JNJ - Psychedelic Stocks: Don't Bet On Just 1 Company

2023-07-13 12:35:00 ET

Summary

• Will tough times continue for psychedelic stocks?
• Analyst Alex Carchidi shares his views on the sector and specific stocks like Compass Pathways, Atai and Cybin.
• Inevitability of big pharma entering the space.

Listen below or on the go via Apple Podcasts or Spotify .

Will tough times continue for psychedelic stocks? (1:50) Analyst Alex Carchidi shares his views on the sector and specific stocks like Compass Pathways (CMPS) (4:20), Atai (ATAI) and Cybin (CYBN) (19:50) and the inevitability of big pharma buying up assets (32:10).

Transcript

Rena Sherbill: Alex, welcome back to Seeking Alpha.

I’d love it if you shared with -- because you just shared with me and I think that it may speak to the evolution of this conversation and where you're at and what we're talking about a little bit. It kind of catch listeners up about where you're at these days, if you would?

Alex Carchidi: I cover the biotech and pharma sectors with a little bit of coverage of other healthcare stocks and medical device as well, and I also handle cannabis industry. And in the course of my coverage, I tend to consider the psychedelics industry as a subset of the biotech industry, or as part of biopharma because it's drug development driven. At least the portion of it that I think is the most promising for investors and also the most likely to create actual changes in the world.

Over the last year or so, it has been tough times for the psychedelics industry. Equity prices are way down. The bear market was absolutely brutal. A lot of companies are starting to run quite low on money. And the terms at which they can raise new money tend to be unfavorable, if I can be blunt there, because their stock is worth a fraction of what it used to be.

So an equity raise, it's going to hurt the shareholders a lot and then people will not be so happy about it even if it's necessary to survive. And at the same time, if they want to take out new debt, there are a few companies that have been able to secure pretty good credit lines.

I’m thinking of COMPASS Pathways ( CMPS ) specifically, they just signed, I think, $50 million. I think it was a revolver credit facility. I might be wrong in that revolver part. But the point is that the surviving leaders, COMPASS Pathways , Atai ( ATAI ), they have the ability to raise money even in this difficult environment, but very few other companies have access to debt at an okay rate, because they're still years away from having a product out the door.

So I think the story of the next year, is going to be collapse and consolidation. I wish I had a more positive message, but I think there's going to be some hard choices made about who has pipeline projects that can make it at some point in the next few years. Who has the money to actually do it, and who doesn't -- who didn't quite meet the threshold to continue. So that's basically where I think it's at. It's a little bit grim, I have to say.

RS: It's a little bit grim, it sounds a lot like the cannabis industry , a lot of expansion and promises and forward guidance, very optimistic , let's say. And the chickens are all coming home to roost.

AC: Yes.

RS: Yeah. And honestly, I mean, if you're in media -- anywhere you look, there's so much cost cutting and just a real 180 from I think where we were a couple years ago. When you're looking at the sector, you talked about COMPASS Pathways having -- and that's something also we’re seeing in cannabis, the most well capitalized companies are going to be the ones that have a chance to survive.

What are your thoughts about where COMPASS is at in terms of its clinical trials? I know that it's trying to go for Phase 3. I don't know what the timeline is there. What are your thoughts there? And would you say that it's the best capitalized because of its Atai connection? What would you attribute that to?

AC: So, for COMPASS specifically, the timeline is kind of an interesting question. One dynamic that I think they're going to bump up against is that it is possible, technically speaking, for their late phase clinical trials to be concluded before the legal regulatory issues of -- these chemicals aren't even legal for any purpose a lot of the time, before that gets resolved. So, they could have a functioning therapy product in hand, proven in clinical trials in the next couple of years even.

And yeah, the regulatory element of it, you can get the FDA on board, but that's not the only agency that you need to have on board. You'd also need to have the DEA on board possibly, congress would need to do something. I would say probably.

So that's kind of a weird problem that doesn't really crop up in biotech ever, that the science is ahead of the legislation, that kind of allows it to be commercialized. I think probably they can figure that out or something could be figured out, but it probably will lead to them getting blocked at some point.

