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Turning Taboo into Opportunity

A venture capitalist’s POV on investing in psychedelics

Problem

The global mental health crisis has been a hot topic among investors for the past few years. Today, more than 1 in 5 U.S. adults (22%, nearly 53 million people) suffer from mental illness, costing the U.S. at least $225 billion annually in lost productivity and medical care. This number does not include the hundreds of millions of dollars paid out of pocket annually by people seeing private therapists and subscribing to virtual mental health services that are not covered under their insurance.

Since the pandemic began, experts have warned of a “second pandemic” of mental health conditions. Anxiety, depression, and suicidal ideation are at their highest levels in history and people deemed “at risk” for mental illnesses are getting younger every year. At the same time, current solutions on the market don’t seem to be working well. Antidepressants — the most popular and traditional form of intervention — often take several weeks or months to yield their full effects and are ultimately ineffective for one-third of the population, highlighting the need for better, quicker alternatives. In addition, when major depressive disorders are accompanied by other medical or psychiatric issues such as anxiety or eating disorders, depression is often harder to treat.

Data: CDC; Chart: Axios Visuals

Opportunity

The good news is, there is mounting evidence proving that, at the right doses, psychedelic compounds such as Ketamine, Psilocybin (aka mushrooms), and MDMA (aka ecstasy/molly) have had breakthrough therapeutic effects on depression, anxiety, and even alcohol addiction. A study in Nature Medicine found that MDMA paired with counseling brought marked relief to patients with severe PTSD. Another in the New England Journal of Medicine highlighted the potential of psilocybin therapy for treating severe depression. And there have been countless placebo-controlled trials supporting the speed, safety, and efficacy of ketamine therapy for a variety of treatment-resistant mental health disorders — all with staggering results. In fact, a recent study conducted by psychedelic-assisted therapy company, Nue Life, found that that two-thirds of its 2,000 treatment-resistant patients saw a 50% reduction in symptoms (meaning, most of those patients are no longer clinically diagnosed with severe depression, anxiety, or PTSD).

Of the psychedelic treatments listed above, ketamine therapy is of particular interest to today’s physicians and investors due to its fast-acting (within hours) and sustained (up to 7 days) antidepressant and anxiety-reducing effects after a single dose. Ketamine is also the only FDA-approved psychedelic treatment for mental illness on the market currently. Although MDMA and psilocybin are prohibited for medical use under federal law at present, researchers expect MDMA-assisted talk therapy to win FDA approval in the next year or two, followed soon after by psilocybin, which has already received agency approval as a “breakthrough therapy” for severe depression and PTSD.

Can psychedelic-assisted therapy produce venture-scale outcomes?

The answer isn’t so black and white. It’s not a matter of whether the market size is big enough (it’s massive) or if there is a need for better solutions (as mentioned above, roughly 1 in 3 people do not respond to traditional interventions), or even if psychedelic-assisted therapy works (it’s been proven with countless clinical studies). The question lies in the treatment’s adoption, which is currently a multi-pronged and complex issue.

Challenges to Adoption

For starters, there is a great deal of social taboo around using psychedelics to treat mental illness, as they are primarily viewed as party drugs. Even today, despite overwhelming evidence around the benefits of psychedelic-assisted therapy, people seem to think of it as a last-resort option for treating their mental illness.

In addition, up until recently, ketamine therapy was extremely costly, time intensive, and inconvenient for many people, as it was only able to be administered in a hospital or clinic setting through intravenous infusions (IV) or intramuscular injections. When Spravato, an intranasal ketamine treatment, became FDA approved, insurance began covering some of the cost, but patients still needed to visit a doctor’s office to have it administered and stay for two hours after taking it to be monitored for side effects. This was not sustainable.

Screenshot of doctor administering intravenous ketamine infusions via WIRED article, “Patients Are Experimenting With Ketamine to Treat Depression”, June 2017

Enter the industry-changing form factor, the ketamine lozenge, also known as troche or sublingual ketamine. As the name suggests, lozenges are administered orally and may be taken at home through a teletherapy guided session. On face, lozenge ketamine may seem like a holy-grail solution for people wanting more convenient and affordable treatment, but there are still challenges facing its adoption.

Many therapists cannot offer Ketamine Assisted Psychotherapy (KAP) without a license to prescribe it, disincentivizing them from educating patients about it as a viable option. This is because one of the biggest benefits of psychedelics also poses one of the biggest potential risks to the traditional therapy industry — they work! Meaning, patients may not see a need to continue traditional talk therapy (either at all or at the same cadence) if they begin using one of the handful of new D2C Prescription-as-a-Service (PaaS) psychedelics companies on the market, many of which combine ketamine therapy with “end-to-end patient journey” support.

