Psychedelics Replace Pot As The New Favorite Edgy Investment
Cannabis is only on the cusp of many investors’ comfort zones, but the family offices and high-net-worth individuals hungry for early stage, edgy investments have already moved on to psychedelics. Psychedelics Replace Pot As The New Favorite Edgy Investment
Marijuana’s legal headway in recent years has paved the way for new interest in remedies typically relegated to the black market. Companies that work with drugs like psilocybin, an ingredient in magic mushrooms, or Ibogaine, used in ayahuasca-style ceremonies, are proliferating, with early-stage investors predicting such substances have an even better shot than cannabis at disrupting the $70 billion market for mental health. The question now is whether such aims bear out — and in time to catch up with all the money flowing in.
“People see this potentially as a get-rich-quick mechanism, just like you saw in the early stages of cannabis,” said Sa’ad Shah, who runs Grey House Partners GP Inc.’s Noetic Fund, which has invested in more than a dozen psychedelics companies. While Shah’s background is in asset management, he said lots of VCs in the psychedelics space have recently come from marijuana. “They feel they don’t want to have another FOMO situation here,” he said, referring to a “fear of missing out,” like they did with early-stage cannabis plays.
The overlap between the two sectors is clear. Both involve substances that are federally illegal in the U.S. and in many other countries around the world, putting off most institutional investors and leaving the playing field to high-net worth individuals and family offices.
Yet there are also huge differences. Psychedelics, which can involve intense, side-effect-plagued trips, aren’t predicted to have the widespread recreational appeal of marijuana. And with all the talk about micro-dosing as a productivity-booster or mood-hack — which has little to do with the narrow regulatory pathways these psychedelics startups are treading — there’s a fear the market could see a bubble just like cannabis did.
Still, the regulatory landscape is shifting fast, giving investors with a higher tolerance for risk a new potential growth area.
Peter Thiel, the Facebook and PayPal investor, and David Bronner, chief executive of Dr. Bronner’s Magic Soaps, both of whom were known names early in marijuana, are two high-profile players in the hot-but-edgy realm of hallucinogenic drugs.
Psychedelics have just recently been decriminalized in a handful of U.S. cities and one state, putting it way behind cannabis, which is now available in some form in 35 states and potentially track for federal legalization under President-Elect Joe Biden. Denver and Oakland both decriminalized psilocybin in 2019, and Washington, D.C., decriminalized mushrooms and other plant-based drugs like mescaline and ibogaine in November’s election.
Such changes don’t make the drugs legal — just the lowest level of priority for police enforcement. Oregon took it a step further, voting in November to legalize psilocybin — but only in a therapeutic setting. Exact rules on what that entails have yet to be worked out.
For risk-friendly investors, it’s these very ambiguities that makes psychedelics attractive.
For cannabis in North America, new investors would be “a little bit late to the game. There are already a few strong cannabis fund managers,” said Bek Muslimov, a co-founding partner at London-based venture firm Leafy Tunnel.
Leafy Tunnel is building a portfolio of around 15 companies, investing only in seed and Series A rounds with a 50-50 split on global psychedelic firms and cannabis companies based only in Europe, where he says the marijuana sector is less developed than in the U.S. He said the fund is taking a long-term view on the psychedelic industry with a 10 to 15 year horizon.
Current investments include Atai Life Sciences AG, backed by Thiel, and Synthesis, a psychedelic retreat in the Netherlands. Psilocybin mushrooms are illegal there, but a loophole means that the root of the plant — known as a “truffle” — can be used.
In Pot’s Footsteps
As with marijuana, there’s already a thriving black market for psychedelics that speaks to their popularity. And attitudes are changing, thanks in part to Michael Pollan’s 2018 book on micro-dosing and a designation from the Food and Drug Administration the same year that fast-tracked a psilocybin-based treatment for depression from Compass Pathways based on preliminary clinical evidence. Investors noticed. When Compass, also backed by Thiel, went public this September, its shares jumped 71% in the first day of trading.
Another Similarity: Dozens of psychedelics companies have gone public just like early cannabis companies did — in Canada using reverse takeovers, mostly of mining companies. Around 25 companies on the Canadian Stock Exchange are in the psychedelics business, according to the exchange. While such substances are federally illegal in Canada, companies can seek government authority for research, and a recent citizen’s petition has called to decriminalize so-called “entheogenic” or spiritual, plants and fungi, citing their potential for therapy and personal growth.
While cannabis is chasing widespread recreational use — a path that hinges more on changes to the federal laws — the narrower medical path that most psychedelics companies are taking makes investing in them more like investing in biotech, said Simeon Schnapper. His JLS Fund has invested around $10 million in 12 psychedelics companies and is currently raising another $50 million.
