Lessons the Psychedelics Industry Can Learn From the Cannabis Market Bubble
When the cannabis industry experienced a significant downturn in Q4 of 2019, many observers noted important lessons that emerging companies in the psychedelics space could learn from the upheaval in the cannabis market.
During the cannabis business bubble that began around 2015, licensing obstacles and limited business models often delayed the path to sustainable revenue for companies. Many early cannabis companies, particularly in Canada where medical cannabis was first legalized at the federal level, chose to focus on the development and distribution of novel pharmaceutical products.
These cannabis business models typically required specialized equipment, extensive testing and approval processes, and buy-in from physicians and the medical community at large. Other companies, especially in the United States where individual states began rapidly legalizing cannabis for adult use, opted to pursue a more commercial approach to the burgeoning industry by prioritizing product branding, retail experiences, and supply chains that could service an entire state’s 21+ population.
Some companies chose to focus on ancillary (also known as “non-plant-touching”) business models to service both medical and adult-use operators. In medical markets, there was an influx of “cannabis clinics” where practitioners specialized in the evaluation and treatment of patients with cannabinoid therapies. Many of these clinic chains built out expensive clinics resembling luxury medical spas, and later cashed out by selling their business along with their patient and client lists.
Ancillary companies also included specialty packaging manufacturers, equipment suppliers, e-commerce sites, and other cannabis-specific technologies. Over the past seven years, there has been an explosion of business and product innovation within the cannabis industry. Some of the same trends appear to be evolving in the nascent psychedelics space.
In addition to the regulatory challenges, companies in both the cannabis and psychedelics industry face significant competition from long-established unregulated markets. While 18 states plus Washington D.C. have legalized cannabis for adult-use, many cannabis companies either overestimated the scope of these adult use markets or underestimated the unregulated market’s ability to maintain its market share, from which it had no prior competition.
Unregulated cannabis suppliers, along with their sophisticated distribution networks and loyal customer base, continue to thrive alongside providers in states that have decriminalized cannabis and built systems for the distribution of medical cannabis. They benefit from not having to pay for expensive licensing, packaging, and testing regulations that legal operators must abide by.
These issues permeated the nascent cannabis sector in a way that detrimentally impacted many companies and investors alike, once the bubble burst. Let’s look at how some of these issues might impact companies entering the market for psychedelic assisted therapies.
The Challenges of Drug Development
Some companies pursuing therapeutic drug development in the cannabis space made it through one or two phases of clinical trials and then were acquired by larger pharma companies that have more resources to market plant distillations or synthetic-cannabis-based drugs.
One example is GW Pharmaceuticals, which was acquired by Jazz Pharmaceuticals. Some observers believe that companies like Tryp Therapeutics are following GW’s model of focusing early on rigorous research and clinical trials. Following this playbook, Tryp Therapeutics could be setting themselves up to eventually be acquired.
“In order to be successful, these companies should be very well funded and there are very few psychedelics companies that are publicly traded that are well funded enough to get through at least the first two stages of FDA trials,” says Jeff Siegel, managing partner of the JLS Fund, an early stage plant medicine venture fund.
Siegel made this observation during a panel discussion hosted by Lucid News at the Psyched Conference that took place in July, 2021. The panel, “What Lessons Can the Psychedelics Industry and Activists Learn From Cannabis?,” brought journalists and analysts, including this reporter, together to address the similarities and differences between the cannabis and psychedelics markets.
Companies with clinic networks that generate revenue in the psychedelic space must hire therapists which increases operating expenses. “The margins are pretty tight,” says Siegel. “Access to capital is imperative and not just a small amount. In order to take these molecules through FDA trials, it is extremely expensive now.”
Some analysts and industry insiders, including Siegel, believe that some cannabis companies were overvalued, especially those launched in Canada. Extensive publicity and extravagant promotion of an emerging industry, led to the sharp rise and steeper fall of many early cannabis companies such as Canopy Growth.
The hyper-inflated valuations of 2017 and 2018 cannabis companies, propped up by legalization trends and future performance estimates rather than actual business fundamentals, were cited by analysts who pointed to devaluation of these stocks. Some psychedelic companies could be overvalued in the same way by investors and stock promoters.
Are companies like Compass Pathways and MindMed, while current industry frontrunners, presently overvalued because they are underestimating competition and regulatory hurdles in their path to revenue? Do these companies have enough runway to generate revenue if they must wait years for clinical trial results before achieving broadspan distribution? Will funds be squandered or run out before achieving profitability, as they did with some cannabis companies, such as gen!us?
