Introduction
We may be at the infancy of the next big investment frenzy similar to cannabis before 2018. Think back to how the cannabis craze created a 50x bagger at the time with Canopy Growth (CGC). However instead of the green leafed plant, we are focusing in on a different vegetable, the mushroom.
In 1970, the Controlled Substances Act was passed and signed into law by Richard Nixon. Within the act, it listed Psilocybin (a natural compound found in certain magic mushrooms) under schedule 1 of controlled substances the most severe classification. Under this classification the drug is not safe to use even under medical supervision.
For over 40 years, Magic Mushrooms were illegal to possess, sell, transport and/or cultivate. It was not until 2018, when the Right to Try Act law was passed to allow terminally ill patients to have access to experimental drugs that have passed Phase 1 testing but had not been approved by the FDA. With this law, Psilocybin has been administered to terminally ill people whom face severe depression. As was seen with the legalization of Cannabis, society’s view on certain drugs have softened. In fact, recently our neighbors to the north in Canada has also allowed 4 terminally ill patients to have access to Psilocybin to treat anxiety and depression.
Mental Health and End of Life use
Without a doubt COVID-19 has impacted our way of life. According to an article by CNBC, Google trends unsurprisingly have seen record high searches for assistance dealing with mental health and anxiety. Even without COVID-19 the mental health industry was growing at 4.2% a year. With uncertainty around job security due to this pandemic, this growth rate will likely accelerate. On the Clinicaltrials.gov, there are currently 41 active/ongoing studies right now exploring Psilocybin. The 41 studies are tackling many different use cases of this drug including the following:
- Depression and anxiety
- Stopping eating disorders
- Obsessive Compulsion Disorder
- Headaches
- Alzheimer
While this is anecdotal evidence, one of the 4 terminally ill candidates had positive results from the usage to treat anxiety.
Upcoming Catalysts
Outside of the science and the ongoing FDA trials, this industry has three tail winds that could help get Psilocybin become more mainstream and accepted by society.
1) Taxation
As of the writing of this article, the government has injected $3.7 trillion of stimulus into the economy, with a fourth bill on the table requesting at least another $2 trillion. With all this money being spent by the government it is no reason that finance executives at companies are anticipating higher taxes. A way to mitigate some of these higher taxes are expanding revenue sources for government. Since 2016 when legalization of marijuana occurred, Colorado has collected almost $1.5 billion of marijuana taxes. Annualized it is about $300 million a year. The Governor of Colorado has been quoted saying that “It’s creating tens of thousands of jobs and tax revenue for the state”. This statement is backed by data as we can cities like Denver be able to track how much that money is being put back in their community. Of the $32 million that Denver receives from the State for their share of Marijuana sales, approximately $9 million is related to the cost of business (enforcement, regulation and education). This leaves $23 million generated from marijuana tax spent on other community improvements. Denver’s consolidated budget is $1.5 billion, of which 1.5% is relieved through marijuana. This same formula could be applied to mushrooms as well.
(Source: City of Denver)
2) “Defund” the Police
The last few months have been filled with protest against the police. While I won’t touch on the political issue of police brutality, these protests have increased the pressure from citizens to their local governments to reduce the powers and budgets of police. In fact recently, the defund movement has also spread to drug enforcement agents as well. According to the FBI, in 2018 there was approximately 1.6 million arrests related to drugs, of which 86.4% is for possession and 25% is related to “Other dangerous nonnarcotic drugs”. The ongoing pressures to remove certain powers from the police could end the war on drugs and thus further the social acceptance of drug culture.
3) Election in November and other movements
Not only is it the presidential election in November, but the District of Columbia and Oregon are voting on the decriminalization of mushrooms. They would join the state of Denver and the cities of Ann-Arbor, Oakland and Santa Cruz as areas where it has already been decriminalized.
