‘The shiny new object’: Despite being illegal, retail investor rush to psychedelics resembles euphoria around cannabis

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Retail investor interest in the psychedelics industry has exploded over the past three months, driven by a heightened appetite for risk in equity markets that are awash in volatility, according to dealers and brokers involved in the space.

But institutional interest in the sector is still small, with private biotech funds and family-owned investment funds leading the charge, while big-name investors remain wary of the industry. The psychedelics sector is still in its infancy and subject to layers of scientific and regulatory hurdles before widespread use of any kind of psychedelic substance becomes possible.

“The system is flooded with stimulus money and equity markets are in a risk-on state. So just like cannabis was, and cleantech is, psychedelics are hot because they are the shiny new object of the moment,” said Brian Bloom, co-founder and CEO of Bloom Burton & Co., an investment firm in the health care space.

Psychedelic companies range from cultivators of medicinal mushrooms, to those conducting clinical trials into the use of substances in the treatment of opioid addiction, or a combination of LSD and MDMA for mood therapy.

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Psychedelics are illegal in Canada and the United States at the federal level (although the limited use of psilocybin by patients and therapists for end-of-life care was recently approved by Health Canada) and widespread recreational consumption of psychedelics is almost a pipe dream for investors this stage.

“This is not a retail-focused market. Investors are looking at these companies as biotech firms trying to tackle a mental health crisis. That’s the value-proposition,” said Stephen Delaney, head of investment banking at Toronto-based investment dealer Eight Capital.

Yet, the retail investor rush to psychedelics appears to resemble the euphoria seen in the months leading up to cannabis legalization.

In 2021 alone, according to internal data from Bloom Burton, there have been approximately 16 deals in the sector involving publicly listed psychedelic companies – many of them either reverse takeovers or initial public offerings on Canadian exchanges. The dollar amount raised by those deals topped $300-million. In 2020, there were 38 deals in total in the psychedelics space, raising roughly $490-million.

There are more than 30 publicly listed psychedelic companies on the Canadian Securities Exchange and the NEO Exchange, with more in the pipeline, according to Eight Capital’s bankers. “We have seen more and more companies coming to us and saying maybe it’s easier for us to raise money on a go-public listing,” said Elizabeth Staltari, an investment banker with Eight Capital.

One of the most recent public listings in the space was a $20-million initial public offering by Optimi Health Corp. on the CSE. The magic mushroom cultivator co-founded by J.J. Wilson (the son of Lululemon Athletica founder Chip Wilson) saw its stock surge as much as 13 per cent within a day of going public.

Mr. Wilson told The Globe and Mail that part of the reason he decided to take his company public right now was how motivated retail investors are. “We didn’t plan to go public this early but the market timing around psychedelics made it feel like this was the right move,” he said.

Mr. Wilson believes that institutional investors are still cautious about psychedelics, which is partly why one of Optimi’s first rounds of funding involved just family and friends. “There were no outside investors. We raised $7-million through family and friends, and used that money to build out our cultivation facility.”

The sector has caught the attention of some well-known investors and funds. According to Ms. Staltari, the sector has received “massive support” from biotech investors, but because it is still in its infancy, it is too early to say whether there will be a surge of or continuing institutional investor interest in the space.

Peter Thiel is one of the few prominent names who has thrown his weight behind psychedelics, investing US$125-million in Berlin-based startup ATAI Life Sciences in November, just months after the hyper-successful public debut of Compass Pathways, a British-based psychedelics company that he also has a stake in.

Another prominent champion of the industry is Shark Tank’s Kevin O’Leary, who told Business Insider in November that investors burned by “bad bets” on cannabis startups should not be afraid to gamble on psychedelics. Mr. O’Leary was an early investor in MindMed, one of the first psychedelic companies to go public in Canada.

“There is growing acceptance that psychedelics are medically important in treating certain diseases, particularly mental health conditions and that evidence has been emerging for a while,” said Mr. Bloom, of Bloom Burton & Co. “But right now, the sector is bifurcated by two kinds of companies – those that are driven by serious long-term investors betting on the intellectual property value of serious clinical programs, and those that are trading magnets for hedge funds, taking advantage of liquid and frothy markets,” he added.

Recently, exchange-traded fund provider Horizons ETF launched the world’s first psychedelics ETF, a basket of stocks comprising 17 companies in the psychedelics sector, including pharmaceutical giants Johnson & Johnson and AbbVie Inc. that have dabbled in researching psychedelic products. The Horizons Psychedelic Stock Index ETF has gained roughly 10 per cent in the four weeks since it began trading on the NEO Exchange.

Steve Hawkins, the chief executive of Horizons, said he decided to launch the product because an uptick in retail interest in psychedelic names reminded him of the interest in cannabis investing back in 2016. “We saw on social media, on psychedelic chat boards that retail investors were looking for a product like this,” Mr. Hawkins said.

Horizons’ first pot ETF – the Horizons Marijuana Life Sciences Index ETF – fluctuated wildly in tandem with developments in the cannabis sector, which experienced a sharp flameout just a year after legalization partly because of supply-chain and corporate-governance issues.

Mr. Hawkins, however, says many of the investors in the psychedelics space, unlike cannabis, are long-term investors. “With the cannabis ETFs, we saw short-term sellers who were in it for a quick buck … they came in quick and they exited quick. We learned a lot from that and we designed this ETF such that it provides necessary diversification,” he said, referring to the decision to include pharmaceutical brand names in the basket of stocks.

But given how retail-centric the psychedelic space is, if there is a broader correction in equity markets, these stocks might be hit particularly hard. “Their rise has been meteoric,” Mr. Bloom said. “They just might crash the hardest.”

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