There are strong signs Europe and North America are about to enter a recession, as sanctions against Russian oil and supply chain disruption exacerbate inflation. This volatility affects capital markets around the world, with a direct impact on investment in psychedelic healthcare.
Earlier this month in the US, the Bureau of Labor Statistics reported that the consumer price index, a measure of the cost of living, surged 9.1% since last year – an increase not seen in four decades.
In response to soaring inflation, the Federal Reserve has raised interest rates three times in six months – with further hikes expected.
High interest rates make it harder for companies to raise the capital that finances research and development, a core activity in life sciences. Rising mortgage and credit payments reduce the expendable income of retail investors, with tapered investment in psychedelic healthcare.
This has resulted in company valuations and investment plummeting; however, the bear market presents lucrative opportunities for investors who can weather the storm.
Macroeconomic factors point towards a looming recession, with traders reducing investment in speculative stocks. Developers of psychedelic medicines will not generate revenue until their drugs are approved, at the end of capital-intensive clinical trials.
As the road to potential returns can be long and uncertain, with the need to consistently secure resources and regulatory approval, investment in the nascent sector is particularly vulnerable to an economic downturn.
A study led by London School of Economics found it cost US$1.3 billion to bring a new drug to market, and now there are concerns around the ability of psychedelic medicine developers to finance the undertaking. Consequently, companies with stronger cash positions represent safer options for investors.
‘When I look at what is happening across the biotech space, it is all macro driven,’ said Cybin’s CEO Doug Drysdale. ‘There seems to be a lot of economic uncertainty between COVID-19, interest rates and inflation…but this creates an opportunity. Fundamentally, nothing has changed about the sector.’
Investment in psychedelic healthcare
Similar optimism is shared by investors who welcome a period of consolidation as a necessary stage in market development. Market volatility has exposed companies without sufficient business resources or acumen, as well as those with unsustainable drug development pipelines. As a result, those with valuable portfolios and efficient business models will remain and can acquire greater funding.
As organisations falter and share prices fall, merger and acquisition activity rises. This presents opportunities for strategic buyouts, with bigger and better businesses emerging and the sector as a whole maturing.
The sector’s maturity has destigmatised psychedelic medicines, with clinical trial data on their safety and efficacy underpinning regulatory reform across North America.
The success of adult-use psilocybin frameworks presents the opportunity for psychedelic healthcare companies to generate revenue and finance medical regulation. On the subject, PSYCH spoke with Filament Health’s CEO Benjamin Lightburn.
‘Looking at states like Oregon, we can bridge the gap between the pharmaceutical and natural markets,’ said Lightburn. ‘The technology that we developed to manufacture standardised psilocybin and psilocin drug candidates for the FDA is equally applicable to that needed in Oregon.
‘Oregon’s draft regulations do provide for natural extracts, but up until now no one has been able to make a standardised dose of psilocybin and its extracts. In Oregon’s clinics, people will have the choice and may prefer to take a little capsule that contains 20 milligrams of psilocybin rather than five grams of dried mushrooms.’
Local frameworks will operate alongside psychedelic healthcare in a medical setting, with MAPS expecting its MDMA-assisted therapy for PTSD treatment to be regulated in North America next year and in Europe by 2024.
With enrolment for MAPS’ second confirmatory Phase III trial complete, the organisation is on course to submit its New Drug Application to the FDA by Q2 2023. This will be a significant inflection point for the industry, reassuring investors in the regulatory process and the eventual return on their investment.
Braving the bear
In modern times, economic recessions have typically occurred every five years and lasted less than a year – far shorter than psychedelic drug development pipelines. This should give hope to investors braving the bear market as the US sinks into recession.
Although the economic downturn will stifle the levels of investment entering the industry, the market’s potential remains the same and the shakeout heightens investor opportunities.
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