Alternatives to ATAI: Go Big Or Go Small?

  • The IPO for atai Life Sciences was arguably the most anticipated event of the year for investors in psychedelic stocks
  • The IPO failed to live up to expectations
  • Are the best alternatives to ATAI the larger psychedelic stocks, or should investors also be looking at the smaller companies?




When atai Life Sciences (US:ATAI) commenced trading on the NASDAQ Friday, June 18th, investor expectations were sky-high.

Atai was/is by far the best capitalized entity in this space. Its growing stable of psychedelics R&D partnerships (currently ten) provide many interesting investment angles.

As one of the first players in this industry, atai has also had abundant visibility in the sector. That profile was raised further when atai partner, Compass Pathways (CMPS), had its own very successful IPO last September.

An anticlimactic IPO for ATAI

With all these factors in its favor, atai’s IPO has generated little excitement among retail investors. Its modest opening day performance (up 29.67% on brisk, but not heavy trading volume) could have been attributed to a negative day in the broader markets.

However, with U.S. markets popping higher on atai’s second day of trading, not only did atai fail to set a new intraday high but trading volume dropped off dramatically (less than ¼ of opening day). On Day 3, volume slipped even further with the share price declining by over 5%.

That’s not going to impress investors sitting on the sideline contemplating an investment in atai. It’s not going to impress ATAI shareholders.

The potential in the industry hasn’t changed. A Renaissance in psychedelic drug research is producing a healthcare Revolution. The “miracle drugs” of the 21st century.

Until Friday, atai was seen by many (most?) pundits as the most promising investment vehicle to capitalize on this enormous opportunity in life sciences. Today, atai looks more like a question-mark.

In our previous article, Psychedelic Stock Watch framed this uncertainty.
 
Back when the company first announced its intentions to go public, Psychedelic Stock Watch touted atai, primarily on the basis of simply being the biggest and best-backed entity (financially). Great potential.

However, look past Compass Pathways’ Phase IIb clinical trial for Treatment-Resistant Depression (atai holds ~20% of CMPS) and atai has very little advanced R&D in its pipeline.

This is a company that needs aggressive marketing. Not just to publicize the sector. Atai needed to generate enough enthusiasm among retail investors to get them to buy in – and then wait for atai’s potential to become a reality.

In the months leading up to its IPO, atai seemed content to just coast on its reputation. Consequently, most investors have voted (with their dollars) to do their “waiting” on the sidelines – at least for now.

Time to look at alternatives to ATAI

Atai Life Sciences is the best-capitalized public company in the psychedelic drug industry. It holds a ~20% interest in Compass Pathways (and its Phase IIb clinical trial for Treatment-Resistant Depression).

Beyond this, the company doesn’t really distinguish itself from other players in the sector. And these other companies aren’t just much cheaper than atai on an absolute basis. Many of them are also relatively cheaper than atai (on a cash-to-market-cap basis).

These other public companies don’t have corporate treasuries equal to atai’s. But they have abundant capital to fund all near-term operational commitments (so no need to return to capital markets any time soon). And they also have abundant capital relative to their compressed market caps.

Cash-rich smaller companies.

In Monday’s article, Psychedelic Stock Watch briefly looked at a few of the more obvious alternatives to ATAI. Some of the larger public players in the sector: MindMed Inc (US:MNMD / CAN:MMED), Cybin Inc (CAN:CYBN / US:CLXPF), and Field Trip Health (CAN:FTRP / US:FTRPF).

MindMed already has a NASDAQ listing. Both Cybin and Field Trip are applying to uplist to the NASDAQ.

Numinus Wellness (CAN:NUMI / US:LKYSF) is another public company that falls into the “obvious” category.
 
  • Diversified operations that include a growing network of mental health clinics
  • Participating in advanced drug R&D
  • Well-capitalized
  • One of the largest following among retail investors

These are all leading companies in the psychedelics space. We’re personally invested in some of these companies and would not hesitate to suggest them as investment alternatives to atai Life Sciences.

Best value found in smaller companies


For retail investors looking for the most bang for their buck in a non-ATAI stock, we suggest you look at the next tier of companies – with market caps much smaller than those of the larger players above.

Why? In a word: over-concentration.

