Recent sideways trading in psychedelic drug stocks could end at any time due to both sector-wide catalysts and individual stock drivers. In Part 1, we examine these individual drivers.
Psychedelic stocks had a tremendous rally last Fall. A number of companies posted very large gains – on generally heavy volume.
These stocks corrected during the thin trading of the Holiday Season and have remained more-or-less stuck in a trading range in the early weeks of 2021.
Why should investors expect an imminent end to this holding pattern?
Psychedelic Stock Watch will answer this question from two angles: the drivers for individual companies and sector-wide catalysts. Part 1 will focus on the individual drivers.
A multitude of factors could lift psychedelic stocks, on an individual basis:
1) Analyst coverage
2) Capital infusions
- M&A
- Organic growth
3) R&D breakthroughs
4) More financings
Analyst coverage powers psychedelic stock break-outs
We observed that in early 2021 psychedelic stocks have “more or less” been stuck in a trading range. Two exceptions to this are
Field Trip Health (CAN:FTRP / US:FTRPF) and
Cybin Inc (CAN:CYBN / US:CLXPF).
Random chance? Hardly.
On
January 14, 2021, Stifel GMP initiated coverage on Field Trip and Cybin, with price targets of CAD$8.50 and CAD$5.00 (respectively). FTRP had closed at CAD$3.55 the previous day and CYBN had closed at CAD$1.86.
Since that time, Field Trip is up roughly 60% to CAD$5.75 and Cybin is up nearly 20% to CAD$2.19 – despite retail investor sentiment in the sector currently weak.
Are we going to see more analyst coverage of psychedelic stocks? A better question is why haven’t we seen more analyst coverage?
One would think that these analysts would have
already dived into an emerging sector that has attracted investors like
Peter Thiel,
Mike Novogratz,
Bob Parsons,
Kevin O’Leary,
Tim Ferriss, etc., etc. After all, that is their job.
More analyst coverage of psychedelic stocks would seem to be seriously overdue. Given all the media attention for the sector, the high-profile investors, and the huge flows of capital into the industry, we could easily see a flood of such coverage emerge over the near term.
Capital drives growth
One of the basic strategies when investing in small-cap growth stocks is to buy stock shortly after a company has completed a financing.
Why? As Sherlock Holmes would say, it’s elementary.
a) The new capital can fund organic growth and/or M&A activity
b) Stocks often get sold down to the price of their financing immediately after closing
Put another way, at the same time that companies are
poised for the maximum amount of growth (before requiring more capital) they tend to be
priced the cheapest. Win, win for investors.
While this industry is in its infancy, it is already attracting major flows of capital. Public trading of psychedelic drug stocks is barely a year old, and most of these companies have commenced trading even more recently.
Yet over a recent 4-month span
over US$500 million was injected into the sector, with
a handful of public companies accounting for US$371 million of that total. Some of these companies closed
multiple financings over this period.
Combined, these companies have a market cap of only ~CAD$3 billion (US$2.3 billion). Well capitalized stocks with compact market caps. Poised for growth.
Psychedelic Stock Watch closely watches the cash-to-market-cap ratio for these companies. All other things being equal, companies with the lowest ratios should be able to fund the most organic growth (or M&A) relative to their current market capitalization.
Before psychedelic drug stocks began to take off late in 2020, most of these companies had cash-to-market-cap ratios of roughly 5:1. Those ratios got stretched in the rally, and that was one reason for the correction in December.
Now these companies have much more cash, with (in most cases) significantly lower market caps.
Currently,
Mind Cure Health (CAN:MCUR / US:MCURF) has the lowest ratio at about 3:1. Mind Cure recently announced its new bought deal financing has been
upsized to CAD$20 million. Cybin also has one of the lower ratios following its own recent bought deal financing.
Cheap stocks at a time that these companies are poised for maximum growth.
Research breakthroughs with psychedelic drugs
With the financial picture with the psychedelic drug industry so strong, it’s easy to forget that (as an emerging biotech sector) it is ultimately R&D that is going to power growth in the industry.
Here, again, the sector looks strong and poised for significant breakthroughs. Psychedelic Stock Watch
recently surveyed drug R&D among the leading public companies.
Compass Pathways (US:CMPS) is proceeding to a Phase 2b clinical trial using psilocybin-based therapy for treatment-resistant depression.
Cybin is moving into its own Phase 2 trial involving psilocybin-based therapy. But this is for major depressive disorder, an even larger treatment market. Mydecine [Innocations is moving into a Phase 2 clinical trial also involving MDMA therapy for PTSD. MindMed is preparing to enter a Phase 2b clinical trial using LSD to treat anxiety.
But as this research advances, psychedelic drug R&D is also broadening into other fields of medical treatment – rapidly.
MindMed itself has two other clinical trials at a Phase 2 stage: one for adult ADHD and another for cluster headaches.
Other advanced-stage research is being conducted by private entities, including MAPS Phase 3 clinical trial using MDMA-assisted therapy for PTSD and Eleusis Ltd’s Phase 2 clinical trial using LSD microdosing to treat Alzheimer’s disease.
Many other psychedelic drug research initiatives are either in pre-clinical or in Phase 1 testing.
Most of these clinical trials have been producing extremely successful results. Breakthroughs are likely at some point in 2021.
Additional individual catalysts could be further growth in
mental health treatment markets. In the U.S. alone, roughly
$300 billion per year is funneled into mental health treatment.
Several psychedelic drug companies are already pursuing (legal) opportunities in mental health clinics. This includes Field Trip, Mind Cure and
Numinus Wellness (CAN:NUMI / US:LKYSF).
Then there is IP.
Psychedelic drug companies are initiating or advancing intellectual property programs in several areas. This includes improved delivery systems for psychedelic drugs, new processes for drug synthesis, and digital health platforms for improving and streamlining mental health services.
With most of these companies active in one or more of these areas, we could easily see additional individual breakouts in 2021 derived from IP announcements.
More capital fueling even more growth
When the rally in psychedelic drug stocks heated up in the fall of 2020, stocks weren’t being sold down on news of a new financing. Rather, they were rallying.
It’s not as strange as it sounds.
With investor sentiment very strong at the time, selloffs never materialized because there was a flood of new investors wanting to climb onboard. As already noted, capital powers growth. This is especially true for life science companies pursuing drug development.
Money talks.
A frequent mantra of Psychedelic Stock Watch is
“follow the money”. The companies who are most successful at raising capital and who have the most robust corporate treasuries are most likely to be first to the finish line in drug development.
In recent months, virtually every public offering for psychedelic drug companies has been oversubscribed. While sentiment among retail investors has been lukewarm in recent weeks,
institutional interest remains overwhelming.
Either all of these professional money managers are wrong in assessing the potential of the psychedelic drug industry, or retail investors are currently snoozing.
When the next rally materializes in this sector, we will likely see these companies again trading higher on news of new financings rather than lower. Any (intraday) dips would draw a flood of new bids – as we saw in late 2020.
From virtually every angle, psychedelic drug stocks appear to be ready to take off -- again. All that is missing is for the fuse to be lit.
We’ve looked at some of the individual drivers that could ignite these stocks. In Part 2, we will examine a number of sector-wide catalysts, including near-term events already on the horizon.
DISCLOSURE: The writer holds shares in MindMed Inc, Numinus Wellness, Cybin Inc and Mind Cure Health. Mind Cure Health is a client of Psychedelic Stock Watch.
