- Huge chunks of capital have suddenly flooded into psychedelic drug companies
- In a capital-intensive industry, this is one of the most important drivers for the future success of the psychedelics space
Drug development is expensive. All investors with experience around the pharmaceuticals industry are aware of this.
Drug development costs can run into the $100s of millions. The clinical trials process (for formal drug approval) usually stretches out over several years.
As the emerging psychedelic drug industry has taken off, skeptical investors would want an important question answered. Are these startups capable of making it to the finish line in such a capital-intensive industry?
Over the past 10 weeks, the psychedelic drug industry has answered that question. Yes – with an exclamation mark.
Look at the size of these numbers, from both pubco financings and private equity rounds.
Compass Pathways (US:CMPS) -- $146.6 million (IPO financing)
ATAI Life Sciences -- $125 million (Series C financing round)
Mindstrong Health -- $100 million (Series C financing round)
That’s over $370 million right there.
Over the same time period, MindMed Inc (CAN:MMED / US:MMEDF / GER:MMQ) and Cybin Corp (CAN:CYBN / US:CLXPF) have collectively raised in excess of CAD$100 million. Given the size of Canadian capital markets, these deals are even larger in proportionate terms.
What does this mean for investors?
Along with smaller financings, close to half a billion dollars has recently been injected into an industry still in its infancy.
This is sufficient to not only finance all of the near-term operations objectives for these companies, there is plenty left over for M&A activity.
Lots of news-flow + lots of acquisitions. No need for most of these companies to go back to capital markets in the near future.
In turn, this can drive enormous additional growth in market caps (and share prices) – on top of the big rallies that many of these stocks have already produced. Rally on!
Some of these companies will go back to capital markets for more cash, because they will have the luxury of doing of doing additional financings at strong valuations.
It’s a good position for the industry to be in. It’s a good position for the companies to be. It’s a good position for investors to be in.
What’s one of the Golden Rules in small-cap investing? Look to do most of your buying after the best companies have cashed up.
Most of the leading pubcos are currently cash-rich. All are financed to at least cover near-term operational objectives.
Psychedelic stocks have been trending higher since September and the Compass Pathways IPO. In short, some of these companies have been able to advance their share price while they were doing new financings.
If these stocks can run as they are absorbing some dilution, how are they likely to perform after getting cashed up?
Small-cap investing is all about seeking to optimize the risk/reward equation. At the moment, investors in psychedelic stocks are staring at an equation for success.
DISCLOSURE: The writer holds shares in MindMed Inc and Cybin Corp.