Now, as far as your second question, are they the best to capitalize at the moment. I think so. However, you also have to go back to the previous thing, which is that, okay, you have a lot of money, and you clearly have enough money to finish development of their lead program. I think that's very obvious that they have enough money to finish, especially with the ability to draw on a little bit of debt like they just secured. It's not that they're about to run out of the money. It’s they’re about to go too fast, so to speak. Really…

RS: Run out of runway.

AC: Yeah. Exactly. And I don't know how the market is going to react to that, honestly. I think it's a rare situation. Then again, they also have to actually finish the clinical trials first. And we can say that early signs are good. That their COMP360 , it's a combination of psilocybin, and they want to call it psychological support. I think probably we will have more evidence that that is pretty effective because we have some preliminary evidence already. But that doesn't matter if they can't actually market it legally.

So, they have actually been -- this is a little bit of a tangent, but I think it's worth it. They have been working with the -- I believe it's the American Medical Association to encode into the medical billing system the appropriate entries for psychedelic therapy, which is a huge foundational step, because it means that if these therapies get out the door, then they could be covered by insurance, provided that they're legal. And that was COMPASS taking the lead on that. They also teamed up with MAPS. Do I need to define that? Or will people know what that is?

RS: I think you can define it briefly. Sure, I think most people listening know, but…

AC: So, MAPS is a nonprofit. It's the Multidisciplinary Association for Psychedelic Studies. It's probably the best known research slash -- not quite lobbying, but certainly advocacy for psychedelics. So, the fact that COMPASS was able to team up with them that's pretty cool. And the fact that they were able to actually get the American Medical Association to suggest changes to medical billing codes such that these therapies be covered. That's huge. It's another piece of the puzzle that was missing before that looks like it's going to fall into place now. And it's thanks to COMPASS. They took the lead on that.

RS: There's also speaking to those kind of big wins and partnerships on the regulatory side. There's also news of the FDA coming out with some guidelines . The DEA, let’s say, isn't coming out with anything on the offensive. I don't know what they're willing to prosecute or not. But what is your -- what are your thoughts -- I mean, I know we're seeing huge wins like in places like Australia. Less consistent in the States, but there are some nice smaller wins I think that we can point to, especially in recent months.

What are your thoughts on the regulatory side of things?

AC: So, my understanding of this regulatory situation in the U.S. specifically is there are states and municipalities that are doing decriminalization. For example, the city that I live in, Somerville, Massachusetts, decriminalized possession and consumption of psilocybin and a few related compounds. For investors in the space, I struggle to believe that any of these small initiatives are going to add up to become a market yet, just because there's a difference between something as decriminalized versus something as legal for medical use.

And I think there's a parallel to the cannabis industry here, also in Massachusetts, for example. I think more than 10 years ago, we “decriminalized” marijuana, but the industry could not begin with any real force until it was legalized.

So it could be a stepping stone for psychedelics to be decriminalized, or to be legally allowed in certain small areas. Usually it’s cities doing this. And I believe -- I think maybe Oregon that decriminalized totally. And I'm sure they probably have some work in progress to get towards allowing medical use as well. Once again, it would take a lot for that to add up to be a market that is big enough to actually target or big enough to actually compete in, or big enough to make the biotech business model really work that well.

Now, I say that, but then also separate bullet point. One interesting trend in the psychedelic industry is that, oftentimes there are international clinics that are set up. For example, Jamaica is a very popular place to do this. Companies will set up clinics with the idea of almost selling a vacation to people. So they fly in. They get their treatment, and the laws there allow it. And then they fly back home. So it's like a vacation/therapy. I don't know if there are any major public companies pursuing that kind of blueprint. Nonetheless, that -- potentially something vaguely similar to that could potentially be, I almost want to say, a puddle-sized market if that's the only thing that's there.

If, let's say, 5 years down the line, companies have therapies that are proven to be effective in hand, and the legal situation has not really loosened up that much. They could try to do something like that where they have their customers fly in. But I don't believe that's where the biggest potential really is.

And I question whether they will be actually able to be profitable, because it’s a huge additional barrier for patients to have to transport themselves somewhere else for a week and probably pay a huge amount more, which probably won't be covered by insurance, even if the therapy itself is.

So it’s a possibility, like I said, at the current way, the decriminalization and medical is going. It's almost like baby steps, but you need big steps before it ever becomes anything. Did that make sense?

