Dave Hodes
When you take a big picture look at the psychedelics industry, you can easily get starry-eyed: Predictions of $6.85 billion industry by 2027. Mental health and wellness demands firing up a ready-made market. Support from more and more mainstream educational and institutional organizations creates credibility and access. Big money investors all in.
Yet most of these psychedelic companies are startups, still in the product research and development stage, working on novel compounds, with no product, no revenue, as they spend more and more on research and development just to stay in the game.
Perhaps there can be some comfort gleaned about the future of a young psychedelic company from the established non-psychedelic life science product companies, who have actual products ready to sell, and who continue adding products to their pipeline.
They face the same issues as the psychedelics companies—regulatory hurdles, patent protection, and months or even years of product development. They have a tried-and-true track record for success—a pathway from expensive research and development to (sometimes) wild profit.
Established non-psychedelic life science drug development companies spend up to 25% percent of their revenues on R&D. Those costs go up all the time, increasing by about 8.5 percent per year over roughly the past decade, according to an April 2021 report from the Congressional Budget Office.
Adjustments to manage R&D costs have to be made to this engine of innovation, which is also the genie of profitability. In response to higher R&D costs, non-psychedelic life science companies are focusing on specialized R&D models that require enhanced capabilities to promote greater R&D efficiency.
The critical importance of the burden of R&D expenses to the success of these non-psychedelic life sciences operations is a lesson learned by psychedelic startups, who know that R&D costs are pivotal because they fuel the future pipeline.
As they operate with no revenue, psychedelics companies tell potential investors from the outset that R&D, where they spend most of any money they can get, is the key to the kingdom of future revenue riches right now. Otherwise, they’re sunk.
Take a look at what one of the fastest-growing and more successful psychedelic companies, Compass Pathways (NASDAQ: CMPS), says about itself.
Compass raised $146 million in its their September 2020 IPO, and an additional $144 million in a secondary offering in April 2021.
Fair enough..and wow. Sounds like a winner.
But what Compass management reported in their Securities and Exchange filing for the fiscal year ending on December 31, 2021, was rife with warnings and negative scenarios about their future success, just so no one misunderstood or diminished the obstacles they are up against in trying to be a profitable, R&D-driven psychedelics company.
In fact, most of the warnings seem to be part of a reporting boilerplate for other psychedelic companies (such as Atai Life Science).
First the good R&D news from the SEC filing. On November 3, 2021, the company announced that they are conducting a Phase II clinical trial to assess the safety and tolerability of COMP360 psilocybin therapy in post-traumatic stress disorder (PTSD). The study expands COMPASS’s research pipeline in COMP360 psilocybin therapy.
Then Compass pounded away on itself, admitting to serious business survival issues that resonate with other psychedelic companies—no revenue, more R&D expenses expected—especially in their list of 24 bulleted statements in the “risks associated with their business” section of the SEC (pages 5 and 6).
Here’s a selection of those statements:
Page 5: “We are a clinical-stage mental health care company and have incurred significant losses since our inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.”
Page 5: “Research and development of drugs targeting the central nervous system are particularly difficult, which makes it difficult to predict and understand why the drug has a positive effect on some patients but not others.”
Page 5: “We have never commercialized a therapeutic candidate before and may lack the necessary expertise, personnel, and resources to successfully commercialize our therapies on our own or with suitable collaborators.”
Page 6: “We face substantial competition and our competitors may discover, develop or commercialize therapies before or more successfully than us, which may result in the reduction or elimination of our commercial opportunities.”
The SEC document noted that R&D expenses doubled for Compass to $44 million for the year ended December 31, 2021, over the previous year. But those expenses are nowhere near slowing down.
Page 136: “Research and development activities are central to our business model. Product or therapeutic candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials and related product manufacturing expenses. As a result, we expect that our research and development expenses will continue to increase over the next several years.”
Investors seem to like psychedelics companies today, wary about the riskiness of them but banking on the hope of a psychedelics therapy development that could make them millions nearly overnight. It’s happened repeatedly in the non-psychedelics life science world. And it continues today. For example, Aduhelm, a treatment for Alzheimer’s disease from life science giant, Biogen, could make upwards of $15 billion in the U.S.
Public opinion could calm investor jitters, too. A recent survey from the United Kingdom think tank found that 59 percent of respondents would consider psilocybin-assisted therapy for themselves if they had a condition where there was strong evidence it could be effective—something only ongoing research and development could confirm.
But for now, investors in psychedelics—and psychedelics company executives—have to live with the burdensome truth of emerging growth companies: a ton of R&D expenses on the rise, no revenue insight, and many, many health and mental wellness promises to keep.
Sidebar #1
Research and development activities for a psychedelics company:
– Laboratory research aimed at discovery of new knowledge.
– Searching for applications of new research findings or other knowledge.
– Conceptual formulation and design of possible product or process alternatives.
– Testing in search for or evaluation of product or process alternatives.
– Modification of the formulation or design of a product or process.
– Design, construction, and testing of preproduction prototypes and models.
– Design of tools, jigs, molds, and dies involving new technology.
– Design and development of tools used to facilitate research and development or components of a product or process that are undergoing research and development activities.
Source: SEC filing, Compass Pathways, Chapter 3: Research and Development
Sidebar #2
Definitions of R&D in the psychedelics industry:
– Research is planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service (referred to as product) or a new process or technique (referred to as process) or in bringing about a significant improvement to an existing product or process.
– Development is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use. It includes the conceptual formulation, design, and testing of product alternatives, construction of prototypes, and operation of pilot plants.
Source: SEC filing, Compass Pathways, Chapter 3: Research and Development
