Why I Didn’t Invest In This Good Depression Fighting Company
I’m in NYC this week for some business meetings. It’s great to see the city bouncing back with vibrancy again although I remain extra careful about crowds, germs, masks etc as I am not willing to take any unnecessary risks that might put little Amaris at risk somehow.
I’m not fighting this market too hard, but I remain quite concerned that we’re in the midst of this blow-off top action that might do some psychological damage to the recent round of buyers at these recently higher-rated prices.
We’ll do this week’s Live Q&A Chat at noon ET on Friday in the TWC Chat Room or just email us your question to support@tradingwithcody.com.
I am going to share a new basket of biotech stocks that I’m starting to nibble but we are continuing to finalize the names. Here’s a name that we didn’t buy and I wanted to share with you the reasons why because we all have to make decisions whether to risk our capital on a trade/investment or not and sometimes it’s helpful to see why someone chooses not to act rather than just seeing when they act.
Email from subscriber: “Cody, I hope you and the girls are thriving. I am very interested in the use of CMPS in the treatment of depression. Would love to know your thoughts on the stock which seems to have some strength. Blessings to you and family.”
So Paul Boni, my biotech/health care expert and a long-time mentor to me, and I dug into it and here’s what he wrote up for us:
I don’t know if this is a good name for us, even though I think they will probably have good data in the next 1-2 months and stock will probably move a lot (2x?) on good data. There is a low probability of failure, but it would be awful for the stock. Some thoughts below:
CMPS = Compass Pathways PLC
Price: $43.06/share
Market Cap: $1,795 million
Cash: $316 million
Next catalyst: Top-line Phase IIb data for COMP360 (psilocybin) for treatment resistant depression “by year-end 2021”
Scenarios: Since psilocybin has been studied elsewhere for depression, odds are strongly in favor of a positive trial result, supported also by the fact that they appear to have a quality management team in place. At $1.7B market cap, I would expect strong upside on good data (2x?). Bad data could be catastrophic for the stock, since this is their only asset. Could be down 60% or more (cash is about $7.66/share). Following good data, stock could be bumpy as they are still a long ways from launching the product (2 years?) and competitors and critics could be active and vocal, they might also do a fund raise off good data which could take back some of the initial spike (although maybe this group wouldn’t do that – I hate when companies kill the “good data rally” with a big fund raise). To keep the stock going, I would expect the company to start talking more about additional indications for COMP360, and potentially business development activities to get the commercial infrastructure in place for COMP360 launch.
Conclusion: risk/reward favors the next catalyst, but need to be prepared for significant losses in the somewhat unlikely event of negative data.
Background
CMPS is developing psilocybin for the treatment of depression, this is one of Peter Thiel’s plays in the space (he owns ~7.5% and his organization has a board seat). Data from many different studies indicate that psilocybin is effective in treating depression, and most alternative drugs in the market today, in my opinion, are not very good. There is a new wave of drugs looking at NMDA and other pathways that are showing a lot of promise, but I still think there is room for psilocybin.
You are probably aware that lots of groups are focused on psilocybin in depression, and today there are clinics where you can go and get psilocybin treatment. What CMPS seems to be doing a bit differently is to take a more pharma business approach. Psilocybin itself is not patented, so any company can make and distribute it. Generally, companies can navigate the rules to do this, but the drug is delivered in a clinic and I believe treatment is rarely reimbursed by insurance. CMPS is trying to go a more traditional drug industry route by developing a patented version/formulation of psilocybin and running large clinical trials, so they can get regulatory approval for their formulation, charge a premium price, get reimbursed by insurance companies, and potentially to claim that their demonstrated clinical benefits are unique to their formulation.
Big pharma is also working in this space, but their approach is to create new molecules (often chemically related to psilocybin) so they can get strong patent coverage and insurance reimbursement. However, there is probably more risk in these programs because the new molecules may or may not be safe and effective.
The company is expected to release Phase IIb data by year-end 2021 in Treatment Resistant Depression. Since psilocybin has already been studied a lot, I expect this trial to be positive, although previous studies have not been large and rigorous so there is definitely a risk that something comes up – if I had to guess any problems would be more likely on the safety side not efficacy. They indicate they would follow in 2022 with a Phase III trial and then file for regulatory approval. I would guess launch might be around late-2023 assuming everything goes smoothly. The trials include administration in a controlled environment (e.g. in a special center/clinic) so I assume that is how they will commercialize the product. I don’t think they have spelled out whether they would build out their own network of clinics, sell their product into existing clinics, or buy out one or more of the companies building out clinics today. I’m guessing with positive data they can raise whatever cash they need to pursue any of these strategies.
Quality management team – a big advantage in this space where a lot of companies are a bit sketchy.
Extra reading if you are interested: https://www.motherjones.com/politics/2021/07/compass-pathways-peter-thiel-psilocybin-psychedics-monopoly-market-mushrooms-mental-health-depression-therapy-shrooms/
