Hi friends,
I didn’t know much about the psychedelics market.
In January, I wrote a deep-dive on psychedelic treatments in mental health with Valentine Assal.
In that article, I wanted to provide an objective assessment of psychedelic treatments and the role they might play in mental health.
The takeaway?
While psychedelics still have a few hurdles to overcome, we should be paying close attention to their ability to treat mental disorders.
The science clearly suggests significant therapeutic potential.
But what does the market landscape look like for this category of treatments?
Well here are a few facts - just on the ketamine market - that you should be aware of;
Spravato (Eskatmine) made over $1 billion in revenue for Johnson & Johnson last year
As of April 2024, there were over 1,200 IV ketamine clinics in the US
One at-home, low-dose ketamine clinic is reportedly doing over $30m a year in revenue
While ketamine treatment is its own interesting market for reasons we’ll get into later - and is not technically considered a psychedelic - the evidence is clear...
This market already exists.
And there’s a good chance it’s about to get a lot bigger.
Seven different drugs, from LSD to MDMA to Psilocybin, are in Phase 3 trials. There are dozens more in Phase 2 and Phase 1.
In Australia, two of these drugs have already been approved for the treatment of mental disorders and are even getting funded by private insurers.
A map of psychedelic drug development stages by Psychedelic Alpha.
I thought it would be fun to try to understand this market, the forces shaping it and how it might develop in the coming years.
So I teamed up with Valentine again to dive into it.
It doesn’t matter what kind of mental health business you run, I think you’ll benefit from understanding how this space is developing.
Let’s get into it.
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Psychedelics: A pharma market with a twist (or two)
When I was first trying to understand this market, I wasn’t sure what to compare it to. But the answer is actually pretty obvious. It’s a pharma market.
Well, a pharma market with a twist.
The primary “job to be done” in this industry is to develop new drugs that treat mental disorders and get them to market.
So, to understand the fundamentals of the psychedelics market and the commercial opportunities within it, we need to make sure we understand how pharma works. Then we’ll look at how this industry is different to traditional pharma due to some interesting quirks of psychedelics.
Let’s do a quick recap of how the pharma industry works.
Understanding Pharma
The pharma market has a simple playbook.
First, companies spend millions developing a new drug for a specific disease. To get it approved, they must run expensive clinical trials, each with a real risk of failure. If the drug fails, all the money is lost.
But if it succeeds, the company gets exclusive rights to sell it. This exclusivity is the important point - it gives them pricing power and the chance to generate massive revenue. Enough to offset the high risk and cost of developing drugs in the first place - 2020 study put the median cost of bringing a drug to market at $985M.
As an example, Johnson & Johnson has the exclusive right to sell esketamine in the US. They charge $600 - $800 per dose, with a typical treatment including eleven dosing sessions. This should help you understand how they get to that billion-dollar annual revenue figure pretty quickly…
Getting exclusivity for your drug is therefore a very important part of the investment case. But that isn’t straightforward in psychedelics and that’s important.
So how do you get exclusivity? There are two ways.
1. Intellectual property protection
The primary way to get exclusivity is to get your drug patented. A US patent would, for example, exclude others from “…making, using, offering for sale or selling the invention throughout the US or importing the invention into the US” for a limited time - usually around 20 years.
Once this countdown ends, anyone can now make the drug (these are called generics) and with all this new competition, the price drops.
2. Regulatory exclusivity
To sell any drug, it has to be approved by the regulating authority.
But these regulators (like the FDA) can also offer some specific exclusivity to drug developers. This is important in psychedelics because many of the drugs may not be able to get patents - we’ll discuss why soon.
If you get regulatory exclusivity, it’s an exclusive marketing right - within a guaranteed period, no other manufacturer can be approved for generic versions of your drug for that indication.
This is different to patents, which protect the intellectual property relating to the drug but don’t protect its specific use cases.
To get regulatory exclusivity, drug developers need to meet specific statutory requirements. Two primary examples include;
Orphan drug exclusivity (ODE): For drugs approved to treat conditions affecting fewer than 200,000 in the U.S.
New Chemical Exclusivity (NCE): For drugs that contain an active moiety (the responsible part of the molecule for its pharmacological action) that has NOT been previously approved by the FDA - essentially a genuinely new drug.
So what’s the story for psychedelics? It’s likely that psychedelic drug developers could be granted NCE - J&J were granted it in 2019 for Spravato - and it’s a path to exclusivity some companies are betting on.
OK great, pharma 101 is now over!
Now let’s talk about how psychedelics are different to standard pharmaceuticals, and what it means for the shape of the market.
