GREEN MARKET REPORT  |  June 26, 2022
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BUSINESS
The Big Money Behind Psychedelics
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The financial players in the disruptive psychedelics industry have become part of a jigsaw hodge-podge of new and strategic investors each taking a risky shot in an industry that is slowly attracting more millionaires. 
They want to get their piece of the action. But with an emerging industry like psychedelics and all the unknowns involved in it, they are essentially banking on the financing moves of other big-money movers and shakers in the psychedelics space for guidance.
Some are sensing a big-time, long-term winner in the making if they can just manage to wait out a company’s startup financial pain management. Others are content to just watch the ups and downs play out—for now. 
There are signs that the industry is about to make the kind of real progress that even conservative investors like to hear. The clinical work of psychedelic companies is getting tantalizingly closer to creating an FDA-approved psychedelic drug that would be a truly original treatment for mental health, currently led by developments in psilocybin and MDMA.
And some of the bigger investors have a personal reason for taking their own leap of faith with their fortunes, adding an interesting wrinkle to their investing motivation.
Psychedelic Billionaires
Over the last couple of years, the psychedelics industry has seen a few billionaires take the plunge, including German billionaire Peter Thiel, co-founder of PayPal and an early investor in Facebook, currently enjoying a net worth of $7.9 billion, down from a 2021 high of over $9 billion. He has also done venture stage investments in both SpaceX and LinkedIn. 
Thiel invested $11.9 million in Atai Life Sciences (NASDAQ: ATAI), which was founded by billionaire Christian Angermayer in 2018, who himself got into psychedelics after an illuminating personal experience with psilocybin
Thiel and Angermayer watched their Atai Life Sciences stock surge 40 percent in its NASDAQ debut in June 2021, just the third psychedelics company to go public in the U.S., raising $225 million from selling 15 million shares. Angermayer also owns about a quarter of Compass Pathways (NASDAQ: CMPS), one of the earliest stars of the psychedelics industry that is gaining even more momentum after completing a phase IIb clinical trial of psilocybin therapy for treatment-resistant depression in 22 sites across Europe and North America. 
It was the largest randomized, controlled, double-blind psilocybin therapy clinical trial ever conducted.
Angermayer has become a sort of investor guru for psychedelics. He appears to ostensibly be on more of a personal mission to cure the ills of mankind than just a billionaire playboy looking for cool investments. He always discusses the huge market for any psychedelic drug that can successfully treat depression, often citing the statistic from the World Health Organization that there are 300 million people suffering from depression worldwide.
That’s just the sort of help-for-all-mankind bandwagon that attracts other big-money players who are checking out the market. Just two years ago, a group of Silicon Valley and Wall Street executives reportedly raised $30 million to speed the development of MDMA to treat trauma patients, including Genevieve Jurvetson and her husband Steven, who co-founded the automation startup Fetcher. They donated $2.6 million. 
Joby Pritzker, the Silicon Valley investor whose private equity company has holdings in Tesla, Uber, and SpaceX, donated over $1 million and is on the board of the Multidisciplinary Association for Psychedelic Studies (MAPS). 
Another Silicon Valley superstar, billionaire Bob Parsons, founder of the web-hosting company GoDaddy, gave $2 million.
Parsons also has a personal connection to psychedelics. He is a Vietnam vet suffering from PTSD who began exploring psychedelic therapy as an option to manage his trauma.
Parsons later went even further with his psychedelics investments. He gave $5 million to the Mount Sinai Health System in September to build and support training and education for therapists using MDMA-assisted psychotherapy and other psychedelic medicine approaches. The multiyear grant will support the Center for Psychedelic Psychotherapy and Trauma Research in the Department of Psychiatry at the Icahn School of Medicine at Mount Sinai.
R&D Investment
But it’s not always the big money guys playing, because the industry is seeing record-setting benchmarks in the industry coming from other investor sources. For example, in 2021, investments in psychedelics companies grew to $595 million across 45 deals, setting a new annual record, accelerated by such drivers as the overall declines in return on investment for drug research and development pushing pharmaceutical companies to explore alternative product types like psychedelics. 
But it’s all a bit of a sticky wicket. While all this good news is playing out, the leading psychedelics companies are still experiencing financial loses. For example, one of the top five psychedelics companies, MindMed, listed a net loss of $93 million in 2021in their annual report, adding that “considerable effort was directed towards employing a successful financing strategy.”
