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The promise of psychedelics

Now that governments have started to accept the benefits they offer, could hallucinogenic drugs provide a cure for the world’s mental health crisis?
The promise of psychedelics

For all the medical advances made over recent times, there is one area of healthcare where scientists are still struggling: mental health. Closely linked is the rise in substance abuse – particularly in the US, where annual deaths by this metric have more than doubled since 1990 to just over 2,000 per 100,000, according to the Institute for Health Metrics and Evaluation. In the same period, the rate of cancer deaths has stayed flat around 5,000 per 100,000, despite ageing populations making cancer more prevalent. 

Deteriorating mental health is not the only factor behind this acceleration. But the Covid-19 pandemic has had a particular impact. In April 2020, the Centers for Disease Control and Prevention (CDC) estimated that 78,021 people died from drug overdoses in the US during the previous 12 months. By December 2021, it forecast this number had risen to 107,622, a 38 per cent rise in 20 months. The effects of lockdowns on mental health is still being debated, but what is clear is that during the pandemic, for whatever reason, Americans became a lot less hopeful.

Over that brief timeframe, the world managed to isolate Covid-19’s genome using Illumina’s (US:ILMN) genome sequencing technology, and create a vaccine using novel mRNA technology that has made Covid-19 less deadly than the common flu. Yet in human history no one has been able to create an effective cure for depression, anxiety or addiction, which is now killing more than 100,000 Americans a year.

Finding a solution to these issues is already big business. According to the CDC, between 2015 and 2018, 13.2 per cent of US adults were prescribed some form of antidepressant. A select band of companies, however, think psychedelic substances might provide a different answer.


From psychoanalysis to psychedelics

It has taken a long time to get to this point. In 1896, Sigmund Freud thought we had a cure for anxiety when he coined the term 'psychoanalysis'. But anxiety and depression continued to grow in society. In 1938, Italian psychiatrist Ugo Cerletti tried electroconvulsive therapy for the first time. Then came antidepressant drugs.

The most popular drugs, still widely used today, were selective serotonin reuptake inhibitors (SSRIs). The current belief that a lack of serotonin is the main cause of depression was first evidenced in the 1960s. Pharmaceutical company Eli Lilly (US:LLY) put together a team to find a molecule that could “selectively inhibit the reuptake of serotonin aimed to minimise collateral effects”.

By July 1972, Eli Lilly had created the LY-110140 molecule (fluoxetine hydrochloride), which successfully blocked serotonin reuptake receptors and flooded the brain with serotonin, also known as the 'happy hormone'. In 1987, it was approved by the US Food and Drug Administration (FDA) after a series of clinical studies, and Prozac was released onto the market.

Prozac remains one of the most widely used antidepressants today, along with many other different types of SSRIs, including Zoloft, Pfizer’s (US:PFE) most popular drug. In 2020, the global antidepressant market was $15.6bn (£13bn) in size; it is expected to rise to $21bn by 2030.

For big pharma, depression has been an extremely profitable industry over the past 50 years. But history could have turned out differently. In 1938, Swiss scientist Albert Hofmann accidentally discovered the psychedelic drug lysergic acid diethylamide (LSD). After returning from the second world war, English psychiatrist Humphrey Osmond learnt of Hofmann’s research. Between 1954 and 1960, Osmond treated 2,000 alcoholics, and the results were impressive: 40 to 45 per cent of the alcoholics who were treated with LSD had not returned to drinking after a year.

Despite the early success of psychedelics in treating addiction, research abruptly stopped in the 1960s – for political not pharmaceutical reasons. Psychedelics had become very popular with counter-cultural 'hippies' who used psilocybin (the compound in magic mushrooms) and LSD recreationally. The fear was that people using these drugs would no longer want to fight in the Vietnam war.

Incidentally, this wasn’t the first time that war had been the reason to implement a ban on drugs. In 1798, Napoleon conquered Egypt, where hashish was grown. Hashish was a cannabinoid that has the same effect as marijuana. French soldiers started to smoke it, and it was promptly banned. It turned out that when soldiers were 'stoned' they were less inclined to go to war.  

But war was not the only factor. High-profile psilocybin scientists such as Timothy Leary, who coined the phrase "turn on, tune in, drop out", used psychedelics himself, and was frequently arrested on drug charges, also helped set the tone. Psilocybin was made illegal in the US in 1970 and research stopped for decades.

