Delivering on the Promise of the Psychedelic Renaissance
Are we prepared for successes?
There is a difference between developing a drug and delivering one (analogous to building a product vs. selling it). Often startup management teams are so focused on seeing if the biology (or tech) works, they largely ignore the delivery aspects; I know I did. If you are working in a newer therapeutic class, this might extend across the sector as it largely did in the early days of cell and gene therapy (CGT), resulting in a scramble to build out production and delivery capacity that continues today — all after the therapeutics showed promise, and strong promise at that. An an entrepreneur, is easy to assume that the field will figure these out for you by the time you get to that stage, but it could require you to change formulation, prove an alternative route of administration or engage in other costly and time-consuming endeavors that slow your path to the clinic.
A few years ago, I had the privilege to work with an amazing team at Arcline, a PE fund investing exclusively in supply chain, production and “non-therapeutic” areas in CGT. This was an incredibly educational time for me to understand just how much goes into the delivery part, how complex and how important these aspects are (and how often startups make small, early missteps that get magnified later). My partner Amy Kruse has posted in the past about the psychedelic therapeutic renaissance and how this class of intervention offers amazing promise for patients suffering from mental health issues. While in some respects, these psychoactive compounds are just small molecule drugs like any other, but in others they are really a new class and have unique scale-out and delivery challenges (and opportunities!) that are discussed below
The Covid pandemic has increased the size and severity of mental health disorders, an area that already suffered from a general lack of effective treatments. The CAGR is estimated to increase from 2.6% to 28.2% post pandemic pushing the TAM well into double digit billions this decade. With significant unmet medical needs there are excellent salient investment opportunities that spawn many entrepreneurial developers. There are many parallels to early days of cell and gene therapy, cannabis, and opioid industries providing opportunities to leverage lessons learned. For example, in the cannabis and opioid biopharma segments, the grey market influences have been significant and limiting. These include challenges with abuse, criminal activity, banking, shipping, logistics, government intervention and public opinion. In cell and gene therapy, after the initial hype wave, the industry adopted a view that “the process is the product,” which changed perceptions in operational, financial, business strategies and ultimately value creation. Those who excelled in these new markets understood these drivers and proactively adapted development plans, cultivated government and public perspectives. They built their businesses from a fundamental philosophy that the patient is the most important stakeholder. But also, that “process” and “patent” are as important as the “product,” at least for those looking to engage in the legal, prescription segment of these markets. The “winners” shed conventional approaches and built a new class of biopharma. These industries are not a perfect analogue for psychedelics, but the way those markets evolved provides important lessons that can be used to accelerate the bench to bedside translation.
Similar to the early days of other new biopharma segments, there seems to be a high level of “financial engineering” vis-à-vis rush to liquidity with less focus on developing the underlying assets (i.e. the first peak of the hype curve). Most of companies in the sector are preclinical or in early clinical trials, and ketamine is the only drug that has been approved by the FDA to date. According to Psilocybin Alpha ~60% of startup companies are public and as of May 2021 have a mean valuation is $182.1mm (mode of $30.8mm). The percentage public is likely to increase in the coming quarters as are up listings riding the general wave of public enthusiasm for biopharma (and continued financial engineering). The trend towards listing earlier is similar across the broader biotech sector, though more pronounced in psychedelics. For comparison, even with the strong IPO’s in biotech over the last few years, the majority of companies remain private (ref).
Regulatory winds are in favor of industry presently. There are over a hundred active clinical trials, the majority using psilocybin, but others with 5-Meo-DMT, ayahuasca, LSD, ibogaine, MDMA, ketamine (and enantiomers), salvinorin A, mescaline, 2C-B, etifoxine, N-actylcysteine, mitragynine, noribogaine, and N, N-dimethyltryptamine. Most are presently producing chemical synthesis or direct purification from the fungi (or plant in the case of other molecules). These manufacturing methods have been used primarily out of necessity rather than downstream commercial/clinical facilitation. As the industry matures, development, integration and adoption of more sophisticated strategies will develop. The nascent nature of the industry is primed for gold rush type, picks and shovels plays.
