Valhalla Ventures Psychedelic Therapeutics Sector Outlook

The Psychedelic Renaissance is roaring. Over the past 18 months the decriminalization of psychedelics has gone from a fringe movement to a mainstream cause and Valhalla Ventures is pleased to share our first market research publication, the Valhalla Ventures Psychedelic Therapeutics Sector Outlook.

The prospects for the adoption of psychedelic compounds for therapeutic purposes have never been brighter. We are emerging from a dark period of roughly five decades of stigmatization by governments who successfully tied psychedelics to the counterculture movement of the ’60s and ’70s and used propaganda pieces laden with misinformation to convince the general public that users of psychedelic drugs could expect at best irreversible brain damage to permanent insanity at worst. Now, a bevy of scientific research is vindicating the efficacy of psychedelics in treating myriad mental health indications and driving a transformative shift in public attitudes catalyzed by the groundswell of positive press amplifying the hard science including publications such as Michael Pollan’s recent works How to Change Your Mind and This is Your Mind on Plants.

Valhalla Ventures Psychedelic Therapeutics Sector Outlook (Slide 10)

This has dovetailed with broader trends embraced by Millennials and Gen Z related to health & wellness as younger generations shift away from the industrial diets and personal care routines of our parents’ generations in favor of plant-based diets, so-called plant medicine detox regimes including ayahuasca ceremonies, and increasingly swapping alcohol and other intoxicants for psychedelics and cannabis as tools for forging social bonds and enjoying leisure time. And of course, where there is hype and where there is a secular shift in consumer behavior, a market opportunity emerges.

In the year and a half that Valhalla has been investing in the Psychedelic Therapeutics space, we have observed a paucity of good data and thorough analysis thereof on the key players in the market. This lack of a comprehensive report on the sector was striking given that in just the past two years roughly $1B was invested in private companies working to develop psychedelic compounds or otherwise facilitate the adoption of psychedelics through commercial efforts related to clinics, consumer products, nutraceuticals, and other areas.

Valhalla Ventures Psychedelic Therapeutics Sector Outlook (Slide 21)

Where is all of this money coming from? Psychedelics as an investment theme straddles a broad swath of demographics ranging from traditional life sciences-focused investment managers with billions in AUM such as Perceptive Advisors, RA Capital, and RTW Investments to psychedelics-focused investment funds such as Integrated, The Conscious Fund, and Noetic Fund. Valhalla identified roughly 25 institutional investors participating in private investments in the space in addition to dozens of psychedelics-focused funds.

Valhalla Ventures Psychedelic Therapeutics Sector Outlook (Slide 20)

Investors in the psychedelics space have an ever-increasing range of investment opportunities to choose from, many of which are companies pursuing incremental innovations that fail to pass real scientific muster and often fall into the category of chasing hype and the dollars attached to it. In our research we found over 110+ companies identifying themselves as psychedelics companies or companies developing psychedelic compounds. Valhalla has chosen to segment the market into six categories based on the focus areas in which these companies are competing.

Valhalla Ventures Psychedelic Therapeutics Sector Outlook (Slide 11)

Out of the multitude of competitors, there has been a clear gravitation of investor capital toward companies focused on drug development as well as diversified platform plays, and specifically on a few key market leaders (namely atai Life Sciences, Compass Pathways, GH Research, and MindMed) who have raised substantial sums of capital from institutional investors, bringing rich valuations that dwarf their competitors.

Valhalla Ventures Psychedelic Therapeutics Sector Outlook (Slide 27)

Unsurprisingly for where we are in the hype cycle (we believe we are approaching the top, possibly around 70% to 80% of the way toward the Peak of Inflated Expectations), returns on early stage private investments across the sector have been quite good. Once companies have debuted on the public markets, however, there has been a substantial divergence in performance across individual companies.

Valhalla Ventures Psychedelic Therapeutics Sector Outlook (Slide 26)

Current market participants, as well as investors who have been sitting on the sidelines, are expressing increasing skepticism on valuations in the space as the rush of new entrants in the space is leading to greater and greater competition for a relatively limited opportunity set.

Valhalla Ventures Psychedelic Therapeutics Sector Outlook (Slide 29)

Many companies in the space have marketed themselves to investors as possessing unique intellectual property that will enable them to develop myriad drugs which could be panaceas for a wide range of mental health indications. Meanwhile, most of the companies in the space are filing very similar claims to intellectual property around the same compounds for use in treating the same mental health indications. The result is unsustainable competition for a limited set of psychedelic compounds with real efficacy in treating a limited set of mental health indications.

Valhalla Ventures Psychedelic Therapeutics Sector Outlook (Slide 28)

Further, investors in the space have largely been looking past the fact that the total addressable market for psychedelic therapeutics is probably nowhere near as large as hoped. Drug sales for all mental health indications are roughly $25B annually, with drugs targeting depression-related indications totaling $5B, while Treatment-Resistant Depression therapies account for only about $1.3B in yearly turnover.

Then we must take into account that many of the psychedelic compounds currently being developed as drug candidates, including psilocybin and LSD, require users to undergo a minimum 4-hour to as much as a 12-hour long psychedelic-assisted therapy treatment which can cost orders of magnitude more than traditional psychotherapy sessions. This alone will relegate the majority of the psychedelic drugs currently in clinical trials to second- or third-line therapies for the mental health indications that they hope to address.

The onerous commitments of time, capital, and emotional effort required to partake in psychedelic-assisted therapy with FDA-approved drugs administered in a clinical setting will ultimately diminish the total addressable market of the compounds being developed by most of the current market leaders to a potentially negligible sum.

Valhalla Ventures Psychedelic Therapeutics Sector Outlook (Slide 31)

The question then becomes, where should a sophisticated investor look in order to produce compelling risk-adjusted returns in the Psychedelic Therapeutics space? In most frontier markets that Valhalla and its partners have participated in or observed, there is a clear tendency toward the development of a herd mentality. Many market participants ultimately end up chasing the same, often illusory, holy grail of a solution to the market’s pain points.

When everyone else is going right, you usually will do better off by hanging a left. So in today’s Psychedelic Therapeutics market where the vast majority of participants are currently chasing the holy grail of winning patents on classical psychedelic compounds such as psilocybin, LSD, and MDMA, and where many companies are focused on single-asset models with a correspondingly high risk of failing clinical trials, it would be a wise strategy to pick the opposite direction and bet behind companies that are pursuing truly unique and competitively differentiated intellectual property, especially relating to the development of non-psychoactive formulations of classical psychedelic compounds.

This criteria alone narrows the field of potential targets to a small handful of companies including Delix, Terran Biosciences, and CaaMTech. Additional criteria for refining the universe of investable companies in the space are a platform-based approach (atai, MindMed, and Terran), as well as companies with meaningful partnerships with established incumbents in the Pharmaceutical space.

Valhalla Ventures Psychedelic Therapeutics Sector Outlook (Slide 33)

Valhalla is optimistic that the companies putting in the work on the hard science required to develop safe and effective psychedelic therapeutics will yield incredible breakthroughs that will alter the arc of the global mental health crisis for the better. However in a market dominated by hype and increasing competition, investors should allocate intelligently and conduct rigorous diligence in order to distil the signal from the noise.

Please feel free to view, download, and share our full report at https://valhalla.docsend.com/view/6tj6k2mxmpuhqvvn.

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