It’s beginning to look a lot like…2020.
No, not the last 3 ½ months of 2020 after the Compass Pathways (US:CMPS) IPO, when psychedelic drug stocks went on a tear – including a couple of ten-baggers.
The 2 ½ months before that: from the beginning of July until mid-September.
The 2020 slump in psychedelic stocks
From roughly the first of July until the Compass Pathways IPO (mid-September), MindMed Inc (CAN:MMED / US:MMEDF) was a dead stock. Absolutely flat price action. Near-zero trading volume.
While there were only a handful of other public companies trading at that time, their stocks showed a similar collapse in trading volume over that same period.
In technical terms, did MMED look like a stock that any investor would want to buy in early September 2020? No.
Then the Compass IPO arrived.
The share price soared. Trading volumes ignited. At its 2020 high, MMED was a 15-bagger from where it was trading immediately prior to the CMPS IPO.
Night and day.
The 2021 slump in psychedelic stocks
Flash forward to today. Since MindMed closed at its recent high of CAD$5.31 on February 16, 2021 (just over two months ago), MMED has dropped by over 40%.
In relative terms, trading volume has once again slipped to near-zero. Déjà vu.
Are there any reasons for this dismal stock performance? Nothing really that is directly connected to the sector.
U.S. tech stocks have corrected in early 2021. Small caps have seen disproportionate selling. Media coverage of psychedelic stocks dropped off in early 2021 – as we saw saturation coverage of anything/everything related to COVID-19 vaccines.
In technical terms, does MMED look like a stock that any investor would want to own today? No. But tell that to the Smart Money.
Institutional investors bought over CAD$90 million of MMED stock at CAD$4.40 – over 40% above today’s share price.
That was in a financing that closed on January 7, 2021. It was part of the US$500+ million that was pumped into the sector in ~3 months following the CMPS IPO.
With the 2021 slump in psychedelic drug stocks, is the Smart Money having second thoughts about investing in this sector?
While the public companies aren’t interested in raising capital at current share prices, institutional investors have still been pumping their cash into private companies.
Atai Life Sciences raised another $157 million in its Series D financing in February. Ireland-based GH Research just announced raising $125 million in its oversubscribed Series B financing. And that’s for a single lead drug that is barely out of its Phase I clinical trial.
In short, the appetite of institutions for the psychedelic drug industry remains voracious.
Psychedelic Stock Watch has summarized the reasons for this rabid investing in the psychedelic drug industry on many occasions.
- Numerous multi-billion-dollar treatment markets for drug development
- Spectacular results for psychedelic drugs in clinical testing
- Mediocre existing standard of care leaves these treatment markets wide open for disruption
An industry with almost unlimited potential in drug development and mental health treatment. Institutions lining up to throw money at the public and private players in this sector. Numerous big-name investors staking out large positions.
Share prices heading steadily lower. Trading volumes extremely anemic.
That’s a rather gigantic investment disconnect – even for the crazy casinos that we call “markets”.
If only there was some investment catalyst looming on the horizon in 2021, similar to the Compass Pathways IPO…
atai Life Sciences IPO is imminent
In fact, any investor familiar with this space knows that atai Life Sciences is preparing to go public. It has previously announced its intention to seek a Spring 2021 IPO.
It’s now spring. The IPO announcement – and a firm trading date – could occur at any time.
The atai IPO is not merely an equal event with the CMPS IPO. It’s even bigger.
Compass Pathways is only one of the industry partners in atai’s big-tent drug development model. Atai holds ~20% of CMPS as well as significant interests in many of the industry’s other private players.
It supplies the capital-raising clout and its own expertise in the pharmaceutical industry. This leaves atai’s partners free to focus on their R&D.
With atai also much better capitalized than CMPS, it’s expected that atai will command a much higher IPO price than the ~$600 million IPO price for Compass.
CMPS quickly tripled its market cap after its IPO, though the share price has retreated significantly in line with the general trough for these stocks.
