Like many classes of small-caps, psychedelic stocks are currently trading near their lows, dragged down by the mindless algorithms that have overrun our markets – and destroyed price discovery.
With “price” no longer representative of anything when it comes to stocks, it becomes even more important for investors to look more closely at value. This is where psychedelic stocks shine.
However, these companies don’t all “shine” for the same reasons. Here are five of the best value propositions for psychedelic stocks at the moment.
- Pure bottom-line value (cash-to-market cap)
- Bullish analyst coverage
- Revolutionary research/therapies
- Enormous treatment potential/scalability
- Lucrative partnerships
We picked out five companies that (separately) epitomize these value propositions.
When psychedelic stocks were having their big rally in the latter part of 2020, even many of the smaller companies aggressively cashed-up while valuations were robust.
One good example here is Mind Cure Health (CAN:MCUR / US:MCURF). The company successfully closed several financings, culminating with a CAD$23 million bought deal that closed on February 10, 2021.
When MINDCURE recently announced its Q2 results for fiscal 2022 (on January 25, 2022), it reported a cash position of CAD$13.4 million. However, since that bullish financing, MCUR’s market cap (like nearly all of these companies) has slid considerably.
With a current market cap of only CAD$14 million, this puts its cash-to-market cap ratio at ~1:1.
As we regularly point out, despite its cash-to-market-cap ratio, any company is really only “cheap” if it also presents investors with strong upside potential. In the case of MINDCURE, it’s the company's iSTRYM digital therapeutics platform.
Over two billion people are in need of psychedelics-based therapies to treat mental health disorders. The growth of psychedelics-assisted treatment clinics is still in its infancy.
How do you scale-up the industry (rapidly) to meet this acute need – and capitalize on the enormous therapeutic potential? Digital therapeutics.
This next-generation software incorporates AI to deliver both superior efficacy and efficiency to any therapeutic model (not just mental health therapy). This software also turbocharges the scalability of these therapies.
MINDCURE already has 20 clinic partners lined up to deploy iSTRYM as it moves toward full commercialization. This will allow MINDCURE to not only capitalize on the enormous growth potential in psychedelic clinics – but also help to drive that growth.
Psychedelic stocks (as noted) are generally very well-capitalized relative to market cap. The therapies are a revolutionary improvement in mental health care in comparison to inadequate conventional treatments. The commercialization potential is nearly infinite.
For these reasons, it’s no surprise that many of these companies are attracting analyst coverage, and receiving bullish price targets. One particularly representative company here is Cybin Inc (US:CYBN / CAN:CYBN).
The company has been diligently expanding its R&D pipeline, with a focus on psilocybin-based derivatives for the treatment of major depressive disorder (MDD). Another psychedelic drug company with a robust cash position relative to market cap, for these reasons CYBN has attracted considerable analyst coverage.
Most recently, Oppenheimer Inc updated its own coverage of Cybin on February 1st. Oppenheimer reiterated an “outperform” rating for CYBN with a USD$10 price target. Most of that weighting was attached to the potential of CYBN’s lead drug candidate, CYB003, for which Cybin is commencing a Phase I/IIa clinical trial.
Coming with Cybin currently trading at $1.04, that is a very bullish endorsement of Cybin. But this potential upside is not radically different from the price targets being assigned to many other companies in this space.
The flip-side to current compressed valuations that these stocks have even more room to run than when these pubcos enjoyed a spectacular rally in 2020.
Just like many of these companies have very attractive cash-to-market-cap ratios, many of them are also pursuing extremely prospective therapies – in advanced clinical research.
However, Awakn Life Sciences (CAN:AWKN / US:AWKNF) has perhaps the most recent news here. On January 11, 2022, Awakn announced positive results from its Phase IIa/b clinical trial of a ketamine-assisted therapy for alcohol use disorder (AUD).
Revolutionary? For sure. Awakn reported abstinence levels of 86% six months after therapy. Conversely, conventional therapies show a 75% relapse rate with one year.
Another reason to single out Awakn here is that it has also indicated it expects to be able to conduct its planned Phase III trial at a microscopic cost of less than $5 million. This highlights the fact that despite the exorbitant R&D costs that Big Pharma claims are necessary to develop even a single drug, these psychedelics small-caps are capable of making it to the finish line in their own R&D.
How many psychedelics-assisted mental health clinics do we need to treat the 2+ billion people with treatable (but generally untreated) mental health disorders?
How many decades of growth will be required to get there?
With perhaps more untapped commercial potential than any industry on the planet (not just life sciences), we’re not even in a position yet to answer such Big Picture questions. In the U.S. alone, over $300 billion per year is spent (and mostly squandered) on mental health services.
With such a huge revenue pie in front of them, public companies on the treatment side of the industry are putting the pedal to the metal in building their own networks of clinics.
The revenue leader at present in this space is Novamind Inc (CAN:NM / US:NVMDF). Via its wholly owned Cedar Psychiatry network of clinics, Novamind reported revenues of CAD$1.86 million in Q1 of fiscal 2022, back on November 29, 2021.
That represented year-over-year revenue growth of 113%. And with the recent closing of the company’s acquisition of an Arizona ketamine-assisted psychotherapy clinic on January 18, 2022, Novamind has now expanded out of its Utah base to become a multi-state operator in the U.S.
With the huge commercial potential of the psychedelic drug industry, companies in this space (both public and private) have been enormously successful in attracting capital, from Day 1. Along with the influx of capital (and investor interest) comes the potential for commercial partnerships.
In drug development, given the amount of revenues dollars on the table there are no shortage of entities with deep pockets. One psychedelics company that has recently capitalized on the potential to team-up with larger partners is Mindset Pharma (CAN:MSET / US:MSSTF).
On January 5, 2022, novel molecule-developer, Mindset announced a partnership with the McQuade Center for Strategic Research and Development, “a member of the global Otsuka family of pharmaceutical companies”.
Otsuka Pharmaceuticals is a behemoth among drug companies, reporting revenues of $12 billion through the first 9 months of 2021. Otsuka has agreed to fund two families of Mindset’s novel molecules through to the end of a Phase I clinical trial. At that point, Otsuka will have right of first refusal for anything that comes out of that pipeline.
In addition to paying the drug development expenses (which could total in excess of CAD$30 million), McQuade has also provided Mindset with an up-front payment of CAD$5 million. That definitely qualifies as a lucrative partnership for a small-cap with a market cap of only CAD$75 million.
Naturally, some of the value propositions for these public companies overlap.
Most have low cash-to-market-cap ratios. Several are pursuing the huge commercial potential of the treatment markets. Several are pursuing revolutionary therapies in their R&D. Most have at least some analyst coverage.
And likely more “lucrative partnerships” loom on the horizon for companies in this space.
With market conditions deeply turbulent and even people like Warren Buffett unable to find any “value” among the large-cap stocks in which he invests, this makes the risk/reward profile for these emerging life sciences small caps more enticing.
Different business models. Different value drivers. A lot of great opportunities.
DISCLOSURE: The writer holds shares in Mind Cure Health, Cybn Inc and Novamind Inc. Mind Cure Health is a client of Psychedelic Stock Watch.