Compass Pathways: Navigating Mental Health Pathways, all the way to the NASDAQ

Compass Pathways (CMPS) is going public. If you’ve been watching the field for a few years, it’s hard to say it comes as a surprise. Since its arrival on the scene in 2015, years ahead of its competitors, all signs point to Compass being the largest and most influential company in the psychedelic domain.

Aside from perhaps Palantir—which, oddly enough, has ties to Compass—this may be one of the most exciting IPOs of 2020. Founders George Goldsmith and Ekaterina Malievskaia M.D., M.Sc. are heading to the NASDAQ with the goal of a $100 million raise during the week of September 14, 2020. They stress that the amount is only an estimate. Commentators have speculations ranging from a bust to “the first billion-dollar psychedelics company.”

This is our attempt to separate the myths from reality. Here are Compass’s key advantages and challenges as they approach the public market.

Compass is much more than the simple IP plays and visionary rhetoric that have emboldened the ‘first-movers’ to go public so far. Compass has depth and expertise that remains unmatched by any company thus far in the psychedelic space.

They also have recognition from the FDA in the form of a “breakthrough therapy” for psilocybin, one of only two in the USA. This regulatory paradigm is “designed to expedite the development and review of drugs that are intended to treat a serious condition”, with Treatment-Resistant Depression (TRD) as Compass’s focus.

This is potentially a huge market. Globally, 320 million people suffer from Major Depressive Disorder, and the economic burden of associated costs in the United States alone is estimated to be over $200 billion. Patients with TRD are more likely to be unable to work and to be collecting welfare or disability benefits; direct medical costs are also estimated to be two to three times higher than those of other major depressive disorders.

However, Compass Pathways has a weakness: non-profits, and the psychedelic community at large. Skeptics have an axe to grind, and open-science proponents continue to undermine any unique IP that Compass might have boasted.

Starting in 2015, Compass operated as a US/UK non-profit to “support a pragmatic research project into psilocybin for psychological distress in hospice” and set out to train psychedelic therapists on the use of psilocybin. The company encountered a problem when they discovered no suitable source for the compound. This spurred their foray into creating a supply of cGMP (current Good Manufacturing Practices, colloquially “pharmaceutical-grade”) psilocybin for their study’s needs.

Before the training of therapists could begin, Compass shifted their entire focus to the manufacture of pharmaceutical-grade psilocybin. In 2016, Compass made the swap to a for-profit entity, with the following reasoning provided by Malievskaia in a 2018 article:

“[We sought] legal advice to establish a drug manufacturing company eligible for tax credits under a UK government program that helps underwrite the cost of medicine research and development. That option, as well as other government incentives, is not available for non-profits. We formed that company, COMPASS Pathways Technologies Ltd in June 2016″

Psilocybin is not a novel compound, nor is it patentable. However, methods for synthesis of scalable, cGMP compounds—’natural’ or otherwise—most certainly are.

For those of you that are watching—or riding—the psychedelic wave, you might have noticed that the simple mention of patents stokes the community into a fevered discourse. But, fears of a ‘mushroom monopoly’ became stunningly overstated, as patent information was eventually released.

Unfortunately, the initial impression and approach lingers in public opinion, made even harder to swallow by Compass’s early commitment to open-science and collaboration. At the 2016 Interdisciplinary Conference for Psychedelic Research, Goldsmith spoke on open science, sharing data, and strong partnerships forming the pillars of the psychedelic community. Ten days before announcing their conversion from non-profit to for-profit, he said:

“We owe this to patients and we owe this to each other to look at how to do this…We formed a not-for-profit medical research organization to help out with some of these items.”

In January 2020, Compass was granted a US patent for their proprietary formulation of synthetic psilocybin: COMP360. This adds to three others in their portfolio (1 in Germany and 2 in the UK), along with more than 20 other pending applications around the globe. Already, they are being challenged on their US patent by the law firm Kohn & Associates.