But still: The millionaire—and billionaire—drumbeat for psychedelics gets louder every year. In fact, the world’s richest person, super billionaire Elon Musk (current net worth is $268 billion) appears to be hovering around the psychedelics industry, tweeting in April that he “talked to many more people who were helped by psychedelics & ketamine than SSRIs & amphetamines.” Is he next to jump in? Or is this psychedelics bonanza slowing down for the time being? As with many things in the disruptive psychedelics industry, all that can be done is to wait and see.
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BUSINESS
California’s Crushing Cannabis Taxes
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Part 3 of Green Market Report’s series on California‘s war on cannabis.
If you were to ask what the main problem facing the largest cannabis market in the country is, there would be one resounding answer – TAXES.
Cannabis taxes on the state and local levels are choking the life out of businesses across the state of California and cultivators, manufacturers, and retailers are looking for relief anywhere. Currently, businesses are subject to a $161 a pound state cultivation tax for flower, then a 15% state excise tax (which is really 27%, but we’ll get into that later), a 10% state sales tax in most areas, not to mention the varying local cultivation, processing, manufacturing, distribution, and retail tax, effectively making the tax rate on the average cannabis purchase about 50%. 
At first glance, these taxes might seem reasonable, but when examined more closely they are not what they seem.  For example, the 15% excise tax is really defined by an arm’s length transaction with a 15% rate being based on 80% of the retail price and not the wholesale price, effectively truly making the rate 27%. These onerous taxes aren’t levied on any other industry except for cannabis and business owners are crying out for mercy.  Legislators on the state and local levels are looking to provide band-aids to the situation, but so far only Senate Bill 1281 is offering long-term solutions.
The legislation introduced by Senator Steven Bradford (D-35) amends the Control, Regulate and Tax Adult Use of Marijuana Act (AUMA) would eliminate the cultivation tax altogether and lower the “15%” excise tax to 5%. It would also have the excise tax paid by the retailers instead of the distributers. Currently, retailers are paying the excise tax to distributors for products has yet to sell, this new provision would have retailers pay the tax directly to the state after the product has been sold and they have the money to pay it. SB 1281 just makes sense.
There are other pieces of legislation that have been introduced to help alleviate the tax burden, Assembly Bill 2792 and AB 2506, but all they do is suspend the cultivation tax until 2028.  While businesses could benefit from these suspensions right now, what happens in 5 years? They are all back in the same place where they started, struggling to stay afloat under the crushing tax burdens.
California brought in close to $1 billion in tax revenue last year for the first three quarters, but the illicit market is rampant and legal businesses can’t compete.  A group of cannabis executives banned together and wrote to Governor Gavin Newsom about the situation, “The opportunity to create a robust legal market has been squandered as a result of excessive taxation,” they added. “75% of cannabis in California is consumed in the illicit market and is untested and unsafe.”
Newsom needs to address this massive problem that is paralyzing the growth and stability of the California market. He has promised tax relief but has been vague in how he would actually accomplish it. Eliminating the cultivation tax and vastly reducing the excise tax would be a good start. SB 1281 is the legislation that needs to cross his desk that is chocked-full of long-term solutions and common sense. No other industry is burdened with these kinds of taxes and cannabis shouldn’t be either. Support SB 1281.
 
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BUSINESS
The Obstacles Facing Psychedelic Medicine Patents
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One of the most important aspects of the psychedelics business—and one that is becoming more contentious—is about securing and protecting the patent for the specific molecule or synthetic that a psychedelics company is banking on because it can essentially protect the investment of millions of dollars a startup spends on setting up and running clinical trials, hiring expensive medical staff and other business development expenses.
Patents give protections for making, using, or selling the patented inventions of a patent holder for 20 years. They are a form of government-granted monopoly. The public policy justification for patents rests on the theory that the right to exclude competitors incentivizes innovation and encourages inventors to disclose their inventions to the public, instead of maintaining them as trade secrets. 
But when it comes to an emerging industry like psychedelics, there are no clear-cut answers to what patents should do, what they can do, and who can own them.
According to an article in the Harvard Law Review, the sudden influx of psychedelic patents has prompted criticism from stakeholders including patient advocates, scientists, journalists, lawyers, and members of Indigenous communities. “Some claim patents on psychedelics monopolize products of nature that should remain affordable and widely available. They contend that patents can exploit the traditional knowledge of Indigenous communities without permission or adequate acknowledgment and compensation. Others argue psychedelic patents are making a small number of companies gatekeepers for the emerging psychedelics industry, which could inhibit research, stifle innovation, and restrict access to needed therapies.”
One of the unique difficulties in securing a patent in the psychedelics industry is making decisions based on “prior art”, defined as “references or documents which may be used to determine novelty and/or non-obviousness of claimed subject matter in a patent application.”
