Is a Psychedelic Trip a Good Investment?

Why is _able Partners, a consumer fund, investing in pharma companies developing illegal drugs? We believe these stigmatized substances, psychedelics, can help address “The Wellness Gap” — the disconnect between accelerating economic indicators (GDP per capita) and declining measures of physical and emotional wellbeing.

One of our portfolio companies, COMPASS Pathways, is using the active ingredient in magic mushrooms, psilocybin, to develop a new model for drug-assisted psychotherapy. In 2018 the FDA granted COMPASS ‘breakthrough therapy’ designation (meaning the treatment demonstrated such potential that the development and review process are expedited) for research into psilocybin for treatment-resistant depression. With COMPASS launching their IPO this week (NASDAQ: CMPS), I decided to share our thesis around “Therapeutic Psychedelics”: the use of psychedelic drugs guided by a trained clinician for therapeutic, not recreational, goals.

First, some definitions. Psychedelics are a class of drugs that induce an altered state of consciousness (i.e., the “trip”) via serotonin 2A receptor agonism. You probably know them as LSD, magic mushrooms, peyote, ayahuasca (DMT) and ecstasy (MDMA). Researchers are studying a new treatment paradigm combining medicine with therapy — in-clinic administration of a single dose of psychedelic medicine combined with a course of carefully designed therapy. Studies often show an immediate resolution of symptoms, and this promising research has been noticed. In addition to a number of non-profits funding research into psychedelic treatments, there is a rapidly growing group of for-profit companies focused on clinical research, drug discovery, distribution, and ancillary services.

What got us excited about Therapeutic Psychedelics:

1. Size of the Opportunity: Globally, 164 million people have substance abuse problems¹ and 322 million people suffer from depression.² Nearly 1 in 5 American adults suffer some form of mental illness.³ As with so many things, Covid-19 has been an accelerant of this trend. In a poll conducted in mid-July, 53% of adults in the United States reported that their mental health has been negatively impacted due to stress over the coronavirus.⁴ Psychedelics show potential to treat the most prevalent mental health conditions. If you look at mental illness on a spectrum from too much entropy (schizophrenia, psychoses) to too much rigidity, psychedelics have shown promise treating everything on the rigidity side: depression, anxiety, addiction, PTSD, OCD, and eating disorders.
2. Historical Precedents: We are not biotech investors, but there was enough historical data to give us comfort that these substances would pass beyond Phase 1 clinical trials (which usually have a 50% failure rate). Psychedelics were studied in nearly forty thousand US clinical research participants from 1950 to 1970⁵, and indigenous usage of hallucinogenic drugs for spiritual and therapeutic purposes is well documented across cultures over centuries. In fact, Bill Wilson, a co-founder of Alcoholics Anonymous, at one point wanted LSD to be the “13th Step” in the recovery program after crediting another psychedelic, belladonna, with the spiritual awakening that allowed him to quit alcohol.⁶
3. Efficacy: The most common depression drugs, SSRIs (like Prozac and Zoloft), require daily maintenance and generally show low to moderate improvement.⁷ Although SSRIs can be lifesaving, they also have serious flaws. They take 4 to 6 weeks to work; 40–60% of patients fail to improve on their first SSRI⁸; and, the side effects can be significant. Early research indicates the potential for psychedelics to deliver a much larger benefit, over a much longer period of time, with minimal side effects. Academic-sponsored studies over the last decade show that psilocybin therapy provided rapid reductions in depression symptoms after a single high dose, with antidepressant effects lasting for at least six months.⁹ A single mushroom-based treatment was shown to help improve cancer patients’ quality of life for nearly five years.¹⁰ Used for nicotine addiction, psilocybin showed an abstinence rate of 80% after 6 months¹¹ and in terminally ill patients it reduced depression and anxiety by 80%.¹²
4. Safety: Despite the stigma surrounding psychedelics, a study by The Global Commission on Drug Policy published in The Economist found magic mushrooms to be the safest drug as measured by potential for harm to self and others. The risk of mushrooms falls well below alcohol and tobacco.¹³ As for abuse potential, studies in animals show no physical dependency.¹⁴ There are risks, including challenging experiences; inflicting danger to self or others during unsupervised trips; and, potentially precipitating a psychotic break in vulnerable individuals — exemplifying exactly why these medicines need to be studied and administered in supervised settings.
5. FDA Cooperation: The FDA recognizes our current mental health crisis and appears to be looking beyond stigma to clinical results. Spravato was the first new class of depression drug approved by the FDA in over 30 years, and is based on ketamine, otherwise known as the street drug “Special K.” In addition to COMPASS, the non-profit Usona Institute received breakthrough therapy designation for psilocybin from the FDA, and the non-profit Multidisciplinary Association for Psychedelic Studies (MAPS) received the same status for the use of MDMA in the treatment of PTSD.
6. Lack of Compelling Alternatives: Despite the large and growing need, and the inadequacy of current treatments, the new drug development pipeline for mental disorders is weak at best. Pharma giants have cut research on psychiatric medicine by 70% in 10 years¹⁵, and depression drug candidates represent only 0.2% of the global drug pipeline.¹⁶ Much as we saw small start-ups out-maneuver big CPG companies over the last decade to bring needed innovation to market, we see a similar opening for visionary and nimble young companies in the pharma space to develop transformational treatments for mental illness.
7. Limited Capital: This is changing rapidly, but when we first started looking at the psychedelic space several years ago, there were only a handful of institutional investors. Some of this stemmed from the stigma around Schedule 1 drugs; some investors can’t invest because of “sin clauses”; and some just aren’t comfortable with the public perception. Given our flexible mandate and focus on opportunities in areas of stigma, _able Partners had the ability to play an early and active role in an emerging category.

