Compass Pathways Phase II Results: A Disappointment For Some, An Opportunity For Others

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Compass Pathways (US: CMPS)  has just released its much-anticipated Phase IIb results for its psilocybin-based therapy for Treatment Resistant Depression (TRD).

Previous guidance indicated that these results were due some time around year-end. While the numbers are out early, the results themselves are a disappointment to most observers. CMPS traded down 16.40% on the day and was at much lower levels intraday.

A disappointment for Compass Pathways; the outlook remains unchanged for the industry

Compass reported significant treatment results for the patient group receiving the 25mg psilocybin-based therapy. But the numbers were underwhelming. Not in comparison to conventional therapies for treating depression, but in comparison to other clinical results for psychedelic drugs.

Indeed, the reason the bar had been set so high regarding expectations for the CMPS Phase IIb results can be summed up in four letters: M-A-P-S.

The Multidisciplinary Association for Psychedelic Studies (MAPS) is already well advanced in its Phase III clinical trial, using MDMA-assisted therapy to treat PTSD – a condition at least as hard to treat as TRD.

Results from MAPS’ initial Phase III trial have been nothing short of revolutionary, as Psychedelic Stock Watch has reported on a number of occasions.

  • Over 90% of study participants reported an improvement in their symptoms
  • Roughly two-thirds were effectively cured (i.e. they ceased to exhibit symptoms of PTSD)

This compares to the dismal standard of care for PTSD using conventional therapies. The U.S. military has been experiencing a “suicide epidemic” for twenty years due its failure to provide adequate treatment for PTSD. Suicide levels are currently at record highs.

Today, an average of 22 veterans commit suicide each day. Roughly two-thirds of veterans seeking treatment for PTSD from the Department of Veterans Affairs reports no benefit from therapy. When the MAPS MDMA-based is approved it will revolutionize the treatment of PTSD.

Thus, the first conclusion we can draw from these clinical results is that this is a significant disappointment for (only) CMPS and its shareholders, as well as atai Life Sciences (US: ATAI) and its shareholders.

The outlook for psychedelics-based therapies in general remains overwhelmingly positive. Psychedelic Drugs: The Miracle Drugs of the 21st Century

Nothing changes regarding the therapeutic/commercial potential of psilocybin

The therapeutic potential of psilocybin itself remains unchanged.

Clinical testing of psilocybin shows that:

  1. Psilocybin does “reset” or “rewire” the human brain (in a manner unlike any non-psychedelics)
  2. Psilocybin does regenerate neural connections, i.e. repair the brain (in pre-clinical testing)

Are Psychedelics The Ultimate Brain-Repair Drugs?

Many people have reported unequivocally – in both formal clinical settings and informal settings – that psilocybin therapy has produced transformative therapeutic results. This one disappointing data print does not discourage the overall outlook.

Psilocybin is the Real Deal in mental health therapy, and very possibly in the treatment of many other conditions. So why has this particular psilocybin-based clinical trial not met the high expectations associated with psychedelics-based therapy?

There are (at least) several potential reasons why the Compass Pathways psilocybin-based clinical trial did not produce stronger therapeutic results:

  • Screening of candidates was not rigorous enough
  • The dosage selected for the primary test group was not optimal
  • COMP360, Compass’ psilocybin derivative, may simply not be as effective as natural psilocybin and/or other psilocybin derivatives in treating TRD
  • There had been discussion even in the early stages of Compass’ Phase II trial that the company was taking too aggressive an approach in how it was structuring the clinical trial

Thus, the next conclusion that we can draw from the Phase IIb clinical results for Compass Pathways is that the therapeutic and commercial outlook for psilocybin itself remains extremely robust.

With this context, we can get to what is really important to investors in psychedelic stocks. Who are the winners and losers on the back of this news?

The losers from the Compass Phase IIb results

You don’t have to look far for the losers from today’s news:

a)  Compass Pathways (and its shareholders)
b)  Large CMPS shareholder, ATAI (and its shareholders)

Both companies saw their stock punished on the day’s news, with CMPS (-16.40%) obviously taking a bigger hit than ATAI (-7.96%). But who else is really a loser here?

Other companies doing psilocybin-based research? Why? Compass Pathways is a competitor of these other companies – a competitor who has just stumbled.

Obviously, over the very short term, all investors in psychedelic stocks are losers, since most of these stocks closed substantially lower on the day, on some knee-jerk selling by investors (and a lot of short-selling).

However, once investors digest the true implications of the Compass Pathways results (which are not that large beyond CMPS and ATAI), many will see opportunities arising from this short-term disappointment.

The winners from the Compass Phase IIb results

Psilocybin-based therapies have been heavily touted not only within the industry, but throughout the mainstream media as “the next big thing” in mental health therapy. Now, this part of the mental health care Revolution has been delayed at least somewhat.

Meanwhile, ketamine, another psychedelic, is already broadly legal. Ketamine-based treatment clinics have been growing at an explosive rate. And public companies in the psychedelics industry have been rapidly expanding their revenue-producing ketamine treatment networks.

Psychedelic Stock Watch has been banging the drum loudly on the magnitude of the opportunity here. The Ketamine RenaissancePsychedelics Clinics Race Gaining Momentum

The primary competition to ketamine-based therapy has been sidetracked – at least temporarily. The commercial potential for ketamine-based therapy is now even more robust. The pubcos with a strong focus in this area have a lot more room to run.

Yet most of these companies were already heavily discounted prior to the release of the underwhelming Phase IIb results from Compass Pathways.

