While Compass Pathways' (CMPS -3.62%) stock is near $8, the analysts on Wall Street are figuring, on average, that its shares will explode by 458% to reach around $42.30 within the next 12 months.

There's no doubt that the psychedelic therapy developer has some promising projects in the making. But could it possibly be true that the company will multiply in value in such a short period?

Only a few catalysts are in store

Right off the bat, Wall Street's estimate bears quite a bit of skepticism. Compass is a pre-revenue biotech company that's nowhere close to commercializing its flagship therapy, COMP360, which is being investigated for treatment-resistant depression (TRD), among a smattering of other potential indications like post-traumatic stress disorder (PTSD).

COMP360's pair of clinical trials for TRD are in phase 3, and the company could report the top-line data for one of the two clinical trials by the summer of 2024. Plus, the company expects to report data from its phase 2 trial for PTSD before the end of 2023. Strong late-stage clinical trial results tend to power small biotech stocks to rise sharply, even by as much as 100% in some cases. But the idea of skyrocketing by over 400% on such data is a stretch that beggars belief, even when considering the possibility of two positive readouts in the next 12 months.

Furthermore, even if the phase 3 results for TRD look great, and based on the company's prior results, there's reason to believe that they might, there are still a couple of barriers to clear before it can make any money. First, psilocybin, the pharmaceutical component of COMP360, is illegal in the U.S. at the federal level, though a few municipalities and states like Colorado and Oregon have decriminalized it. That will need to change to sell COMP360, which will require a successful and timely political push. At present, there is not any sign that such a push is gaining momentum in Congress.

Second, Compass will need to raise more money to actually get COMP360 out the door and onto the market once the legal issues are settled. It currently has $117 million in cash, equivalents, and short-term investments, but in the trailing-12-month (TTM) period, it spent more than $106 million. Management is anticipating spending as much as $110 million in 2023.

As its long-term debt load is negligible, taking out a loan might be the course of action that management chooses. But when was the last time you heard about the market reacting extremely positively upon learning about a business taking out a lot of debt? It's certainly possible, but it probably isn't a smart bet. There is also the risk of the company issuing more shares to generate capital, which would cause its stock to drop. 

It might take a while to hit the target, if it ever does

Given the above, it's probably not possible for Compass Pathways stock to do what the analysts are calling for. The only wild card that could change the equation is some kind of broad legalization of medicinal psychedelic therapies, which investors should not count on. 

There is, however, a kernel of hope that the stock could eventually reach Wall Street's price guidance. At the start of 2021, when the hype surrounding psychedelic biotech stocks was at its apex, Compass' shares were briefly worth more than $50 each. Its pipeline programs were all earlier-stage then, which meant that they were riskier and their potential revenues even less certain than they are today. So if investors were willing to pay that much for the stock, albeit in the midst of a speculative frenzy, it isn't completely unbelievable that they could be willing to pay the same amount in the future too when COMP360 could have even more data supporting its safety and efficacy.

So don't let Wall Street's sky-high price target dissuade you from buying a few shares if you're the type that's willing to make a risky bet on biotechs. Compass is a pioneer on the frontier of treating mental illnesses, and it's one of the clear leaders in the psychedelics space. As formidable as the challenges it faces may be, so far, it has navigated the research and development (R&D) process quite effectively. Time will tell whether it can do what it takes to get COMP360 out the door sometime in the next few years.