In the cannabis sector, there is a wide net of different types of companies from growers to extractors to logistics & tech and everything in-between. In the earlier days the extraction companies were often seen as the ‘pick and shovel’ plays alongside the gold rush of big-time licensed producers. The early licensed producers talked about ‘funded capacity’ and future sales targets until their faces turned red. They talked a big game. Extraction companies like Valens (VLNS.T) won the pick and shovel game, and are now producing their own products, full supply chain soup to nuts. I have written about them before, but long story short -they started as a pick and shovel and it really worked out.
Finding the hidden value
The pick and shovel theory to investing is all about finding undervalued assets, or underpriced entry points that allow the company to scale and growth hack faster than their competitors. In a rapid-paced sector like psychedelics, there are bound to be some picks and shovels. I would argue the true undervalued assets here are not the drugs, the research centers in Jamaica, mushroom powders or microdose kits, but rather the therapists and the clinics themselves. In ‘Pyschedelic-assisted therapy’ it’s important to focus on the assisted part. Anyone can go out and find drugs in the black market, but it takes someone with extensive training to help put the pieces together for someone who has a long history of mental health issues.
Everyone is so excited about the drugs right now, and rightfully so. MAPS’ Phase 3 MDMA trials for assisted therapy were highly successful, psilocybin was given fast-track status by the FDA as a potential breakthrough medicine, and new clinical trials and NCE’s are being announced weekly. It’s so abundantly clear that these drugs are effective and hold enormous stored value after decades of sitting of the shelf. As the world has gotten mentally sicker, those drugs become more valuable as their potential customer base increases, as well as the need.
Nothing proves this more than a recent study that compared the effectiveness of antidepressants vs. psychedelic-assisted therapy. Researchers recruited 59 individuals with long-standing moderate-to-severe depression. They were randomized into two groups over a six-week period. To prevent participants from knowing which treatment they were getting, both groups were given one treatment and one placebo. Spoiler, the psychedelic-assisted therapy approach worked better, but there was no control group for just therapy or just psychedelics. This is a key missing point in a lot of the studies and underlines how the average investor is missing where a lot of the value in the sector is. As someone who is actively going through trauma therapy, it takes a really good therapist to actually help, many don’t understand the topic well and can actually further traumatize the patient. It’s an extremely delicate dance, and when psychedelics are added to the mix things can get really messy without a professional, especially in the hard-to-treat cases – which are the very cases most companies are out to target.
Verticals
The cost of doing Phase 1,2 and 3 clinical trials is around 30-40 million dollars, with each subject costing an average of $41,000 USD, according to SofproMed.
Last year Novamind (NM.C) acquired Cedar Psychiatry, a small chain of 4 ketamine clinics in the Salt Lake City, Utah area for a total of $1 million CAD in cash, and $2.05 million CAD in Novamind shares. Novamind has since doubled its number of clinics to 8, with plans on adding more. The company announced revenues of $1.85 million CAD for Q1 2020, a 43% increase over the prior quarter. They also expect to increase patient volume to more than 65,000 clinic visits in 2021, representing a 225% increase year-over-year. Novamind also has the capacity to host clinics, another source of revenue, and a sort-of pick and shovel approach. Companies like Braxia (BRAX.C) and Field Trip (FTRP.T) are also going in heavy on this vertical. Braxia has 5 clinics in Ontario and Quebec with hopes of creating a broad network of clinics across the country. Field Trip plans to have 20 clinics operating by 2022, which the company projects will cost $4.1M CAD according to their recent MD&A. They currently operate in Toronto, Los Angeles, New York, Chicago, Atlanta, and Amsterdam.
Another angle is drug delivery systems. Companies like Cybin (CYBN.NE), IntelGenX (IGX.V), PsyBio (PSYB.V), and Core One Labs (COOL.C) are all developing better delivery systems for psychedelics use. Cybin is producing an under-the-tongue psilocybin breath strip with IntelGenX that removes the 45 minutes of wait time for the trip to kick in. IntelGenx will develop a VersaFilm prototype that Cybin will use to develop four psilocybin doses for testing against a 25-mg psilocybin capsule at the University of the West Indies in Kingston, Jamaica.
Ecosystem
Clinics like the ones Novamind operates could be buyers, with over 65,000 clinical visits estimated this year alone there could be a sizable market of a breath strip years before legalization. That time before the trip kicks in can cause anxiety as it can be a similar feeling to getting a needle, the anticipation can often cause more stress than the event itself. It’s also an extra hour therapists or staff need to be on the books for.
It’s interesting that alongside the costly clinical trials there is this other ecosystem forming, one that appears to be both important and profitable. For now these are the pick and shovel plays, but just like how Valens moved from kings of extraction to that plus branded products, don’t expect these companies to stay niche. They have big plans, and the capital to back it up. Companies I previously mentioned like Cybin and Field Trip are going to have a lot of options in how and where they scale. Both have massive war chests, both coming off $90 million CAD + raises earlier this year.