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Twist #1: Patent challenges
Psychedelics companies have a major challenge… getting a patent for a psychedelic drug is hard. Many of the compounds are simply not patentable. This is for two reasons:
Many of the compounds occur naturally (e.g., Psilocybin, DMT/5-MeO-DMT)
Many of the compounds were developed a long time ago and the patent has already expired (e.g., MDMA, LSD).
So psychedelics have this major question to answer…
How can they make the investment to bring a drug to the market if they won’t have a patent (and the related exclusivity) for that drug if it succeeds?
But that’s not the only twist in the tale of this psychedelics market…
Twist #2: Infrastructure requirements
Most drugs are simple to integrate into the healthcare system. Your doctor prescribes them, you pick them up from the pharmacy, you take them at home each day, and you go on with your life.
That is not the case for psychedelics and it has significant implications for the market landscape.
Some psychedelic therapies induce significant trips, often for several hours. These kinds of treatments require a lot of labour, physical infrastructure and other clinical and technological support.
For example, a single dosing session might require a supervising psychiatrist, a nurse as well as two trained therapists to sit with the patient in a specifically designed room for several hours.
For psychedelic treatment to be delivered at scale, a significant amount of new infrastructure and capabilities need to be developed. They can’t just slot into the existing system.
This presents a challenge for the psychedelic drug development companies, but also an opportunity for other businesses that want to play in this space.
Treatment complexity determines the level of required infrastructure
There’s a lot of variability in the complexity of the treatments being developed by each company.
Treatment complexity is determined by five different factors;
The duration of action of the drug
The method of administration (e.g., IV vs Inhaled)
The level of psychotherapy or psychological support included
To what degree the drug is a hallucinogen
The labour and supervision required for the treatment protocol
The more complex the treatment, the more infrastructure required for its delivery.
This level of required infrastructure, in turn, defines the strategies that different businesses are pursuing in order to get their drug to market - we’ll discuss these strategies in more detail later.
OK, so what do we know so far?
Psychedelics is mainly a drug development market
Patenting and infrastructure requirements create challenges (and some opportunities)
The level of required infrastructure is determined by the complexity of the treatment
Market layers
Now that we understand some of the fundamentals and quirks of this market, how should we think about how the market might develop and the different strategies that are being pursued?
One way to think about a market is to assess the different “jobs to be done” by that market.
So, if we assume psychedelics become widely approved and used as mental health treatments, what jobs will the industry need to “do”?
Develop the drugs: ensure the molecules themselves work and are approved.
First comes the drug. While there are several drugs in the regulatory pipeline, there are not yet any psychedelic drugs that are approved by the FDA (excluding esketamine). This is where most of the funding and companies are focused.Develop the therapy models and treatment protocols
Most psychedelic treatment combines their drug with some form of psychological support or psychotherapy protocol. So far, this combination has been seen to be central to their efficacy. Companies, therefore, need to design what this treatment protocol looks like - how much psychological support is provided, in what format, in what setting, etc.This has big implications for regulatory approval. The FDA struggles with the inclusion of therapy in a treatment. It’s not something they’re accustomed to making judgments on, and they seem not to like the level of variability that could exist with psychotherapy.
Companies are taking different approaches to this area of the market. Some are leaning into the role of psychotherapy in the treatment, others are trying to reduce it or remove it entirely.
If a company can demonstrate that its drug works without any psychological support, that would make the regulatory process easier and also reduce some of the infrastructure requirements.
This all raises important philosophical questions about the nature of healing and mental illness that are yet to be answered. Do psychedelics work as an amplifier to the healing that primarily takes place in therapy, or can healing occur through their biochemical effects alone? I’ve spoken to a few experts on this, and the consensus is that we just don’t have enough data to know yet.
Develop and run the clinic infrastructure
So even if we get drugs approved and associated treatment protocols, we’re still going to need to build the infrastructure that allows these treatments to be delivered.These clinics will need to satisfy regulatory requirements as well as organise all the appropriate staff for the in-person care delivery processes. This is far from trivial. When I spoke to folks in Australia about this, they noted how hard it is just to coordinate the staff required to deliver treatment.
The businesses that run the clinics will also be responsible for distribution. They’ll take a lot of the responsibility for building awareness of these treatments and acquiring patients. As we’ve seen in the teletherapy and digital mental health space, this is not a trivial task.
Train and certify the therapists and facilitators
Once therapy models and treatment protocols are developed, therapists, psychiatrists and other facilitators will need to be trained to deliver the treatment.Develop all the additional infrastructure required to support this ecosystem
Beyond the physical clinics and trained staff, we will likely need some bespoke infrastructure (software, data tools, etc.) to support these clinics and treatments operating at scale.
