For years, investors that poured money into psychedelic stocks have wagered that their breakout moment — and the eye-watering returns that would quickly follow — were just around the corner. And year after year it’s been, by-and-large, a losing bet.

Now, three months into 2024, investors are once again piling in.

Shares of Mind Medicine Inc., or MindMed, have more than doubled this year, while GH Research Plc’s stock price has surged by roughly 85%. Billionaire-backed Atai Life Sciences NV has climbed more than 25%.

It’s easy to dismiss the gains as another false dawn in a sector that’s had plenty of them. Yet some of the $15 billion market’s most ardent observers say this time could really be different.

For one, MindMed’s LSD-based treatment for anxiety became just the third drug in the psychedelic space to secure a so-called breakthrough designation from the US Food and Drug Administration — a status meant to expedite development. What’s more, this August the agency is expected to announce a landmark decision on what could be the first FDA-approved psychedelic therapy, a treatment for post-traumatic stress disorder based on MDMA, better known as ecstasy.

That could pave the way for more approvals and a flood of fresh investment, according to Cody Shandraw, a managing partner at Ambria Capital.

“It’s going to be monumental,” said Shandraw, who’s been active in the sector since 2019. “That approval is going to bring in Big Pharma.”

FDA approval, of course, is far from a given. Psychedelics have long struggled to gain regulatory acceptance, and industry watchers say monetizing hallucinogens will present its own challenges. 

Still, Lindsay Hoover, co-founder and managing partner at JLS Fund, which invests in psychedelic technology, is bullish on the future for such therapies.

“When you get the first phase three approval, it’s going to be big,” said Hoover. “Once you get to where it’s being prescribed, it’s going to be a big magnet to help pull through the other effective therapies.”

Investors should know by Aug. 11 if the MDMA-assisted therapy from Lykos Therapeutics, the for-profit arm of a decades old nonprofit supporting psychedelic research, has won an agency nod.

Canna-Bust
Those skeptical of another hype cycle need only point to the boom and bust of cannabis stocks in recent years. 

As states loosened rules around medicinal and recreational uses, retail trader interest soared. Assets in the Amplify Alternative Harvest ETF (ticker MJ) swelled past $2.5 billion. Now, with the frenzy long-since cooled, the ETF oversees about $270 million.

There are differences. Pot companies benefited mainly from recreational use, while firms working on psychedelics are developing them for mental health care, following a biopharmaceutical model.

Psychedelics, unlike pot, are also more likely to be manufactured than grown, according to Jane Edmondson, head of thematic strategy at TMX VettaFi. To Edmondson that means companies could charge more and earn better margins.

Psychedelic Renaissance
While psychedelic decriminalization and usage has been gaining wider acceptance, commercial success could still elude drug developers. Significant concerns remain on patent protection, drug pricing, insurance coverage and patient uptake.

It’s too early to tell if psychedelics have turned a corner, according to Edmondson.

“Some of this may be a little bit overhyped,” she said, adding talk of a “psychedelic renaissance” has been swirling for years. Still, she noted there’s a great need for new treatments for mental illnesses, and “if you can get beyond the negative cachet some of these drugs have, it seems like there’s some promising uses.” 

Bad Trip
That would be welcome news for funds tracking the industry. The AdvisorShares Psychedelics ETF (PSIL) has seen its price fall in every year since its 2021 inception. Optimism over potential breakthroughs has helped it post a 7.2% gain so far this year, and the ETF is on track to lure the most cash in 19 months.

The Defiance Next Gen Altered Experience ETF (PSY) fared worse, it was liquidated a little over a year after its inception, and the PSYK ETF was shuttered last March.

While an approval of Lykos’s MDMA therapy would show that regulators are willing to allow psychedelics on the market — potentially paving the way for others — a setback could spill over to peers and make fundraising more difficult.

That doesn’t mean efforts to develop psychedelic drugs will stall, according to Ambria’s Shandraw. “It is already out in the ether. To bring it back inside is going be next to near impossible.”

This article was provided by Bloomberg News.