The long history of indigenous and black market use make it easier to predict success compared to novel drugs, he said. “Sometimes there’s a drug where indigenous forest cultures have been using it for centuries. We know these molecules can work. We just need to get them through FDA trials.”
So far, there haven’t been any high-profile investor run-ins with the law, though companies continue to warn in registration statements about the risks of being in a federally illegal industry. For example, even if a drug like psilocybin wins FDA approval for use in a certain drug, the DEA would still need to “deschedule” or “reschedule” it, removing it from Schedule 1 under the Controlled Substances Act, for it to be commercially marketed.
The long history of psychedelics also means intellectual property needs to be scrutinized. Investors in the space caution about companies that are all smoke and mirrors, and say it may take the discovery of novel molecules, synthetically derived hallucinogens or other creative business models for companies to distinguish themselves in a field dominated by natural products — which can’t be directly patented.
Meanwhile, hopes for medical breakthroughs are high. Whereas cannabis aims to treat things like depression, addiction, anxiety and PTSD, psychedelics investors say many substances show the promise of actually curing them by resetting the brain — with some claiming it takes a single use.
Research at universities like Johns Hopkins University, Imperial College London and King’s College London have created excitement around such prospects for a range of drugs — like ketamine, a horse tranquilizer that’s now legally prescribed off-label at some U.S. and German clinics; MDMA, also known as Ecstasy or Molly; and 5-MEO, which is found in plants, and the Sonoran Desert toad.
“The possibilities for psychedelics to be a new medicine and replace antidepressants is 100 times greater than cannabis,” said JLS Fund’s Schnapper.
After working as a cannabis operator just before what he called the “greenrush” years, he invested a few million dollars and lost a lot of it in 2018 and 2019 when stocks deflated. He is currently only in one well-known cannabis-investment, Method Man’s Tical, because he’s decided to go otherwise all-in for psychedelics. An investment in one company gave him around 1,000 times his money in less than a year, he said.
“I’ve seen the best returns in any industry,” Schnapper said.
This Ancient African Plant May Be A Cure For Addiction
The Iboga plant has been used for tribal rituals in West Africa for millennia. While the highly toxic root causes days-long hallucinations, it may also be the answer to a problem plaguing modern society. Today, Iboga and its ingredient ibogaine are being closely studied as a potential cure for drug addiction.
Why Psychedelics, Big In The 1960s, Are Drawing New Interest Now
People have been blowing their minds with hallucinatory substances for millennia — at least since the ancient Greeks drank a psychoactive brew thought to contain a barley fungus, ergot, in one of their sacred rituals. Today, many researchers are convinced that trippers are onto something good — that the alteration of consciousness induced by psychedelics can be a tonic for mental health.
Though these substances are largely outlawed, dozens of startups betting on legal changes are seeking to develop treatments based on them for illnesses like depression and anxiety. Not everyone is sold on the idea, and there are risks that come from manipulating the brain’s chemistry.
1. What are psychedelics?
They are a subset of mind-altering drugs distinguished, in the words of researcher J.H. Jaffe, by their ability to induce “states of altered perception, thought and feeling that are not experienced otherwise except in dreams or at times of religious exaltation.” Those with a history of use for spiritual purposes are called “entheogens,” from Greek roots meaning “to generate,” and “God within.”
Psilocybin or “magic” mushrooms were used in Mesoamerican civilizations and possibly even prehistoric Europe. Ayahuasca is a brew of vines and shrubs native to the Amazon basin, while peyote is a small cactus that grows in the U.S. southwest and northern Mexico.
LSD, which stands for lysergic acid diethylamide, is synthesized from a chemical present in ergot. These so-called classic psychedelics do not include the party drugs ketamine and MDMA (also known as ecstasy or Molly), nor the herb salvia, which is common in southern Mexico and Central America, nor ibogaine, which is extracted from the root of the iboga tree native to Africa; these are sometimes referred to as hallucinogens but have different mechanisms of action on the brain. Regardless, they are all being talked about as a new scientific and investment frontier.
2. Why Is There Renewed Interest?
Researchers in the 1950s and 1960s produced hundreds of scientific reports on the use of LSD and psilocybin as therapeutic drugs, including studies showing improvements in patients with various mental disorders. But when the substances became associated with the counterculture movement of the time, they were strictly regulated in most countries, complicating research. Still, some scientists persisted, amid growing interest in alternatives to the pharmaceutical drugs that have so far been used to treat mental health disorders.
In recent years, researchers produced groundbreaking studies on the promise of psychedelics to relieve emotional suffering in people nearing death followed by a growing body of work suggesting the substances can help with depression, post-traumatic stress disorder, addiction and anxiety. One theory is that by inducing an eroded sense of ego and feelings of universal connectedness, psychedelics can produce a shift in perspective that’s less fixated on the individual’s struggles and more appreciative of life.