The three business models in psychedelics
We understand the fundamental forces in this market and what needs to be built. But how are companies thinking about the role they want to play in this space, and where is the opportunity? We see three primary strategies being pursued;
Pure-Play Drug Developers: Just make the drugs, e.g., Johnson & Johnson, COMPASS, Lykos Therapeutics
Clinics and Distribution: Own the clinic infrastructure and distribution, e.g. Hope Therapeutics, Ember, etc.
Infrastructure only: “make the shovels”, the software, training, and certification that will be required by all other players, e.g., Journey Clinical
1. Pure-Play Proprietary Drug Development (e.g., Johnson & Johnson)
This is the strategy pursued by most of the big names in psychedelics - folks like COMPASS, Cybin, Beckly Psytech and Lykos Therapeutics. They’re focused on making a drug, getting it approved and selling it.
There are two dimensions on which their strategies diverge, however;
How much complexity they are trying to remove from the treatment
How much they are investing in building infrastructure to deliver their treatment.
Let’s look at a few examples;
Johnson & Johnson with Spravato
Here’s how I’d summarise J&J’s strategy with Spravato - their ketamine-derived nasal spray for treatment-resistant depression…
Take moderate action to reduce the complexity of the drug and rely on the existing medical infrastructure to deliver it.
They didn’t meddle much with the actual complexity of the drug but tweaked it to improve its safety profile. For example, rather than relying on IV administration, it can be self-administered via a nasal spray.
Patients need to visit an approved clinic with the space and staff required for the two-hour monitoring period for each dosing session. While there is no trip, it still keeps the overall complexity (and cost) high.
Johnson & Johnson has taken a relatively passive role in the development of infrastructure. They didn’t do anything like open their own clinics. They took the “pure-play” route of simply selling the drug and certifying clinics, clinicians and pharmacies to dispense Spravato. Like any pharma company, they invested in sales and marketing for the drug.
When Spravato launched in 2019 they had a bit of a slow start. J&J didn’t even report their sales figures in the first few years. It took time for the infrastructure to develop to allow Spravato to gain traction. Of course, the pandemic didn’t help, considering in-person visits were required.
However, Spravato sales have grown like wildfire since, delivering $689M in revenue in 2023 and $1.08B in 2024.
This is the outcome desired by many of the psychedelic players. Get a drug to market and let the ecosystem develop the infrastructure while your sales grow.
COMPASS
COMPASS is one of the pioneers of the psychedelics space.
They recognise that their psilocybin treatment sits quite high on the complexity scale and will require significant infrastructure to be adopted by the healthcare system (assuming they get approved). While they have taken some steps to try and reduce the complexity of their treatment, their strategy is primarily focused on taking an active role in building the infrastructure needed for its delivery.
They run their own therapist training program, developed their own app and digital platform and have invested in multiple partnerships to build other infrastructure.
For example:
They’ve partnered with Mindful Health Solutions (MHS), which runs over 20 outpatient clinics across California, Washington, Texas, and Georgia. Together, they’re exploring how COMP360 (their psilocybin drug) could fit into existing clinics by studying patient pathways, especially for depression and treatment-resistant depression (TRD). The goal is to test what a real, working delivery model could look like.
They partnered with Journey Clinical to further develop training, education, and care models that could support broad access to COMP360. More on Journey below.
They signed a three-year research agreement with Greenbrook TMS, a national provider of TMS and esketamine treatments. Using this partnership, they’ll study how COMP360 could be offered through Greenbrook’s existing network of clinics, focusing on TRD and other mental health conditions.
Gilgamesh and Psylo
Most companies are trying to reduce the complexity of their treatment to some degree. But some are going further than everyone else.
Companies like Gilgamesh and Psylo are betting that psychotherapy is actually not required to deliver clinical outcomes and are developing “non-hallucinogenic” therapies, i.e. neuroplastogens. Their belief is that hitting the receptor might be sufficient and that you don’t need the trip at all. Gilgamesh has entered a research and development agreement with AbbVie to pursue this strategy.
2. Clinics and Distribution
Psychedelic drug developers might learn from the lessons of the digital therapeutics industry. Pear and Akili were successful in getting digital therapeutics approved, but they failed because they could never crack distribution and reimbursement.
Drug developers will need a healthy clinic ecosystem to sell their drugs. This ecosystem is actually already being developed thanks to the existence of IV ketamine.
IV ketamine is used off-label for the treatment of depression and a large network of clinics has popped up around the US to deliver this treatment.
IV Ketamine Clinics: HOPE Therapeutics
HOPE Therapeutics is a subsidiary of NRx Pharmaceuticals. They are betting big on developing clinical infrastructure for IV ketamine and other treatments of suicidality. In August of last year, they announced their plans to reach over $100M in revenue within 12 months.