Programs offered by consumer-friendly businesses such as Nue Life, Mindbloom, Innerwell, Peak, and Curio often include telehealth visits with a licensed practitioner as well as a companion app for intention-setting, patient education, experience logging (journaling of a guided session), pathway-focused content (for pre- and post-session support), prescription administration/delivery, and more.

The Nu Life mobile app

Taking a 10-year View

Like with any lucrative investable category, if something is hot right now, you’ve likely already missed the mark. This is why many investors are showing interest in the psychedelic-assisted therapy space and continue to spend time evaluating companies within it, despite these early adoption challenges. Businesses that are improving patient outcomes while making treatment more accessible, affordable, and approachable through a consumer-first lens will undeniably catch growth waves during the mental health renaissance yet to come.

The nascent and growing market for KAP and other psychedelic treatments represents a significant opportunity to back early players since there is little competition, yet large and growing demand as more people discover its benefits. Of note, the market for psychedelic substances is projected to grow from $2 billion in 2020 to $10.75 billion by 2027, at a rate that may outpace the legal U.S. cannabis market.

If you’re interested in continuing to explore psychedelic-assisted therapy as a potential investment opportunity, here are a few business models to look out for

D2C Psychedelic Assisted Therapy — Prescription as a Service (PaaS)

Companies in this bucket typically offer ketamine prescription and “end-to-end patient journey” support, including guided psychotherapy sessions. Many also have plans to expand their services to offer other psychedelic modalities as soon as they are FDA-approved. These businesses sell to prospective patients and charge a recurring monthly or weekly fee for services ranging from $60 — $230 per session, depending on what’s included.

As mentioned above, many programs often include telehealth visits with a health coach or licensed practitioner, a companion app, session logging capabilities, pathway-focused content, prescription administration/ delivery, and more. At present, most patients pay out of pocket for these services, but it is reasonable to expect this to change in the future as an increasing amount of data is collected on improved outcomes. Almost all businesses in this category are already collecting patient data (anonymously, of course) and participating in scientific studies that will aid in patients’ reimbursability.

B2B Clinician Training/Infrastructure

As mentioned earlier, not all therapists can facilitate guided psychedelic-assisted therapy without specific training, and they cannot prescribe psychedelics without being licensed under the DEA to administer controlled substances. In fact, you may be surprised to learn that primary care providers — not psychiatrists — currently service the bulk of mental health needs, prescribing 79% of all antidepressant medications and seeing 60% of people being treated for depression. As you can imagine, these physicians do not specialize in psychotherapy and will be looking for built-for-purpose solutions to help monitor their patients’ progress and facilitate similar end-to-end care offered by the D2C platforms mentioned above. Add to this the growing psychiatrist shortage and enormous demand for mental health treatment, and you can see how necessary training and infrastructure will become.

When it comes to guiding psychedelic-assisted therapy sessions, traditional therapists can facilitate, but still need to be trained in this capacity. Clinicians will need further training if regulatory approval is obtained for psilocybin and MDMA, or if use cases for other clinical indications are found, such as substance use disorders, eating disorders, obsessive-compulsive disorders, and social anxiety. Even more clinician training will be needed if we eventually build a post-prohibition world with legal access to “micro-dose” psychedelic therapy for the normal struggles of life such as the search for meaning and purpose, couples therapy, grief, aging, illness, death, or — dare we say — recreation.

Journey Clinical, Ember Health, and Nue Life are examples of businesses taking infrastructure seriously, inevitably benefiting the entire psychedelics movement beyond their respective companies. Similar to what Invisalign did for general dentists (enabling them to offer orthodontic services with limited credentials), Journey Clinical is doing for psychologists, health coaches, and talk therapists, by allowing them to offer ketamine-assisted therapy to their clients through a turnkey telehealth platform, ketamine training, and a team of in-house medical professionals— all supported by a built-for-purpose backend management system to help streamline their business. Under this approach, therapists are trained to facilitate KAP and manage post-session care after Journey’s in-house team of psychiatrists screen patients for eligibility and prescribe appropriate dosages. Similarly, Nue Life is building out a secondary B2B business model that allows primary care physicians and psychiatrists to use the Nue Life platform to co-manage their patients’ progress after completing their own intake and prescriptions.

