Has A Sugar Daddy Emerged In The Psychedelic Drug Industry?

Somewhat obscured by the recent carnage in markets is a big story in the psychedelic drug industry. A new drug development partnership not only has great commercial potential for the company that did the deal, it bodes well for the future development of the whole industry.

On January 5, 2022, Mindset Pharma (CAN: MSET / US: MSSTF) announced a drug development partnership with the McQuade Center for Strategic Research and Development.

It is a very prospective partnership for novel molecule developer, Mindset, and its shareholders. Mindset not only receives an up-front payment of CAD$5 million but will have the expenses paid to take two of its families of novel molecules through Phase I of the clinical trials process.

The key point here is that as a novel molecule developer, Phase I represents the finish line for Mindset. Once its molecules have been tested for safety/tolerance, it’s ready to farm these out to the pharmaceutical companies that will actually develop these drugs – like its partner in this R&D.

Reaching the finish line in drug development with no additional shareholder dilution is a neat trick. In return, Mindset will provide right of first refusal to its partner on anything that emerges from this pipeline.

When Psychedelic Stock Watch spoke with CEO James Lanthier and CSO Joseph Araujo, we learned that these expenses could total in excess of CAD$30 million. That is a huge financial contribution for a company with (as of today) a market cap of less than CAD$60 million.

Very significant news for Mindset. However, when we take a closer look at Mindset’s R&D partner in this drug development joint venture, we see the enormous significance for the industry as a whole.

The McQuade Center for Strategic Research and Development is “a member of the global Otsuka family of pharmaceutical companies.”

Who is Otsuka Pharmaceutical?

Otsuka Pharmaceutical Co. of Japan is “big pharma” with a small “b”, separate from the cartel of large Western-based drug multinationals that are more commonly known as Big Pharma.

But don’t let the small “b” fool you. Through the first nine months of 2021, Otsuka recorded revenues of ¥1.1 trillion (~$12 billion). This is a major drug development company with deep pockets.

As Psychedelic Stock Watch has previously reported, Big Pharma largely stopped funding drug development for mental health-related drugs in the previous decade. The only research that has continued has centered around tweaking the minimally-effective SSRI-based antidepressants that doctors prescribe today like walking Pez-dispensers.

While the Western-based drug multinationals have effectively vacated drug development with respect to mental health, a few of the more specialized players in the industry – like Otsuka – have continued to fund this research.

While most investors in psychedelic stocks may not be familiar with Otsuka Pharmaceutical, Otsuka is very familiar with psychedelics. It made its first investment in the sector via one of the financing rounds for Compass Pathways (US: CMPS).

Then, on March 16, 2021, atai Life Sciences (US: ATAI) partner, Perception Neuroscience announced that Otsuka and itself had formed “a collaboration and licensing agreement for the development and commercialization of Perception’s lead molecule, PCN-101 (R-ketamine)in Japan as a potential treatment for mood disorders such as major depressive disorder (MDD) and treatment-resistant depression (TRD).”

The precise terms of the licensing agreement were not spelled out, but Perception commenced a Phase IIa clinical trial for this drug in November.

These are significant financial contributions for the individual companies, and for the psychedelic drug industry as a whole. But for a company doing $4 billion in revenues per quarter like Otsuka, it’s a drop in the bucket.

A sugar daddy in the psychedelic drug industry?

These three investments, by themselves, may not qualify Otsuka Pharmaceutical as a sugar daddy for the psychedelic drug industry. But what will we see going forward?

This isn’t charity on the part of Otsuka.

As more and more people understand within the psychedelic drug industry, psychedelic medicine is going to revolutionize the treatment of mental health disorders. With 2+ billion people currently suffering from treatable (but untreated) disorders, that is an almost infinite amount of commercial potential.

As noted, there are still a few other larger drug development companies outside of Big Pharma who remain active in the development of mental health-related drugs. Are those companies just going to stand back and watch as Otsuka makes a strategic entry into these next-generation therapies for mental health?

That seems improbable. But what if they do?

Put yourself in Otsuka’s shoes. If the rest of the pharmaceutical industry is content to watch the emerging small caps in the psychedelic drug industry pursue this research, why not write a few more checks – and establish a dominant presence in the industry?
Invest millions today, to potentially generate additional billions in revenues annually for Otsuka’s own bottom line.

Outside of psychedelics, mental health research is largely at a dead end. It isn’t like the psychedelic drug industry has to compete with other research opportunities when it comes to the commercial potential of revolutionizing mental health treatment.

For mental health, the future is psychedelics.

In psychedelic drug development, a little capital can go a long way

Some investors in pharmaceutical stocks may be skeptical that one company (or even a handful) can make a dramatic difference – financially – with respect to psychedelic drug development.

Investors are used to hearing about the costs of drug development from Big Pharma. According to these esteemed sources, it now costs somewhere around $1 billion to develop one new drug. One hyperbolic estimate is that can cost as much as $3 billion to develop a drug.

Of course, cynics might note that these huge drug companies (and the slavish media companies that parrot their opinions) have an enormous incentive to exaggerate the truth on the costs of drug development.

If national governments and their health bureaucracies think that it costs Big Pharma $1 billion to develop a new drug, then they are much more amenable to the vampiric price-gouging for which these Western multinationals are infamous.

Back in the Real World, it apparently costs much less to develop a drug.

In a recent written interview with Psychedelic Stock Watch, CEO Anthony Tennyson of Awakn Life Sciences (CAN: AWKN / US: AWKNF) attached a rough cost estimate to the companies planned Phase III clinical trial of a ketamine-based therapy for alcohol use disorder (AUD): less than $3 million.

Tennyson noted (proudly) that Awakn would be able to achieve considerable cost efficiencies in the trial through the assistance of its research partner, the University of Exeter.

Elsewhere, the Multidisciplinary Association for Psychedelic Studies has raised well over $100 million in total, as it moves through its second Phase III trial. And much of those funds are directed to administrative costs and other research.

There is a rather large difference between Big Pharma’s claims of drug development costs of $1 - $3 billion per drug versus what it actually costs in the Real World.

Other opportunities exist to economize on drug development. The Real World Evidence pathway for drug development is a less-rigid, more-incremental approach to drug development, with drug development costs more in line with the estimate from Awakn versus the expenses of MAPS.

Clearly, even a single large player becoming very active in this industry – like Otsuka Pharmaceutical – could have an enormous impact in accelerating psychedelic drug development.

Blue sky, and more blue sky

The difficult market conditions at present for psychedelic stocks (and equities as a whole) may make investors forget about the almost unimaginable amount of blue-sky potential for the psychedelic drug industry.

These are genuinely (and amazingly) effective drugs competing against minimally effective therapeutic bandaids. And psychedelic medicine represents high-margin therapies.

Over $300 billion per year is spent on mental health each year in the United States alone – with most of those dollars currently wasted. Currently, the market cap of the entire psychedelic drug industry is less than $3 billion.

Even without a Sugar Daddy, the upside potential here is mind-boggling. With the addition of a Sugar Daddy (or more than one), the payoffs get larger – and come sooner.

“It’s always darkest before the dawn.”

For investors in psychedelic stocks, this well-used cliché seems especially appropriate today. At the same time, when the next “dawn” arrives for psychedelic stocks, the likelihood is that it will make the 2020 rally in these stocks pale in significance.

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Mike Nolan 2 years ago Member's comment

Sounds a bit overly optimistic to me.