With the legalised cannabis industry experiencing challenges the past 12 months, investors have been turning their attention to an interesting new market – psychedelics
Ongoing research is revealing the potential efficacy of psychedelics in treating conditions like anxiety, depression, and opioid addiction.
The medical application of psychedelic substances like MDMA, LSD, ketamine, and most notably psilocybin – extracted from mushrooms – has been gaining traction in recent years as several clinical trials enter their second phases and beyond.
Researchers1 are suggesting that psilocybin and MDMA will play a very significant role in treating depression and Post-Traumatic Stress Syndrome (PTSD) within the next five years.
Consequently, entrepreneurs are looking to get into the market early to benefit financially as the industry takes off.
While psychedelics remain a controlled substance in Canada, a ballot measure was recently proposed in Washington D.C. that would decriminalise psychedelic plants like psilocybin.
Previously, U.S. state Vermont put forth a bill seeking to remove psilocybin, ayuhuasca and peyote from the list of controlled substances. And in 20192, Denver officially became the first U.S. city to decriminalise psilocybin.
Within Canada, so called ’grey market’ dispensaries are forging ahead and providing customers with micro-dose orders of psilocybin, ordered online and delivered by mail.
Toronto-based company Mind Medicine (MindMed) is, instead, working within the legal framework and preparing a Phase 2 clinical trial for the treatment of opioid addiction with a psychedelic compound called ibogaine, and LSD micro-dosing for treating ADHD2.
The company made history in early March when it became the first psychedelics pharmaceutical firm to go public3. MindMed is backed by high-profile investors, including Kevin O’Leary of Shark Tank fame, and Bruce Linton, former CEO of Canopy Growth Corp. Their IPO has ushered in a new era in which the existing grey market demand can be ‘legitimised’ in mainstream markets.
Three qualities for success
The challenges experienced by the cannabis industry during the first years of legalisation provided many lessons upon which savvy investors can base their decisions. Wise business owners looking to enter or expand within the psychedelics market can also look to these lessons as a guide for best practices.
It’s useful to take a closer look at the three qualities investors want – strong leadership, financial controls and alignment with regulations – and the lessons learned from Canada’s legal cannabis industry in each of these areas.
The early cannabis industry in Canada was powered by a strong spirit of entrepreneurship. Many founders also took on the role of CEO, and ultimately found that leading a billion dollar publicly traded company is very different from managing a small private business. The cannabis industry’s early failings were in many cases a direct result of inexperienced leadership. As the industry gained momentum, companies needed external assistance making effective decisions for business operations, finance, management and governance.
Psychedelics companies should learn from this mistake by launching with an effective and experienced leadership team from the beginning. Financial expertise and business acumen need to be treated with equal importance to the scientific and cultivation components of the business.
The Canadian cannabis industry experienced challenges with internal controls and financial reporting, including some that resulted from the International Financial Reporting Standards (IFRS) mandate of the recording of biological assets at fair value. Inaccurate valuations wreaked havoc on financial reporting and compliance, sometimes pausing forward momentum.
The lesson here is that internal control and financial reporting processes are particularly important for companies considering a future IPO, and thus should be a focus from the beginning. Psychedelics companies should establish an effective corporate governance structure and commit to maintaining impeccable financial reporting from the outset.
Alignment with regulations
Canada’s cannabis industry experienced significant losses as a result of poor compliance and complications with supply and demand. One of the main causes was the frequent adjustments required as a result of changing regulations. Changes to packaging, and an evolving licensing process gave way to fits and starts and, in some cases, product sitting in warehouses rather than being sold. Furthermore, some industry players clearly did not buy into the need for strict compliance in an industry subject to extensive government regulation.
Clearly, psychedelics companies need to be flexible, resourceful, and adaptable but deeply committed to playing by the rules. It’s likely that this industry will experience a number of regulatory fluctuations in the coming years, and financial and marketing decisions should be made with this fact in mind. Those who are resilient, responsive and compliant will rise to the top.
Planning for the future
As leaders in the legal cannabis space, Zeifmans is also active in the fledgling psychedelics market, with a number of psychedelics clients at varying points in their development, and we’re confident that this will be an interesting space to watch in coming months.
If you’re considering entering the psychedelics market, or if your company is conducting an IPO or another strategic transaction in future, now is the time to reach out and learn as much about this industry and its potential opportunities as you can.
For more information, contact:
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1 Stockhouse, “Why Psychedelics Look Like the Next Billion Dollar Business”, https://stockhouse.com/news/newswire/2019/08/23/why-psychedelics-look-like-next-billion-dollar-business
2 Global News, “Denver Becomes First U.S. City to Decriminalize Psychoactive Ingredient in Magic Mushrooms”, https://globalnews.ca/news/5251353/denver-magic-mushrooms/
3 The Cannabis Investor, “MindMed Becomes First Psychedelics Pharma Company to Go Public Following Historic IPO”, https://www.thecannabisinvestor.ca/mindmed-becomes-first-psychedelics-firm-to-go-public-following-historic-ipo/