Psychedelics the new play in emerging markets: Dentons lawyer

Psychedelics have become the “new cannabis” in capturing investors’ imagination, especially that of retail investors, says Eric Foster, a partner with Dentons Canada LLP.

However, Foster wants to clarify that there are differences between the two.

Many of us may think of mind-altering drugs like LSD and magic mushrooms used for recreational purposes. But Foster says the emergence of psychedelics has more to do with drug development for medical conditions such as pain, PTSD and depression, not helping people see Lucy in the Sky with Diamonds.

“From my perspective, psychedelics are very much a type of biotechnology play,” he says.

But from an investment perspective, Foster says psychedelics do share a lot in common with cannabis, especially in the fast upwards trajectory of psychedelic stocks, as was the case with pot stocks.

“We’ve seen an absolute explosion of capital markets work focussed on the psychedelic sector,” he says. Research indicates the psychedelic industry will grow to US$6.85 billion by 2027. That growth is more than 16 per cent compounded annually from its current size. The potential is significant considering the globally rising numbers of depression and mental disorder cases.

Still, the investment cycle is different than with cannabis, Foster says. Because the players are very focused on psychedelics use as a drug, with all the R&D and regulation that involves, these companies would “likely not see meaningful revenues for quite some time.”

Compare that to cannabis, which started as being approved for medical purposes, then moved on to recreational purposes through the federal government changing the law to allow it. While cannabis shares rose quickly in the run-up to recreational legalization, cannabis stocks have since dropped in value as the industry consolidated. The weaker players got taken out or went bankrupt.

Foster acknowledges that Canada is generally punching above its weight regarding psychedelics, especially with companies that recently have gone public. The reverse takeover model for going public is especially handy. The reverse takeover process finds a shell company that already sits on a public exchange, takes it over and integrates the new company into that publicly traded shell.

“Canadian capital markets have always had a focus on emerging markets and emerging opportunities, and we’ve been doing it for a while,” Foster says. He points out Canada has had a vibrant junior mining market for years, with a similar risk profile, which played well into the cannabis boom.

“I would say Canadian capital markets over the last three to five years have been really focused on emerging markets, whether it is blockchain, crypto, eSports, cannabis, and now psychedelics.”

Foster points out that interest in psychedelics has sparked interest from institutional investors who understand the risk profile and retail investors who saw cannabis stocks bring enormous wealth for shareholders after being legalized in Canada. “For them, especially if they missed the cannabis rally, it might be a matter of having a chance to get into psychedelics at an earlier stage.”

Encouraging research and a more favourable regulatory environment have sent psychedelic stocks through the roof over the last year. For example, take Numinus Wellness, a Canadian-based healthcare company working on psychedelic therapies. Its stock soared from a 52-week low of 18 cents to a 52-week high of $2.45 before settling now into its current $1.20 range.

Numinus Wellness received a licence from Health Canada to produce and harvest magic mushrooms and extract and research Psilocybin. In late 2019, the U.S. Food and Drug Administration affirmed that Psilocybin could be a breakthrough therapy for depression and mental disorders.

Psilocybin is a hallucinogenic compound found in a species of fungi. Studies have shown that this compound can help treat mental disorders, anxiety, depression, and addictions.

Another stock, Mind Medicine, which trades on the NEO exchange in Canada and the OTC exchange in the U.S., has seen its stock jump to US$4.76 from US 40 cents in March 2020.

Mind Medicine is researching psychedelic-inspired medicines and therapies to address addiction and mental illness, developing a pipeline of treatments based on psychedelic substances, including Psilocybin, LSD, MDMA, DMT and an Ibogaine derivative, 18-MC.

There is even a psychedelic-drug-companies ETF that recently began trading. The Horizons Psychedelic Fund currently trades at $9.4 and tracks the North American Psychedelic Index. Top holdings include Compass Pathways, Numinus Wellness, and Mind Medicine. They form ten, nine and nine per cent of the fund, respectively.

Though growth potential might look attractive, psychedelic stocks could be risky. Their smaller size and underlying uncertainties could make their volatility hard for investors’ appetite.

Foster says investing in psychedelics is as risky as many other plays in the biotech sector, given how long it takes to develop and get approval for a drug or a delivery model and the risk that clinical trials don’t end up confirming efficacy to gain regulatory approval. However, by using the reverse takeover model for raising capital and going public, Foster says the securities regulators have some control to make sure the public companies are transparent, declare risks and report regularly.

Publicly traded shares are also a good form of currency, Foster says. These shares are more liquid than those of a private company and can be helpful in M&A transactions as the company grows. Foster says the smaller start-ups often do the research and development. When it gets to the point to mass produce, market, and distribute their product, they hitch their wagon to larger companies through an outright sale, a joint venture or production and distribution agreement.

Foster adds that larger pharmaceutical and biotech companies “are keeping tabs” on the psychedelics plays to see how this space will develop. Like other areas of biotech, the smaller firms do the heavy lifting on R&D, and the more prominent players come in later.