RS: Yeah. I think so. In the cannabis industry, people are always trying to predict the passage of SAFE Banking and how much that's going to unlock what cannabis companies are able to do, and uplisting and all of these things. And it seems ever more futile as the years pass on and people's predictions are very off. Would you say it's just as futile to predict when there's going to be a straight up totally legal market in the U.S.?

AC: Yeah. I think so. I think it is futile to try to predict it. I just don't see -- I don't see either political party really picking up psychedelics as something that they really want to carry forward. There has recently been some bipartisan collaboration, I believe, with AOC and Matt Gertz regarding getting the Department of Defense to study these compounds for the purpose of alleviating PTSD. I don't know if that actually ended up passing or not, or getting included into a bill or anything. And I don't believe that it was like a major, you know, no one was willing to die on that hill. And not to say, they should either. But there's not necessarily that much momentum for it at the moment at the federal level at least.

RS: How are you thinking about the industry? And how would you advise investors, given the fact that there are so many unknowns, how should we best be looking at the industry? And what -- is there a kind of company or there are just specific companies like that have the best relationships that are going to be the best capitalized that have the best, you know, path to profitability even if that path is quite long?

AC: So, the way that I'm approaching it now is, whereas before they were super-risky biotech companies, now they are super-risky biotech companies that are low on cash. So, you can see that that’s the – it went from super risky to like super risky squared, unfortunately.

RS: Yeah.

AC: In practice, I would say, don't bet on just one company. Make a few small bets on the best companies. And for me, it's still the same group . It's still , more or less in order, COMPASS, Atai, Cybin ( CYBN ). Once again, they could eventually run low on money, not COMPASS, but the other two. And certainly anyone who is a smaller name, then those are already running very low on money. So I would probably try to avoid those.

The other really general thing that I would say, and this is just for me, but I think it's a useful principle. I refuse to invest in any kind of psychedelics company that is anything outside of primary pharmaceutical drug development. Which is to say, if there is a company that is manufacturing, let's say, psilocybin, for the point of selling it to one of these biotechs, so that they can do their research more easily. I'm not really seeing that there is a business model that is going to work there.

The reason is, in that little example, specifically you need very small volumes of these molecules to get a therapeutic effect, and at research scale, it could be a fraction of that even.

And obviously, if it's for clinical operations, probably these biotechs will want to be manufacturing their own from scratch to have full control over every element of the manufacturing process, especially because of all the legal and regulatory issues that are specific to these molecules because they are, you know, the DEA has many different standards for it, that are, I don't think that they're negotiable, right? You have to abide by them, which means that anyone that is outside of the primary drug developers, they're on very shaky ground. I think often, the paperwork burden is very large, but even beyond that, the demand is minimal.

And I would say that's also true for, if you ever see, there are some micro caps that are publicly-listed. I earlier mentioned these clinics in Jamaica, or things like that. There are ones that are publicly-listed. I would not choose to invest in those, which is not to say that they will not be successful. But I'm really only familiar with the regulatory structures of the United States, and the legal structures of the United States, and the clinical standards here. And the scientific standards here as well.

So, perhaps you can say, you know, for 3 years, these clinics will be stacking revenue, right? Because they do actually make money and many of -- some of them -- they could be profitable. There's no reason why they shouldn't be profitable because they don't have the same barriers as these biotechs do. They're not held to the standard of making a new product, proving in clinical trials. They're held to the standard of, do people go, get treated, feel better, and tell their friends or something along those lines. And it's cool because they could be profitable, but they're also very vulnerable to a bad news story coming out of someone saying, hey I went there, and I had a terrible experience. Or I went there and I got sick or something.

So in my opinion, I would really confine my recommendations to biotech, United States, Canada, maybe Europe-based, because that's where I see that -- the risks are still very high, but I know the risks well enough to be able to kind of quantify them and work around them, and I understand that it's not going to be the same completely catastrophic impact if there is a story that comes out that says, oh, patients in the trial are struggling with x, y, z.

Well, that happens. And so there's a system for working with that and addressing those issues as well. So it doesn't have to be the end of the road. But with some of these very small business that are kind of scattered around the globe, it could be, right. They don't necessarily have the ability to survive a bad news story, so I wouldn't invest in them.

