Motley Fool Money – Episode Summary: "You Can’t Patent LSD"

Podcast Information:

• Title: Motley Fool Money
• Host/Authors: Dylan Lewis, Ricky Mulvey, Mary Long
• Description: A daily podcast for stock investors, offering long-term perspectives on business news with The Motley Fool's investment analysts. Weekday episodes feature investment insights, while weekend shows include investing classes and in-depth interviews.
• Episode: You Can’t Patent LSD
• Release Date: November 23, 2024

Introduction to Psychedelics in Investing

Ricky Mulvey opens the discussion by highlighting the focus on the psychedelics industry, particularly companies aiming to legally provide psychedelic therapies. He introduces Keith Spates, a Motley Fool contributor, and mentions Mary Long's recent conversation with Spates about the current state of psychedelic investments, regulatory challenges, and associated risks.

Clinical Trials and Current Progress

Mary Long inquires about the findings and ongoing questions in clinical trials for psilocybin therapies. Keith Spates explains that clinical trials aim to determine the safety, optimal dosage, and effectiveness of psilocybin. He notes positive progress, mentioning companies like Compass Pathways and Cybin advancing their therapies into phase three trials—the final stage before seeking regulatory approval.

• Notable Quote:
  • “The news has been generally positive so far for both safety and efficacy.” — Keith Spates [00:51]

Understanding the Clinical Trial Phases

Mary Long requests an overview of the clinical trial process. Keith Spates outlines the three primary phases:

1. Phase One: Tests safety with a small group of patients.
2. Phase Two: Assesses safety and efficacy with a larger group, also determining optimal dosage.
3. Phase Three: Involves thousands of patients to confirm efficacy and safety before seeking FDA approval.

He also mentions the possibility of accelerated approval for drugs addressing significant unmet medical needs, allowing for earlier market entry pending post-approval studies.

• Notable Quote:
  • “A drug usually has to move through all three phases before a company can file for FDA approval.” — Keith Spates [02:31]

Regulatory and Legal Landscape

Mary Long shifts the conversation to the legal status of psilocybin treatments in the U.S. Keith Spates clarifies that the FDA treats psilocybin like any experimental drug, requiring extensive proof of safety and efficacy. He highlights the FDA's 2023 guidance emphasizing measures to prevent misuse and manage psychoactive effects.

Despite psilocybin being classified as a Schedule I substance by the DEA—indicating no accepted medical use and high abuse potential—legal challenges persist. A notable 2023 federal court ruling against the DEA's scheduling of psilocybin has yet to result in official changes. On the insurance front, coverage remains limited but may expand if FDA approvals are secured.

• Notable Quote:
  • “The FDA is taking the same stance with psilocybin as it does with any other experimental drug.” — Keith Spates [04:42]

Market Interest and Investment Trends

Mary Long contrasts the booming interest in psychedelics from 2021, when startups raised nearly $1.8 billion, to the current decline, exemplified by the delisting of the Horizon Psychedelic Stock ETF. Companies like Atai, Compass Pathways, and Mind Medicine have seen their market caps plummet by over 60%.

Keith Spates attributes this downturn to excessive hype and overvaluation during the peak interest period, combined with delays in clinical trials. He uses Compass Pathways' extended phase three trial for Comp360 as an example of the complexities involved in large-scale studies.

• Notable Quote:
  • “There was just simply too much hype about psychedelic stocks a few years ago.” — Keith Spates [07:25]

Business Models and Intellectual Property

Mary Long probes the business strategies of psychedelic companies, questioning how they differentiate products when dealing with naturally occurring substances like psilocybin. Keith Spates explains that these companies pursue composition of matter patents, modifying the chemical structure or manufacturing processes to secure intellectual property rights. For instance:

• Cybin holds 70 composition of matter patents worldwide for its deuterated psilocybin (CYB003), which has a shorter duration of effects.
• Compass Pathways has over 20 patents for Comp360, including manufacturing methods.

This strategy aims to protect their formulations and processes, ensuring a competitive edge and potential exclusivity in the market.