Companies can burn through cash and investors without carefully crafted business plans that ideally provide opportunities for revenue while research is in progress.
Learning From IP Challenges
Some of the lessons surrounding intellectual property that emerged in the cannabis industry are also applicable to the psychedelic sector. Because naturally-occurring molecules cannot be patented, GW Pharmaceuticals focused instead on the delivery system through a patented cannabis-based spray called Sativex.
Companies developing psychedelic therapies are encountering these same issues with unpatentable substances. Cybin is focusing on novel delivery systems for psilocybin, such as a sublingual strip manufactured by IntelGenX. Other companies are developing proprietary molecules derived from psychedelic compounds, such as the COMP360 molecule that Compass is bringing through a phase IIb psilocybin therapy clinical trial for treatment resistant depression. If approved by the FDA, these therapy treatment protocols could be patented and then licensed for broader use.
Bringing therapies through clinical trails is costly and time-consuming. Companies developing psychedelic-assisted therapies, such as MindMed, are also acquiring the intellectual property of other companies in order to grow their business. This approach gives them a unique story to sell to capital markets to differentiate themselves and raise the funds needed to acquire more IP.
As with cannabis, much of the technology used in drug development or delivery is already developed and adapted from other industries. Are companies creating psychedelic therapies developing or acquiring IP just to tell a better story to investors, who appear to be rewarding this strategy? Some companies that have intellectual property as a fundamental part of their business strategy are finding that they must defend that IP, which can be under significant public and investor scrutiny.
Siegel says he foresees challenges for companies, such as Compass Pathways, that attempt to patent widely used therapeutic methods such as soft furniture, muted colors and a high-resolution sound system. He predicts that companies that use these strategies will encounter some roadblocks, particularly as the market further develops. “As more and more people become aware of what they’re doing, there is going to be a lot of pushback,” says Siegel.
Compass has declined to comment about their IP strategy, but states on its website that patenting their formulation of psilocybin as its intellectual property secures the funding needed to make emerging therapies widely available.
“Without IP,” reads the Compass website, “there would be little incentive to take the risk to fund the research and development of new products, given the large number of drug candidates that fail during the development process.”
While there has already been resistance against IP strategies that focus on the development of patents that may limit competitors, some companies in the psychedelic space may put themselves at a strategic disadvantage by avoiding the acquisition of IP that could increase their value in a competitive market.
“For instance, you may have a smaller player that perhaps is not funded well enough to get through two years of clinical trials, but it has spectacular IP. If it can develop its IP to a certain point, it would be a viable acquisition target,” says Siegel.
Taran Grey, a Director of Intellectual Property and Grants for several Vancouver-based technology firms says that investors often view IP as an asset.
“When I’m hired to do due diligence on a tech start-up, the existence of patent applications tells me that the company genuinely values innovation. Management chose to spend their precious few dollars to enact proper lab book procedure, to ensure documentation best practices, and to foot the legal bill,” says Grey who notes that it’s costly for patent holders to challenge infringement.
“It costs half a million dollars to assert patent infringement and three times that if there’s a counterclaim. For a start-up, a patent portfolio is a virtue signal to sophisticated investors and prevents deep pockets from preventing the startup from doing business.”
Flawed Hiring Strategies
As large cannabis companies secured significant funding throughout 2017 and 2018, they were encouraged by continued legalization efforts to scale up quickly, enter new markets, and hire more employees. A large number of these hires were let go by 2020 when the downturn hit.
During this market bubble, some cannabis companies also appeared to focus on increasing the number of their employees, not the quality of their staff. Some believe that cannabis business “experts” were overpaid, corporate promotion took precedence over solid management, too many people were hired, and that some companies were staffed by specialized cannabis staffing agencies that charged exorbitant recruitment fees.
“Management teams are priority number one. Without a solid management team in place you have nothing,” says Siegel.
Some believe genuine talent and legacy growers in the cannabis industry are often overlooked for not having a corporate resume, or perhaps had “criminal” records for low level, non-violent cannabis crimes. Many of these records were retroactively expunged with the advent of legalization.
Cannabis cultivators with decades of experience in the pre-nascent industry were passed over for cultivation jobs in favor of scientists with more experience in large-scale corporate agriculture. Comparisons between hiring strategies between companies in the psychedelic space and these businesses is less direct because cultivating cannabis is highly specialized and different from traditional agricultural products or psychedelic substances such as psilocybin mushrooms.
While Curaleaf, arguably one of the most successful cannabis companies today, welcomed growers with legacy cultivation experience, other cannabis companies focused resources on recruiting executives with impressive corporate resumes but little to no practical cannabis knowledge, often to their detriment. This modus operandi caused operational inefficiencies, wasted resources on the high-paid executives’ industry learning curves, and expedited layoffs once the bubble burst.