“The banning was a political decision and not a health decision. My belief is that the banning of these drugs in the 1960s and 1970s is the worst censorship of research in the history of the world,” said David Nutt, professor of neuropsychopharmacology at Imperial College.


The resurrection of psychedelics

Psychedelic research slowly started to return in the 1990s. The Multidisciplinary Association for Psychedelic Studies (MAPS) a non-profit organisation, was founded by Rick Doblin in 1986. The body has handed out millions of dollars to pick up research that was scrapped in the 1960s.

In the past few years, spurred by the huge increase in deaths from despair, research and political support for psychedelics has picked up speed. And with legal restrictions easing, many psychedelics companies have gone public in the past two years. In October 2020, Compass Pathways (US:CMPS) listed on the Nasdaq and was valued at $544mn. Then in June last year, Atai Life Sciences (US:ATAI), backed by venture capitalist Peter Thiel, listed on the Nasdaq for $3.19bn, the largest listing for a psychedelics company to date. Just a month later, to less fanfare, Cybin (US:CYBN) listed on the New York Stock Exchange.

So far, Psych Capital (PSY) is the only public psychedelic company in the UK, having listed on the Aquis Stock Exchange Growth Market in June of this year. But Psych Capital isn’t a pharma company: it is an investment vehicle that also provides reports and data for researchers to use. Although the listing only raised £810,000, it was seen as an important symbolic moment.

“The regulators in the UK have been a bit behind the curve, which is why a lot of the good talent and capital has gone to the US,” said Psych Capital co-founder William Potts. “Things are catching up here, though. Lots of institutional investors are interested in the industry.”  

One of the companies in which Pysch Capital is invested in a private UK company named Awakn Life Science, which researches psychedelic therapeutics for addiction therapy. Imperial College's Nutt, one of the pioneers of recent psychedelic research, is the chief research officer. He is best-known for being fired by the UK home secretary from his role as chair of the Advisory Council on the Misuse of Drugs in 2009, having claimed that ecstasy and LSE were safer than alcohol.

Attitudes have changed since then. Last year, UK regulators gave the go-ahead for the first clinical trial of the use of the psychedelic drug dimethyltriptamine (DMT) to treat depression. DMT is the active ingredient in South American hallucinogen ayahuasca and acts fast. The 'trip' starts in seconds and last less than 30 minutes.

Managing the duration of trips is one of the problems the pharma companies are trying to solve. LSD trips can last up to 12 hours, while psilocybin, the active ingredient in magic mushrooms, can last six hours. “Psilocybin can take an hour to kick in; that’s a long time to sit around to wait for metabolism to happen, and then the same dose might have different impacts on different people,” said Cybin chief executive Doug Drysdale.  

This issue is why Cybin has created its CYB003 molecule derived from psilocybin. It is designed to have less variability, a faster onset of action and shorter duration of effect. Phase 1 trials have started this summer to investigate its efficacy in curing major depressive disorder and the results are expected by the autumn. There are three phases that need to be passed before approval.

Cybin has also developed CYB004, which is derived from DMT. The hope for this molecule is that it will extend the length of the trip, as DMT is the fastest acting psychedelic. A phase 1 trial is soon to be conducted on 50 smokers to see whether it can help them break the addiction.

Compass Pathways is ahead of Cybin in the clinical trial process. In May, it completed a phase 2 trial of its COMP360 molecule, in the largest randomised control trial study of psilocybin ever completed. The study showed a “highly statistically significant reduction in depressive symptoms” from patients that received a 25mg dose compared with those that received 1mg. The patients received the drug in conjunction with psychological support from specially trained therapists.


A dose of reality?

But while the political backdrop for such trials appears to be improving, the cannabis industry provides a cautionary tale. A spate of cannabis start-ups have emerged over the past half-decade, but share prices that soared on the hope that the incoming Biden administration would introduce drug-friendly legislation were brought back down to earth when no such plans followed.

In terms of legal status, psilocybin may soon end up in a similar situation as cannabis in the US: subject to a patchwork of different rules that vary from state to state, or city to city. Oregon is the first state to widely legalise psychedelics, via legislation that comes into force at the start of 2023. A variety of other states and cities are starting to decriminalise possession of psilocybin products or explore their use in medical therapies.

But it remains banned at a Federal level, which has a particular relevance for companies: US tax law means involvement with a controlled substance limits the amount of business expenses that are deemed tax deductible. While expenses related to costs of goods sold – which can be significant given the emphasis on production and distribution – are acceptable, the lack of other exemptions tends to mean these businesses face larger tax burdens overall.

