Psychedelics investors are seeking 3 key qualities

Posted -

Research is proving the impressive efficacy of psychedelics in treating conditions like anxiety, depression, and opioid addiction. Psychedelic substances like MDMA, LSD, ketamine, and most notably psilocybin (magic mushrooms) have been gaining traction in recent years as several clinical trials enter Phase II and beyond. And as the cannabis industry has experienced some undeniable challenges in 2019, investors have been turning their attention to this interesting new market.

Researchers[1] are suggesting that psilocybin and/or MDMA will play a very significant role in treating depression and PTSD within the next 5 years. Consequently, entrepreneurs are looking to get in early and experience financial gain as the industry takes off.

The legal framework
While psychedelics remain a controlled substance within Canada, a ballot measure was recently proposed in Washington D.C. that would decriminalize psychedelic plants like psilocybin. Previously, Vermont put forth a bill seeking to remove psilocybin, ayuhuasca and peyote from the list of controlled substances. And in 2019[2], Denver officially became the first U.S. city to decriminalize psilocybin.

Within Canada, so called “grey market” dispensaries are forging ahead and providing customers with micro-dose orders of psilocybin, ordered online and delivered by mail. Mind Medicine (MindMed), a Toronto based company, is instead working within the legal framework and preparing a Phase 2 clinical trial in which opioid addiction is being treated with a psychedelic compound called ibogaine, and LSD micro-dosing is being used to treat ADHD2. The company made history in early March when it became the first psychedelics pharmaceutical firm to go public[3]. MindMed is backed by high-profile investors, including Kevin O’Leary (of Shark Tank fame), and Bruce Linton, the former CEO of Canopy Growth Corp. Their IPO has ushered in a new era in which the existing grey market demand can be “legitimized” in mainstream markets.

3 qualities critical to success
The challenges experienced by the cannabis industry during the first years of legalization have provided many lessons upon which savvy investors can base their decisions. Wise business owners looking to enter or expand within the psychedelics market can also look to these lessons as a guide for best practices.

Let’s take a closer look:

1) Strong leadership
The early cannabis industry was powered by a strong spirit of entrepreneurship. Many founders also took on the role of CEO, and ultimately found that leading a billion dollar publicly traded company is very different from managing a small private business. The cannabis industry’s early failings were in many cases a direct result of inexperienced leadership. As the industry gained momentum, companies needed external assistance making effective decisions for business operations, finance, management, and governance.

Lesson: Psychedelics companies should learn from this mistake by launching with an effective and experienced leadership team from the beginning. Financial expertise and business acumen need to be treated with equal importance to the scientific and cultivation components of the business.

2) Financial controls
The cannabis industry experienced challenges with internal controls and financial reporting, including some that resulted from the International Financial Reporting Standards (IFRS) mandate of the recording of biological assets at fair value. Inaccurate valuations wreaked havoc on financial reporting and compliance, sometimes pausing forward momentum.

Lesson: Internal control and financial reporting processes are of particular importance for companies considering a future IPO, and thus should be a focus from the beginning. Psychedelics companies should establish an effective corporate governance structure and commit to maintaining impeccable financial reporting from the outset.

3) Alignment with regulations
The cannabis industry experienced significant losses as a result of poor compliance and complications with supply and demand. One of the main causes was the frequent adjustments required as a result of changing regulations. Changes to packaging, and an evolving licensing process gave way to fits and starts and in some cases, product sitting in warehouses rather than being sold. Furthermore, some industry players clearly did not buy into the need for strict compliance in an industry subject to extensive government regulation.

Lesson: Psychedelics companies need to be flexible, resourceful, and adaptable but deeply committed to playing by the rules. It’s likely that this industry will experience a number of regulatory fluctuations in the coming years, and financial and marketing decisions should be made with this fact in mind. Those who are resilient, responsive and compliant will rise to the top.

Planning for the future
As leaders in the cannabis space, Zeifmans is quite active in the fledgling psychedelics market. We have a number of psychedelics clients at varying points in their development, and we’re confident that this will be an interesting space to watch in the coming months.

If you’re considering entering the psychedelics market, or if your company will be conducting an IPO or another strategic transaction in the future, reach out to our team today to learn more.

[1] Stockhouse, “Why Psychedelics Look Like the Next Billion Dollar Business”, https://stockhouse.com/news/newswire/2019/08/23/why-psychedelics-look-like-next-billion-dollar-business

[2] Global News, “Denver Becomes First U.S. City to Decriminalize Psychoactive Ingredient in Magic Mushrooms”, https://globalnews.ca/news/5251353/denver-magic-mushrooms/

[3] The Cannabis Investor, “MindMed Becomes First Psychedelics Pharma Company to Go Public Following Historic IPO”, https://www.thecannabisinvestor.ca/mindmed-becomes-first-psychedelics-firm-to-go-public-following-historic-ipo/

Supplemental insights

What LPs need to know from the CSA Cannabis Report

Financial opportunities abound in Canadian cannabis market