RS: Are there new catalysts for the stocks that you do like? Or is it for mostly the same reasons?

AC: New catalysts, not really. There are two big catalysts for all the stocks that I like in the psychedelics sector. The first one is obviously legal regulatory, and I count this latest, getting the medical billing codes updated, that is - I count that as legal/regulatory, and things of that nature. And then the other kind is clinical trial results, or technology development that is tangible, and that you can show people, oh, we've developed this capability that improves our ability to make or evaluate our medicines. So, those are the two big ones.

And regretfully, many of the latest studies that these companies have been doing, they haven't made the biggest impact on their stock prices, even if there are relatively positive results. And I think this is because a lot of the money has kind of flowed away for now, at least.

RS: A lot of the money from the investing side, like from…

AC: Yes.

RS: Can you point to some of the wins and some of the companies? And would you -- and can you kind of specify in terms of Atai, and Cybin, and what they have going on?

AC: Yeah, so from what I remember, the biggest win from Atai recently. And I think this is something that I think that the market missed a little bit. So, let me just verify this quickly, so I don't lead you astray. Essentially, they're either initiating or they've already initiated a Phase 1 program for a nonbenzodiazepine anxiety reducing medicine, which could be gargantuan. Let's see. Yes. So they completed their Phase 1 study for a nonbenzodiazepine antianxiety drug. And the results were good, and they will be moving forward from what I understand.

So, this is not necessarily something that I think is on the radar of many people who are kind of focusing on the psilocybin drug development, or the MDMA drug development in the space. Paradoxically, it could be a much larger market ultimately, and it could have an easier time getting to the market.

Reason for that being, one, there's not many other options for anti-anxiolytics drugs with a short onset, and short duration other than benzodiazepines. And benzodiazepines have all sorts of problems, which make them not suitable for long-term use, and also kind of not – it’s difficult for people to be functional while they're on them, which kind of you know, you could suggest that some level of anxiety is necessary to perform a task successfully. And then when you reduce it sharply with benzodiazepines it makes it difficult to perform a task correctly even if you might need to.

So that data from Atai was really good, and it could set them up for a tremendous medicine down the line, needs to prove efficacy first in Phase 2. Nonetheless, they're also, I think, one of the few, if not the only because I don't remember any others, the only drug developers in the psychedelic space that are bothering with this kind of – it’s not based on a primary psychedelic.

And yet it could have a huge market, and it’s a derived product, right? It's not as though they're taking some molecule that's well known and simply repackaging it in a new way. So that's kind of – it demonstrates that they have real drug development expertise beyond just kind of repackaging what other people have done, or what nature did, and they created the molecule. So that's their, I would say, their latest win.

For COMPASS, I honestly, I don't think I've seen any research out of them that makes me say, wow. That being said, I kind of -- I'm expecting to see something like that from them in their TRD program. Just because the Phase 2 data has been quite good, and all the surrounding literature that has been published makes me think that, like I said, eventually they're going to do it. They're going to create this psychedelic therapy that is perhaps not what everyone dreamed of, but certainly will tick all the boxes of what a good therapy would be, and what an effective one would be. So, I'm expecting that. I think they have results coming out before the end of next year, late-stage results. So, I'll certainly be reading those for sure.

RS: There has been a lot of talk, or some talk about MDMA being legalized to some degree for PTSD before the end of the year. And then some people are saying, no, that's, you know, it's another goal line that's really far off into the future. Do you have thoughts on that?

AC: Yes, before the end of the year, I am doubtful. But sooner than these other -- these therapies based on other molecules like psilocybin, or LSD, I think that the road for MDMA is a much shorter one. Specifically because there's such an abundance of research showing that it is very beneficial for post-traumatic stress disorder and also social anxiety disorder among many others. And I think pretty much universally the side effect profile is known to be very mild without any wild cards in most cases. And in a controlled setting, from what I've heard, therapists find it to be a context that is easy to work with so to speak.

Just to dive into it a little bit. I think the challenges with something like psilocybin is that people always have -- people have heard of oh, a bad trip. What is a bad trip? It can mean so many things. But the point is, MDMA does not really have that reputation of, oh, it can cause a bad trip. Oh, it can cause all sorts of big problems for people. And of course, in the therapeutic context, when you have a trained practitioner right there with you, the chances of all these bad outcomes are so much lower.