Psychedelic Stock Watch has previously pointed (in May) to the extreme (absurd?) degree of market cap concentration among the public companies in this sector, prior to atai’s IPO.



Adding ATAI into the mix, that concentration is significantly more extreme, but spread among a much greater number of players.



Is such concentration justified? There are two answers to that question.

Looking narrowly at the number of retail investor dollars on the table today, then the answer is maybe. At this moment, the sector doesn’t really look like it can support a greater number of winners.

However, Psychedelic Stock Watch offers three powerful reasons why we can expect the number of retail investors (and retail investor dollars) to start increasing exponentially.
 
  1. Massive flows of institutional capital into this emerging sector
  2. Massive media coverage of psychedelic drugs and the psychedelic drug industry
  3. Massive need for psychedelics-based medical therapies

Apart from atai, the psychedelic drug industry has raised ~$500 million in what is effectively the first full year for this emerging industry.

Media coverage of psychedelic drugs has soared in recent weeks as the mainstream media gains increasing awareness of the spectacular potential of psychedelic drug R&D.

The Mental Health Crisis (now a pandemic) affects as many as 1 in 4 people on the planet. And psychedelics hold out the only potential solution here.

Microcaps in emerging sectors are often shunned by more experienced investors, especially in any sort of capital-intensive endeavor. Why? Capital.

These smaller companies generally aren’t able to raise significant amounts of capital for operations. It becomes a chicken-and-egg proposition.

Investors won’t buy in because the companies aren’t sufficiently capitalized. The companies can’t raise significant capital because they don’t have sufficient support from retail investors – to elevate the share price and raise capital more efficiently.

This is not the case with most psychedelics micro-caps. When psychedelic stocks had their big run in the fall of 2020, management teams raced to raise capital, on terms generally favorable for their own investors.

By early 2021, these companies were cashed up. Share prices have sagged but the treasuries are the same size. Similarly, several private companies raised substantial capital before going public this year, but have traded down rather than up since commencing trading.

Translation: many of these companies have low (even very low) cash-to-market-cap ratios. Cash rich.

5 superb value opportunities in psychedelic drug microcaps


Mydecine Innovations Group (CAN:MYCO / US:MYCOF)

Clinical drug trials get serious when they reach Phase II: the proof of concept stage. For investors, what is the cheapest entry point for a public company with a clinical trial entering or ready to enter Phase II?

Mydecine Innovations Group (CAN:MYCO / US:MYCOF).
With a market cap of ~CAD$80 million (US$65 million), MYCO is commencing a Phase II clinical trial of a psilocybin-based therapy to treat PTSD. And Mydecine offers investors considerable depth beyond this Phase II clinical trial:
 
  • Psilocybin cultivation
  • Robust lab facilities for both drug R&D and psilocybin extraction
  • Digital therapeutics platform for psychedelicsbased therapies (Mindleap)
  • Preparing to initiate a second Phase II clinical trial for smoking cessation

That’s a pretty exciting investment proposition for investors with a public company currently sporting a market cap less than 1/20th that of Compass Pathways.

Not as far advanced in its Phase II clinical trial as CMPS. Not nearly as much cash. Way more upside.

That’s the opinion of Roth Capital Partners. Roth just initiated coverage on MYCO with a “buy” rating and CAD$3 price target. This sounds a lot more impressive when investors note that Mydecine was trading at CAD$0.28 when the analyst coverage was announced.

Small Pharma Inc (CAN:DMT / US:DMTFF)
 
Another smaller psychedelic drug company that is preparing to commence a Phase II clinical trial is Small Pharma Inc (CAN:DMT / US:DMTFF).

The company derives its name not from “small” aspirations. Rather, Small Pharma is positioning its own drug development model to compliment and mesh with the drug R&D of Big Pharma.

The focus of DMT’s psychedelic drug research is (no surprise) the psychedelic drug DMT. With more rapid onset and a shorter duration of psychoactive effects than other psychedelic drugs, the drug offers significant economic advantages as companies seek to commercialize these therapies.

Small Pharma’s lead R&D program is a little behind that of Mydecine. Not as much overall depth in operations.

Where Small Pharma does shine is its cash position. The company raised CAD$63 million for its recent RTO. Roughly three times as much cash as Mydecine; a little more than double the market cap. Still a tiny fraction of either ATAI or CMPS.

