Psychedelics’ mental health potential leads to surge in investment
Adrienne Rivlin, partner, and Jess Sharpe, associate, at L.E.K. Consulting assess the rise in investment seen within the psychedelics market for mental health.
It is well recognised that mental illness is a growing worldwide problem – made worse by the Covid 19 pandemic – and that current mental health treatments are often unsatisfactory for many patients, working only partially or not at all, or with intolerable side-effects. Against this backdrop, psychedelics have recently emerged as a potential solution to revolutionise mental healthcare, and there has been a surge in investment in the space to tap into the huge commercial opportunities ahead.
2020 saw a ramp-up in psychedelics investment, and this accelerated in 2021. Investors have been attracted by increasingly impressive scientific results, larger and more robust clinical trials, advances in establishing the legal therapeutic framework for psychedelics, growing public support for a step change in mental healthcare, and the establishment of the infrastructure to deliver psychedelic assisted psychotherapies.
Despite the influx of funding, there has been little published analysis of investment in psychedelics. To fill this gap, we analysed the majority of financing events (over 110) from more than 60 companies working in psychedelics between 2018 and 2021, and interviewed leading investors and businesses in the space. Companies included pharmaceutical businesses focused on discovering, developing and manufacturing psychedelic drugs; healthcare companies establishing clinic networks and retreats for psychedelic-assisted psychotherapy; and technology companies producing telehealth platforms and electronic health record software for medical practices using psychedelics.
Psychedelic investments: a meteoric rise
In both 2018 and 2019, around $60 million was invested in psychedelics-focused companies. 2020 saw almost 10 times this level of investment as the number of psychedelics businesses and new clinical trials rapidly increased. 2020’s figure was overtaken in the first three months of 2021, and predicted investment this year is set to exceed $2 billion globally (see Figure 1).
The pandemic explains some of this extraordinary increase as it has drawn much-needed interest in the importance of our collective mental health and in raising the level of dialogue in the public sphere.
Biopharmaceutical R&D continues to attract most investment
In the last three years, around 80% of investment in psychedelics has been in R&D, either in existing psychedelics in new therapeutic forms or in the generation of new derivatives.
The largest proportion of funding is in developing drugs for mental illness. Some companies focus on a range of areas, from depression and anxiety to PTSD and eating disorders. Others work on specific issues such as alcohol use disorder or cancer-related anxiety and depression. For example, Entheon
Biomedical is developing treatments for addiction through DMT-assisted psychotherapy and will begin clinical trials in nicotine addiction in late 2021. The company is also developing a predictive biomarker response platform to ensure the safest psychedelic treatment possible.
Many companies also have neurology streams for neurodegenerative conditions such as traumatic brain injury or Alzheimer’s disease. Others are realising the anti-inflammatory potential of psychedelics, as well as the connection between physical and mental health through work in further innovative areas, such as MYND Sciences’ application of psilocybin to autoimmune diseases, NeoMind Bioscience’s obesity treatment and Psyence’s palliative care therapy.
The variety of proposed use cases for psychedelics has been supported by an increase in basic research by universities in psychedelics as strong anti-inflammatory agents and their role in the connection between the mind and body.
While funding to biopharma comprises the majority of investment in psychedelics, there has been growth in the clinical and digital infrastructure that will help lay the foundations for the future success of the sector (see Figure 2). As a result, many digital companies have had oversubscribed Seed and Series A rounds in 2020 and 2021.
Some development companies are expanding into clinical and digital opportunities to generate short term revenue and reduce their and investors’ risk in developing new drug therapies.
As an example, MINDCURE is developing ibogaine for traumatic brain injuries and manufacturing synthetic ibogaine, but is also working on shorter-term projects such as software-as-a-service digital therapeutics and psychotherapy clinics.
Europe continues to lead the way as a key hub in psychedelic research, accounting for over half of investment every year since 2018. This is largely driven by the success of larger European companies such as Atai Life Sciences and COMPASS Pathways. However, investments in psychedelics companies are increasing more rapidly in the US than in Europe and Canada, paving the way for a larger psychedelic sector in the States.
Investor dynamics
A major driver of the surge in investment growth in 2021 has been the increase in public offerings by psychedelics companies, led by COMPASS Pathways’ 2020 $147 million IPO, followed by Atai Life
Sciences’ $225 million flotation and GH Research’s $160 million listing. Currently, there are 60 publicly traded companies focused on psychedelics.
But most capital in the sector is private, from niche psychedelic funds and high net worth investors, and there has been a marked increase in the last year in investment by traditional healthcare funds.
Outside investment funds, direct investors in psychedelics can be grouped into three main archetypes: frontier investors and those with personal experience of mental health issues are the key players in Seed and Series A rounds (and typically have not invested in pharmaceuticals before). The third group is traditional biopharma investors, which tend to invest in later-stage companies, often in Phase 2 or 3 trials. Because of this approach there has been little investment from this group so far, although there have been some recent examples, such as Otsuka’s participation in COMPASS Pathway’s 2020 Series B funding round via the McQuade Center for Strategic Research and Development.
Predictions for the future of psychedelic investing
1. Continued high levels of investment overall
While investment in psychedelics is set to top $2 billion in 2021, there could be further capital injection, depending on the appetite for IPOs and new Seed rounds for recently launched companies.
2. Growth in healthcare and digital
Investor appetite in healthcare and digital platforms will grow to fill gaps in the value chain. This will provide short-term revenue for pharmas developing next-generation psychedelics and help establish the foundation for the anticipated approval of psychedelic-assisted psychotherapies beyond ketamine and its derived compounds, expected from 2023.
3. Greater scrutiny of clinical results as funding increases
Pivotal clinical trial results are set to be reported in the next 12 months and investors are already scrutinising therapies’ benefits.
4. Europe’s ongoing investment leadership
Europe’s leading role will continue, but investment in the US will also see strong growth.
5. Greater interest from traditional biopharmaceutical investors and established pharmaceutical companies
More traditional biopharma investors will enter the space as companies work on developing next generation psychedelics with improved properties and increased patentability.