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Shroom Shmooz

Psychedelic stocks continue their bad trip despite the psychedelic renaissance. The headlines flowing out of the psychedelics sector over the past year indicate that the psychedelic renaissance appears to be gaining momentum. Clinical trials at various stages involving psychedelic substances, led by MDMA, psilocybin, ketamine, and DMT, have produced results showing clinical promise in a number of treatment-resistant mental health disorders. At the same time, the momentum toward legalization continues with high expectations that MDMA-AT will become the first Schedule I psychedelic substance to be legalized in the US for the treatment of PTSD in 2024. However, despite these tailwinds, public investors in the psychedelics space have endured negative returns over the last couple of years and shown little signs of reversal. Too early for a public market in psychedelics? The funding that is fueling the psychedelic renaissance has been largely driven by venture capital, which is not unusual for an emerging industry. VCs have parked more than $1.4 billion in private psychedelic startups since 2017. The buzz around psychedelics brought their early introduction to the public markets in 2020, with most companies seeking funds from a listing on a public exchange being drug development companies that are years away from generating revenue and profit. Following the initial albeit brief enthusiasm for the first round of psychedelic IPOs, hindsight indicates that the psychedelics’ embrace of the public markets has been premature. The PSIL ETF, currently the only psychedelics ETF trading in the US, has lost 86% of its value since its launch in September 2021. Psychedelics and the hype cycle. From a public investor perspective, it’s hard to argue against the fact that the past two years have been a slide toward the trough of the disillusionment part of the hype cycle. While all points to the big picture for psychedelics being positive, a deeper look shows that most publicly traded companies in the sector find themselves in financially precarious positions. We are seeing the beginning of a shakeout in the industry, which is not unusual for this part of the hype cycle. Where does it go from here? A continuing shakeout in the psychedelics sector and a likely significant shrinkage in the universe of publicly traded psychedelic companies are in the cards until the trough of disillusionment in the hype cycle is reached. Moving beyond the trough onto the recovery slope will require multiple triggers, including the advancement of more clinical trials through the approval process, the removal of bottlenecks (i.e. infrastructural and payor reimbursement) that threaten to slow the pace of the rollout of psychedelic-assisted therapies (PATs) once approved, starting with MDMA-AT for PTSD, the emergence of big pharma interest in psychedelics, and a possible MAPS IPO as it looks secure quick access to the substantial funds it will likely need for the rollout of its MDMA therapy once approved.