COMPASS PATHWAYS PLC: A PSYCHEDELIC TRIP WORTH TAKING?

Amongst the results of our recent national elections, one unusual result stands out. The voters of the State or Oregon have voted to legalize Psychedelic Mushrooms. 

The voters responded to a growing body of scientific evidence that the mushrooms’ key ingredient, psilocybin, could be useful in treating a wide range of psychiatric conditions, including Major Depression Disorder, a common disease that has stubbornly resisted many other therapies on the market. 

Compass Pathways, PLC, is a British company that just celebrated its debut listing on the NASDAQ stock exchange in America. Compass is challenging old stereotypes and outmoded societal prejudices by studying psilocybin with scientific rigour and discipline. 

Would a purchase of Compass shares be good medicine for your portfolio? 

By the Sick Economist 

If you have ever known anybody with TRD (treatment resistant depression) then you know how badly psychiatry needs new tools to address this recalcitrant disease state. Up to 1/3 of patients cannot achieve relief from traditional antidepressants, leaving millions of Americans to grapple with the disease unaided by modern science. 

Compass Pathways, PLC, a British firm, is among a cohort of daring new companies that are trying to bring non-traditional therapies to market. Compass is currently testing a proprietary formulation of psilocybin, the very same active ingredient that some of you may remember from late night college parties or Grateful Dead Concerts. While Compass is pioneering some of the first large scale research on the topic, the idea is not without historical precedent. 

A Little Bit of History Repeating

The exact origins of “magic mushrooms” are murky; some evidence exists that the compound has been used in shamanistic rituals for untold thousands of years. The first modern encounter with the mushrooms came from 1950’s Mexico, where biologists such as Dr. Gordon Wassan witnessed the fungus being used by indigenous priests. By 1959, a swiss chemist named Albert Hoffman had isolated and synthesized the active compound in the mushrooms (psilocybin) and Sandoz, a major global pharmaceutical company, began producing the compound specifically for use by psychiatrists. 

A number of major universities and established researchers did begin to conduct controlled, fully legal studies on the drug for maladies including depression and alcoholism. One study, conducted by Harvard, even gave the drug to convicts with the aim of reducing recidivism. In the early 1960’s psilocybin was not a party drug that you had to buy from a shady guy on the corner….it was a legitimate and promising psychiatric compound being investigated by Ivy League professors. 

But somewhere in the extreme turbulence of the 1960’s, psilocybin lost it’s way and got tossed into the same category as cocaine, heroin and PCP. This may have been because the drug became too associated with the Hippies to retain its “Establishment” bonafides, or it could have something to do with the deep roots of Puritan culture in America. But either way, by 1971 psilocybin was considered to be a “schedule 1” drug, meaning casual cultivators or users could face jail time. In fact, some schedule one drugs can still be used for research under the right conditions, but the stigma surrounding the designation chased away most legitimate researchers. 

With changing attitudes and an evolving culture, more and more researchers have slowly been reevaluating the compound over the last ten years. Now the voters of Oregon have removed the chains of stigma, and psychedelic research is back in vogue. 

Compass Blazes the Trail

Compass PLC has already taken several important steps towards returning psilocybin to its clinical roots. The company has already conducted a traditional, double blind placebo phase I trial with 89 healthy patients, proving that the drug is safe to use in a controlled environment under the supervision of a licensed professional. Although a phase I study is very preliminary and typically nothing to get excited about, it is important for Compass to rigorously prove the safety of the pharmaceutical, given the convoluted and controversial history surrounding it. 

Next Compass conducted a successful Initial Public Offering of stock, listing it’s stock on the Nasdaq stock exchange, right along established, respected names such as Apple and Tesla. Not only does this raise funds for the company, but it brings psilocybin “out of the shadows.” Public companies must be transparent by law. This listing on a reputable public stock exchange means that the company’s research will be open to the scrutiny of all government officials and the “Establishment” scientific community. 

Now Compass is taking a critical next step. The company is currently running a phase II trial with 216 patients across 21 international sites.  This is a randomized, controlled trial, the “gold standard” of the global scientific community. If this study can help TRD patients to improve, Compass could well be on it’s way to revolutionizing psychiatry. 

Is Compass a “Buy?” 

The company’s groundbreaking research has received loads of Media attention. Media Savvy Business luminaries such as Peter Thiel and Kevin O’Leary have publicly backed the budding psychedelics industry. Compass’s IPO was a resounding success; the company is now well funded and well positioned to carry its research to it’s fruition. Should you be buying this stock? 

No. A great therapeutic leap forward does not always make a great business. There are still too many unknowns that would make this a risky long term investment.

First of all, we just don’t know enough about Compass’s compound, which is closely related to the same psilocybin that shamans have been administering for thousands of years. The company simply calls the formulation “proprietary.”  At a minimum, we know that Sandoz was producing something very similar fifty years ago. Therefore it just isn’t hard to make. Compass runs the very real risk of proving that psilocybin works, but NOT proving that their “proprietary” compound is any different from generic pills that can be churned out for pennies. 

A bold investor may accept the following premise; psilocybin is easy to make, but not that easy to get approved. So, even though Compass’s “proprietary” agent might not be much different from the generic, if people want access to psychedelics in a medical setting, they will have to pay Compass’s price. This is an awfully risky proposition. 

The research required to get other psilocybin copycats approved is not that hard for a major pharma organization. Unfortunately, TRD patients are not rare at all, and the research simply consists of administering the drug to patients in a controlled environment. Easy drug to make, easy patients to find; if Compass shows clinical success, competitors will grow more quickly then a mushroom patch. 

Additionally, compounds that are easy to make will have a limited market. Yes, American laws around intellectual property and FDA approval might force the medical community in America to pay a high price. But in most international markets local chemists will just copy the formulation and sell it for pennies. Typically when we recommend an investment, we look for robust international markets outside of North America. 

There are other risks. One notorious element of current psychiatric treatments is that anti-depression pills are typically taken….forever. While some patients only take antidepressants to get through acute episodes in their lives, the reality is that most depression patients need that clinical support indefinitely. This is a gold mine for an investor. Compass doesn’t envision future psilocybin patients needing prolonged therapy, or a daily pill. This is great for patients, but, frankly, not so great for investors. 

There is still legal risk. Even though we have currently entered a more permissive phase of American culture, one never knows when the winds may shift. Whether psilocybin is an effective treatment for depression remains to be seen, but it’s potency as a party drug is well known. If Compass puts in all the hard work to prove the drug’s value as a medicine, and the general American populace decides instead to abuse the drug merely for pleasure, it’s always possible that our old puritan values could flair up. 

Finally, we still don’t know if the stuff works. You can find tantalizing clues from small, early studies. But there is very little of the same scope and rigor of the current, ongoing research. The phase II trial might show dramatic results, might show minor results, or it might flop. No matter how much the media wants Magic Mushrooms to regain their footing in the medical community, ultimately the science will judge. And the science is still out. 

All of these factors add up to a major helping of risk that is far from groovy if you are a long term investor. The stock could see a major upward trend if the Media grabs hold of the narrative. This might be a good name to buy in pure speculation if you are looking for a short term thrill. However, we believe that the long term fundamentals don’t make sense for most biotech investors. 

If you buy into Compass Pathways, PLC, get ready for a “long strange trip” indeed.