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Psychedelics space poised for dealmaking rush amid favorable regulatory environment

Magic mushrooms, ecstasy, and other psychedelic drugs are starting to attract the attention of Wall Street. Their promise to treat depression, anxiety and post-traumatic stress disorder (PTSD) more effectively than traditional drugs has investors hooked.

Dealmaking peaked in 2021 when 14 transactions worth a combined USD 798m targeted North America-based companies developing treatments that use hallucinogens. Mergers and acquisitions tailed off in 2022 with five deals, amid a broader pullback in biotech, although volume of USD 556m remained historically strong. In 2023, activity has rebounded, with seven deals worth USD 221m in the year to date. Filament Health’s USD 176m merger with a blank check company, announced 19 July, is the flagbearer.

While M&A activity is still in its infancy, more is expected, with several factors supporting it.

First, the regulatory environment is favorable. In the next couple of years, the Federal Drug Administration (FDA) is set to approve therapies that use psilocybin, the hallucinogenic compound found in magic mushrooms; MDMA, commonly known as ecstasy; and ketamine, an anesthetic. Once that happens, a dealmaking rush is expected.

Second, the potential market size is attractive. By the end of the decade, some estimate psychedelic treatments could be worth USD 10bn-plus.

Light my fire

Several companies have recently raised money or are looking to raise capital. One is MAPS (The Multidisciplinary Association for Psychedelic Studies), granted a breakthrough therapy designation from the FDA for its ecstasy-based drug candidate, which has been undergoing trials to treat PTSD. MAPS is reportedly working on a USD 85m private share sale at a USD 200m valuation to stay afloat until mid-2024 when it believes it can start selling its drug.

Another is Calgary-based Zylorion (formerly PsiloTec Health Solutions), which plans to raise USD 20m before summer ends.

Several more have announced capital raises. Transcend Therapeutics raised USD 40m in Series A funding in February to develop an ecstasy-based treatment for PTSD. Gilgamesh Pharmaceuticals
raised USD 39m last December for a small-dose ketamine-based drug to treat depression without the high of the recreational drug.  Lusaris Therapeutics last November announced a USD 60m Series A for a similar antidepressant that uses dimethyltryptamine (DMT), a hallucinogenic compound found in ayahuasca plants.

The capital raises have come as biotech companies suffer from a steep investor selloff that started in 2022. That has led to many biotech stocks trading at a fraction of prior highs and has impacted the enthusiasm for psychedelic companies too. Berlin-based Atai Life Sciences [NASDAQ:ATAI] trades at a USD 355m market cap, down from USD 3bn two years ago, before the selloff.

Changing minds

Psychedelic dealmaking has experienced several false starts. Red Light Holland’s merger with Creso – called off 10 weeks after it was announced in June 2021 – is one example of several transactions that were subsequently cancelled.

Because of the difficulties in the public markets, some psychedelic companies have become creative.

Victoria, British Columbia-based Lucy Scientific Discovery [NASDAQ:LSDI] offered a 142% premium to buy Pasithea Therapeutics Corp. [NASDAQ: KTTA] in June. Lucy Scientific intends to sell or shutter Pasithea’s drug program and use the USD 30m on Pasithea’s balance sheet to finance development of its own psychedelic drugs, according to Richard Naruda, Lucy Scientific’s CEO. Pasithea’s board rejected the bid on 20 July.

Lucy Scientific also wants to acquire psychedelic drug candidates that are tucked away in larger publicly traded companies that are trading poorly or may have run out of money, said Naruda. Lucy Scientific did just that when it acquired drug candidate SANA-013 from Chicago-based Wesana Health Holdings [PNK:WSNAF] in March.

“There hasn’t been that much M&A in psychedelics,” said Naruda. “But I think there can be and expect there will be given the tailwinds.”

Analytics by Izaz Ansari