Magic Mushrooms, LSD and MDMA have typically been synonymous with party drugs, Pink Floyd, Phish, and the Grateful Dead. However, a new group of companies is investigating the psychoactive ingredients found in these substances in search of therapeutics for tens of millions of people dealing with depression, post-traumatic stress disorder, addiction and other medical ailments who may have no other options.
With the American FDA approval of Johnson & Johnson’s ketamine-like spray Spravato (esketamine) for depression, there is now a recognizable regulatory precedent for this group of drugs to make it to market. That approval came on the heels of Compass Pathways receipt of the “breakthrough therapy” designation for its synthetic version of psilocybin, which is being developed for treatment-resistant depression.
Who are the Players?
There are currently several high-profile psychedelic companies that have caught notable investor attention over the past two years:
Germany’s ATAI Life Sciences raised $43 million in its Series B financing round in March 2019 and more recently closed a $24 million convertible note financing in April 2020.
All three of these companies are focused on funding and developing treatments based on psilocybin’s therapeutic qualities. Psilocybin is a psychedelic compound found in certain species of mushrooms. Other psychoactive ingredients are also being explored in clinical trials.
New York-based Perception Neurosciences has decided to focus its efforts on arketamine-based therapies for patients with neuropsychiatric diseases. In addition, Florida-based DemeRx is focused on the applications of ibogaine. Psychedelic companies are taking a similar approach to publicly listed GW Pharmaceuticals, which created the first FDA approved cannabis extract (cannabidiol) based treatment for epilepsy. Unlike the large cannabis companies that focused on selling recreational products and becoming large-scale producers, psychedelic companies are focusing more on pharmaceutical opportunities.
The Canadian Public Markets
Another ibogaine-focused company, Mind Medicines, recently went public in Canada and is being followed by companies like Cybin and Entheon Biomedical. Psychedelic substances are currently going through the same de-stigmatization that cannabis did several years ago, and the receptive Canadian markets have built up the infrastructure to handle these high-profile listings. As a result of the recent cannabis-boom, there are many capital market veterans located in Canada that have experience running public companies while navigating the regulatory hurdles that related to controlled substances. Bruce Linton, the former Chief Executive Officer of Canopy Growth Corporation, for example, was made a director of Mind Medicines when it decided to go public in Canada. Due to the increasing interest in going public, choosing to list on the Toronto Stock Exchange (TSX), TSV Venture Exchange (TSXV), Canadian Securities Exchange (CSE) or NEO Exchange has become a serious consideration for psychedelic companies.
Why Go Public?
With the potential that these companies and others have, they are reaching a point where their capital raising, and other business needs, are starting to outgrow the private markets. Their ability to increase awareness of their businesses and products may best be achieved through having a public market presence. For many businesses, going public can improve their reputation, demonstrate their stability and improve their capital-raising abilities. Going public may help with recruiting patients for clinical trials, motivating employees and building out infrastructure. These were just some of the reasons for Mind Medicine’s “reverse-takeover” transaction.
How Can Smaller Companies Go Public?
For some promising companies, the time to go public may precede the point in time when the investment community fully recognizes their potential. This was the case for Canopy Growth Corporation (formerly Tweed Marijuana Inc.) and Aphria when they first listed on the TSXV back in 2014. Due to the lack of awareness of the opportunities for cannabis companies at the time, both companies opted to go-public through “reverse takeover” transactions.
What is a Reverse Takeover Transaction (RTO)?
A traditional initial public offering (IPO) may be too time-consuming and costly for some companies that are contemplating going public. In many cases, this can outweigh the benefits of them going public in the first place. As a result, many companies, especially in innovative industries, choose to go public through “reverse takeovers” (RTO). These can be done on the CSE, NEO, TSX, TSXV, and through a Capital Pool Company(CPC).
Through each exchange, a promising psychedelic company merges with a public-listed company that typically lacks business operations (a shell). In the case of merging with a CPC, the CPC will use the cash raised during its CPC IPO to help fund the RTO. When the psychedelic company combines with the shell, it will end up with control over the shell and assume its place in the market. With the ability to sell shares on the public market after an RTO, the prospect of an RTO occurring can help a company raise money from investors who prefer more liquid investments.
When choosing which exchange to list on, there are many different considerations including the costs of going public, the ongoing regulatory burden after listing, as well as the potential public market exposure. For example, when going public on the CSE or TSXV, both exchanges require disclosure about the target company before an RTO occurs. This contrasts with the CPC program where money can be raised for a psychedelic company in advance, with disclosure about the business released in some cases only after the decision to merge with the target company is announced.
Many of Canada’s high-profile marijuana companies like Canopy Growth Corp. and Aphria went public in Canada through the CPC program on the TSXV. Companies on the TSX and TSXV also typically receive more exposure than on the other exchanges due to their long history and broader network.
Psychedelic companies are starting to reach an inflection point. As clinical trial results start to pour in, should these psychoactive ingredients and their administration methods (like “microdosing”) prove beneficial, there’ll be more weight to the argument of making them accessible to patients and individuals suffering from widespread medical ailments. In the meantime, investor interest in nascent psychedelic companies is already starting to build. The convergence of these factors appears promising for psychedelic companies going forward.