Despite Core One Labs' financial problems, the thesis for investing in psychedelic stocks has not changed, and we should expect to see more companies fold before psychedelic medicine ultimately succeeds.
A second domino is falling in the world of psychedelic stock investing.
Last week, Psychedelic Spotlight reported that Mind Cure Health (CSE: MCUR) (OTCQX: MCURF) was halting its psychedelic medicines research, following a “strategic review” undertaken by the company.
In short, they ran out of money.
As I have stated repeatedly, running a psychedelic research company is ridiculously expensive, and many smaller companies with low market caps and little money in the bank will find it hard to survive in a market context of low stock prices.
At the time, I speculated that “we shouldn’t be surprised if this is just the first domino,” and unfortunately, it didn’t take much time for the prophecy to be realized.
On March 19th, psychedelics company Core One Labs (CSE: COOL) (OTC: CLABF) announced that they are “working to investigate investment and potential takeover opportunities by strategic psychedelics or pharmaceutical companies.”
Or, in other words, they too have run out of money and are looking for a financial savior.
This wasn’t particularly surprising. Taking a cursory look at their financials, we can see the dire position the company is in. As of the end of September, the company had $587,000 CAD in the bank, and they were spending more than $5 million per quarter. With a market cap of around $32 million, Core One would have to dilute their stock by more than 15% each quarter to keep spending at the same levels. This, obviously, is an unsustainable proposition.
So, with two psychedelic medicine companies essentially announcing that they no longer have the financial wherewithal to continue operations, does it mean that the end of psychedelic stocks is near?
No, it most certainly does not.
To start, we need to understand that the psychedelics companies that are beginning to falter are the ones who were already in bad financial shape. There are many companies that have strong financials, and do not need to worry about refinancing any time soon. A short and non-exhaustive list of these companies include: atai Life Sciences (Nasdaq: ATAI); MindMed (Nasdaq: MNMD) (NEO: MMED); and Small Pharma (TSXV: DMT) (OTCQB: DMTTF). Even if — and I judge this to be likely — more small-cap psychedelics companies follow Mind Cure and Core One Labs’ lead, the more financially stable companies won’t be affected.
Next, those who are faltering are not necessarily dead, and may have a chance for a second life.
Take Core One Labs. Despite apparently not being financially viable, several weeks ago the company announced that they have pioneered a process for creating synthetic psilocybin that will cost less than $100 per gram by the end of 2022. Synthetic psilocybin is very expensive; as of 2020 it cost upwards of $10,000 per gram. If Core One’s innovation is legitimate, they most likely have very valuable trade secrets and intellectual property. Therefore, rather than the company dissolving, they are likely to be acquired (again, if their innovations are judged to be legitimate). This means that their research will not evaporate, and their hard work will still progress the psychedelic medicines industry.
Furthermore, this consolidation would make more capital available to other psychedelic medicines companies. At the moment, there are more than 50 publicly traded psychedelic stocks, and capital entering the industry is finite. If we do see Core One Labs and other companies absorbed, we hopefully will see greater scaling capabilities within companies, and more capital allocated to each individual one.
So, what do we expect to see in the near future?
Well, first, I do expect to see many more small companies in this position within a year. While this is by no means a prediction, companies such as Mydecine (NEO: MYCO) (OTC: MYCOF) are spending money hand over fist, and will need to continue to dilute to spend their $4 million plus each quarter.
This is certainly not a dig at the company, who, in partnership with Johns Hopkins University, are doing amazing work attempting to treat smoking addiction with psilocybin. But, at the end of the day, economic realities will need to be faced. At a market cap of around $28 million (CAD), they can not indefinitely raise $5.5 million (CAD) every quarter, as they did this past December. Either something fundamental will need to change which greatly increases their market cap allowing them to better finance their company, they will need to merge with another firm, or they will need to find a partner to finance their work.
The last option is what happened with Mindset Pharma (CSE: MSET) (OTCQB: MSSTF), who forged a financing deal with a subsidiary of the pharmaceutical giant Otsuka Holdings Co Ltd. As psychedelic clinical trials continue to release positive results, I expect to see Big Pharma accelerate investments into the space. This may become a lifeline to certain psychedelic companies, but not to all of (or even most of) the struggling firms.
Lastly, as more firms continue to be absorbed and we see a consolidation in the space, I expect it to become clearer who the long term players are. Again, the thesis for investing in psychedelic stocks has not changed because of Core One’s financial problems. And as more research continues to show the potential for psychedelics to treat mental health conditions such as PTSD and depression, I expect it to be further validated. And as there become fewer companies in the space, it will become more obvious who the best bets are.