Mind Cure Health (CAN:MCUR / US:MCURF)

 
Atai Life Sciences has a cash-to-market-cap ratio of roughly 6:1 after its IPO (and new financing). Mind Cure Health (CAN:MCUR / US:MCURF) has a cash-to-market cap ratio of ~2:1.

As a newer startup, commencing public trading in September 2020, MINDCURE obviously doesn’t boast the same level of development as atai Life Sciences. But MINDCURE does present investors with a very diversified business model.

Led by CEO Kelsey Ramsden, twice named Canada’s Top Female Entrepreneur, MINDCURE is advancing operations in:
 
  • Digital therapeutics: its iSTRYM platform is already being deployed in a mental health clinic setting
  • PsyCollage: more advanced IP, this aimed at expediting psychedelic drug R&D via the faster, more efficient selection of novel molecule candidates
  • Drug R&D: moving toward clinical trials with several candidates, starting with its lead initiative – an ibogainebased treatment for Traumatic Brain Injury (perhaps the largest individual market for psychedelic drug R&D)
  • Drug synthesis (to support R&D)
  • Manufacturing/retailing nootropic product line

Mind Cure also has a strategic investment in one of Canada’s first psychedelics-base mental health clinics, to support both its drug R&D and IP development. Indeed, an industry insider recently quipped privately that MINDCURE looks somewhat like a tiny version of ATAI. Only 1% of ATAI’s market cap, but a lot more than 1% as much potential.

Wesana Health Holdings (CAN:WESA / US:DBDIF)

 
For investors looking for a psychedelic stock trading at an even lower cash-to-market-cap ratio than MINDCURE, how about Wesana Health Holdings (CAN:WESA / US:DBDIF)?
 
Wesana raised in excess of CAD$20 million prior to commencing trading in May 2021. With the tough, current market conditons, WESA has traded lower off its RTO.

The net result is that the company presently sits with a market cap of only CAD$30 million, only roughly 1.5 times its current cash position.

What do investors get at this price? A strong focus on TBI research.

Former National Hockey League player, Daniel Carcillo, was on a five-year personal mission: to find relief from the post-concussion syndrome that was a legacy of his NHL career.

Via psilocybin therapy, Carcillo now has a clean brain scan. His new mission, as CEO of Wesana, is to take what he learned in his personal journey and incorporate it into formal drug development.

The head-start that Carcillo provides to Wesana in its TBI research translates into what is already a sophisticated drug R&D strategy. WESA seeks to become the R&D leader for a treastment market projected to grow to $182 billion by 2027.

Novamind Inc (CAN:NM / US:NVMDF)
 
A common concern for investors in startups of an emerging industry is the lack of revenues. That’s not an issue for Novamind Inc (CAN:NM / US:NVMDF). Novamind is the revenue leader with respect to psychedelics-based mental health clinics.

The company reported revenues of CAD$1.8 million in its most-recent quarter That was an impressive quarter-over-quarter increase of 43%. However, Novamind’s management is expecting this revenue growth to accelerate. Not only does Novamind continue to see strong patient growth in its existing treatment centers, the company is about to double its total number of locations from four to eight.

With smaller psychedelic stocks at bargain-basement prices, investors can buy into this revenue growth with a current market cap of only CAD$42 million.

Want more? Novamind has already announced research partnerships with two Big Pharma players. It is also a strategic investor in ATAI.

These smaller psychedelic drug companies aren’t charity cases. They are steals for investors.

Over-concentration in psychedelic stocks = opportunity for investors


Sometimes extreme concentration in an emerging industry is justified. There simply aren’t a lot of viable/attractive public companies from which investors can choose.

This is obviously not the case with psychedelic drug stocks and the psychedelic drug industry. An industry pioneering a full-fledged healthcare revolution can support a lot more than just six winners.
The over-concentration in psychedelic stocks exists not because there aren’t a lot of quality options for investors. It exists because (at this moment) not nearly enough retail investors have flocked to this space to take advantage of all the opportunities.

That’s an important distinction. And it’s a distinction that could spell enormous profits – for investors with the foresight to still be one of the early-birds in this exciting, emerging industry.




DISCLOSURE: The writer holds shares in MindMed Inc, Cybin Inc, Numinus Wellness, Mind Cure Health and Novamind Inc.
 
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