For the reasons above, Psychedelic Stock Watch is expecting an even more intense feeding-frenzy when atai commences trading. Where will all the investors go who get priced out of that IPO?
A bigger catalyst implies a bigger rally for the sector as a whole. Even if psychedelic stocks merely staged a repeat of their performance in late-2020, investors in these pubcos will be thrilled.
But investors in this sector don’t have to completely tie their wagon to an atai IPO. There is another important – and very similar – catalyst that could be about to impact this sector.
Way back last fall, MindMed announced its intention to seek to uplist to the NASDAQ. In addition to MindMed’s primary listing on Canada’s Neo Exchange, MindMed currently trades in the U.S. on OTC.
In fact, some little-known “seasoning rules” with respect to listing on the NASDAQ prevent MindMed from uplisting until (at least) May 2021. While there is no guarantee that MindMed will be awarded a NASDAQ listing, with its deep R&D pipeline and robust corporate treasury (~US$160 million), the company certainly looks like a prime candidate.
The combination of these NASDAQ rules and atai’s own internal timetable for corporate development is that investors could very easily see these two catalysts occur almost simultaneously.
Uplisting to the NASDAQ is obviously not the same thing as a brand-new IPO. However, when it comes to the share prices of other psychedelic stocks, a MindMed uplisting could be an even stronger driver of higher share prices.
Not only will the uplisting attract more investors to the sector (like the atai IPO), existing investors in other psychedelic stocks would (rightfully) view their other holdings in this space as also being potential uplisting candidates.
Cheaper psychedelic stocks, even more upside potential than 2020
Arguably, psychedelic drug stocks are even cheaper today than they were in September 2020 – even the companies like MindMed whose market cap today is much higher.
a) Much more cash in the bank
b) Even better sector opportunity
c) Much further advanced in corporate development
b) Even better sector opportunity
c) Much further advanced in corporate development
MindMed has been the Poster Child for capital raising for Canadian-based psychedelics companies. MindMed has gone to capital markets several times for new infusions, culminating (as noted above) in a CAD$92.7 million financing that closed in January.
This represents (at its current burn rate) several years of capitalization. For investors, it means the company has no need to go to the market for more capital – unless/until it is able to do so on favorable terms.
Along with the capital raising, MindMed has been busy. Over 50 news releases have been put out, many of them material developments. Existing research is advancing, new programs are being announced.
In the summer of 2020, the entire industry was lightly capitalized. Investors bid up these stocks in the fall of 2020 on the potential of the industry – not on the financial capacity of these companies to actually execute on their plans.
US$500 million later, these public companies now have plenty of meat-on-the-bone in terms of capitalization.
Indeed, with the robust cash infusions and compressed share prices, some of these companies are currently trading at less than 3 times cash. Mind Cure Health (CAN:MCUR / US:MCURF) is currently trading at a market cap roughly equal to its capital reserves.
None of these companies had liquidity ratios anywhere these lows – not even during the deepest point of the 2020 trough.
Very cheap stocks.
Meanwhile, the Mental Health Crisis continues to worsen and psychedelic drug R&D is rapidly branching into many other major treatment markets.
A much brighter picture for the industry in 2021.
It’s hard not to conclude psychedelic drug stocks offer investors better value and a better opportunity today than immediately prior to the Compass Pathways IPO. And today investors are looking at the very real possibility of a major double-catalyst for the industry – in the weeks ahead.
It’s difficult for investors to summon the courage to “catch a falling knife”. Many will be tempted to wait until after the atai IPO (or MindMed uplisting) to commit any of their own capital.
A week after the Compass Pathways IPO, MindMed had already more than doubled. And with psychedelic stocks even cheaper today than in 2020, positioning for this upcoming opportunity could commence at any time.
In markets, the early bird often does catch the proverbial worm.
DISCLOSURE: The writer holds shares in MindMed Inc and Mind Cure Health. Mind Cure Health is a client of Psychedelic Stock Watch.