Psychedelics are so new that there really isn’t much prior art. And you can’t patent a plant. But those are just a few of the trapdoors of patents in psychedelics.
To explain the patent issue in more detail, Psychedealia talked with Peter Rands, a patent attorney, and the CEO and founder of biotech company Small Pharma (OTC: DMTTF), working on DMT assisted psychotherapy. He used DMT as an example. “DMT is a molecule that is a known compound. You cannot patent what is known,” Rands said. “The specific application of known compounds can be patented if there is something novel and non-obvious about it.”
The interesting thing about the psychedelics environment, he said, is that for the most part, the private companies that are developing proprietary medicines—the fundamental evidence that these molecules were effective as kind of antidepressant medicines, maybe expanding beyond depression into other mood disorders or other neurological conditions—was put into the public domain by academia, such as Johns Hopkins and Imperial College. “So no one has proprietorship either on the fundamental molecule or the specific applications,” he said. “This opens up the question of the value of secondary patents.”
An example of a secondary patent is the specific polymorph that one of the top psychedelics industry companies, Compass Pathways, has patented with their Compass360 psilocybin therapy, which is the company’s synthesized psilocybin formulation being developed for psilocybin therapy in treatment-resistant depression. “I worked for three years at a generics company, where what we were doing was finding ways around patents, or challenging them in court,” Rands said. “And a patent that covers a very narrow polymorph is really easy to design around.”
He said that he keeps an eye on patents in the psychedelics industry. “Absolutely. There have been some interesting ones. There are a lot of companies trying to come up with novel combinations. A lot of companies are finding the sort of specific ways to assess the subjects and see what they can get protection around with kind of a pre-screening mechanism, basically, for people that will be receptive or unreceptive to psychedelic therapy.”
He said that Small Pharma is specifically focusing on the manufacturing methods for producing their DMT, which they think is more efficient than any other producers. “We published it fully in our patent application. So you know, to the extent that it’s protectable, it is also in the public domain.”
Compass Pathways (NASDAQ: CMPS) is currently addressing a patent challenge from Freedom to Operate (FTO). FTO is a non-profit founded to advance science and education, specifically to support and facilitate scientific research, in the public interest and for the public benefit. 
FTO is currently challenging Compass Pathways’ first patent with claims covering its Form A hydrate psilocybin. The Form A hydrate is distinct from the anhydrate psilocybin for which the company has already been granted eight patents in the U.S., UK, Germany and Hong Kong. It is used in Comp360.
It’s the fifth time that FTO has challenged a Compass Pathways patent. FTO claims the patent on this form of crystalline psilocybin is invalid because the substance was publicly used prior to the date on which the patent for the claimed invention was first filed. 
FTO claims that the form of psilocybin had first been used as far back at 1963, according to an open letter on the subject. The challenge is expected to continue, but it has genuinely caught the attention of the psychedelics community.
Christian Angermayer, who founded Atai Life Sciences and helped found Compass Pathways, expressed his opinion about patents in an open letter, starting off with a sort of Patents 101 discussion: “Patents were actually implemented in the U.S. to reward innovators in the short term with a temporary monopoly,” he wrote. “Patents and any similar forms of protection like data exclusivity can be compared to a mortgage on a house. For a certain period of time, society has to pay back the mortgage (assuming the house is great, and people want to move in), but after that, society owns it and can live there rent-free.”
Angermayer then added that he feels that the patent discussion is mixed up with other societal issues. “Many use this discussion to express their discomfort with current FDA regulations,” he wrote, commenting on the burdens and expense of trials. Others, he wrote, use the patent discussion to express their discomfort with capitalism itself. “I personally believe that capitalism—though it has its flaws—is by far the best economic system tried to date and that many, especially young people who flirt with socialism at the moment, forget the destruction, pain and death socialism has brought for hundreds of millions of people over the years. I would be interested in having this discussion, but…it’s not a psychedelic discussion.”
So what can be done? A more preventative approach to improving the quality of psychedelic patents involves bolstering the prior art search by creating prior art repositories, according to the Harvard Law Review. Another potential assistance would be tightening up U.S. patent law requirements for novelty and non-obviousness. 
Some call for patent pledges in the psychedelics industry. And some say that this industry should not use patents at all. “Because psychedelics represent the most innovative approach to mental healthcare in decades, and the most promising potential solution to the mental health crisis, they are too important to be monopolized,” the Harvard Law Review concluded. “Keeping psychedelics in the public domain, off-limits to the patent system, may be akin to prohibiting patents on abstract ideas, products of nature, and natural phenomena, because they are fundamental tools of scientific inquiry.”
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