- An ATAI IPO is seen to be one of the major catalysts for psychedelic drug stocks in 2021
- There has been speculation that ATAI’s IPO might come sooner than expected
- Psychedelic Stock Watch explores potential investor strategies
It’s no secret to investors in psychedelic stocks that
ATAI Life Sciences will be filing for a NASDAQ IPO early in 2021. That news came out when ATAI recently completed its
Series C financing round – raising $125 million.
However, there has been increasing speculation that “early in 2021” could mean as early as the end of January. If so, this means that psychedelic stock investors need to get their “ATAI strategy” in place sooner rather than later.
Buy into ATAI or play the rally?
The first decision that investors need to make is whether to seek to take a position in ATAI at/near the time of the IPO.
For investors new to ATAI, this is the Big Tent business model in the psychedelics space.
ATAI currently has nine
research programs in place – with nine different corporate partners. Among those partnerships (and the most advanced R&D program) is ATAI’s partnership with
Compass Pathways (US:CMPS).
ATAI is the best capitalized private player in the psychedelic drug industry. It is expected to become the new industry (and market cap) leader in the psychedelics space when it goes public.
Current
market speculation is that ATAI will be
valued between $1 - $2 billion when it commences public trading. However, some observers (including Psychedelic Stock Watch) see that as a very conservative range.
Compass Pathways itself has a market cap of $1.6 billion (and has traded above $2 billion). And ATAI holds a >20% stake in Compass.
Interest in ATAI will be intense. The share price will likely shoot higher when trading commences – especially if it’s priced at a more conservative level. This will greatly favor investors able to get in the earliest.
But at what price will ATAI level off once ‘IPO fever’ dies down?
Clearly, ATAI is an attractive target for all psychedelic stock investors. How rich a price are they prepared to pay to gain entry?
The other “ATAI strategy” is to avoid ATAI (at least for the moment) and focus holdings on some of the other stronger players in the industry.
This could also be called the “Compass strategy” revisited.
Déjà vu with ATAI IPO?
When Compass Pathways declared its intention to go public in 2020, Psychedelic Stock Watch immediately pointed to this as an industry-wide catalyst.
Our reasoning was simple.
Compass’s new NASDAQ listing would (and did) attract a lot of media and investor attention to not only CMPS itself, but the entire industry. As investors surveyed the other public companies in this space, they could (and did) conclude that some of the smaller players offered better value propositions than Compass itself.
Fueling our confidence in this spin-off effect,
valuations for psychedelic stocks were very depressed at the time that Compass went public.
Several psychedelic drug stocks produced multi-bagger returns for investors in 2020 following the Compass IPO that were greater than the returns for Compass itself.
Flash forward to January 2020.
After a major rally in psychedelic stocks late in the year, most of the leading public companies experienced sharp corrections during thin holiday trading in late-December.
If ATAI was to go public with valuations at current levels, many of these other pubcos will also look very attractive to investors.
The advantage of banking on an IPO-based rally rather than investing in ATAI directly is that investors don’t need to attempt to compete in the trading feeding frenzy that will almost certainly take place on IPO day.
Make money (hopefully) on other companies based upon the anticipated ATAI IPO rally. Then investors still have the potential opportunity to take profits on these other companies and – if still interested – rotate those proceeds into ATAI.
The downside to such an approach is that it’s always possible that ATAI could take off on its IPO and never look back. If ATAI broadly outperforms the industry post-IPO, it will simply cost investors more to enter than if they elbowed their way in early.
Impact of an early ATAI IPO on other psychedelic stocks
If the ATAI Life Sciences IPO comes sooner rather than later, this also may affect the share prices of other public companies over the near term. Psychedelic Stock Watch has previously engaged in some speculation in this area.
First, we suggested that news of the ATAI IPO may have been a positive driver for shares in
MindMed Inc (CAN:MMED / US:MMEDF / GER:MMQ).
Our reasoning was straightforward.
For investors interested in ATAI, out of all public companies MindMed bears the greatest resemblance to it. MindMed is the only public entity with R&D and IP to rival ATAI itself.
But MindMed was already available to investors immediately. And they wouldn’t have to compete for shares in the frenzied environment of a high-profile IPO.
When that article was written, MindMed had just broken CAD$2 for the first time, with a market cap of less than CAD$700 million. MindMed stock went on to
more than triple from that point, hitting a 52-week high of CAD$6.47 – before pulling back significantly over the last half of December.
At its peak, MindMed had a market cap above CAD$2 billion (US$1.5 billion). Suddenly, it no longer looked “cheap” relative to ATAI. But (as noted) MMED was already publicly trading and ATAI isn’t.
MindMed has also filed for its own NASDAQ listing (back in October). And expectations were that it could/would begin trading on the NASDAQ before ATAI went public.
However, MindMed is still waiting for an answer on its uplisting application. If ATAI does launch its IPO toward the end of January, will this take investor dollars away from MMED to invest in ATAI?
Has this already been happening?
In recent weeks, MindMed has experienced one of the steepest corrections among psychedelic stocks and until yesterday, trading below CAD$4. At that price level, MindMed’s market cap has dipped below US$1 billion.
If ATAI commences trading (on the NASDAQ) while MindMed is still awaiting approval for its uplisting, will ATAI still look more attractive to investors – even with a much greater market cap?
Psychedelic Stock Watch will do our own head-to-head comparison of MindMed and ATAI in the near future.
Is ATAI’s pending IPO hurting Compass Pathways?
In early December, Psychedelic Stock Watch suggested that CMPS could be one of the losers from an ATAI IPO.
Will ATAI’s IPO Help Or Hurt Compass Pathways?
First of all, as most investors already know, ATAI holds a big piece of Compass (>20%). So investing in ATAI still gives investors significant exposure to Compass. But ATAI is much more…
By itself, ATAI will give investors broad exposure to the psychedelic drug industry.
In contrast, Compass is more of a one-trick pony – at the moment.
At that time, Compass was trading around $55. But it had advanced from under $40 on low volume. Since then, CMPS has slipped back below $45 per share.
Despite its robust treasury, Compass has yet to significantly diversify beyond its flagship psilocybin-based clinical trial for treatment-resistant depression. If it continues to stand pat, an early ATAI IPO could cause further slippage for Compass.
It would be ironic indeed if after its own IPO was a catalyst for the whole sector that the next major IPO could actually hurt Compass.
Beyond the two largest players, an early ATAI IPO looks like an unambiguous positive catalyst for most psychedelic stocks. This is especially true given that most companies are currently trading near/at multi-week lows.
The Compass Pathways IPO was arguably the single largest catalyst for psychedelic drug stocks in 2020. The time for investors to be preparing for the IPO by ATAI Life Sciences is now.
DISCLOSURE: The writer holds shares in MindMed Inc.