On top of this, as these companies are pre-profit businesses, valuations have been badly hit by interest rate rises and the recent sell-off in growth stocks. In the year to date, Cybin’s share price has fallen 50 per cent, while Compass Pathways' share price dipped 44 per cent and Atai Life Sciences 44 per cent. With phase three trials still to be completed and approval likely to be years away – cash flows are not arriving soon.

Brokers doesn’t expect Cybin to produce any revenue until after 2026, according to FactSet consensus. At Compass Pathways, as it is further though the trial process, analysts expect it to generate $79.3mn of revenue by 2025 before jumping to $272mn in 2026. As revenues are so far into the future it is hard to assess their valuations in the present.

Pysch Capital estimates the US psychedelic market is currently worth $190mn, and expects this to increase to $2.4bn by 2026. Psychedelic companies in the US are currently valued at around a combined $9bn so the average 2026 price to sales ratio should be 3.75. Compass Pathways’ 2026 forward price/sales ratio is currently 1.2, which suggests investors are currently undervaluing the potential growth of the market – compared with Pysch Capital’s forecasts, at least.

When capital is harder to come by for investors, it’s important to look for balance sheet strength because it is expensive to get a drug approved with the FDA. “With all the regulations, completing the trials is an expensive business. Cybin has done more than 100 pre-clinical trials,” said Doug Drysdale. “There has been a big sell-off across all of biotech and there are probably only half a dozen or so psychedelic companies that have raised enough cash to survive.”

Although the current investment conditions make it trickier for the weakest companies to endure, they can create opportunities for acquisitions for those with the most cash. In some cases, these deals are not for other businesses, but for medical studies themselves. Cybin used the fall in valuations to buy a phase 1 DMT trial from Entheon Biomedical. "I'm not going to call the bottom, but I think some of these companies are better value now than they were last year," said Drysdale. 


Hurdles to adoption

Even with the mental health epidemic, strong trial results and a more accommodative political landscape, there is no guarantee psychedelics will be the future of mental healthcare. Scientists still don’t know a huge amount about what psychedelics do to the brain. They are confident that the substances act on the serotonin receptors, and this is what the synthesized Cybin molecule is designed to do.

However, there are second-order effects when people take LSD and psilocybin. “We are in an embryonic state of research and we still don’t know if the secondary target for the psychedelics are contributing to the therapeutic effects of the drug,” said Nutt. In other words, will the synthesized version be as effective as the original versions?

One of the secondary effects that has been hypothesized is the impact psychedelics have on the default mode network (DMN). This is the part of the brain that gives humans a sense of self – or ego. It allows people to think about the past and future and is thought to be more active in people with depression and anxiety. Rumination is a common cause of stress.

Using MRI scans on patients, there is a theory that psychedelics reduce activity in the DMN, and this could be a large contributory factor in the therapeutic nature of the treatment. By creating molecules that only act on the serotonin receptors this important aspect might be missed. “Natural products can give you better benefits perhaps than a pure psilocybin pharmaceutical that is right now being capitalised on by many start-up companies,” said mycologist Paul Stamets in an interview with Double Blind, a psychedelics publication.  

Larger companies are also experimenting with different drugs. In 2019, the FDA approved Johnson & Johnson’s (US:JNJ) esketamine nasal spray Sprovato as a depression treatment. Esketamine is derived from ketamine, an anaesthetic used by doctors at high doses. Ketamine is different to psilocybin, in that, while it does have some psychedelic qualities, it ultimately has more of a dissociative effect on the user.

The other elephant in the room is psychedelics' taboo status among the general populace. But the fear built up around these drugs in the 1970s and 1980s is slowly being reduced, particularly at an institutional level. In the summer of 2021, the National Institute of Health awarded John Hopkins University in Baltimore a grant to study the impact of psilocybin on tobacco addiction. This was the first grant awarded for research in psychedelics in 50 years.

“Psilocybin is only deadly if you take 1,000 doses of it, much less dangerous than alcohol,” explained Drysdale. “Studies have also shown it is non-addictive”. For comparison, it only takes around 10 glasses of wine before there is a danger of dying from alcohol poisoning. 

The pandemic was the catalyst for the acceleration of investment in new mRNA technology. It may also prove to be a new beginning for some of the world's oldest medicine.