Psychedelic IPOs build momentum as Atai Life Sciences goes public

Making its Wall Street debut, Peter Thiel-backed Atai Life Sciences has become the third biotech company focused on psychedelic treatment for mental health disorders to list on a major US stock exchange.

Coming on the heels of debuts by MindMed and Compass Pathways, the Atai deal underscores continuing investor interest and growing acceptance of what until recently was seen as a fringe area of medicine.

On Thursday evening, Berlin-based Atai priced its shares at the top of the target range at $15, raising $225 million. Based on the number of shares outstanding, the deal values the company at about $2.3 billion. Private investors valued Atai at $2 billion in a deal in March.

Psychedelic drugs that are being developed for clinical use include those on the federal list of illegal substances such as LSD, psilocybin—the active ingredient in magic mushrooms—and MDMA, also known by its recreational name ecstasy or Molly.

Clinical research suggests that psychedelics could be effective in treating conditions including cluster migraines, severe post-traumatic stress disorder, depression and end-of-life anxiety.

Investors are hopeful that FDA approval of these compounds could revolutionize mental health treatments, leading to the creation of a large industry consisting of not only drug discovery companies but also treatment clinics and ancillary software platforms.

“Psychedelics for mental health could be what anesthetics were to surgery 100 years ago," said Eric Scott, who until recently was a principal with Founders Fund and is currently a senior adviser at 8VC. Founders Fund backed Compass Pathways.

Some investors believe that these compounds can eventually help treat other medical conditions, including strokes. 

But first, in addition to regulatory hurdles, psychedelic companies have to hone in on a business model that is not a big time commitment for physicians and ensure that health plans would cover the cost of the treatment.

These treatments typically are administered in a controlled setting and overseen by a medical professional—a tall order amid a severe shortage of psychiatrists in the US.

"Currently, a full dose of these compounds is a very intense, multi-hour experience," said Michael Hoyos, co-founding partner at The Conscious Fund, a psychedelic-focused venture firm that invested in Atai.

As for reimbursements by health plans, Scott said that there is a strong case for it amid increased adoption of value-based care, a concept that links payout rates to quality of care and patient outcomes.  

Since mental health conditions often occur simultaneously with other diseases, treating mood disorders could lessen the severity of the other illnesses, Scott said.

In the meantime, basic infrastructure serving the psychedelic industry is starting to pop up.

Mindbloom, a startup providing medically supervised psychedelic therapy in its New York clinic or via telemedicine, reportedly raised an undisclosed amount of Series A funding in 2019 from investors including Founders Fund and 8VC.

Osmind, a health data and analytics platform for mental health providers offering psychedelic treatments, launched out of Y Combinator last summer and a few months later picked up $2 million in seed funding led by General Catalyst.

For the time being, these infrastructure and drug-delivery startups work with ketamine, the only psychedelic medicine that can currently be prescribed in the US. But their addressable market—and their competition—could grow if the FDA approves other psychedelic substances.

Despite the uptick in activity, traditional healthcare VCs are shying away from psychedelics.

Biotech investors haven't gotten involved in part because their expertise is backing new molecules, and most psychedelic substances undergoing trials now are naturally occurring, Scott said. 

"The next generation of psychedelic medicine will likely be novel compounds that are derivatives of psychedelic compounds found in nature," he said. "These will likely be far easier for life sciences funds to wrap their minds around."

Recent IPOs and impressive results from a Phase III clinical trial of MDMA are expected to create tailwinds for the sector.

"The negative effects of mental health disorders in our society are so high," Scott said. "We don't need to capture a big percent of the market to create massive value."

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