Where is the the value in psychedelics companies?
You need to look carefully
Many people including your author believe that psychedelics will be a mental health game changer. However, if you are an investor, researcher, potential business partner or operator you may be challenged finding and deciding which company, business model and compound will be a/the winner.
That is a daunting task at the moment. Although it's early in the game, the competitive dynamics are intense, there is political & regulatory uncertainty and capital is becoming scare & expensive.
Interested parties must put aside the hype and ‘happy talk’ and take an objective, business minded view of the sector, beginning with some of its strategic assumptions:
1. Speed to market – Biotech is almost a ‘winner take all’ game. If you are not on track to be first or best to market in a crowded therapeutic area you are dead in the water. This market risk is particularly high right now for firms in the psilocybin and MDMA spaces.
2. Capturing as many patents as possible – Quality of patents wins over quantity, any day. Patent litigators and IP trolls are circling a crowded landscape featuring many weak and overlapping patents. Be prepared financially, emotionally and legally to fight it out in court, cut your losses by walking away or concluding a royalty deal.
3. Becoming a services or platform business – this ‘picks and shovels’ strategy can yield rich returns if done right i.e. creating the right platform. However, it’s certainly not a realistic strategy for most of today’s underfunded and unfocused psychedelics firms.
Moving forward, industry players and investors should be asking some tough but fundamental questions of each company, such as:
- Does the company have a focused strategic plan with risk mitigation measures?
- How will the firm turn its R&D into a commercialized and scalable product or service?
- Is the IP unique, compelling AND defensible?
- Does the company have enough cash (including reserve funds) to meet its objectives?
- What is the path to positive cash flow and profitability, especially if market demand is 50% lower and slower than expected?
Finally, the (very) early days of the legal cannabis industry can teach us some important lessons: 1) a high level of invested capital does not mean said capital has been efficiently and effectively deployed; 2) persuasive, capital markets-savvy entrepreneurs do not make the best operators and; 3) everything will take much longer than anticipated.
#psychedelics #valuation #IP #strategy #capitalmarkets #biotech