Could psychedelic drug start-ups pave the way to better mental health? Investors seem to think so

Biotechnology start-ups seeking to use psychedelic drugs to treat mental health disorders are raising hundreds of millions of dollars, as investors are tempted back to the sector by watershed clinical data and regulatory approvals expected this year.

Groups seeking to harness mind-altering substances including MDMA, psilocybin mushrooms and 5-MeO-DMT, a hallucinogen found in desert toad secretions, raised at least $163 million across five deals in January, according to PitchBook and company data. It is the second-highest month of fundraising ever recorded, after March 2021.

Multiple people who work in the sector said they expected more backing for psychedelics groups, as promising scientific data and positive signals from regulators attract high-profile investors.

[ Psychedelics showing ‘promising’ results for mental health conditions, conference to hear ]

Singapore’s $300 billion investment fund Temasek and the venture capital arm of one of Abu Dhabi’s largest sovereign investors, Mubadala, have held talks with biotechs to fund development of psychedelic mental health treatments and clinics, according to three people familiar with discussions.

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The funds both have a history of investing in biotechs but are bankrolled by countries that have some of the world’s most restrictive laws on drug possession; Singapore has executed at least 15 people for drug-related offences in the past two years. Temasek declined to comment. Mubadala said it was “continuously evaluating all possible clinical and therapeutic prospects to address significant unmet needs”.

Once considered a relic of the 1960s counterculture, psychedelic drugs have experienced a renaissance both in society and healthcare research in the past two decades, such as the rise of “microdosing” by Silicon Valley tech executives. While many of the early studies into the effect of psychoactive substances on mental health were funded by philanthropy, billionaire evangelists for the drugs such as tech entrepreneur Peter Thiel, German financier Christian Angermayer and crypto investor Mike Novogratz became pioneers in funding over the past decade by deploying their personal wealth, as institutional investors remained wary.

“Psychedelics have already arrived in society as an accepted fact,” says Angermayer, who started investing in psychedelics when he became convinced of their efficacy after using them about a decade ago, despite a lifetime abstaining from drugs and alcohol. “I always try to ask myself, ‘Is it just my circle?’, but ... the demand is so high and the current treatments are so bad.”

The investor interest in businesses developing psychedelics comes as the broader biotech sector enjoys a revival. A Nasdaq index of small-cap biotech stocks has rallied by more than 40 per cent in the past three months as investors bet on an end to interest rate rises.

Even so, the drugs have remained in a legal grey area in many countries, with concerns about a rise in illicit recreational use following the uptick in their clinical acceptance. Most common psychedelics remain controlled substances in the US, although this does not prevent state-by-state decriminalisation and is not considered a barrier to FDA approval.

An FDA decision could lead to the schedule-1 controlled substance MDMA being reclassified for use as a mental health treatment, the first time such a reclassification will have taken place

By this summer, London-based Compass Pathways, a Nasdaq-listed group backed by Thiel and Atai Life Sciences, a biotech group that Angermayer founded, is expected to publish data from a “phase three″ trial of 800 human subjects who have taken synthetic psilocybin to treat treatment-resistant depression.

These will be the first results from a study designed around landmark US Food and Drug Administration guidelines for researching psychedelics that were outlined last year, a decision that encouraged investors that formal approval of the drugs would soon follow.

“Much of the stigma in investing circles has started to dissipate,” said Kabir Nath, Compass chief executive, who said the FDA’s move to issue guidance had “made it a lot more straightforward” for investors.

Lykos Therapeutics, a corporate offshoot of the nonprofit Multidisciplinary Association for Psychedelic Studies, is also awaiting a decision from the FDA on its MDMA-assisted therapy for post-traumatic stress disorder expected by the third quarter of 2024.

The decision could lead to the schedule-1 controlled substance being reclassified for use as a mental health treatment, the first time such a reclassification will have taken place.

According to three people close to the company, a funding round worth more than $100 million last month from a group of 10 investors including the charitable foundation run by hedge fund billionaire Steven Cohen and his wife Alexandra, was oversubscribed. As a result, Lykos is considering raising more money by the end of this year.

“There’s a lot of biotech investors and big pharmaceutical companies sitting on the sidelines ... they want to see what the commercial roll-out looks like,” said Tim Schlidt, co-founder of Palo Santo, a Chicago-based venture capital fund that invests exclusively in psychedelics healthcare. “There’s going to be a lot of change based on whether [Lykos] comes through and gets approval.”

The world’s on fire and psychedelics are going to become more essential as a medicine

—  Rick Doblin, a psychedelic drug advocate who founded the non-profit Maps in 1986

Spravato, a nasal spray based on a molecule from the psychedelic drug ketamine used to treat depression, already ranks as Johnson & Johnson’s fastest-growing product. Analysts project it will achieve more than $1 billion in sales this year, and become a so-called “blockbuster” drug.

That clinical distribution of Spravato has laid the groundwork for future drugs. “The emerging commercial infrastructure is giving investors great comfort,” said Greg Mayes, chief executive of Reunion Neuroscience, a Canadian group developing psilocybin treatment for post-partum depression in women. “Data, regulatory and commercial [progress are] all converging in an area where there is a giant unmet medical need.”

More than 50 psychedelic companies have gone public in the US and have a combined valuation of more than $2 billion, which is predicted by analysts to reach $12 billion by 2030.

In July, the American Medical Association released the first CPT codes – reimbursement codes used for healthcare billing – for psychedelic therapies, which created a pathway for the drugs to be integrated into the US healthcare system.

“We have demonstrated ... that it’s possible to take the psychedelic experience and work within highly regulated protocols and still get great results,” says Rick Doblin, a psychedelic drug advocate who founded the non-profit Maps in 1986. “The world’s on fire and psychedelics are going to become more essential as a medicine.”

The results of early leading studies into psychedelics made public have been groundbreaking. The first clinical trials by Lykos showed that over 70 per cent of its MDMA-assisted therapy study participants were cured of PTSD after 18 weeks, while Compass Pathways found that it could get a quarter of patients with treatment-resistant depression into remission in 12 weeks, according to data released last year.

The early data helped Compass raise $285 million in a private placement of its shares last August from mainstream biotech funds including $10 billion fund RA Capital and Surveyor Capital, an equities business owned by Ken Griffin’s Citadel.

That Compass funding round was “good for the sector overall”, says Doug Drysdale, chief executive of Cybin, a Nasdaq-listed company backed by asset manager Janus Henderson and Cohen’s Point72 hedge fund, as it showed that fundamental pharmaceutical investors were doubling down on the space.

“You don’t have to be a tie-dye-wearing investor to think of the psychedelic space as interesting,” says Protik Basu, managing partner of Helena Special Investments, which led the latest investment round in Lykos.

“Investors like investing in inevitabilities: you can’t argue with the absolute crisis of mental health around the world; you cannot argue with the fact that antidepressants and the current suite of tools generally suck.” – Copyright The Financial Times Limited 2024

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