Should investors begin ringing the funeral bells for psychedelic stocks?
To some, this may seem like a fair question. After all, if you look at the year-over-year performance of most psychedelic stocks, you’ll see naught but carnage. For example, Compass Pathways (Nasdaq: CMPS) has collapsed 62% over the last year, atai Life Sciences (Nasdaq: ATAI) has crashed 74%, and MindMed (Nasdaq: MNMD, NEO: MMED) has plummeted a horrifying 90%.
For those with financial skin in the game, this must feel like a bad trip. After experiencing a parabolic high, many investors —especially irresponsible ones who put too large a proportion of their portfolios into this speculative sector— may be feeling withdrawal as the realities of biotech investing are made clear.
So, should we abandon all companies attempting to craft new medicines to treat mental health disorders using psychedelics such as psilocybin, DMT and LSD?
Not so fast. To understand whether or not psychedelic stocks will recover, we first have to understand the reasons behind their fall. Therefore, in this article I will attempt to do just that. Then, we will re-examine the thesis for investing in psychedelic stocks to investigate whether the events of the past year have changed its validity. And finally, I will end with a plea for responsibility.
As best as I can see, there are three contributing factors:
- the wider economic paradigm
- recency bias
- distrust in the leadership of psychedelic companies
An analysis of the fall of psychedelic stocks
Starting with the economic trend lines, as a general rule, when there is a correction in the wider stock market, speculative moon-shot companies without revenue will be slammed the hardest. And that is exactly what we are seeing here.
Over the past year, the Nasdaq is down 8% while the S&P 500 has tumbled 14.5%. As everything falls, investors are taking their money out of riskier bets and parking it in “safer” stocks. We are clearly seeing that here, as the Horizon’s Psychedelic Stock Index is down 54% in the same time frame. In my article 4 Tips for Investing in Psychedelic Stocks During a Market Downturn, written February 4th, I predicted this would happen, and here we are 8 months later.
Remember, however, that the flip side of this equation is also true. If ever we enter another investing period such as 2019 and 2020, where everything is going up, speculative companies may benefit the most, though we have no way to know if psychedelic stocks would get included in the bonanza.
Compounding the above problem is the cognitive bias called recency bias.
Human brains operate in such a fashion that we make predictions of the future based on what has just happened to us. When psychedelic stocks are going parabolic, we think the run-up will never end, and we buy more. When they’re crashing, we fear this will never end, and we sell.
The problem is that these decisions are not being made based on any underlying logic as to why the stock is rising or falling. If the movement is due solely to other people’s decisions to buy or sell, as opposed to changes in the thesis surrounding the industry or a specific company, then people are making their decisions based on the noise, not the signal.
In other words, people have seen stocks like MNMD and ATAI fall for months on end, which whittled away their conviction that in the long-term these companies will succeed, causing them to sell. Again, this has nothing to do with the long-term fundamentals.
Finally, there have been some worrying signals coming from some of the main psychedelic medicine companies. Both MindMed and atai cut their pipelines, and Compass faces persistent accusations that they use the patent system unfairly. For MindMed in particular, they also recently completed a reverse stock split, and announced further dilution, which has spooked many retail investors.
While these stories —and more like them— are enough reason to avoid euphoria and be cautious when considering an investment into psychedelics, they again do not alter the long-term thesis behind psychedelics as an investment.
Staying focused on the psychedelic stock investment thesis
So, what is that thesis? In brief, it is as follows.
- First, we are in a mental health crisis, with near all-time-high levels of depression, PTSD
- Second, our current mental health treatments, such as SSRIs for depression and rehab for addiction, while effective for some people, leave far too many behind.
- Third, the treatment market for these conditions is massive, raking in tens of billions a year, even without effective treatments.
- And fourth, early scientific evidence shows that treatments such as MDMA therapy for PTSD, psilocybin therapy for depression, and ketamine therapy for addictions, are much more effective than current treatments.
Therefore, given the above facts, if psychedelic medicines continue to progress through the clinical trial system and within a few years become approved for use in medical circumstances, the companies providing these drugs —and their next-generation improved versions— will disrupt these markets worth tens of billions.
None of the reasons for the collapse in psychedelic stocks alter this long-term thesis. What will ultimately determine whether the industry succeeds is whether the science researching psychedelics continues to be paradigm-shifting.
In fact, in parallel, while stock prices have fallen, research conducted by these companies and others has continued to be very exciting, bringing us closer to what seems like an inevitable legalization of certain psychedelics in specific medical circumstances.
For example, a MindMed Phase 2 clinical trial treating Anxiety Disorders with LSD showed that 65% of patients saw their anxiety levels decrease. An Awakn study treating Alcohol Use Disorder showed that 86% of those who received ketamine therapy remained abstinent 6 months post-treatment. And an NYU psilocybin therapy for Alcohol Use Disorder study found that heavy drinking days fell by 83% in the 3 months post-treatment.
These recent results only further solidify the above thesis. As MDMA and psilocybin progress through Phase 3 trials over the coming two years, we should expect to see both substances legalized — in specific medical circumstances — within two to three years. The companies that dominate the production, sale and administration of the medicines look set to disrupt the mental health treatment market.
Don’t sell the farm: perspective in psychedelic investing
Now, having shown that the psychedelic stock thesis is still looking strong despite the epic crash of the past year, does this mean we should throw money at the sector in hopes of a huge reversal, making us all rich and sending us to Boat Week (ah, the hopium of the early days)?
Well, probably not.
Even if the psychedelic stocks thesis is correct, you still need to predict which specific companies will succeed in the long run. And with dozens of psychedelics companies, we just don’t know. Plus, distrust in the leadership of certain companies is not unjustified, and any one of them may fail (just look at Mydecine, HAVN, and MindCure Health for examples). So you could be right about the wider sector thesis, but still choose the wrong companies. It’s even possible the ultimate winner will be a company that’s on nobody’s radar yet. Added to this, as we have seen over the last couple of years, this sector is bound to be HIGHLY volatile, so putting any large sum of your portfolio into it is asking to be hurt.
Therefore, though I cannot give financial advice, I would stress personal responsibility with your money. Investing in mental health research is 100% okay, just don’t overexpose yourself to the sector. Understand that it is risky, and by no means a certain bet.
PERSONALLY, I do believe that the sector as a whole will recover. To me, the science is becoming ever more conclusive with each passing month. I believe that this sector will not only make me some money, but more importantly, help improve the lives of millions. If not, well, my portfolio will only decline by several percentage points.