Enterprise Technology & EHR Solutions

Companies that help practitioners optimize their workflow, prescribe medications, remain compliant, and analyze patient-reported outcomes will be critical for the industry to scale. Osmind and Homecoming Health are examples of businesses beginning to make headway in this space. B2B care coordination and adherence functionality will be especially important as younger populations begin adopting psychedelic-assisted therapy — an inevitable next step. This is because it is very common for people with learning or behavioral disabilities to also suffer from mental health issues (40.7%).

In this way, pediatric patients may be good candidates for psychedelic-assisted therapy as a way to avoid the common recourse of being prescribed multiple medications for their co-existing depression, anxiety, or other mood disorders — the norm for treatment-resistant populations. The issue of polypharmacy, or over-prescription of psychotropic medicines, is a growing problem among the pediatric population, suggesting a potential future use case for psychedelic-assisted therapy for adherence-resistant and at-risk children. More research will be needed to confirm this hypothesis, but I expect it is already underway.

Product Development

Similar to the legalization of the cannabis industry, once additional psychedelic compounds become FDA-approved, the floodgates will open for companies that wish to cash in on opportunities to bring innovative products to the masses. LOVE Pharma and Freedom Biosciences are two early-stage businesses exploring product development in this space. LOVE Pharma — a business focused on psychedelic use cases for mental and sexual health — is in talks to receive an undisclosed amount of acquisition financing through a PIPE deal after only raising $2.95m to date.

Freedom Bioscience is a clinical-stage biotechnology platform aiming to advance ketamine and psychedelic therapeutics. The company’s newly launched FREE001 compound is a ketamine treatment that’s been demonstrated in clinical trials to have even more durable effects than ketamine. A Phase 2 investigational study showed that the combination provided 14 days of antidepressant effects — 2 to 3 times longer than the usual 2–7 days of effects from ketamine alone. This extended efficacy has extremely promising implications for the treatment’s accessibility for patients who are unable to make frequent visits to a clinic. Freedom Biosciences recently closed a $10.5m seed round in August 2022, according to Pitchbook.

Key questions to be asking / Winning business characteristics

While psychedelic-assisted therapy (PAT) is ripe to disrupt the mental health industry, not all businesses are created equal. Here are some things to look out for when evaluating opportunities in this space:

Retention & Churn: As mentioned earlier, one of the best things about psychedelic-assisted therapy is that it works — almost too well. After users opt into packages of 6 or 16 treatment sessions, how likely are they to return? Businesses that sustain long-term growth will be either those that keep patients engaged in lighter-touch ways (e.g., via education, community, or pathway-focused content for mental health maintenance), or those that target an enterprise customer base who have an evergreen need for services that enable them to remain compliant, monitor patient progress, and scale their practice while improving patient outcomes.

Accessibility: For PAT to be venture scalable, it needs to be accessible to the masses. Right now, many of the most impacted populations are least able to pay for treatment, given it is still uncommon for insurance to cover psychedelic-assisted therapy beyond the initial consultation. However, there are ways around this. Therapy in a 1:1 environment with a licensed practitioner is generally reimbursable, making it more likely for people to opt-in (and pay steeper prices). In this way, companies that succeed will learn to leverage licensed clinicians to guide ketamine-assisted psychotherapy sessions (e.g., Innerwell), not coaches or glorified customer service reps, such as those offered by competing businesses (e.g., Mindbloom).

Evidence-backed practices: Platforms that are hyper-focused on administration nuances such as in-depth onboarding and screening as well as time-based dosing guidelines are key for treatment efficacy. Investors should be looking for businesses that use technology to advise clients to complete reflection sessions when their minds are still in a neuroplastic state versus any time they feel it is convenient. At the end of the day, businesses that are documenting improved outcomes and contributing data to research will be more likely to receive grant funding, ultimately lowering their institutional capital requirements and decreasing the financial risks for VCs. Cha-ching!

Clinician incentives: As these businesses scale, they’ll begin competing with the supply shortage of therapists and psychiatrists who are already in demand from other virtual mental health businesses and traditional talk therapy practices. Winning businesses in this category will find ways to give practitioners skin in the game, forge partnerships with companies in adjacent industries, offer work flexibility through gig economy/contractor models, or extend revenue-sharing proposals that incentivize clinician participation.

Conclusion

There is a growing mental health crisis in our country, and a massive population of people looking for better, faster treatment options (and who are willing to pay for them). It’s time for VCs to start backing science and turn taboo into opportunity.

This article does not reflect Swiftarc Ventures’ immediate plans to invest in this space, but was rather part of a larger research effort to better understand the landscape of mental health, which is a core thesis area.

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Jess Schram

Health & Wellness Investor @Swiftarc Ventures, formerly at 14W and Lerer Hippeau. All thoughts are my own.