With its shares down by 60% in the last 12 months and a recent layoff affecting 30% of its workforce, it's fair to say that Atai Life Sciences (ATAI 2.40%) is having a rough go of things lately. Nonetheless, per bombastic predictions by Wall Street analysts, the stock could potentially explode upward by 527% this year.
When faced with such a discrepancy between recent performance and projected future returns, investors are right to hesitate to invest in this super-risky biotech stock. Let's take a peek at what's going wrong with Atai so that we can figure out if it's capable of surviving in the near term, and if it is, whether that makes it a buy.
Rumors of its demise are exaggerated
In case you aren't familiar, Atai is a biotech that's developing a handful of mental health treatments based on psychedelic molecules like MDMA via several subsidiaries and variable-interest entities. It also has minority stakes in other operators like Compass Pathways that are doing the same type of development. It doesn't have any recurring revenue as of yet, and it probably won't until it can commercialize a drug within the next few years. That effectively means its business model is to fund research and development (R&D) on its behalf.
One advantage of that model, in theory, is that it somewhat insulates the company from the massive stock drops that tend to happen when biotechs strike out on clinical trials, as it often doesn't own 100% of the organizations running the trials. In early January of this year, it reported that one of its portfolio holdings, Perception Neuroscience, flubbed its phase 2a trial investigating ketamine for treatment-resistant depression when the drug failed to outperform a placebo. But the stock crashed, so shareholders aren't as protected from the downside as what they might have hoped.
Nonetheless, it'll have more shots on goal in the near future. Within the next two years, the company is planning to finish several clinical-stage proofs-of-concept, like its candidate RL-007, which aims to treat the cognitive impairment associated with schizophrenia. It could also benefit if Compass Pathways succeeds with its phase 2 trial investigating a combination of psilocybin and therapy for post-traumatic stress disorder (PTSD).
Right now, Atai has $273.1 million in cash and equivalents, which management thinks will be enough to keep it through the first half of 2026 now that it took action to reduce its burn rate by laying off staff. As its 2022 operating expenses were $144.6 million, and it has access to a term loan facility worth $160 million, it will likely be able to survive for as long as management estimates.
Now isn't the right time to buy (unless you're brave)
As you might be thinking, the case in favor of buying Atai right now isn't very strong, even if it's not about to go out of business.
There's little in the way of concrete opportunities to realize revenue anytime soon. More of its clinical trials could fail, hurting the stock price. And while it isn't in management's control, the legal and regulatory environment for psychedelic therapies remains less permissive and far more uncertain than the environment for drugs being developed for the same indications using more mundane modalities, like selective serotonin reuptake inhibitors (SSRIs). Many psychedelics are still illegal for any purpose in the U.S. as well as in the E.U., though there have been a few positive shifts over the last few years, which likely portend favorable changes for Atai in the future.
Nonetheless, Atai remains one of the leaders in the psychedelics segment of the biotech industry, and it holds a 22.4% stake in Compass Pathways, which is one of the other leaders. So if Compass can strike gold with its pipeline programs, Atai will probably gain a bit of its glimmer back. But that isn't really much of anything concrete to invest on, and buying this stock is incredibly risky, even if in the long term people who buy it now might see their shares multiply in value by several times. Avoid buying this stock until it has a few later-stage programs in the pipelines of the businesses it owns the majority of.
On the other hand, if you're looking to make a speculative bet within psychedelics or biotech, Atai is an acceptable choice, though you should probably be willing to kiss your investment goodbye just in case.
