacy in treating mood and anxiety disorders such as cancer-related psychiatric distress.
But the current level of excitement is partly related to the recent funding that Johns Hopkins has received from the National Institute of Health’s (NIH) National Institute on Drug Abuse to research its ability to get long-time smokers off the habit.
Johns Hopkins did a clinical study on psilocybin back in 2014 and found remarkable success. The drug was given in 2 to 3 sessions, the first being on the date the subject quit smoking; the second was two weeks after that and the optional third one was after eight weeks.
Before administering, the patient was put on a couch with dark glasses and music playing; and was given some idea about the experience. They returned each week for the next 10 weeks to have their breath and urine tested and again after six months and then 12 months.
It turned out that after six months, 12 out of the 15 smokers had abstained from cigarettes for at least a week. Moreover, 67% had abstained up to 12 months while 60% had not smoked for at least 16 months. Since it was a small group, further testing was deemed necessary.
With the NIH now providing $4 million, Johns Hopkins will lead a multisite study in collaboration with the University of Alabama and New York University to explore potential impacts of psilocybin on tobacco addiction.
So what exactly is a psychedelic?
It is a class of hallucinogenic drugs that trigger different states of consciousness by binding to serotonin receptors, which modulate brain circuits involved in sensory perception and cognition. The most common psychedelics in use are mescaline, LSD, psilocybin and DMT.
Investing in the Phenomenon
Psychedelics are often compared with cannabis since both are used widely for recreational purposes. And since marijuana has generated big gains, there’s a similar expectation of psychedelics as well. However, marijuana is a much more mature market. It’s already legal in many states and some of the companies are also profitable.
On the other hand, psychedelics are still illegal in most places across the world, and certainly in the U.S. And despite all the research, actual products from companies could take a while to come to market, if at all they do.
3 Players Worth Considering
It’s possible to spread your risk in psychedelics by going for an ETF. And there are currently a couple available.
One is the Defiance Next Gen Altered Experience ETF PSY, which made its debut in May 2021. The first US-listed psychedelic ETF, PSY tracks a market-cap-weighted index of North American companies focused on psychedelics, medical cannabis and ketamine for medicinal and health treatment purposes. The Defiance Next Gen Altered Experience ETF is focused on securities with at least 50% of their revenues coming from legal activities and is reconstituted and rebalanced semi-annually every March and September. It has an expense ratio of 0.75% and does not pay a dividend.
The second is a psychedelics pureplay called AdvisorShares Psychedelics ETF: PSIL. PSIL is an actively managed ETF that seeks long-term capital appreciation by investing at least 80% of its net assets in securities of companies that derive at least 50% of their net revenue from or devote 50% of their assets to psychedelic drugs and derivatives that have economic characteristics similar to such securities. It has an expense ratio of 0.68% and does not pay a dividend.
Or, you could place your bets on what are, at the moment, the most attractive psychedelic stocks-
ATAI Life Sciences N.V. ATAI
ATAI Life Sciences is a clinical-stage biopharmaceutical company aiming to transform the treatment of mental health disorders with previously overlooked or underused therapies, including psychedelic substances and digital therapies. It is headquartered in Berlin, Germany.
ATAI has engaged in a number of acquisitions and invested in several variable interest entities (VIEs), in which it is the primary beneficiary. Its acquisitions include PsyProtix, Psyber, InnarisBio and Neuronasal.
While the 21 cent loss that ATAI reported in the last quarter was better than the estimated 28 cent loss, the estimated loss for 2021 and 2022 have not improved materially in the last 90 days. The 2021 estimated loss is currently 86 cents, down from a loss of $1.05 estimated 90 days ago. For 2022, the estimated loss has gone from $1.15 to $1.11.
COMPASS Pathways plc CMPS
COMPASS Pathways plc is primarily involved in researching and developing psilocybin therapy for end-of-life anxiety and the manufacture of psilocybin for research. Given the significant gap in treatment for mental illnesses, it is particularly focused on the development of psilocybin therapy for treatment resistant depression (TRD). It started clinical trials for the purpose in 2017. However, later stage clinical trials are still some way off, only after which will it be able to apply for regulatory approval, to be followed by commercialization and sales. COMPASS Pathways operates principally in New York, USA and is headquartered in London, UK.
In the September quarter, COMPASS Pathways did better than expected, with its 38-cent loss coming in much stronger than the estimated 50 cents. The expected loss per share for 2021 is down from $1.87 to $1.72 in the last 90 days while the loss for 2022 is down from $2.29 to $2.24.
Field Trip Health FTRP
Founded in 2008, Field Trip Health Ltd. is involved in the development and delivery of psychedelic therapies in North America. The company operates Field Trip Centres that provide these therapies. In addition, it also offers Field Trip Digital apps. In the Field Trip Discovery division, the company investigates is developing next generation of psychedelic molecules Field Trip Health Ltd. is based in Toronto, Canada.
In the September quarter, Field Trip’s results were slightly short of estimates. The estimated losses for 2022 (ending March) and 2023 are also edging up. For 2022, they’ve gone from 66 cents to 70 cents and for 2023 they’re up from 76 cents to 79 cents.
The NIH funding ushers in a new era of legitimacy for psychedelics and to that extent this may be a good time to commit some of your money. But given that research is still ongoing, mainly at universities, that big pharma is yet to make big commitments and that legalization will of course take its own sweet time, it’s going to be a long wait.
3-Month Price Performance
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atai Life Sciences N.V. (ATAI) : Free Stock Analysis Report
COMPASS Pathways PLC Sponsored ADR (CMPS) : Free Stock Analysis Report
Defiance Next Gen Altered Experience ETF (PSY): ETF Research Reports
Field Trip Health Ltd. (FTRP) : Free Stock Analysis Report
AdvisorShares Psychedelics ETF (PSIL): ETF Research Reports
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