Immediately after the CMPS news, look at some of the bargains here.

Field Trip Health (US: FTRP / CAN: FTRP) has nearly CAD$100 million in cash, an expanding North American ketamine treatment network, and an emerging drug development program. Sold down to a market cap of ~US$300 million today.

Awaken Life Sciences (CAN: AWKN / US: AWKNF) is targeting revenues of US$110 million by the end of 2025 with its growing network of ketamine clinics. It already has two advanced ketamine-based drug development programs, and CAD$8.8 million in working capital. Today’s market cap: CAD$70 million (US$56 million).

Novamind Inc (CAN: NM / US: NVMDF) is the current revenue leader in ketamine treatment with full-year revenues for fiscal 2021 of CAD$6.1 million (US$5 million) and ~CAD$10 million in working capital. Sold down today to a market cap of CAD$26.5 million (US$20 million).

Delic Holdings (CAN: DELC / US: DELCF) announced a binding merger agreement to acquire a 10-clinic network of profitable ketamine treatment facilities. Aiming to open 15 more over the next 18 months and just raised CAD$7 million in new capital. Today’s market cap: only CAD$13 million (US$10 million).

Levitee Labs (CAN: LVT / US: LVTTF) was actually up 11.39% yesterday. But even after that jump, its market cap is only CAD$35 million (US$28 million). For that you get a company with an expanding ketamine clinic network that just reported unaudited revenues of nearly CAD$1 million for the month of August and recently secured a CAD$12 million credit facility.

Stocks that were already cheap are (mostly) even cheaper today, despite their extremely robust commercial opportunity getting even larger.

There are two billion people globally with treatable mental health disorders who (for the most part) aren’t obtaining adequate treatment from conventional therapies. Ketamine-based therapies have not only been yielding better results for patients than conventional therapies, the treatments generate strong margins for the clinic operators.

Large treatment margins + unlimited treatment populations = ?

You do the math.

In the United States alone, over $300 billion per year is spent on mental health – with very little to show for it.

How much of this $300 billion revenue pie will get soaked up by ketamine treatment clinics over the next 5 years? These treatment companies are clear winners from today’s CMPS news.

MindMed Inc (US: MNMD / CAN: MMED) is the biggest rival to both Compass Pathways and atai Life Sciences in drug development. But MindMed has minimal exposure to any psilocybin research. The company’s most advanced (and most promising) R&D programs have no connection to psilocybin.

MindMed Inc should have been a winner from the CMPS news. Instead, it traded down 10.39%. Another opportunity for investors.

Other companies that also have no connection at all to psilocybin-based research were lower on the day – and already cheap.

Small Pharma Inc (CAN: DMT / US: DMTTF) focuses exclusively on DMT-based research. Mind Cure Health (CAN:MCUR / US:MCURF) is aggressively partnering with (mostly) ketamine treatment clinics in expanding the reach of its iSTRYM digital therapeutics platform.

More room to run for these companies too. No reason for them to have traded lower yesterday – but they did.

What about other companies focused on psilocybin-based research?

The largest public company in psilocybin-based research has stumbled with its most advanced R&D program. Is this good news or bad news for the other companies pursuing Compass Pathways with their own psilocybin-based research?

Objectively, it looks like good news for them.

As already noted, nothing changes with respect to the research/commercial potential of psilocybin itself. Now the perceived distance between CMPS and these other companies researching psilocybin-based treatments has shrunk.

Cybin Inc (US: CYBN / CAN: CYBN) is in the process of launching its Phase IIa clinical trial of a psilocybin-based therapy for Major Depressive Disorder, and Cybin has been aggressively expanding its psilocybin R&D pipeline.

Just named psychedelics “Company of the Year”, Cybin looks like another winner from today’s news.

Markets often trade irrationally, especially when surprised. What should be the takeaway for investors going forward?

Short-term setback, longer term opportunity

Compass Pathways sparked a huge rally in psychedelic stocks in 2020 with its IPO. It looked like it was in the process of doing so again.

Prior to Monday’s trading, CMPS had risen by 68% since its October 6th low. Several other psychedelic stocks had also registered clear breakouts in recent trading. It appeared that Compass Pathways was about to ignite another rally in psychedelic stocks. Compass Pathways 2.0: A New Rally In Psychedelic Stocks?

Obviously, the “Piggyback on Compass Pathways (again)” rally is over. But what about a “Catch up to Compass Pathways” rally?

Compass actually recovered half of yesterday’s intraday losses and sits with a market cap of $1.5 billion. Look at some of the relative values represented by its peers – who have not been weakened by today’s announcement.

Unless investors expect a collapse in the market cap of Compass Pathways, the companies above have enormous room to run as investors previously focused on Compass (or atai) look for greener pastures.

Indeed, the collective market caps of the companies above are roughly equal to Compass Pathways. However, as of yesterday, the combined investment potential of these eight companies grossly exceeds that of Compass Pathways.

CMPS may still have more room to fall (although it’s still sitting with a ton of cash). However, clearly, these other stocks could still have very robust catch-up-to-Compass rallies, even if CMPS itself slips lower.

Yesterday was a disappointment for most investors in psychedelic stocks and Compass Pathways in particular. But clearly, there are better things to come for the industry – and many of the other public companies in it.

Disclaimer:  The writer holds shares in MindMed Inc, Cybin Inc, Novamind Inc, Levitee Labs, Mind Cure Health, and Delic Holdings. Mind Cure Health is a client of Psychedelic Stock Watch.

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