But with MDMA, I really do think that it's close to zero at that point, whereas with psilocybin or some of the other ones, there is still a small chance that someone can have some kind of psychological bad reaction to it. And that is why I think the road is much quicker for MDMA. And also just physically, it is not a drug that's going to create a huge side-effect burden on the person's body either, which I think the FDA likes to see that, honestly.

And then there's the matter of -- the DOD has expressed interest in this very approach to treating post-traumatic stress, among other things. So that's some level of government buy in already. And I think all those factors kind of – they make it much easier to get it out the door so to speak, legally speaking, than some of the other ones. And also, it's not a drug that's associated with addictiveness, not that the other ones are.

Nonetheless, I think there's a huge body of research that kind of really proves all of the positive factors and if you look for negative things, you can always find them. But I think that there is less hesitancy about saying, okay, yeah, we should start to actually use this to treat people because at this point, there's so much evidence. Then there's not any major barrier, so to speak.

RS: Speaking of the negative things, you could say, what would you, or what are concerns you have about those specific stocks that you mentioned? What would make you less bullish on them?

AC: Several things, right? Number one would be, if I were to get an impression that the management team, were floundering. And by that, I mean, replacing people willy-nilly, making big strategic changes…

RS: Cough cough, MindMed (MNMD), cough cough.

AC: …yes. Exactly. Yes. And they -- I don't know if you have kept up with them at any point, but they're it has not gotten so much better since -- one of their founder departed, and there's been, I believe, a fight between the shareholders and their new management, it's a whole mess. So I see that. Still ongoing. Like a couple years later and I say, okay, well, any indication of that, it'll be big, big signal to leave, to quit my position. I don't expect that to actually happen in COMPASS, Atai or Cybin.

However, the other big thing that would really make me less bullish on any of them is obviously a clinical trial results that kind of swings and misses. It doesn't hit its endpoint. But that happens in biotech all the time.

That's not the thing that'll make me lose my faith unless it's like repeated failure such that, you know, clearly their drug doesn't work. I don't expect to see that, but what would make me lose my faith very quickly is this kind of getting a clinical trial result that is not what was expected, and then trying to repackage it as a success.

And trying to say to investors, oh, well, we might have missed the endpoint. We might have missed the actual goal that we were shooting for. But we got all these secondary measures that are kind of like around where we wanted to go, and they can talk about, for example, if -- the most important thing with the medicine is the patient becomes less depressed.

If that's what you're shooting for, and then when the results come out, they say, well, the biomarkers in the sample that we took improved by this percentage even though the patient did not feel less depressed. So the trial is a success, because the biomarker showed that, hey, our chemical is doing something, it's changing something.

That's a success, right? That's not a success. That wasn't the point. And this is a pattern I see very frequently, especially in these biotechs that are kind of on the edge of their scientific field where there's not, you know, there's not Pfizer competing in the space, right? They will have this pattern of, oops, data did not turn out as well. Well, we need to say something positive.

So we'll say a bunch of positive stuff that is ultimately irrelevant. And that's the point where we really start to think, well, that's a problem, because if they believe it, they're going to continue down a path that does not appear to be working. They're going to waste a lot of resources. And then ultimately, they will not succeed in making a drug, and I will lose all my money.

So I haven't really seen that yet. Nonetheless, I kind of expect to, especially now that money is starting to run low, the incentive to create the appearance of a big win, it's very high. And it is often hard to tell when these companies announce their clinical trial results, what is actually going on, because I might know a thing or two about the common scales that they would use to measure the level of depression in a subject, for example. But I'm not going to know about every single little biomarker that they might mention.

So obviously, I'll do the diligence, and figure it out, is this relevant or not. Are they saying something that actually matters or not. But for the average investor, I think it's a very difficult -- a very difficult problem. Because you can see, oh, well, they missed but actually they didn't miss, right?

Because you don't have the context always to say, if the patient's not getting better, it doesn't really matter. Because sometimes -- yeah, they'll do another trial after that to say, oh, we just want to confirm our biomarker data in hopes of actually getting that primary endpoint that they missed the first time. So, I'd be on the lookout for that. That's like three red flags in one, when I start to see that. And I try to inform people about that when I do.

