$800 Million Valuation for First Psilocybin Company?

Recent developments in science and policy reform suggest that “magic mushrooms” and psilocybin technology will evolve into a psilocybin industry.  Investments by several early movers illustrate that a psilocybin industry is already forming. What is the value of the opportunity?  Apparently investors pursuing the first psilocybin company are seeking  “a valuation of $800M  or more, according to one of the people familiar with the matter.” See BusinessDay.

Psilocybin is one of the active molecules found in magic mushrooms. Recently, psilocybin has earned considerable attention for its potential therapeutic value.  See generally, Michael Pollan, How to Change Your Mind. 

Renewed interest in psilocybin is supported by studies demonstrating the safety and efficacy of psilocybin for treating some of the world’s most intractable mental health problems, such as “treatment resistant depression,” addiction, post-traumatic stress disorder, anxiety, etc..  See generally recommendations from Johns Hopkins University Scientists for rescheduling psilocybin.

Changing perspectives on psilocybin have left many investors wondering whether psychedelic medicine (e.g., psilocybin therapies) could be the next big opportunity after cannabis.

What does cannabis have to do with psilocybin?

Within the past decade, society’s opinion of cannabis has evolved considerably.  While cannabis was once considered a scorned drug of abuse with no therapeutic potential, it is now recognized as having tremendous potential as a medicine.  And, many critics admit that cannabis is considerably less harmful than they previously believed.  These changing perspectives have grown alongside enormous economic activity, resulting in tremendous returns for many cannabis investors. All of the logic from the cannabis industry also applies (more so) for magic mushrooms, creating a near perfect analogy between cannabis and magic mushrooms.

Early Signs of Emerging Psilocybin Industry

Some early investors have already entered the psilocybin space.  For example, according to Bloomberg, as of Q4 2018, Atai Life Sciences AG is close to announcing fundraising with lead backers Christian Angermayer, a German investor, as well as PayPal co-founder Mike Novogratz and Icelandic entrepreneur Thor Bjorgolfsson.

Atai owns a “substantial stake’ in U.K. startup COMPASS Pathways, which is conducting clinical trials with psilocybin for treating depression, specifically treatment resistant depression (“TRD”).

Other efforts towards legalization and/or decriminalization (e.g., in Colorado, California, Vermont, Iowa, and Oregon) indicate that psilocybin and/or magic mushrooms containing psilocybin may soon become more widely available.  Presently, it is unclear whether that legal reform will pertain only to “magic mushrooms” or also to extracts, purified molecules, and formulations derived from them.

Efforts in Denver (Decriminalize Denver), California (California Psilocybin Mushroom Decriminalization Initiative) and Vermont (Vermont Psilocybin Wellness Initiative) appear to be focused exclusively on decriminalizing mushroom fruiting bodies.  Proposals by Jeff Shipley (an Iowa lawmaker) and the Oregon Psilocybin Society (Psilocybin Services Initiative) include language that would also include purified or synthetic molecules, such as synthetic psilocybin, which is an important part of COMPASS Pathway’s research and development.

$800M for the First Attempt at a Psilocybin Company?

The above described activity indicates that a psilocybin industry has already started to emerge.  For investors, this raises a handful of questions about the size of the opportunity. According to Bloomberg, Atai has provided and initial figure of $800MM for COMPASS:

“Atai is already in talks with banks about a potential listing in Canada next year, a step for which it seeks a valuation of $800 million or more, according to one of the people familiar with the matter.”

At first glance $800MM seems both arbitrary and enormous.  However, treatment resistant depression is one of the most costly conditions afflicting the world today.  According to the U.S. Center for Disease Control and Prevention, “about 1 out of every 6 adults will have depression at some time in their life.  Depression affects about 16 million American adults every year.”

Economists estimate the annual societal cost of depression (in the United States alone) to be in the tens of billions of dollars.  Accordingly, a company poised to provide the world with a treatment to this condition could create a lot of value for both society and investors.

Future Opportunities in Psychedelic Medicine

Notably, COMPASS Pathways is focussing on only one molecule that is found in magic mushrooms.  Plus, COMPASS Pathways appears to have only narrow patent protection, focussing on methods of making synthetic psilocybin within Great Britain.  See, e.g.,  GB 1716505.1, “Preparation of Psilocybin, different polymorphic forms, intermediates, formulations and their use”:

The future of psilocybin technology will expand outside of Great Britain. Additionally, future products will probably leverage all of the active ingredients found in magic mushrooms instead of only psilocybin. Either way, COMPASS co-founder, Ekaterina Malievskaia is clear that COMPASS’s patent position is “not blocking anyone.” She explains, “It doesn’t mean that we patented psilocybin as a molecule …. Anyone can make it in many different ways: 3D printing, growing on yeast, genetic engineering.”
Drawing again from the lessons learned in the cannabis industry, formulated products combining multiple active ingredients offer benefits beyond single molecules.  See Entourage Effect.  Some have even suggested that “The Future of Cannabis is Formulations of Cannabinoids.” See Madison Margolin’s article in Rolling Stone. Recent acquisitions in the cannabis space demonstrate that patents protecting such formulations are highly valuable.
In sum, although COMPASS appears to be first out of the gate within the emerging psilocybin industry, their position lacks strong patent protection and also seems vulnerable to competitors creating superior products with multiple active ingredients. COMPASS’s vulnerability to future innovation and its limited patent position put the $800M figure associated with their potential IPO into context.  An $800M valuation for the first psilocybin company is probably just the tip of the iceberg.

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