Invest in Psilocybin Therapy with Compass Pathways Stock
Perhaps it was an old urban myth, but everyone used to say that if the cops bust you with mushrooms, just dump them on the floor of your car. As long as they’re not in baggies, you’re cool. We’re not sure if that’s sound advice or not, but soon it may be a moot point. That’s because mushrooms – and psychedelics in general – are quickly becoming recognized for their therapeutic powers.
In last year’s piece on 7 Psychedelic Therapy Companies Addressing Mental Health, we briefly covered a company called Compass Pathways (CMPS) that’s looking to create psilocybin therapeutics. Given the significant level of interest we’ve seen from investors surrounding this topic, we’re going to take a closer look at Compass Pathways stock.
About Compass Pathways Stock
Founded in 2016, Compass Pathways is located on the outskirts of Karl Pilkington’s stomping grounds – Manchester, England – where the company managed to raise just over $116 million in funding from around a dozen investors including Peter Thiel before going public. All that money is being put towards developing “a proprietary, high-purity polymorphic crystalline formulation of psilocybin,” and then turning it into a therapeutic that can address a severe form of depression known as treatment-resistant depression (TRD).
ATAI Sciences and Compass Pathways
In our recent piece on The Psychedelic Therapy Company Treating Mental Health, we talked about how ATAI Sciences acts as a holding company with all kinds of ventures afoot in the area of psychedelic therapeutics. One of the founders of ATAI, Lars Christian Wilde, is also a co-founder of Compass. The most recent SEC filing document – a 424b4 filed in September of 2020 – talks about how ATAI owns 23.43% of Compass Pathways. It also goes on to say:
In addition, our Chief Executive Officer, Co-Founder and Chairman of our board of directors, George Goldsmith, and our Chief Innovation Officer, Co-Founder and Director, Ekaterina Malievskaia, who are married, together hold a 7.4% equity interest in ATAI, and our President, Chief Business Officer and Co-Founder, Lars Christian Wilde, who was a Co-Founder of ATAI, may in the future receive up to a 5% equity interest in ATAI.Credit: Compass Pathways 424b
There are a few governance red flags here. The first concerns companies where the CEO also holds the position of Chairman of the Board of Directors (BoD). Since the BoD is typically the CEO’s boss, it’s like discussing your employee’s performance review with your boss while said employee is sitting in the room listening and commenting. The second concern is the conflict of interest in having two key members of management in a marital relationship. Any HR policy would frown on this practice for the same reason they don’t let the management team fly on the same flight.
At any rate, let’s assume they’re appropriately managing these governance risks, and move on to the value proposition.
The Value Proposition
If people become so depressed that no treatments are working and they’re unable to hold down a job, why not give them some mushrooms? Anyone who has taken mushrooms recreationally understands why this might actually work. People eat mushrooms because they put you in an excellent mood. You’ve never experienced a giggle fit like the bouts of uncontrollable laughter you’ll have while smashed on shrooms with a group of mates. In a similar fashion, Compass expects “rapid reductions in depression symptoms and effects lasting up to six months, after administration of a single high dose.”
Over 320 million people worldwide are depressed. The medical term for clinical depression is major depressive disorder (MDD). Of those, 100 million suffer from treatment-resistant depression which is what it says on the tin – depression that resists treatment. Well, that’s not actually true. There are a few treatments for treatment-resistant depression – esketamine, and a combination of olanzapine and fluoxetine. You can also do what Tony Soprano did and find yourself a Dr. Melfi. But, the Americans’ love for pharmaceuticals demands a pill to sort everything out in.
In 2018, Compass Pathways received Breakthrough Therapy designation from the FDA for COMP360 for the treatment of TRD. In 2019, they completed a Phase I clinical trial (safety and feasibility) administering COMP360, along with psychological support, to 89 healthy volunteers, the largest randomized controlled trial with psilocybin therapy to date. COMP360 was generally well-tolerated, so now they’re in a Phase IIb trial with plans to report data in late 2021.
As with all companies developing therapies, there are no revenues until they have an approved product. Compass believes their cash on hand of $196.5 million will be sufficient to fund operating expenses and capital expenditure requirements into 2023. If the therapy shows that it can safely treat severe depression, it’s likely they’ll partner with a big pharma company or even be gobbled up by one.
To Buy or Not to Buy
The Nanalyze Disruptive Tech Investing Methodology talks about how we navigate a risky investment space by actively trying to reduce risk as opposed to investors who take excessive risks “trying to find the next Microsoft.” One rule we have is not to invest in companies that don’t have revenues yet. We’ve seen far too many companies die a slow and painful death trying to get therapies to market in an environment where you cannot control regulatory risk. Essentially, the regulatory authorities decide whether you live or die. It’s not something we’re interested in, but there are a few more reasons we wouldn’t long the stock.
Those same hippies who tell you to throw your mushrooms on the floorboard when popo is flashing in your rearview mirror will be the first to say mushrooms aren’t owned by anyone. They’re free man, just go out there and pick ’em. There’s nothing stopping any company from running clinical studies on psilocybin as a treatment for any mental disorder, including TRD. The intellectual property Compass Pathways has is their synthetic psilocybin and the process they use to produce it. That doesn’t sound like a very formidable competitive moat.
And then you have the same type of investors who were attracted to cannabis coming around. We passed on the cannabis theme because of how risky the space was, mainly because so many newbie investors were piling in with no notion of valuations. We’re not able to say if Compass Pathways’ $1.6 billion market cap is currently supported by such individuals, and we’re not interested in trying to find out. For those of you that are, check this out:
Shares jumped 71% to $29 in New York after an initial public offering of 7.5 million shares priced at $17 each.Credit: Bloomberg Wealth
That was the day Compass Pathways had their IPO, and today shares are trading at around $45 a share. The share price is up +165% in four months compared to a Nasdaq return of +22% over the same time frame. Even if we assume that the offering was fairly priced, you’re paying way too large a premium to hold those shares right now. Of course, there are thousands of longs who strongly disagree with that statement, so to each their own.
You don’t need to have dabbled in hallucinogens to understand Compass Pathways’ value proposition, but it does help. That’s because most people don’t know how incredibly powerful psychedelics are. Many people have changed their lives using these powerful chemicals, some not for the better. That’s where creating a pure psilocybin substance and administering it in a controlled setting will be the way forward to treating any sort of mental health problem with any sort of psychedelic.
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