KEY POINTS

  • Stocks related to psychedelics are plunging in value during this bear market.
  • Psychedelics are illegal, and researchers have yet to prove their efficacy in treating mental disorders.
  • Although current market conditions are unstable, investors could experience significant rewards if they choose to invest now.

It might sound surprising, but soon it could be common place to buy psychedelics stocks. Currently, companies are developing mental health therapies based on psychedelic chemicals could be very successful someday. A growing body of clinical trial results suggests drugs like psilocybin could effectively treat conditions like treatment-resistant depression (TRD). So it is likely only a matter of time before these medicines are commercially available.

Despite this, no one has done it yet, meaning investors will need to be okay with substantial risks if they opt to invest. There are a few persuasive arguments for buying shares of these companies now. However, there are equally compelling arguments against it, so let’s investigate further.

Buying the dip

Now is a good time to invest in psychedelics stocks because many bargains are available thanks to the bear market.

COMPASS Pathways (NASDAQ:CMPS) and Atai Life Sciences (NASDAQ:ASAI) are just two examples of companies that have seen better days. For example, shares of Atai have declined by almost 79 % in the previous twelve months, while COMPASS has dropped more than 61.3 %. Furthermore, they may get even cheaper in the coming months if the market continues to fall.

Investing in either company now would allow penetration into the market early on, as both companies are still developing their first psychedelic therapy. This way, the investor, could see price appreciation should they have positive clinical trial results or favorable regulatory outcomes. That said, it’s not pressing that investors buy shares immediately because it will be a long time before these stocks generate revenue.

Illegality problem

Another reason psychedelic stocks are popular right now is that the legality of psychedelics chemicals in the United States is gradually moving in favor of the sector. Psychedelics are prohibited at the federal level right now. But, as of 2020, psilocybin, the active component of psychedelic mushrooms, has been decriminalized in Oregon state. A few cities have followed suit, including well-known locations such as Washington D.C., Ann Arbor, Maryland, and Oakland, California.

The National Defense Authorization Act (NDAA) this summer received bipartisan efforts to enable the Department of Defense (DOD) to study psychedelics and marijuana for the treatment of health conditions. Specifically, psychedelics are being studied for their use in treating post-traumatic stress disorder(PTSD). If it passes and gets signed into law, psychedelic stocks may receive a boost. But, more importantly, there will be another piece of proof that prohibition is finally beginning to thaw.

No rush to buy

For many investors, reasons to buy psychedelics stocks are simply not as appealing as other options, especially when considering the level of associated risks.

There are three significant roadblocks for psychedelic manufacturers. First, the chance their treatments will not be proven safe and effective in clinical trials. Other biotechnology stocks somewhat share this danger, but it’s far more significant in this scenario because even basic details about the best treatment methods remain unknown.

For example, COMPASS’s lead program, COMP360, combines psychological assistance from trained psychologists with psilocybin administration in a carefully controlled form. Many other pharmaceutical businesses have successfully completed developing a therapeutic molecule but creating an in-clinic psychedelic treatment protocol and a training curriculum for the clinicians who will administer it is entirely new territory.

Commercial viability

The second risk is that the psychedelic treatments companies develop will not be profitable even though regulators agree they are safe and effective. COMPASS’s example for COMP360 necessitates patients going to specialized clinics with well-paid professionals. We do not know how much a course of COMP360 would cost, nor do we know if public or private insurers would assist patients with payment.

Lastly, the third considerable risk is that psychedelic therapies are still unlawful for medicinal purposes in most Western countries. There’s no possible way for any corporation to commercialize a psychedelic medicine until that changes. That’s true regardless if clinical trial outcomes are positive and expected economic returns are substantial. The recent progress on legality is favorable, but it’s so new that it isn’t enough to invest money into yet.

Should you buy?

Currently, psychedelic stocks are quite speculative and will most likely continue for at least a few more years. So if you’re not afraid of losing money or waiting for your investment to pay off, buy psychedelics stocks now. Conversely, it’s probably better for most investors to put their money where they can have confidence in a good return.

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