The 2020 election had many areas of significance, with investors focusing on renewable energy, healthcare, and navigating the COVID-19 pandemic effects. But voter approval of one state ballot initiative took a potentially historic step in treatment in mental healthcare. 

Oregon became the first U.S. state to legalize the use of psilocybin -- the active ingredient in magic mushrooms -- for the treatment of mental health disorders. The vote has positive ramifications for newly public biotech company Compass Pathways (NASDAQ:CMPS)

mushrooms in red and blue light against black background

Image source: Getty Images.

Where it came from

U.K.-based Compass Pathways was founded to study the approach of psilocybin therapies to treat mental health issues. The company developed a synthesized version of psilocybin, and is studying the effectiveness of using it as a psychoactive treatment for treatment-resistant depression. 

Psychedelic, or "magic," mushrooms have been used as a recreational drug since the 1960s when Timothy Leary traveled to Mexico for his first experience with the hallucinogenic. It had been used in Mexico for more than 2,000 years for sacred and medicinal purposes by the Aztecs, whose word for it is teonanácatl, or "god fungus." 

Compass now has its formulation in phase 2b clinical trials, where the efficacy of the treatment is tested. The treatment has received breakthrough therapy designation from the U.S. Food & Drug Administration (FDA), allowing it to expedite the development and review of the therapy. 

The path forward

Oregon Measure 109, named the Psilocybin Program Initiative, was approved with 56% of the vote, according to the Associated Press. Oregon's ballot initiative gives its public health department a two-year program development period to create regulations and a framework for manufacturing and dispensing psilocybin treatment for mental health therapy. Licensed service providers would be able to treat adults 21 and older for treatment-resistant depression, post-traumatic stress disorder, and other mental health conditions. 

Compass plans to have its phase 2b clinical trials completed by the end of 2021, chairman, co-founder, and chief executive officer (CEO) George Goldsmith said in a recent CNBC interview. 

The biotech company went public Sept. 18, 2020 with an initial public offering (IPO) priced at $17 per share. Though shares have more than doubled since then, there may be plenty more to come, and the Oregon vote helps set up its path forward. 

Who benefits

Citron Research, most widely known for short-seller reports, put out a positive evaluation on Compass on Oct. 5, saying it has the "potential to be a generational stock." It notes the importance of the treatment's breakthrough therapy designation from the FDA, which Compass itself calls a "significant milestone." The designation is given "if preliminary clinical evidence shows that it may demonstrate substantial improvement over available therapy," as stated by the company. 

Citron estimates that there are over 100 million people who have unsuccessfully tried two or more existing treatments for depression, and would qualify for the psychoactive therapy for treatment-resistant depression. Beyond that, Compass believes it could be an effective treatment for "depression, anxiety, addiction and other mental illnesses, when administered with psychological support from specially trained therapists." Citron believes the stock should be valued at $100 per share based on the potential market. 

The Oregon vote

It's important to remember that the passage of the Oregon ballot measure does not decriminalize psilocybin. It's still a Schedule I drug under federal rules and is therefore not approved for any medical uses at the federal level. The approval of 109 provides for a development period to organize a state-licensed, psilocybin-assisted therapy program, including plans for regulation. 

Compass doesn't use psilocybin specifically, though. It developed its synthetic formulation, COMP360, which is specifically what got the FDA fast track designation, and what is in clinical trials. 

Investors should be clear that whatever program Oregon creates won't directly affect Compass. Chief communications officer Tracy Cheung said in an email that the company supports the goals of the Oregon efforts "to help patients with mental health challenges who are not helped by existing treatments." But she clarified that the company's clinical trials are a different means to that end. She added, "We believe the medical route is the safest and most effective way to get psilocybin therapy (if approved) into the health system."

The results of the Oregon vote will certainly shine more of a light on psilocybin as a course of therapy, though. If Compass gains approval of its COMP360 treatment, that light will raise awareness and should help the treatment gain a wider acceptance, sooner. Investors who believe Compass will receive final approval should cheer the Oregon vote to help advance the cause.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.