Magic mushrooms — an investment boom or doom?

In the third quarter of 2023, 22 million antidepressants were prescribed to an estimated 6.8 million patients. Sadly, mental health problems are not limited to adults – 1.5 million children will need additional mental health support following the pandemic, according to a report from the Centre for Mental Health. The NHS is struggling to cope with the increased demand – the size of the workforce dealing with mental health has risen by 22%, but that has been outpaced by referrals, up 44% since the pandemic. Around one in six adults in England have a common mental health disorder, and roughly half of mental health problems start by the age of 14. Last year the government spent £12billion, or 9% of the total NHS budget, on mental health services. 

Job insecurity, long working hours and high levels of personal debt have been linked to the six-fold rise in prescriptions for psychiatric drugs since the 1980s. Similar trends are being seen in the US and other countries, and social psychologists such as Jean Twenge and Jonathan Haidt have suggested that the rise of smartphones and social media are partly to blame.

Are smartphones the billion-dollar solution for depression?

But if capitalism and smartphones are part of the problem, perhaps they could also be part of the solution – whether through funding more effective drug treatments or the use of mobile phone apps such as MoodKit, iBreathe, Happify, Me (for self-awareness), Quit That!, Reframe and I Am Sober (for addiction). 

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The two apps with the highest number of downloads are US-founded Headspace and Calm. They were launched more than a decade ago and offer breathing exercises, sleep stories read by celebrities and guided meditations. Together they have raised just under half a billion dollars but are yet to float on the stock market, despite the technology-focused Nasdaq index more than doubling in value over the past five years. In 2022, The Wall Street Journal reported that Calm, which had been valued at $2billion by VC backers in 2020, had laid off 20% of its staff. 

Good examples, perhaps, of the frothy valuations that US venture capitalists put on their funding rounds not matching the reality that stock market investors see.

Could psychedelics treat mental health?

Another promising area of progress is using psychedelics to treat mental health. Millions of people have experimented with these drugs outside of a clinical setting since the 1960s, if not legally. 

Now Compass Pathways (Nasdaq: CMPS), atai Life Sciences (Nasdaq: ATAI), Cybin and MindMed (Nasdaq: MNMD) are trying to get their drugs through the regulatory hurdles for treatment-resistant depression (TRD) and similar conditions, such as generalised anxiety disorder (GAD), attention deficit/hyperactivity disorder (ADHD) and anorexia nervosa. 

Compass Pathways, MindMed and Cybin have all passed Phase II trials, with Compass now expecting preliminary results from a Phase III trial later this year. Phase II means that the drugs work, but Phase III has to confirm that the treatments are not only safe and effective but superior to existing treatments. Drugs can fail Phase III trials, of course, but early evidence suggests that psychedelics can be more effective than traditional anti-depressants such as selective serotonin reuptake inhibitors (SSRIs). 

Although SSRIs are useful for managing depression, they are not a cure. Robert Whitaker in Anatomy of an Epidemic has suggested there is evidence that the longer patients rely on current therapies such as SSRIs, the worse the outcomes tend to be. 

Psychedelics, in contrast, are taken infrequently and work by enhancing emotional processing, so the benefits tend to be longer-lasting. Even if psychedelics do prove to be an effective treatment for depression, however, the path to profitability may still have obstacles. Psilocybin, for example, can’t be patented, as it occurs naturally in 180 species of fungi. 

Breathing exercises, meditation, yoga, physical activity, sunlight, journaling and cold-water immersion are all considered helpful when treating depression too, but they tend not to be subject to expensive double-blind clinical trials. They are also impossible for large corporations to patent and generate a profit from. 

As a result, drug companies are making their own synthetic compounds, which they can patent and then put through clinical trials. An estimated $2.9billion of the $3.26billion in capital raised by the 73 biggest psychedelics companies has been spent on drug development, says the Financial Times, and hundreds of patents for psychedelics have been filed with the US patents office.

The investment hurdles for psychedelics

Decriminalisation and legalisation
Ironically, a risk to the business model might be decriminalisation and legalisation. In Oregon supervised psilocybin use has been legal since 2020, and state lawmakers are intending to follow suit and legalise psilocybin for both therapeutic and recreational use in New York, according to the New York Post. 

The drug would still need to be consumed at specific service centres, where customers would be supervised and guided through their hallucinogenic experiences in a controlled environment. Companies have already sprung up to train and license trip supervisors, according to The Guardian. 

Decriminalisation would benefit a subculture of people who already obtain psychedelics illegally for therapeutic use with informal “trip-sitters”, as well as removing the criminal penalties for possession of psychedelics, while not creating a legal framework. 

In the UK psychedelics are considered a class A drug, possession of which risks a maximum sentence of seven years in prison and an unlimited fine. Despite the penalties for class A drugs, psychedelics remain widely available. According to the Office for National Statistics, 38% of people aged 16 to 59 claim it would be “very” or “fairly” easy for them to obtain illegal drugs within 24 hours. Not only are illegal drugs available, they tend to cost less than a few pints in a pub as, unsurprisingly, dealers tend not to declare their earnings to HMRC. Hiring an Airbnb for the weekend in a quiet location with a trusted friend is also likely to cost significantly less than official treatment protocols developed by the likes of Compass and atai. 

Recouping drug development costs
In contrast, the listed companies need to charge thousands of dollars to recoup the cost of getting their compounds approved by regulatory bodies. So far Compass has spent roughly $340million putting COMP360 through clinical trials. Cybin, Seelos Therapeutics and MindMed have spent less than that, but the figures still run into hundreds of millions of dollars. As of September 2023, Compass had $248million of cash, following a $125million financing in August 2023. Management believes existing cash will be sufficient to fund activity into late 2025. 

In the US, insurers and government programmes such as Medicare and Medicaid play an important role in determining the extent to which new drugs will be covered. It is hard to know what these third-party payors will decide with respect to reimbursement for psilocybin therapy. 

Outside the US, governments tend to negotiate attractive prices for new drugs, and this is one area where the UK’s NHS benefits from economies of scale. Treatment-resistant depression currently costs the US healthcare system between $17,000-$25,000 per patient per year, according to the psychedelic companies. 

The treatment centres already exist and are delivering services such as transcranial magnetic stimulation (TMS), electroconvulsive therapy (ECT) and ketamine. The latter has a psychedelic component, but its use is already approved as an anaesthetic, so it can be used for TRD when other approaches have failed. That said, the benefits of ketamine are short-lived and it failed a clinical trial in 2012 because it failed to outperform the placebo effect when given to cancer patients for pain relief in conjunction with opioids. 

CMPS, ATAI and MNMD shares are all down more than 50% in the last two years, but some of that reflects the loss of confidence in speculative healthcare stocks. Psychedelics could yet pass the Phase III trials, but even then they might struggle to recoup the costs of development. In a narrow sense, that will represent a failure. 

In a broader view, though, where health services are struggling and millions are in distress, the rehabilitation of psychedelics will be a huge benefit, if not an investment opportunity.

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