Psychedelic drug boom in mental health treatment nears reality

There are example of stigmatized drugs in FDA-approved medical usage, ketamine, for example, as an anesthesia since the 1970s, and ultimately, used on an “off-label” basis to treat depression based on the existing FDA authorization. In 2019, a Johnson & Johnson ketamine-derived treatment for drug-resistant depression was the first new approach for the mental health condition specifically approved by the FDA in decades.

The current treatment approach of helping people to live with depression and PTSD, and on medication, creates a patient population and cost factor that is a burden on the health-care system. That may ultimately help the new drug companies gain acceptance if the clinical trials results continue to be positive.

A close friend of Simon’s almost lost a child suffering from mental illness. The individual was looking at a prognosis of never going back to school, never being able to work, at best not being a danger to themselves with medication. “That was not a prognosis you want for a 20-year-old,” he said. “They had tried everything, and eventually out of complete desperation, they started learning about the potential for psychedelic-assisted therapies, and it worked,” he told CNBC in an interview conducted late last year.

Now, he says, that person is off medication, in a relationship and leading a normal professional life.

Mental illness is among the most costly medical expenses in the U.S., and it has a high cost to employers in lost productivity. In 2019, 51.5 million adults were living with a mental illness in the U.S., and the number of people suffering and drug costs, already in the tens of billions of dollars annually, are projected to grow in the years ahead, with Covid-19 compounding mental health issues globally.

Roughly 7% of Americans suffer depressive episodes annually, and roughly 1% are resistant to treatment, the latter associated with a significantly higher economic burden including hospitalization. Americans who suffer depressive episodes have additional bouts within 2-5 years at a rate exceeding 40%, according to a recent Cowen & Company research report on Compass Pathways, and that risk increases with each new depressive episode.

“Covid has done a lot of terrible things, but it has elevated mental health visibility, and as a result of that there is lots of interest,” Simon said.

Denver became the first city in the U.S. to decriminalize psychedelic mushrooms in 2019, and in a 2020 ballot measure, voters in Oregon made it the first state to decriminalize mushrooms and legalize them for treatment purposes. But investors behind the new drug treatment approaches are not focused on public acceptance, the trend of microdosing (for which they say data remains slim) or consumer recreational market potential, though many do find ideas about these drugs to be outdated.

“Consciousness is not the key here,” Simon said. “For purely medical use, there is a tremendous amount of data and traction for expanding use, which is where I’m focused.”

One of the biggest investors in the emerging field is Atai Life Sciences, a holding company for multiple biotech start-ups pursuing alternative treatments for depression, anxiety and addiction based on stigmatized drugs, and backed by venture capitalist Peter Thiel. It recently filed for an IPO.

Atai’s chairman Christian Angermayer — who says he has never touched a beer even though he comes from Bavaria where it is “our daily nutrition,” or smoked a joint or cigarette — is a personal believer in the power of psychedelics to have a positive influence on life. He described his first experience with psychedelics as “the single most meaningful thing” in his life.

“Nothing else even comes close,” Angermayer told CNBC in an interview conducted late last year.

But his personal experience is distinct from his role as an investor and executive focused on the mental health market needs. Angermayer was an early investor in Compass Pathways, where one of the founders, Lars Christian Wilde, suffered from drug-resistant depression and found help in psychedelics.

“We want to bring it back to the legal realm, but in the shamanistic setting of today, and that is with a therapist. We want to make it legal, but solely for doctors or psychotherapists in a clinical setting,” said Angermayer, who will speak at CNBC Healthy Returns on Tuesday. “These are not drugs you can take alone and not everyone can afford to go to the Amazon and see a shaman. We need to bring it into the medical system.”

A common thread among those closely watching, and investing in this space, is the personal experience with family and friends suffering from mental illness and struggling to find a successful medical treatment. “These people have been suffering for decades,” said Piros, who has a family member now struggling with depression and who has not yet found an effective medical therapy.

The new companies come with a high level of investment risk, common in the biotech space, with early trials showing promise but the business generating no revenue today. Advocates and investors in these alternative drug treatments say the economic argument is compelling when compared to current options.

Piros, who has spent more than two decades analyzing biotech companies, says investors need to be mindful that when you get involved with a development stage company it is not about the money being made already, but factors including how long the companies will have IP protection, when they can be expected to enter the market, and potential cash flows over a period between a decade to 15 years.

Unlike biotechs working with brand new compounds which have a failure rate as high as 90%, the trials using psychedelic drugs that have been studied for decades are less likely to result in outright failures. Still, Piros said that the proper way to think about this new theme is as part of an existing investment risk tolerance for the biotech sector, and these new drugs should be no more than 10% of that existing allocation.

“It’s not chronic medicine, which as a business model is reasonably predictable and a great business model. It remains to be seen how this business model works, but … if we only need treatment for depression twice a year to be in remission that is a thousand times better than anything we can offer today, and PTSD has no approved drug,” Piros said. “It’s not like a crapshoot anymore.”

If a company like Compass makes it to market, its treatment approach could reach millions of Americans — estimates range from roughly 2 million to 4 million — not being served well by the current class of depression drugs. Pricing of the treatment could be $10,000, according to Cowen estimates, or as high as a $20,000, according to Piros, which he said is closer to the cost of current treatments. Depending on the number of patients who are resistant to current drugs that the therapy reaches, a 5%-7% market share could be worth billions. According to a Cowen estimate, $1 billion in annual sales; according to Berenberg, more than $2.5 billion; and according to Piros, possibly as much as $5 billion for a new, successful entrant at peak.

“We don’t expect 5% penetration two years after launch, more like five to seven years after launch, and going beyond 5% is crazy. But that is still a very large chunk of value,” Piros said. “We don’t need to go to the consumer angle.”

Many factors would influence the overall size of the market, from patients who are designated as good candidates for the new treatments, to the number of treatments needed, the infrastructure required for the guided sessions, which need to be in controlled environments like existing treatment centers that currently administer ketamine, and physician acceptance. Compass is creating 100 centers to train medical professionals and offer guided therapy, and plans to grow to 3,800 centers in a peak year.