Despite the optimism there are significant risks to investing in psychedelics:

1. Cannabis ≠ Psychedelics: Investor interest in psychedelics stems at least in part from the gold rush in the cannabis space, but other than both being Schedule 1 drugs, there are limited parallels. The biggest difference is how they are used in treatment. Cannabis is a consumer product used for both recreation and to treat symptoms. Psychedelics are a medicine used to enhance therapy, and the service/therapy is half of the treatment. Don’t expect psychedelics to make their way into OTC recreational consumer products like “weed gummies” any time soon.
2. Clinical Study Risks: Almost all psychedelics are listed as Schedule 1 drugs with no accepted medical use, and the clinical trials necessary for rescheduling require a significant outlay of time and funding. This may seem obvious; but, it bears repeating given the recent glowing press coverage. Clinical trials still need to be completed with positive outcomes before these drugs make it to market.
3. Business model: Unlike a daily pill, psychedelics will generally be given once or a handful of times for each patient episode, so how will insurers reimburse an episodic treatment? What is their approach to drug-assisted psychotherapy, an entirely new hybrid form of treatment? One answer may be a value-based care model, but the economic model needs to be built and proven.
4. Intellectual Property: What will be patentable or defensible? Because most psychedelics don’t qualify for patent protection, companies need to rely on changing the molecular make-up (composition of matter patent), use patents, or process formulation and manufacturing patents. These approaches can and will be challenged, as a (recently overruled) objection to one of COMPASS’ patents shows. New drug development offers better IP protection, but it is very capital intensive.
5. Decriminalization/Legalization: In step with the FDA’s progressive approach, cities like Denver, Colorado, as well as Oakland and Santa Cruz, California have decriminalized magic mushrooms. Many others in the U.S. are expected to follow suit. While still illegal on the federal level, these initiatives could impact the potential for a prescription treatment — or, with lax supervision, lead to an adverse outcome that creates a more difficult regulatory environment even for legal drugs.
6. Distribution: The distribution model for drugs like psilocybin is still to be determined and likely to require the creation of an entirely new delivery framework. Administering psychedelics needs to be coupled with professional therapeutic guidance in tailored facilities that take into account the 6–8-hour duration of the drug. Treatment outcomes are impacted by ‘set and setting,’ so while in-patient services or retreats could be the dispensaries in this space, they will be capital intensive to build out. In addition, given the underground nature of these substances, very few mental health practitioners are trained in this type of therapy. Creating adequate training programs and scaling provider supply will be a key challenge in this space.

Weighing all factors, _able Partners determined that allocating capital to a stigmatized treatment (psychedelics) targeting a stigmatized condition (mental illness) had great potential to make an impact at scale, both for the greater good and as a good investment. We believe that supporting private companies tackling public problems will not only deliver financial returns but also help reduce The Wellness Gap.

1. https://www.samhsa.gov/data/sites/default/files/cbhsq-reports/NSDUHNationalFindingsReport2018/NSDUHNationalFindingsReport2018.pdf
2. https://www.theguardian.com/society/2017/mar/31/depression-is-leading-cause-of-disability-worldwide-says-who-study
3. https://www.nimh.nih.gov/health/statistics/mental-illness.shtml#:~:text=Prevalence%20of%20Any%20Mental%20Illness%20(AMI),-Figure%201%20shows&text=In%202017%2C%20there%20were%20an,%25)%20than%20men%20(15.1%25)
4. https://www.kff.org/report-section/the-implications-of-covid-19-for-mental-health-and-substance-use-issue-brief/
5. https://scholar.google.com/scholar_lookup?journal=Science&title=LSD+Reconsidered&author=L.+Grinspoon&volume=21&publication_year=1981&pages=20-23&doi=10.1002/j.2326-1951.1981.tb01901.x&
6. https://www.nytimes.com/2010/04/20/health/20drunk.html
7. https://www.nhs.uk/news/medication/big-new-study-confirms-antidepressants-work-better-placebo/ https://bmcpsychiatry.biomedcentral.com/articles/10.1186/s12888-016-1173-2 https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5667359/
8. https://effectivehealthcare.ahrq.gov/products/depression-treatment-ssri/research-protocol#:~:text=However%2C%20the%20rate%20of%20treatment,from%2030%20to%2045%20percent
9. Carhart-Harris, R.L., Bolstridge, M., Day, C.M.J. et al. Psilocybin with psychological support for treatment-resistant depression: six-month follow-up. Psychopharmacology 235, 399–408 (2018). https://doi.org/10.1007/s00213-017-4771-x
10. https://nyulangone.org/news/mental-health-benefits-one-dose-psychedelic-drug-last-years-people-cancer
11. https://hub.jhu.edu/2014/09/11/magic-mushrooms-smoking/
12. https://journals.sagepub.com/doi/pdf/10.1177/0269881116675513
13. https://www.economist.com/graphic-detail/2019/06/25/what-is-the-most-dangerous-drug
14. Johnson MW, Griffiths RR, Hendricks PS, Henningfield JE. The abuse potential of medical psilocybin according to the 8 factors of the Controlled Substances Act. Neuropharmacology. 2018;142:143–166. https://doi:10.1016/j.neuropharm.2018.05.012
15. https://www.theguardian.com/society/2016/jan/27/prozac-next-psychiatric-wonder-drug-research-medicine-mental-illness
16. http://go.bio.org/rs/490-EHZ-999/images/BIO_HPCD_Series-Depression_2018-01-03.pdf