Some ongoing efforts to legalize fully in the state of California were stopped earlier this year due to the pandemic. As the state does not accept online signatures, all petitions have been halted. This similar situation impacted Vermont as well where a bill was introduced in January, before the pandemic, being deferred to deal with COVID.
How to invest in this space?
The unfortunate part is that there are very few reputable public companies to invest in this space. There is one that does stand out. However before we discuss the play, it is important to point out that this is a purely speculative stocks similar to any other biotechnology stocks. They have next to no revenues and have been raising money through additional debt or stock offerings to finance their Psilocybin research.
Compass Pathways (CMPS)
Debuting on the NASDAQ a few weeks ago on September 18th, the stock has doubled the IPO price of $17, now trading at $35. This is the company backed the billionaire Peter Thiel whom is famed for his track record with venture capital such as Facebook (FB), PayPal (PYPL), and Palantir (PLTR).
Currently they are in phase 2B trials for their lead candidate of using Psilocybin in treatment resistant depression. They are not scheduled to report results from this trial until mid to late 2021.
From a liquidity perspective, they had $67.6 million of cash at the end of June based on their prospectus. From their IPO they raise approximately $115.6 million. They should have approximately $183 million of cash in hand. Looking at their cash flow statements, in 2019 cash outflow for operating and investing activities was $17.9 million. As of the first half of 2020 cash outflow is $11.3 million (annualized $22.6 million). They currently anticipate phase 2b trails and other research and clinical costs to be around $96 million. This would leave them with $87 million to complete Phase 3. Below is a study submitted to the US Department of Health and Human services which researched what the average clinical trial costs based on therapeutic area. Looking at pain and anesthesia area we can see that Phase 3 trials typically cost 3 times as much as phase 2 trials. If this trend also applies in this scenario it would require almost $300 million to complete phase 3. It is likely that Compass Pathways will need to do a secondary offering of shares if Phase 2b trials are successful.
(Source: Eastern Research Group)
The Psychedelic Drugs market is expected to reach $6.85 billion by 2027. This contrasts to the North American Legal Marijuana Market Cap expected to reach $104.9 billion by 2027. This discrepancy of almost 15 fold gives the psychedelic industry room to grow. However this is contingent on both legalization and successful completion of FDA trials. Currently Compass Pathways has a market cap of $1.24 billion. It is the largest player in this space by a mile. The next largest players are Mind Medicine (OTCQB:MMEDF) with a market cap of $230 million, Revive Therapeutics (OTCPK:RVVTF) of $50 million and Numinous Wellness (OTCPK:LKYSD) at $27 million. An investment in Compass Pathways is essentially an investment in the entire industry given its size relative to its peers. If the projections for the Psychedelic industry is accurate than the upside is a six-bagger by 2027. However given the large amount of red tape and regulatory hurdles the downside is a stock worth nothing if there is no political will to change the perspective on psychedelics.
Conclusions
It is important to note that as we have seen with Cannabis, society has slowly become more accepting to drug culture. Mushrooms seem to be next in line in terms of the next drug to gain social acceptance. With many states and cities beginning the conversation to decriminalize mushrooms this could lead to a domino effect with other states following. Again the company I have recognized as a play in this space are both high speculative and unproven. They will likely need to do additional offerings or take on more debt to finance their research which could negatively impact stock performance. However due to a lack of public companies in this space, this is the play will likely be where investors pile their money should my thesis play out.
If investors want to play in this space, they should only allocate what they are willing to lose as this is a very speculative play. Upcoming catalyst for the Psilocybin industry going forward are as follows:
- November 2020 – Voting results of decriminalizing mushrooms in Oregon and District of Columbia.
- Mid to late 2021 – Compass Pathways Phase 2B trials
It is crazy to think that we have come such a long way since 1970 when the Controlled Substance Act was passed. But it is 2020 and crazy is the new normal. So perhaps mushrooms will be part of that new normal as well.
Disclosure: I am/we are long CMPS, MMEDF, LKYSD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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