Reports indicate that this attempt was largely funded two paragons of the non-profit psychedelic science research community – Carey Turnbull, a board member of Usona Institute (see below), and the Heffter Research Institute. The challenge on COMP360 has since been dismissed, but the effort may not be the last we see in an attempt to stifle Compass’s ambitions.

Ultimately, the patent IP that Compass holds is extremely limited in its scope: a specific crystalline form of psilocybin, extracted and prepared in a specific way (their proprietary COMP360 formulation), and provided in a specified therapeutic manner. Also, the patent covers only therapies related to treatment-resistant depression.

As mentioned, Compass is not a simple IP play. If anything, the highly specific patent is nearly insignificant in discouraging competition. Their true value, as we see it, comes from a multi-pronged and robust business plan that hits nearly every vertical in the nascent psychedelic domain.

At every level, from the executive, through advisory boards, to those who will become primary equity holders—Compass has stacked the human capital deck by onboarding the biggest and brightest minds.

Not only does Compass Pathways boast an all-star cast of players, but they also bring along their connections as well. An example includes both Angermayer and Thiel, joined by Mike Novogratz, in the form of Bionomics (BNO). The company recently raised $22 million in new capital and aims to focus on novel drug discovery for PTSD.

With everything primed for a successful IPO and future, there seems to be little standing in the way of innovation and growth in the domain of psychedelic science. In reality, the true challenge for Compass lies in the domain itself. 

Investors must keep in mind that this is a clinical-stage biotechnology company. COMPASS Pathways is not profitable and will remain so for a very long time. So far, they have piled up a deficit of more than $64 million. 

While they had about $67 million cash in hand at the end of June and expect to take in at least $100 million for the offering, they will burn cash pretty quickly as they continue to spend heavily on research and development. Clinical trials are very expensive, and the current trial is not the last one they will have to conduct.

For context, Compass closed an $80 million raise at the end of April 2020, with sources indicating that was based on a valuation north of $600 million. It is highly likely that the company will have to come back to the markets to obtain additional financing at some point in the future. If they choose to issue more equity, the sale of additional stock may be dilutive to the holdings of those who buy the IPO.

Finally, there is always the possibility that these clinical trials simply do not indicate the level of success the FDA needs to see, and the drug is not approved for sale in the United States. Only a very small percentage of new drug applications gain final approval. Although the early results and current research is extraordinarily hopeful, hence the “breakthrough therapy” designation, there is always a risk of non-approval.

The foundation of open-science on which their non-profit was initially built may come back to bite their for-profit business model.

From their SEC filing:

“We face substantial competition and our competitors may discover, develop or commercialize therapies before or more successfully than us, which may result in the reduction or elimination of our commercial opportunities. The pharmaceutical and psychedelic industry is intensely competitive and subject to rapid and significant technological change. 

Our competitors include multinational pharmaceutical companies, universities and other research institutions. We also face competition from 501(c)(3) non-profit medical research organizations, including the Usona Institute. Such non-profits may be willing to provide psilocybin-based products at cost or for free, undermining our potential market for COMP360.”

A specific mention of Usona Institute is telling, but not surprising. The non-profit organization is largely matching the path taken by Compass at every step of the way and has risen to the position of the direct competitor.

They too have a “breakthrough therapy” designation from the FDA, but for the wider-ranging application of major depressive disorder. Usona is also developing scalable, cGMP production methods, but publishing all findings and encouraging the use of their protocols. They are competing in the supply chain, providing their psilocybin at-cost or free when possible. Ultimately, they have the capacity and intention to undermine Compass’s pursuit of profits.

Compass has a multitude of varied strengths, with some scattered weaknesses that have the capacity to hinder the growth they strive for. Nonetheless, the company is already a giant fish in a small, but growing, pond. Compass has all the components they need to become a behemoth of psychedelic innovation, with signs of early diversification that underscores the need for flexibility in this evolving domain.