While institutional investors are still avoiding cannabis, they appear to be jumping on psychedelics. The recent capital raise by Compass Pathways is a prime example of the comfort that institutional money has with psychedelics.
Recently, Green Market Report wrote that Compass (NASDAQ: CMPS) raised $125 million with the potential for an additional $160 million, in a deal with health care investors TCGX and Aisling Capital.
However, there was a limit to how many shares an investor could own – with the cap set at 9.99%. That meant a range of investment firms, including Vivo Capital, RA Capital, and Surveyor Capital (a Citadel company) joined the investment club.
Paradigm BioCapital Advisors LP
PFM Health Sciences
Laurion Capital Management
In addition, Morgan Stanley & Co. LLC and Cowen and Co. LLC (dba TD Cowen) acted as placement agents. Morgan Stanley hasn’t had anything to do with cannabis, but because psychedelics are seen mostly as an FDA-approved drug play, there seems to be a level of comfort – despite the fact that LSD, MDMA, and psilocybin are also pegged as Schedule 1 drugs and are federally illegal just like cannabis.
Viridian Capital Advisors wrote that the psychedelics sector is currently second in total capital invested at $438.21 million and ranks third in transaction volume with 25 total capital raises for the 12 months ended Aug. 18. In the comparable period a year ago, the psychedelics sector had only nine transactions.
Other than the vape sector, it is the only category that has experienced an increase in capital raises.
The amount raised by the sector was $438 million, an increase of 116% over last year’s psychedelics capital raise figure of $202 million.
Despite the influx of investor interest, Viridian said it remained concerned about the liquidity of the group.
“The median current ratio of the 25 companies in the sector is a deceptively strong 3.41x; however, the industry is heavily negative cash flow from operations, funding operating costs, and the costs of clinical trials,” the company wrote.
Viridian went on to add, “Considering this, the median free cash flow adjusted current ratio is -0.59x, indicating severe liquidity stress. The 1st quartile figure of -1.51x is the lowest among the 12 sectors we track. Only the top eight companies will be fully funded through the following year.”
Despite the sobering comments from Viridian, there are still positive signs for the sector. In 2023, the DEA substantially increased the aggregate production quotas (APQ) for certain psychedelics to be used in research, including:
Psilocin (a psychedelic substance found in psilocybin mushrooms)
In June, the FDA published new draft guidance to highlight fundamental considerations to researchers investigating the use of psychedelic drugs for potential treatment of medical conditions, including psychiatric or substance use disorders. This was the first FDA draft guidance that presented considerations to the industry for designing clinical trials for psychedelic drugs.
“Psychedelic drugs show initial promise as potential treatments for mood, anxiety, and substance use disorders. However, these are still investigational products. Sponsors evaluating the therapeutic potential of these drugs should consider their unique characteristics when designing clinical studies,” said Tiffany Farchione, M.D., director of the Division of Psychiatry in the FDA’s Center for Drug Evaluation and Research.
With that guidance, the FDA signaled a much more welcoming environment for psychedelics versus cannabis, where the agency continues to pass on making decisions about cannabidiol products.
This positive tone from the FDA tells institutional investors that the coast is somewhat clear for psychedelics, while it remains clouded for cannabis.
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