The World Health Organization says that 700 million people globally suffer from some form of mental illness, and around 250 million suffer explicitly from depression. There has been very little development of new pharmaceuticals to treat drug-resistant depression in the last decade. One area where there seems to be some real progress is in the use of psychedelics to treat some of these mental illnesses. In some ways more than cannabis, the therapeutic potential of some of these drugs seems to have some real credibility behind them. The global anti-depressant market is approximately $15 billion, according to 360 Insights research, and the introduction of psychedelics has the potential to be a new tool in this market.
Horizons Psychedelic Stock Index ETF (PSYK) is the world’s first ETF offering exposure to this emerging sector. Thematic ETFs like PSYK have taken off in the last year and investors are turning to these ETFs as a way to get diversified exposure to key trends in previously overlooked or new thematic sectors.
There is a symbiotic impact for investors with a thematic ETF like PSYK. It provides a more efficient way for investors to get into this sector and, in turn, may provide access to capital for these companies to grow.
The Psychedelics Opportunity
In 2019, the psychedelics industry was valued at approximately US$2 billion. By 2027, it’s predicted that the sector will reach a market capitalization of US$6.8 billion, with a forecasted compound annual growth rate of 16.3% between 2020 and 2027, according to Data Bridge Market Research.
Much of the research surrounds key psychedelic compounds like psilocybin, ketamine, Lysergic acid diethylamide (LSD), Dimethyltryptamine (DMT), and 3,4-Methylenedioxymethamphetamine, commonly known as MDMA or Ecstasy.
The primary focus of these businesses is the development of potential treatments for mental health illnesses which include, but are not limited to:
1) Drug-resistant depression
2) Anxiety
3) Addiction
4) Post-Traumatic Stress Disorder
For investors in PSYK, the opportunity is to get in at the early stage of this drug development, which has the potential to disrupt the global anti-depressant market, an industry that has remained stagnant in drug development for much of the last two decades as most drug development remained focused on SSRIs and treatment of other hormones. Roughly 33% of depression cases are classified as serious drug-resistant cases (Source: World Health Organization), where cognitive behavioural therapy and anti-depressants are found to be ineffective. It’s in these cases where much of the research on psychedelics is focused.
We are continuing to see more entrants into this market — particularly on the Canadian exchanges — as new entrants seek to take advantage of investor interest and equity financing.
The excitement over relatively new offerings on Canadian exchanges resulted in four new names being eligible to be added to PSYK’s portfolio during its March rebalance.
Algernon Pharmaceuticals: Algernon Pharmaceuticals is a Canadian-based drug repurposing firm. This means that the firm looks to re-examining drugs that have an established safety history for potentially new disease applications. Specific to psychedelics, Algernon has a clinical research program for the treatment of stroke-focused on AP-188 (“N,N-dimethyltryptamine”), which is commonly known as the psychedelic drug, DMT. Algernon hopes to be the first company globally to pursue DMT for stroke in humans and is planning to begin a clinical trial as early as this year, 2021.
BetterLife Pharma: BetterLife is a diversified early-stage pharmaceutical and nutraceutical development company. One area of study for the firm involves research around the effectiveness of using a 2nd-generation version of LSD, ostensibly a compound that doesn’t have the same level of hallucinatory effects that are commonly associated with LSD. The firm is studying whether this version of the drug can be used to effectively treat major depression.
Core One Labs: Core One Labs is a diversified psychedelics research and treatment delivery firm. The company is focused on three key areas of business development. It’s developing polymer sublingual strips, or potentially psychedelic-infused thin strips that could be used as a delivery mechanism for psychedelic treatments. The company is also looking to create new strains of bio-synthetic psilocybin. Finally, Core One Labs is looking to develop two medically supervised psychedelic-treatment clinics in the greater Vancouver area.
Lobe Sciences: Lobe Sciences focuses a good portion of its research on micro-dosing treatments using psilocybin and MDMA for a range of neurological disorders. These micro-dose treatments are being studied in combination with N-acetylcysteine (NAC), a dietary supplement derived from the amino acid L-cysteine. Interestingly, as of March 31, 2021, Lobe Sciences joined the NFL Alumni Association as an Enterprise Member. The goal will be for Lobe to help identify more efficient ways of identifying players at risk of or battling various mental health challenges, such as traumatic brain injuries and PTSD.
Key Differences Between the Psychedelics Industry and the Cannabis Industry
First and foremost, there is no perceived recreational opportunity for psychedelics. These drugs are illegal in both Canada and the United States (apart from the state of Oregon). The opportunity for these companies is in developing therapeutic or pharmaceutical solutions to treat mental illness. The companies in PSYK have largely received legal exemptions to run research and development on the use of these drugs in different forms of treatment.
With regards to cannabis, roughly two-thirds (or potentially more) of the revenue generated by that industry is anticipated to come from recreational usage. Regardless of what happens on the therapeutic side, there is a viable business on the recreational side as a disruptive force to beverages.