• Notable Quote:
  • “They're taking an approach that many other pharmaceutical companies have done that aren't in the psychedelic space.” — Keith Spates [09:10]

Impact of Negative News: The Lycos Therapeutics Case

Mary Long brings up the recent FDA denial of Lycos Therapeutics' MDMA therapy for PTSD and subsequent retractions of articles from the Psychopharmacology Journal due to unethical conduct. Keith Spates asserts that this incident further dampens investor confidence, reinforcing the industry's existing challenges with regulatory pathways and clinical trial designs.

• Notable Quote:
  • “The FDA really didn't put up a roadblock for MDMA itself. However, the agency absolutely hammered Lycos Therapeutics on its clinical trial design.” — Keith Spates [10:32]

Challenges in Clinical Trial Design for Psychedelics

Mary Long highlights the difficulty of conducting double-blind studies with psychedelic drugs, as the psychoactive effects can reveal whether participants receive the drug or a placebo. Keith Spates acknowledges this challenge and discusses potential solutions, such as varying dosages or using different psychoactive substances in control groups. He references the FDA's guidance, which suggests innovative trial designs to address these issues.

• Notable Quote:
  • “A double blind study just doesn't work with psychedelics because patients would know whether or not they're experiencing any psychoactive effects.” — Keith Spates [11:19]

Comparison with the Cannabis Industry

Mary Long draws parallels between the rise and fall of the cannabis market and the current state of psychedelics. Keith Spates disagrees with this comparison, noting that cannabis largely operates as a commodity without stringent FDA regulation, unlike psychedelics, which follow a traditional pharmaceutical path. He explains that supply issues affecting cannabis do not apply to psychedelics, where FDA approval would lead to controlled, standardized production and distribution.

• Notable Quote:
  • “The cannabis market, it's like a commodity market. Most cannabis products don't go through the FDA regulatory process.” — Keith Spates [13:21]

Company Spotlight: Atai Life Sciences and Compass Pathways

Mary Long requests insights into specific companies. Keith Spates spotlights Atai Life Sciences, particularly their program RL 007, a neuromodulator aimed at improving cognitive function in schizophrenia. He notes the upcoming phase two results expected mid-2025.

He also discusses Compass Pathways, mentioning their recent layoffs of approximately 30% of their workforce. Spates interprets these layoffs as a strategic move to focus resources on advancing Comp360 through phase three trials, extending their operational funding into 2026 despite acknowledging possible management missteps.

• Notable Quote:
  • “They're shifting their entire focus on getting Comp360 to the finish line.” — Keith Spates [19:38]

Investment Advice for Psychedelic Stocks

Keith Spates advises cautious investment in psychedelic stocks due to their high-risk nature. He recommends a staggered investment strategy, increasing positions as companies progress through clinical trial phases:

1. Phase One: Invest a small amount, acknowledging high risk.
2. Phase Two: Incrementally increase investment if trials are successful.
3. Phase Three: Further investment upon successful phase three results.

He emphasizes the importance of only investing money one is willing to lose and staying informed about each company's progress.

• Notable Quote:
  • “There's no guarantee that any of these companies will be successful.” — Keith Spates [21:09]

Future Outlook for the Psychedelics Industry

Mary Long asks about the industry's prospects post-interest decline. Keith Spates maintains an optimistic outlook, citing the culmination of phase three trials as a potential catalyst for renewed investor interest. Successful trial outcomes and FDA approvals could lead to significant stock rebounds within the next two to three years.

• Notable Quote:
  • “If those late stage tests go well, then I think you're gonna see renewed interest by investors into this space.” — Keith Spates [22:44]

Conclusion

The episode "You Can’t Patent LSD" delves deep into the complexities of investing in the psychedelics industry, covering clinical trial progress, regulatory hurdles, market dynamics, and company-specific strategies. Keith Spates provides valuable insights for investors, emphasizing the high-risk, high-reward nature of this emerging sector and offering strategic advice for navigating its volatile landscape.

Listeners are reminded to conduct their own research and consider their risk tolerance before investing in psychedelic stocks.