Since mid-2021, biotech companies developing medicines based on psychoactive molecules like LSD and psilocybin (more commonly referred to as psychedelics) have had a rough go. Stocks of most of the segment's leaders are down more than 75% compared to three years ago, and for a time, funding for early-stage businesses looked like it was drying up.
2024 is going to be different. In fact, there's reason to believe that investors should prepare for takeoff, and also that there are opportunities in store for those who are comfortable taking significant risks with their money. Let's analyze what's going to happen and what it means.
Progress means risks are falling
In late 2023, three important developments set the stage for 2024 to be a wild year in the psychedelics industry. Two of those pertain to treating post-traumatic stress disorder (PTSD) using psychedelic medicine in conjunction with psychological support provided by a trained practitioner. Approximately 13 million people in the U.S. suffer from PTSD to some degree, and many don't get sufficient relief from the existing set of interventions, so it's a common indication for the psychedelics businesses to target, as the market is likely to be large.
On Dec. 19, Compass Pathways (CMPS -3.62%) said that its candidate, COMP360, which features therapy with psilocybin with concomitant psychological support, had been well tolerated for the first 24 hours after treatment in a phase 2 clinical trial including 22 patients. Compass will give another update on the trial in the spring after a 12-week observation period elapses. If the results are favorable, it'll be a boost to the company's share price, and it'll help to address any lingering concerns about the safety of using certain psychedelic drugs to treat PTSD.
Compass also plans to report some data from one of its phase 3 trials testing COMP360 for treatment-resistant depression (TRD) sometime in the summer. TRD is actually COMP360's flagship indication, and, much like PTSD, the stakes are high. Getting a confirmation that its lead program is working as intended as it inches closer to submission to regulators for approval could be another significant catalyst for the biotech, as well as for many of its peers with earlier-stage programs. Investors should note that Atai Life Sciences (ATAI 2.40%) is particularly exposed to potential upside as well as downside, as it has an equity investment in Compass, as well as its own psychedelic therapy programs for TRD and PTSD.
The biggest breakthrough thus far could be right around the corner
Aside from the pair of possible industry-wide catalysts that Compass Pathways is cooking up, there's an even larger one in the works.
The nonprofit Multidisciplinary Association for Psychedelic Studies (MAPS) Public Benefit Corp. reported on Dec. 12 that it had submitted paperwork to the Food and Drug Administration (FDA) petitioning for the approval of its combination of MDMA and psychotherapy to treat PTSD. Many people are familiar with MDMA by its many slang names, such as ecstasy or molly.
The submission is the first time that regulators have had any psychedelic-derived treatment on their desks, but it almost certainly won't be the last. The FDA already granted MAPS a breakthrough therapy designation in 2017, and this time around, it requested a priority review of its application.
Now, by Feb. 12, regulators will need to decide whether to grant the priority review request. If they assent, six months from that date they'll need to weigh in on whether to grant the approval or not. Importantly, if regulators digest the phase 3 clinical trial data MAPS submitted with its approval packet and decide to go with the priority review, it'll be a (very) good omen for the chances of approval later on.
If instead, they opt for a standard review period, it'll be 10 months before they issue a verdict, and the verdict could easily still be in the affirmative. That means unless there's an unforeseen delay at the FDA, 2024 is going to see the first approval -- or first rejection -- of a traditional psychedelic therapy where the patient's experience of psychedelic effects is a core component of its efficacy.
Marking the industry's first commercialization would be a major milestone. It'd likely catalyze a significant rise in the share prices of practically every clinical-stage competitor, especially for those investigating MDMA specifically. One major component of the risk associated with these psychedelic biotech stocks is that their scientific approach is unproven, and that risk would subsequently be significantly diminished after the first approval.
Furthermore, per the logic of MAPS' management, if the FDA opts to approve its MDMA program, it'd force other regulatory gatekeepers like the Drug Enforcement Administration (DEA) to reschedule the molecule, thereby removing perhaps the single largest barrier to further development in the space. It's unclear what the chances of that happening actually are, but if it does, people who invested in public psychedelics companies today will collect a tidy windfall.
What's an investor to do?
So what's the right move for investors? Given that each of the three catalysts described here will be major de-risking events for the entire psychedelics industry if they go as planned, there is a big opportunity for those who can tolerate buying shares with the current level of risk (read: high).
Remember: In the eyes of the law, as of this moment, these medicines are not proven to be safe or effective, and they're outright illegal except in very controlled settings. That suggests the risks for drug developers are even higher than one might normally expect for a pre-revenue biotech. And the normal set of risks, like running out of money, are still in play too.
But if the dam is breached and regulators agree that psychedelics can be useful tools in treating intractable mental illnesses, the probability of additional therapies getting approved for sale will be dramatically higher than before. This opportunity won't knock twice.
