Is the psychedelics industry heading for an extinction event?
In the movie, The Wizard of Oz, Dorothy says to her dog, “Toto, I've a feeling we're not in Kansas anymore.”
Dorothy may have foreshadowed the psychedelics industry prospects for 2022. The outlook is grim and sadly, unavoidable for most firms.
Blame it on a confluence of global developments:
High inflation - 40 year high numbers are driving up interest rates, significantly raising the global cost of capital and spooking the equity markets. Governments and Central Banks have quickly shifted from quantitative easing to quantitative tightening.
Capital markets funk – The 13 year equity bull market is over. The number of 2022 IPOs plus their returns are way down versus 2020/2021 levels. Investor sentiment towards sexy sectors like crypto, tech and cannabis have taken a hit, hammered by disappointing results and the recognition that profitability is a long way off. SPACs are dead. Fewer exits mean less high risk capital will flow into capital-hungry industries like psychedelics.
Unforeseen events like the Ukraine-Russia War – This ongoing conflict is triggering political instability, market volatility and supply chain interruptions. There is a high possibility for new shocks such as social/political gridlock (Roe vs Wade Supreme Court battle) and flare-ups in regional hotspots (Iran pulling out of the JCPOA).
And Its not like the sector didn’t begin 2022 with challenges. Industry valuations are down around 75%. Many firms have a proclivity towards self-inflicted wounds in areas like strategic planning and governance. Finally, looming on the horizon are serious problems such as therapist sexual abuse and impending patent conflicts.
Companies can avoid or at least postpone an extinction event by taking immediate action:
1. Improve focus - Fine tune the number of target compounds, indications and business lines to drive better strategic clarity, resource allocation and execution ability.
2. Reduce your burn rate - Dial back on expensive, ‘nice to have’ functions like investor relations and marketing. Sharpen your procurement pencils with research, clinical trials and legal activities.
3. Raise money if you can. This might be a 1-2 year storm. Expect to take a valuation hit based on real world comparables. To wit, Facebook/Meta is only trading at 14x earnings despite +23% year-over-year growth.
4. Better manage expectations – Stakeholder want to keep things real. Come clean on idealistic market sizing, overly-confident IP plans and unrealistic times to market.
No amount of psychonaut ‘happy talk’ and funder chearleading will counteract these effects. Time to batten down the hatches!
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