Revival of Interest
3. How Are They Used Therapeutically?
In many proposed therapeutic uses, people have a series of trips overseen by a clinician or guide of some sort. Ayahuasca tourism, with shamans leading psychedelic ceremonies, has become an industry in the Amazon. So-called microdosing involves ingesting, over an extended period of time, amounts so small there’s little or no perception of an altered state. There’s lots of anecdotal reporting of people using this practice to improve their mood or cognition but little scientific research.
4. Are They Legal?
Mostly no, with exceptions. A 1971 treaty requires its 184 signatories to prohibit the use of LSD, psilocybin, mescaline (the hallucinogenic compound in peyote) and dimethyltryptamine (or DMT, the agent in ayahuasca). However, scientific and limited medical uses are exempted, and countries can, and do, make exceptions for indigenous, wild plants that contain psychotropic substances and are traditionally used in rites. Ayahuasca is permitted in such contexts in Brazil, the U.S., Canada and Peru.
In the U.S., psilocybin mushrooms are outlawed under federal law, but the states of Oregon and a handful of cities have decriminalized them, making arrests for possession the lowest priority for police. Washington D.C. also decriminalized plants containing DMT, mescaline and ibogaine, and Oregon legalized psilocybin mushrooms for therapeutic use in supervised, licensed facilities.
A loophole in the law in the Netherlands permits psilocybin truffles, the mushroom’s root-like filaments. Many psychedelic users continue to rely on a robust black market, often making purchases on the so-called dark web.
5. Are They Risky?
Psychedelics can produce intense, confusing trips, which is one reason having a guide can be beneficial. Ayahuasca famously provokes vomiting and diarrhea. Drugs purchased on the black market may be tainted or come in unpredictable doses. Classic psychedelics aren’t associated with fatal overdoses, but they can impair the judgment of users, leading to deaths. Although it happens rarely, some users have recurrent hallucinations, called flashbacks, long after taking a psychedelic. Classic psychedelics are not addictive.
Research into long-term effects is just getting started, but a number of studies have found either no association between lifetime use and rates of mental health problems, or an inverse relationship between the two. But there have been rare reports of use triggering psychotic episodes, especially among people with a family history of serious mental illness.
‘Altered Experience’ Fund Brings Psychedelics To U.S. ETFs
Curious investors looking for new experiences in the $6.3 trillion U.S. exchange-traded fund market can now dabble in the world of psychedelic drugs.
The Defiance Next Gen Altered Experience ETF began trading Friday under the ticker PSY, offering exposure to firms involved in “the next generation of medicine, including psychedelics, cannabis and other psychedelic-derived treatments,” according to a statement.
Although a similar product launched in Canada in January, the Defiance fund will be a first for the exchange-traded fund industry in the U.S. This version will track the BITA Medical Psychedelics, Cannabis and Ketamine Index, which includes companies that conduct federally legal medical activities with psychedelics, cannabis and ketamine.
“The focus of this is the medical aspect around psychedelics and mental health — we’re seeing a lot of breakthroughs,” Paul Dellaquila, president of Defiance ETFs, said in an interview. “You’re seeing some of the bigger companies get involved in this type of treatment. Johnson & Johnson has a treatment that is ketamine-based for depression.”
Its top positions are in Charlottes Web Holdings Inc. and Aurora Cannabis Inc. During its first day trading, the fund rose 4.1%.
Despite poor performance, the Canadian product — Horizons Psychedelic ETF (PSYK) — has attracted about $50 million since its January launch, even as it plunged almost 20% amid a broader selloff in speculative bets. Top holdings in the fund include Seelos Therapeutics Inc., Mind Medicine MindMed Inc. and Cybin Inc.
Horizons ETFs has filed for a sister psychedelics ETF for U.S. markets, also trading under the ticker PSYK, although it has not yet been approved by U.S. regulators.
The market for psychedelic drugs is worth only about $2.8 billion but is growing rapidly and expected to reach $7.6 billion by 2028, according to Data Bridge Market Research.
“With cannabis becoming more accepted across the U.S., we believe the door is opening wider for alternative drugs, especially as substitutes for opioids,” wrote Eric Balchunas, ETF analyst for Bloomberg Intelligence, in a note.
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How Psychedelic Drugs Affect Consciousness
Psychedelic plants have been ingested by man for thousands of years and are believed by many researchers and ethno-botanists to be the driving factor in the development of the speech, language, art, music, culture and various other aspects or manifestations of the human intellect.
Dr. Michael A. Persinger is a cognitive neuroscience researcher and professor at Laurentian University, Canada. In this award winning lecture called ‘Psychotropic Drugs & the Nature of Reality’ he brings forward knowledge about the effects of psychotropic drugs on consciousness and how our brain has the natural ability to produce similar compounds which help us attain altered states of consciousness.
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