“In cannabis, we’ve seen an unhealthy relationship with profit and investment that has created consolidation of the market, perverse incentives, and is slowly driving the lovers and believers out of the game only to be replaced by traditional business fundamentals of ‘scale,’ ‘ROI,’ and ‘exit strategies,’” opines Nicole Howell in Double Blind. “Legacy operators are increasingly replaced with multistate operators, traditional venture capitalists, and Canadian public company management or ownership.”
Are these same mistakes being made now by companies in the psychedelic space or will new business models emerge?
“For psychedelics, we have a chance to do this better,” writes Howell. “Through psychedelics, we are given clear direction toward a system that is less ego-driven and individualistic. Must we choose only between status-quo free market capitalism and nonprofit? Maybe these are not the only options. But first, we have to get weird. And if nothing else, that’s what psychedelics are here to help us do.”
Some companies are choosing to focus on building their management team’s understanding that the founders of a startup might not always be the right CEO to take the company through a rapid and sustained growth phase – as was the case with some cannabis companies, where there was a high degree of executive turnover as businesses expanded.
Psychedelic biotech companies such as MindMed and Cybin have already replaced their founding CEOs, a move that signals these companies understand that different leadership skills and talent will be necessary as a business continues to evolve.
Compared to the cannabis industry, psychedelic companies currently require less labor and staffing while a majority of products are still in the conceptual and R&D stages. As regulations change and psychedelic products become more commercially available, it is likely that companies will need to increase their personnel count at production, packaging, and distribution facilities rather than inside the research and development lab.
Have psychedelic companies learned the hiring lessons encountered by cannabis companies to onboard more slowly and avoid hiring surges? While the industry may require more educated and trained staff, some may also encounter challenges due to little or no formal training for the science and other skills needed – such as therapists who must be trained to provide proprietary treatments.
As many states transitioned from medical to adult use cannabis laws, many cannabis companies may have miscalculated the impact of state-level decriminalization initiatives and continued impact from the illicit cannabis markets. Additionally, the lack of interstate commerce makes consistent quality control an issue for brands, as local terroir impacts cannabis cultivars and fragmented supply chains limit true scalability.
Are companies seeking FDA-approved psychedelic therapies underestimating the impact of state and local psychedelic decriminalization initiatives on their potential markets?
A handful of psychedelic companies including Field Trip, Cybin, and privately held Wake Network have laboratories and facilities in Jamaica where psychedelics are not scheduled or currently regulated. These companies may be better prepared to compete in environments where psychedelics are decriminalized because they are already operating in unregulated markets.
Research into both cannabis and psychedelics has historically been blocked because both types of substances were scheduled and criminalized by the U.S. federal government. Some nonprofits and for profit companies are advocating and working together with Drug Policy Alliance and other advocacy groups for drug law reform, and to help fund research centers that are developing clinical trials.
Do for-profit developers of psychedelic therapies see psychedelic decriminalization initiatives as a threat to their potential market share? Will companies developing psilocybin therapies try to undermine Oregon Measures 109 and 110 passed in 2020 that support the decriminalization of psilocybin-assisted therapies? These measures will likely increase competition by reducing the criminal impact of psilocybin distribution.
Advocates for psychedelic decriminalization are focusing on multiple levels of government, a lesson they likely learned from watching efforts to reform cannabis laws. Initiatives for FDA-approval for MDMA-assisted therapy for PTSD have been led by the Multidisciplinary Association for Psychedelic Studies. In parallel, the Usona Institute has helped lead the push for FDA-approval for psilocybin-assisted therapy for depression and other mental health conditions.
To support its own FDA clinical trials, Cybin recently added Dr. Thomas Laughren to their Clinical Advisory Board. Laughren formerly served as the Director for the Division of Psychiatry Products, Center for Drug Evaluation and Research at the FDA for nearly 30 years.
According to Jeff Siegel of the JLS Fund, it’s easy to compare cannabis and psychedelics because they are both currently federally prohibited substances. But the two markets have a very different relationship to the FDA. Siegel notes that regulation of medical cannabis was always in defiance of the FDA. Regardless of the 18 states that legalized adult-use cannabis and the 37 states that have legalized medical cannabis, the FDA still disapproves of the plant with the exception of the limited approval of only one CBD product: Epidiolex cannabidiol, which is used to treat epilepsy and Dravet’s Syndrome.
“Whereas, if you look at the psychedelic space the industry is actually working alongside the FDA,” Siegel points out.
