MYDECINE

Is Compass Pathways Stock a Buy?

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November 18, 2020

By Jim Halley

Published at fool.com

Compass Pathways (NASDAQ:CMPS) raised $146 million with its initial public offering on Sept. 18. While the IPO's price was set at $17, on the first day of trading, it opened at $23.40 and closed the day at $29. The stock has been trading this week in the neighborhood of $36. The British pharmaceutical company is testing a synthetic form of psilocybin, a psychedelic compound that occurs naturally in "magic mushrooms," as a therapy for treatment-resistant depression.

Psilocybin works by binding to serotonin receptors in the brain. Serotonin is a neurotransmitter that regulates mood, sleep, and appetite.

Compass Pathways isn't the only pharmaceutical company looking into using psychedelic drugs as therapies, but it does have a head start because its synthetic psilocybin, COMP360, was granted breakthrough therapy status in 2018 by the U.S. Food and Drug Administration. The company is testing COMP360 in a phase 2b clinical trial.

Young woman on a mountaintop.

IMAGE SOURCE: GETTY IMAGES

Of course, there are caveats

While Oregon voters just passed Measure 109 to allow the controlled, therapeutic use of psilocybin mushrooms, the drug is still illegal everywhere else in the U.S. except for Denver, Santa Cruz, and Oakland, Calif. At the federal level, psilocybin is classified as a Schedule I drug, meaning it has no accepted medical use.

Still, one only has to recall that Oregon was one of the first states to allow medical marijuana use to see where this trend could be headed. The District of Columbia also recently passed a ballot initiative essentially decriminalizing the cultivation, possession, and sale of psilocybin mushrooms, though either the D.C. City Council or Congress could still block the initiative from going into effect.

The other catch, and it's a big one, is that Compass Pathways, while funded by such well-heeled backers as PayPal billionaire Peter Thiel and Apeiron Investment Group founder Christian Angermayer, isn't making any money yet. In its recently delivered third-quarter report, the company said it lost $41.5 million in the first nine months of the year, compared to a loss of $12 million in the same period in 2019. Thanks mainly to its IPO, the company has $196.5 million in cash, which it says will be enough to last it into 2023.

Current competitors, potential rivals

While Compass has a head start in the United States, some Canadian pharmaceutical companies such as Mydecine Innovations Group and Cybin are also looking into psilocybin as a mental-health therapy, and they have advantages that Compass Pathways lacks.

Unlike Compass, which because of U.S. laws can only produce the compound synthetically, Mydecine has a Health Canada license to use psilocybin extracted directly from mushrooms, which is a much cheaper method of acquiring it. Cybin is working on its own license to market a dissolvable oral strip of psilocybin.

And at least two other companies are obvious candidates to take what they've learned about the medical cannabis market and transfer that expertise into the psilocybin niche: Great Britain's GW Pharmaceuticals (NASDAQ:GWPH) and Chicago-based Cresco Labs (OTC:CRLBF).

GWPH Chart

GWPH DATA BY YCHARTS

The potential for growth is mushrooming

The Centers for Disease Control and Prevention estimates that 1 in 5 adults in the United States will experience some form of mental health issue in any given year. If it can be shown that psilocybin can help even a small fraction of them, the potential revenues from it could be significant.

In 2017, sales of antidepressant drugs totaled $14.1 billion, according to a study by Allied Market Research, which said that it expected those sales to rise at a compound annual rate of 2.1% through 2023. If psilocybin is found to be safer, more effective, and less addictive than many currently available antidepressants -- which some scientific studies have indicated to be the case -- the drug could significantly carve into those medications' sales.

And there are plenty of other potential applications for psilocybin: Researchers at Johns Hopkins University are investigating whether it can be an effective treatment for post-traumatic stress disorder, Alzheimer's disease, opioid addiction, anorexia, and alcohol addiction.

Still, there are a lot of ifs

Even if clinical trials show psilocybin to be the "next medical marijuana," it would require a long regulatory and political slog to get it legalized for use in most of the U.S., let alone at the federal level.

Compass Pathways would also face a lot of potential competition if its therapy is approved, and it has to show it can make a profit. However, the potential gains are enormous if it can. This isn't the type of stock I'd recommend devoting a large share of your portfolio to, but it's potentially worth a smaller investment, depending on what level of risk you're willing to accept.