What’s past is prologue – or is it? It seems like only yesterday when the cannabis industry was one of the fastest-growing segments of the stock market, attracting billions of dollars from investment banks and investors (mostly retail) hoping to hitch a ride to untold riches. At present, the markets have cooled for cannabis as it continues to mature and define itself as an industry.
Conversely, another industry – psychedelics – has begun its own odyssey as an investible asset class. Over the past few months, no fewer than six companies have gone public, most of them following the playbook perfected by cannabis, using reverse takeovers as the most common path to going public.
At the same time, one of the stalwarts of the burgeoning psychedelics industry, COMPASS Pathways, successfully closed its upsized IPO on September 18, 2020, pricing its offering at $17 a share and raising total gross proceeds of $146.6 mn. After just one month as a public company, COMPASS is currently trading at $32 a share (it actually hit $47 a share at one point), with a market cap just north of $1.1 bn.
On the surface there appear to be numerous commonalities between the cannabis and psychedelics industries as they pertain to the capital markets. But upon deeper examination, the two are more dissimilar than similar.
For psychedelics, it’s all about the science – and therein lies the biggest difference between psychedelics and cannabis. While there are exceptions, a majority of the publicly traded cannabis companies are at their core consumer-packaged goods, retail-focused and recreational-based. On the other hand, a majority of the early entrants in the psychedelics space are clinical-stage biotech/pharmaceutical companies, steeped in science, developing compounds to treat central nervous system (CNS) issues such as depression, PTSD and anxiety – which will eventually receive Food and Drug Administration (FDA) approval and be administered in a clinical setting by trained medical professionals.
In fact, one of the biggest roadblocks that continues to plague the cannabis industry is that it remains federally illegal in the US. This is one of the main reasons most of the US cannabis companies have chosen to list on the Canadian Securities Exchange. The illegality of cannabis has also made it difficult for the institutional investment community to put its full weight behind the industry and, just as importantly, has stymied medical cannabis research in the US. On the contrary, the psychedelics industry has been cleared by both the Drug Enforcement Agency and the FDA to conduct research and clinical trials in the US. The psychedelics industry is taking the long, slow path toward FDA approval, targeting a potential multi-billion-dollar market.
And here’s an important point: to date, the investment banks leading the charge to raise capital for psychedelics companies have been a combination of the leading cannabis bankers, working in tandem with traditional healthcare bankers, many of whom cover the CNS space. Over time, I believe there will be a near, if not complete, shift of psychedelics companies raising capital through healthcare bankers and being covered on the sell side by healthcare analysts. At the same time, as we’ve already seen, both in private rounds and public offerings, a number of the stalwart healthcare buy-side firms have moved quickly to commit capital support to the psychedelics industry.
No need to rewrite the playbook
So what are the major differences between the psychedelics and cannabis industries and what does it mean for the management teams seeking to raise capital and contemplating public offerings, as well as the IROs tasked with developing and effectuating sound investor relations programs?
First, over both the near and long term, psychedelics companies are well positioned to increasingly attract capital from well-known healthcare investors. Attracting the likes of investors such as OrbiMed and RS Investments – should they choose to invest; to my knowledge neither firm has invested in psychedelics – will not only result in raising much needed capital, but will also help validate these companies by virtue of associating with proven healthcare investors, resulting in companies being able to raise additional institutional capital. For IROs, your job just got easier. Similar to other industries, and unlike cannabis, healthcare boasts a highly identifiable group of institutional investors, sell-side analysts and investment bankers. Over time, making meaningful introductions to these key constituents will become easier and easier.
At the same time, because many of the psychedelics companies are no different from any other clinical-stage company, the way IROs help companies communicate with the investment community will be based on proven tactics honed over many years, so there will be no need to rewrite the playbook.
I hate to say it but I’m going to say it anyway: investing in clinical-stage companies is not for the faint of heart, less sophisticated or get-rich-quick retail investor audience. If you think I’ve described the typical cannabis investor, you’re correct. While it may seem I am denigrating retail investors, I am not. I am simply stating that certain industries are easier to understand than others; cannabis is reasonably easy, while healthcare, especially clinical-stage company investing, is some of the most difficult, complex investing there is.
For the most part, the aforementioned should make IROs’ jobs easier in that most of their communications will be directed toward a more informed institutional audience. One word of caution: there will be a subset of speculative retail investors (probably a lot of current/former cannabis investors) who will view certain psychedelics companies as the next Facebook or Amgen and double down on their investments in the sector. It will therefore be incumbent upon IROs to find a middle ground in how they and their management teams communicate their value proposition and progress – this includes press releases, presentations and earnings conference calls.
As Major League Baseball has just crowned the Los Angeles Dodgers the 2020 World Series champions (who says you can’t outspend everyone and win it all), I’ll revert to a baseball analogy: if cannabis is in the fourth or fifth inning of a nine-inning game, psychedelics is in the first inning. There are a ton of innings left to play but one thing will trump all: there will be winners and losers. The winners will comprise companies having the best science, deepest funding and most executable go-to-market strategy. The winners will also employ the most astute IROs to execute formidable investor relations strategies based on best practices.
Jeffrey Goldberger is managing partner at KCSA Strategic Communications