The FDA has given fast track approval to a number of companies that are researching psychedelic molecules, as opposed to the FDA’s approach to the cannabis sector, where the industry focus has largely shifted away from medical drug development of cannabinoid-based therapies to the commercialization of cannabis for adult use.
In the psychedelic sector, it is “more of biotech play,” Siegel says. “If you’re looking at companies that are going through the same procedures, it is biotech companies that are doing FDA trials and raising a ton of money in order to get through the FDA trials. Companies in the psychedelic space are in it for the long haul, because these medicines don’t exist yet.”
Those seeking to change laws governing psychedelics are also making an effort to normalize the use of these substances, another lesson that may have been taken from the cannabis reform playbook. There has been an influx in media campaigns highlighting psychedelic allies such as veterans, drug treatment specialists and medical professionals. There is also an increase in psychedelic use being normalized through spiritual retreats, group functions, and even vacation packages at luxury resorts.
Since both cannabis and psychedelics are heavily regulated, some believe that companies developing psychedelic therapies are focused on building brand identity and long term consumer trust rather than focusing exclusively on earning quick returns. Psychedelic biopharma and biotech companies appear to be playing the long game to develop viable medicines. Wake Network, for example, is assisting in creating a regulatory framework in Jamaica for psilocybin, according to Wake CEO Nick Murray.
New Legislation Seeks More Equality
Some companies, activists and researchers in the psychedelic space also seem to have learned lessons about equal access from campaigns for the reform of cannabis laws. Legislation surrounding psychedelics is beginning to include language about more equitable access to psychedelic treatments, support for small entities, and reducing the drug crime incarceration rate for people of color.
Unregulated cannabis growers, illicit dispensary owners and long-suffering craft cultivators complain about complying with regulatory structures that make it difficult to compete against Big Ag cannabis cultivators that focus on low-cost production at a massive scale. Some believe that companies who treat cultivating cannabis like growing tomatoes are racing to the bottom by creating rock bottom prices per pound and reducing if not outright prohibiting opportunities for women and people of color.
Critics of the corporatization of psychedelics, such as the former Director of National Organization to Reform Marijuana Laws (NORML) Canada and NORML Women’s Alliance, advocate and author Kelly Coulter, feel that psychedelics are being “colonized,” as white men in suits separate such substances from their Indigenous origins and “whitewash the narrative” surrounding the ceremonial use of psychedelics for millennia.
Some companies developing psychedelic therapies are attempting to address inequalities by including members of Indigenous cultures and people of color on their boards of directors or in the equity strategies. Journey Colab is one company following this approach with the help of funders. Also of note is Aphrodite, a woman of color-founded and female-focused psychedelic health company.
Allan Steiner, a Lucid News reporter who participated in the Psyched Conference panel, has been covering the proposed California psychedelic decriminalization bill SB 519. He says that supporters of this measure are trying to learn from cannabis legislation and create broader access to decriminalized psychedelic therapies through state laws and local regulatory strategies, like those used to decriminalize psychedelic plants and fungi in Oakland, California.
Steiner notes that many smaller cannabis producers find themselves encountering challenging license and regulatory requirements in the transition from unregulated to regulated cannabis markets. Some believe that the cannabis regulatory structures favor larger and better capitalized operations instead of small producers.
“There’s a lot of people who are paying attention to this issue and trying to make sure that some of the mistakes that have been made around cannabis are not going to happen with psychedelics,” says Steiner who notes that there are inherent challenges associated with starting a “semi-legal” business. “There’s going to be additional costs that I think are going to make things challenging for small producers in general.”
Siegel also warns of the significant costs for producers entering a regulated market for both cannabis and psychedelic therapies and “understanding local policy barriers.”
“As risk decreases, the cost of entry is going to increase because there are going to be more people entering the market,” Siegel says.
Steiner notes that many smaller cannabis producers find themselves encountering challenges with licensing and regulatory requirements in the transition from illicit to regulated cannabis markets, such as jockeying for dispensary shelf space. Some believe that the cannabis regulatory structures favor larger and better capitalized operations instead of small producers.
“It’s not just that regulations themselves make things challenging for small producers. It’s the barriers that are created by regulations and have a lot of unintended consequences that end up leading to situations where small producers are often left out,” says Steiner. He notes that some who seek to reform drug laws are now focusing on considering both proposed regulations and their potential unintended consequences.
“That is a challenge that we’re going to continue to see in psychedelics,” continues Steiner. “It’s going to take a lot of people standing up and supporting initiatives that they believe in, and really putting time and effort behind those two to change that convoluted narrative.”
Image: Nicki Adams