The psychedelics boom in healthcare is losing buzz as some companies struggle to pay their employees.

The psychedelics boom in healthcare is losing buzz as some companies struggle to pay their employees.

The Psychedelics Renaissance and the Trials and Tribulations of the Industry

The world of psychedelics has experienced a renaissance, fueled by Michael Pollan’s best-selling book “How to Change Your Mind” in 2018. Since then, this resurgence has been reflected in pop culture references and underground usage, as well as legal changes in some regions. For instance, Oregon has established a legal framework for the industry, and Colorado has decriminalized certain psychedelic drugs. However, despite these developments, most psychedelics companies are still striving to get their products approved through clinical trials. Unfortunately, there have been no significant breakthroughs thus far, and as a result, stocks in the sector have seen a sharp decline. The Advisorshares Psychedelics ETF, for example, is down around 53% from its peak last August.

The prevailing disconnect between the visions of industry leaders and the reality of the psychedelics market has led many once-promising companies to face financial challenges. Cody Shandraw, a managing partner at Ambria Capital, which has been investing in the space since 2019, describes the current state of affairs as the “shakeout stage” of the industry. Shandraw predicts that about half of the companies that went public since 2019 are either in the process of selling their intellectual property or facing closure. In 2022, investments in the industry amounted to around $400 million to $500 million, and this year’s investments are projected to be even lower, potentially falling below the levels of the previous year.

Based on data from Crunchbase and other sources, the industry experienced a significant surge in investments from just $62 million in 2019 to $617 million in 2020, and a staggering $1.6 billion in 2021. However, investments dropped to $570 million in 2022. Shandraw believes that many companies will go bankrupt, and while some might merge with other distressed companies or form joint ventures, only those with strong intellectual property will survive the storm.

The trajectory of the psychedelics industry parallels the broader biotech sector, which has also witnessed a shift away from risky assets. However, psychedelic drugs, or novel variations of their active molecules, present a unique set of challenges. The cultural interest in psychedelics, amplified by popular Netflix shows like “Have a Good Trip” and “Fantastic Fungi,” allowed many companies to go public even at the preclinical stage. This led to an overcrowded market with not all companies having sufficient funding to successfully undertake clinical trials. The US Congressional Budget Office estimates that the preclinical work on a pharmaceutical drug costs $474 million, with an additional $1.1 billion required for clinical trials. Furthermore, only 12% of drugs that reach the clinical phase end up making it to the market.

Infrastructure plays, such as companies focused on developing retreats or locations for administering psychedelic drugs, have also faced significant challenges. Field Trip Health, known for its ketamine clinics where it aimed to offer other drugs like MDMA or psilocybin in the future, recently sought creditor protection in Canada. Investors are becoming increasingly skeptical of non-biotech companies like ketamine infusion clinics, which have struggled to deliver on their promises over the past few years.

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Despite the current turbulence, there is hope on the horizon. Shandraw anticipates that by late 2024, numerous companies will unveil midstage results from their clinical trials. This period also coincides with the expected announcement from the Multidisciplinary Association for Psychedelic Studies (MAPS) regarding their efforts to seek US Food and Drug Administration approval for the use of MDMA, or ecstasy, in treating post-traumatic stress disorder.

The industry remains cautiously optimistic about the potential of traditional pharmaceutical companies making strategic investments. One noteworthy example is Otsuka Pharmaceutical Co., based in Tokyo, and known for its production of drugs like Abilify for schizophrenia treatment, which invested in Mindset Pharma Inc.

In the midst of this shifting landscape, Lucy Scientific Discovery Inc. has taken the opportunity to acquire assets from Wesana Health Holdings Inc. for a drug candidate that combines psilocybin and cannabidiol (CBD) to treat major depressive disorder, migraines, and other conditions. Lucy’s ambitions extend beyond intellectual property acquisitions. In June, they made an offer to purchase Pasithea Therapeutics Corp. for a 142% premium of its stock price at the time, aiming to use their substantial cash reserves to buy out Pasithea’s current investors and strengthen their position in the market.

Lucy’s approach parallels that of Atai Life Sciences NV, a company with a portfolio of several drug candidates. They plan to diversify their manufacturing focus and become a significant player in the psychedelics space. However, Pasithea Therapeutics rejected Lucy’s bid, stating that the proposed offer did not adequately reflect their strategic value and future growth prospects.

While the psychedelics industry is currently facing significant challenges and undergoing a shakeout period, it remains a captivating field of exploration. The potential for breakthrough treatments and the involvement of traditional pharmaceutical companies offer a glimmer of hope for the industry’s future. As the industry evolves, it is essential to strike a balance between visionary aspirations, financial feasibility, and scientific rigor to create a sustainable and impactful space for psychedelic therapies.