RS: It's hard. Yeah, I was going to say it's hard to suss out, you know, specious data or massage data. I think that points to also probably maybe you can rely a little bit on management in that way that you can kind of be loyal to management that's not going to do that, but I suppose, we always have to have our eyes wide open to nefarious behaviors.

RS: Thoughts on Seelos ( SEEL ), a company that have a couple people have written in about. Any thoughts there?

AC: Seelos? Yeah, I find it to be a very interesting company in the sense that the market they're targeting is incredibly small and the ketamine tool that they're using to target that market with is incredibly effective for the little niche that they are shooting for. And I will say, my opinion on it has not really changed that much. I find it to be well grounded in what they're trying to do versus what they have the resources to accomplish.

I think it's difficult because it's one of those situations where if the bear market had not happened, if interest had not declined so much in the psychedelics industry, I think probably they would have an easier time executing on their vision for what their product could be, because they'd be able to have a lot more money.

But I think in the long-term, I think that they will be in pretty good shape. I don't know that I would invest in them today because I haven't looked at them in close detail too recently, basically. But certainly, I would leave the door open there.

RS: What are your thoughts on -- and this might speak to a little bit further down on the timeline. As a biotech guy, what are your thoughts on more of the pharma, the bigger players coming into the sector. How do you see it evolving or shaking out or consolidating? How do you see it playing out?

AC: I think it is inevitable that the big pharma players will enter the space. How will they do it? This is a complicated question, and I'm not 100% sure there's any one answer. What I will say is, I doubt you're going to see Pfizer ( PFE ) spinning up a preclinical program for any psychedelic medicine. And putting it through the clinical trial process completely in-house.

More likely, what I think big pharma will do is they will either buy assets from one of these biotechs, acquire the biotech entirely. I think that is a little bit less likely for now.

Or potentially just poach a lot of the most relevant scientific stuff, and then figure out some other way to do it or -I don't think a collaboration is really on the table right now. And my reason for that is the legal aspect of it is the big barrier to any kind of collaboration going on. Even the very vague width of working in a field that is not completely legally sanctioned to be used for medicinal purposes, I think that's enough to keep the big pharma players away from the current biotechs in terms of working with them.

Buying them once the legal issues change, possible. Buying their assets, I think that's still on the table, because it doesn't imply any kind of ongoing relationship, really. But until those really basic legal regulatory questions get answered in a way that allows psychedelic space to actually -- legally commercialize something for medicinal use, I don't see big pharma really touching the biotechs that are out there right now. I don't know that that's to their detriment or not just yet.

And in terms of which big pharma is most likely to compete in the space other than Johnson & Johnson ( JNJ ) with their SPRAVATO t hat I don't really know for sure. I think probably one of the companies doing more neurology or psychiatry drug development is more likely than, you know, Takeda Oncology ( TAK ) or something like that.

So, I don't know, it's hard to say exactly who is going to make a move. I haven't really seen anything that makes me think that they're interested in entering aggressively or anything like that. I think really sitting on the sidelines is kind of the way to describe big pharma's approach for now.

Watching and waiting, 5 years down the line, I think that they'll be far more interested because by then there will be some progress in legal regulatory issues.

And also some progress on kind of testing the waters in terms of commercializing a product, because they, for instance, if COMPASS manages to commercialize COMP360 for treatment resistant depression, and they make money with it, that'll be a big stamp of approval from big pharma, because I do think that they are quite reluctant to try to compete in markets that are not kind of proven to exist, proven to be viable. Even if they're approached to, it might be very different from the initial competitors, so to speak. Does that make sense?

RS: Yeah. Any thoughts on ETFs ? I know there's ( PSIL ), any attention paid there?

AC: So, I've looked at them once in a while, and I've noticed that their value has declined tremendously, as to be expected. I would not recommend those to people looking to get exposure to the space, just because I think that they're going to include companies that are not the leaders by virtue of needing to include something other than just small handful of leaders. And that means that they're going to be invested in a lot of downwardly mobile stocks, so to speak. Perhaps I'm wrong, but that's kind of my impression.

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