Existing regulatory frameworks (primarily non-FDA ones) have forced many to use strategies available to them rather than ones optimal for their businesses. For example, companies are patenting what they can and leveraging production processes that do not require shipping scheduled compounds or regulated starting materials rather than optimizing formulation and process with the patient top of mind. The influence / tail of the grey market (parallel to cannabis and opioid) could have a chilling effect on the prescription segment and also provide financial incentive(s) to remain in or wade into the grey markets. Outside of recreational use, there is a preference for “naturally” produced drugs, either purified directly or leveraging biomanufacturing processes. Interventions that do not require the hallucination component may be preferred by the larger patient population (allowing more broad market penetration) but there is significant debate in the industry if this removes or lessens the efficacy. Various groups are working on analogues to test this hypothesis. Scheduling can swing (positively or negatively) any time and in heterogenous or contradictory manners. Some developers are specifically working with chemical entities that circumvent these to facilitate easier operations (though, not completely risk free), whereas others are taking these head-on trying to create differentiation. Some locate labs or operations in countries and states with appropriately permissive governance.
The biopharma industry is highly regulated and “psychedelic” adds additional layers to the already complex situation. These regulations have the potential to touch almost all aspect of the business: HR, banking, transportation, storage, R&D, clinical trials, market access, etc. In the US, practitioners must have and maintain specialized security systems and highly audited documentation. While CMC, GMP and scale up conceptually are identically to any other small molecule, the practical constraints with psychedelics make these unique. This creates a challenge for developers and clinicians but also an opportunity for infrastructure and tools developers. The DEA requires specific licenses for all aspects from R&D through delivery of scheduled drugs. These include more sophisticated methods for import/export, storage and shipping creating more complex logistics, infrastructure requirements than typical drugs. An existential issue for the industry is labor force shortages. Two therapists are required in each inpatient session, which increases costs and limits market penetration. Innovative solutions will enable this class of therapeutic to reach a broader audience. Due to the size of the grey market there is risk of a black swan event cratering valuations and setting back the field. The gene therapy death of a healthy volunteer in 1999 (ref) resulted in massive pullback of capital and stifled R&D for over a decade; reverberations exacerbated by recent deaths are still felt today. The cannabis industry has been slower to mature due to some actors masquerading recreational uses through the medical segment; the opioid industry has had even more profound negative impacts due to systemic abuses that are playing out in the courts presently. Psychedelic drugs do not have nearly the same addictive powers or established recreational user base. But the risk is also not zero and there are strong financial incentives for those comfortable with selling into grey markets.
The therapeutic IP landscape is getting crowded. Developers have been largely focused on patenting what they believe they can get issued rather than what may be best for their businesses. Some of these “innovative patent strategies” are actually regurgitation of old Pharma tricks. The approach, partially born out of necessity, may show us new techniques to protect intellectual property and capture value in the new medical paradigm. But it also could be setting things up for short term gain (i.e. close early funding) with long term pain. If parallels to the segments mentioned above bear out, it may be that second or third wave IP are more valuable in the long run.
This field stands on a foundation of sound science, centuries of anecdotal evidence and, with the natural compounds, a reasonable presumption of safety. Though, any NCE (new chemical entity), sans deuterated analogues, will not share this “safety pass.” On average, psychiatric drugs have lower approval rates than their non-psychiatric counterparts (ref and ref). This is likely due to a lack of predictive in vitro and in vivo efficacy models, a challenge shared across the industry, irrespective of drug class or modality. Thus risk to achieving approval is greater in this segment, however this also means the patient needs are higher due to historical dearth of approvals. As such, first mover advantage (e.g. first-in-class) will likely command larger than average market share and face less competition from branded drugs. However, generics and grey market competition have a strong presence and their influence cannot be ignored. Overuse of CRO’s to generate and produce API’s, specifically in geographies with historical issues, will exacerbate this. Taken together, across the market, there will likely be more failures relative to traditional biotech and those that succeed will need more capital and time to see their assets in clinical practice, but those that make it will command stronger dominance on the market. This provides a timely opportunity for supply chain, production and logistic innovations and the companies that bring these to market. Very much looking forward to how this industry pans out!
Prime Movers Lab invests in breakthrough scientific startups founded by Prime Movers, the inventors who transform billions of lives. We invest in companies reinventing energy, transportation, infrastructure, manufacturing, human augmentation, and agriculture.
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