This is not the case in psychedelics, and to some degree, there is a bigger risk in this industry, in that they are effectively “all-or-nothing” on the proposition of finding real clinical success in using these drugs for the treatment of mental illness. In some ways, the results are more promising initially, but narrower in scope than the use of cannabis. Major pharmaceutical companies have already been doing extensive research on the use of psychedelics, and there is a large body of early clinical research available on their usage.
With that in mind, it’s hard to ascertain the sales and revenue viability of the psychedelics companies based on their current valuation as very few of the companies in PSYK are generating substantial revenue from their enterprises. Much of their value is tied in the intellectual property they are developing in various clinical treatments and research on psychedelic usage.
You can see below that many of these companies do not have a viable revenue stream at the moment, which makes even basic valuation metrics like price-to-book or price-to-sales difficult to ascertain. Below are the top 10 holdings in PSYK as at March 31, 2021.
The sheer number of unknowns associated with the valuation metrics with many of the names in PSYK just underscores the sheer importance of maintaining diversified exposure to the sector, which PSYK provides. While there could be potentially a high degree of failure amongst the names, the sector itself does have an attractive long-term growth potential if it can start to disrupt traditional forms of pharmaceutical and clinical treatment of neurological and mental health illnesses.
Commissions, management fees, and applicable sales taxes all may be associated with an investment in the Horizons Psychedelic Stock Index ETF managed by Horizons ETFs Management (Canada) Inc. (the “ETF”). The ETF is not guaranteed its value changes frequently and past performance may not be repeated. The prospectus contains important detailed information about the ETF. Please read the prospectus before investing.
The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.
Certain statements may constitute c (including grammatical variations thereof). The forward-looking statements are not historical facts but reflect the author’s current expectations regarding future results or events. These forward-looking statements are subject to several risks and uncertainties that could cause actual results or events to differ materially from current expectations. These and other factors should be considered carefully and readers should not place undue reliance on such forward-looking statements. These forward-looking statements are made as of the date hereof and the authors do not undertake to update any forward-looking statement that is contained herein, whether as a result of new information, future events or otherwise unless required by applicable law.
An exchange traded fund that is expected to invest in, and indirectly derive revenues from, companies in the psychedelics industry engaged in legal activities involving psychedelic drugs and substances. While the medical and adult use of certain psychedelic drugs and substances are generally prohibited under U.S. federal law, despite this prohibition, a limited number of states have either sought to decriminalize or authorize the medical use of certain psychedelic drugs and substances in limited circumstances. Clinical trials involving psychedelic drugs and substances are, however, permitted, provided they comply with both state and federal laws applicable to such trials. The ETF will passively invest in companies engaged in legal activities involving psychedelic drugs and substances in the U.S. where state and federal laws permit such activities. Such companies may also be involved in the Canadian legal psychedelics industry.
The ETF, through the ownership of life science companies in the psychedelic industry, may also have some exposure to the legal marijuana market in Canada, and the hemp industry and/or marijuana industry in certain U.S. states that have legalized marijuana for therapeutic or adult-use, which is currently illegal under U.S. federal law. However, the ETF will not be directly engaged in the manufacture, importation, possession, use, sale, or distribution of hemp or marijuana in either Canada or the U.S. Please read the full risk disclosure in the prospectus before investing.
There are risks associated with this product. PSYK is expected to invest in, and indirectly derive revenues from, companies in the psychedelics industry engaged in legal activities involving psychedelic drugs and substances. While the medical and adult use of certain psychedelic drugs and substances are generally prohibited under U.S. federal law, despite this prohibition, a limited number of states have either sought to decriminalize or authorize the medical use of certain psychedelic drugs and substances in limited circumstances. Clinical trials involving psychedelic drugs and substances are, however, permitted, provided they comply with both state and federal laws applicable to such trials. Psychedelic drugs and substances in Canada are primarily regulated under the Controlled Drugs and Substances Act (the “CDSA”), the Food and Drug Act, and the regulations promulgated thereunder. The medical use of certain psychedelic drugs and substances remain illegal under Canadian federal law unless discretionary exemptions are granted under the CDSA, while a limited number of other drugs and substances may be prescribed by a health care practitioner to patients under their care. Adult recreational use of psychedelic drugs and substances remains generally prohibited under the CDSA. Commercial activities involving psychedelic drugs and substances are permitted in Canada by parties who hold the required federal regulatory approvals and licences; however, distribution and sales opportunities for psychedelic drugs and substances are heavily restricted at this time. PSYK will passively invest in companies engaged in legal activities involving psychedelic drugs and substances in Canada and the U.S. where applicable laws permit such activities. PSYK will not be directly engaged in the manufacture, importation, possession, use, sale, or distribution of psychedelic drugs or substances in either Canada or the U.S.