Are Psychedelics Still too Risky an Investment?

Editors Note: This story was originally published on June 13, but due to some technical problems we had to reset the website and as a result, the story got erased. This is the same story but republished.

 

Biotechnology is always a dicey business to create, run, and make profitable. Psychedelics add a difficulty factor of 10 to that equation.

Currently, there are many psychedelic companies still working their compound through clinical trials—with no actual product to market and sell for years.

Much of the real success of any psychedelic business hinges on the completion of clinical trials and Food and Drug Administration (FDA) approval, which takes serious time and money and is never guaranteed. 

And with any startup business, there is always risk: internal threats, external threats, workforce issues such as illness or theft, fraud, market changes, facility damage, rent increase—it’s a fairly exhaustive list.

An SBA financial education course presents a sort of Business Risks 101: Good risk management will help a business continue in operation. Mitigated risk leads to better cash flow and greater stability. Creditors will see this stability and good cash flow reflected in a company’s financial reports. Greater stability will mean the company will last into the future. 

The rewards of risk management are all linked together: good cash flow leads to stability, which leads to good credit, which leads to longevity.

Even before the startup business really gets off the ground, an investor should have done their due diligence on the risk they could be exposed to by the business, and do an analysis of an investment’s returns compared to its risk, with the expectation that a greater degree of risk is supposed to be compensated by a higher expected return.

There are computations and equations for determining risk using statistical methods that are historical predictors of investment risk and volatility, such as standard deviation, Sharpe ratio, value at risk, conditional value at risk, and others.

But all that cool analysis may or may not work in the hot, complicated world of the psychedelics industry, even with the news that nearly 50 psychedelic companies have gone public. Going public can offer a more secure investment because it helps a company raise capital to invest in future operations, expansion and acquisition.

Due diligence for a public company in the U.S. also means checking the U.S. Securities and Exchange Commission (SEC) filing of any company they are considering. 

The SEC filing can show how some psychedelics companies are still scrambling to organize their operations—even as investor money pours in seemingly oblivious to the danger at hand.

Take the sure thing as one example: Atai Life Sciences (NASDAQ: ATAI) . The company has eight lead investors, and has gone through 10 funding rounds since mid-2018, raising a total of $347.1 million. 

It’s one of the most closely watched psychedelics companies by investors. But the stock has been experiencing a steady decline since November, 2021, from just over $17/share to less than $4/share.

And company executives admitted in the company’s SEC filing that the company did not design and maintain formal accounting policies, processes and controls related to complex transactions necessary for an effective financial reporting process. “These deficiencies constitute material weaknesses in the design of our internal controls over financial reporting,” they said in their filing (pg. 60). “As a result of the material weaknesses, we have relied, in part, on the assistance of outside advisors with expertise in these matters to assist us in the preparation of our consolidated financial statements and in our compliance with SEC reporting obligations and expect to continue to do so while we remediate these material weaknesses.” 

As of March 31, 2022, those weaknesses had still not been remediated… but the company reported it had $335 million in cash as of that same day, the day of its first quarter reporting.

All that cash, all those funding rounds, and a crashing stock price.. under a management structure the company admitted had “material weaknesses.” 

Still too risky? Most investors would agree. 

But then there’s the 400 pound gorilla in the room: Predictions of a global psychedelic drugs market are very encouraging to say the least. Data Bridge Market Research says that the global market is expected to reach $6.4 billion by 2029, up from $2.4 billion in 2021.

Positive signs one day, red flags the next, all coming amidst projections of a wildly profitable industry just gaining its footing and attracting more startups. What’s the end game here?

There’s always risk in any business. But as the saying goes: Let the buyer beware.

Dave Hodes

David Hodes is a business journalist based in the Washington D.C. metropolitan area. He has contributed feature articles to several cannabis and psychedelics publications, as well as general business/lifestyle publications, on a variety of topics. Hodes was selected as 2018 Journalist of the Year by Americans for Safe Access. He is a member of the National Press Club, and the deputy booking agent for the National Press Club Headliners Committee.


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