They define their strategy as “building a network of interventional psychiatry clinics focused on ketamine and other lifesaving interventions for suicidal depression and PTSD”. To execute this, they are pursuing an aggressive clinic M&A strategy, building a national brand, augmenting ketamine with TMS and digital therapeutics and developing “other proprietary products”.
Low-Dose, At-Home, Online Clinics
Another business we’ve seen emerge in this space is those providing low-dose, at-home ketamine treatments. This includes businesses like Mindbloom and Joyous. These companies allow users to get prescriptions online through a telehealth consultation and then have the drug delivered to their homes.
I’ve heard reports that one such business is doing over $30M in revenue. Considering the low cost of ketamine, I would imagine they are also quite profitable.
If new psychedelics are approved, these businesses will look for ways to use their infrastructure and distribution capabilities to capitalise on the availability of the new treatment.
The large, traditional mental health players may also get interested. Lifestance has one of the largest physical clinic networks in the US and has expressed a desire to expand its range of treatments, specifically mentioning TMS. I have no doubt they would consider psychedelic treatments if they are approved and reimbursed.
3. Infrastructure only (make the shovels) - e.g., Journey Clinical
Unlike drug developers or clinic operators, infrastructure companies position themselves as enablers rather than direct providers. Their business models are focused on serving multiple treatment modalities across the emerging psychedelic medicine ecosystem.
One example is Journey Clinical.
Journey Clinical
Journey Clinical is a plug-and-play platform making psychedelic-assisted therapy more accessible for patients and clinicians.
Whilst positioning themselves to be a platform for psychedelics in general, their current focus is on Ketamine-Assisted Psychotherapy (KAP) with plans to expand to other treatments once they are approved.
They do have some patient-facing features, which are signs of a distribution play, but a lot of their offering focuses on providing services to support clinicians in the provision of KAP. This includes;
Training and support to become a KAP provider
A telehealth platform that verifies patient eligibility, tracks outcomes and monitors for adverse effects.
Marketing, legal and education services for providers
A peer community for KAP providers
Sometimes it’s better to sell shovels than dig for gold.
What do investors think?
2020 and 2021 saw a significant volume of psychedelic deal-making in the private markets, most of it focused on the drug development segment.
While some of this came from the kind of life-science funds you might expect, most of it came from specialist funds and individual investors with personal interests in psychedelics.
However, since 2021, investment has cooled significantly. While this trend occurred across all private markets, it is even more pronounced in psychedelics.
Source: Psychedelic Alpha
2020 and 2021 also saw a bunch of IPOs in the space, but since then, public market investors have had a similar sentiment to their private market peers - public company share prices are down approximately 75% since May 2022.
Today, investors are largely taking a “wait and see” approach.
The FDA’s rejection of Lykos Therapeutics’ MDMA treatment was a major setback for the industry, and investors may be getting concerned that none of these treatments will get approved anytime soon. Big pharma has largely stayed away from this space for similar reasons, including the concerns over exclusivity mentioned above.
Private market investors are increasingly interested in approaches that reduce treatment complexity, including short-acting drugs as well as non-hallucinogenic treatments.
Other investors, who don’t want to hold the regulatory risk associated with drug development, will look to make bets in the clinic and infrastructure segments of the market but will wait until they have conviction that these drugs are going to actually get approved.
So what?
What should you take away from all of this? I think there are a few things;
This market already exists. Yes, I know Ketamine is not technically a psychedelic, but from a commercial perspective, we can consider it as one. That market is already substantial - over 1,000 IV ketamine clinics, Spravato making over $1B a year and low-dose, at-home businesses making tens of millions. Psychedelic treatments are also becoming increasingly popular in states where it’s legal, and psychedelic tourism is booming.
However, the market’s future is entirely dependent on regulators. In the next year or two, we will know whether many of the leading candidates get FDA approval (or not). Those decisions will have a massive impact on the entire industry. In the meantime, companies’ strategies will be defined by the bets they are willing to take.
There are major scientific questions still to be answered. We still don’t know a lot about how these treatments work - one major area of investigation being into whether we need psychotherapy for them to be effective. Answers to these questions will determine the shape of the future market.
Exclusivity is a major challenge. If that point isn’t clear by now, I’m a terrible writer…
Distribution may be a bigger moat than molecules. Let’s assume these drugs do get approved. Who will capture the value? Considering the challenges in getting exclusivity and the complexity of developing the clinic infrastructure and distribution, it might be the clinics and those that own distribution that capture more value than the drug developers.
The real opportunity might be for the second movers. Every market needs pioneers. Unfortunately, those pioneers often aren’t the ones to get the rewards. In Digital Therapeutics, Pear and Akili paved the way but ultimately failed. After they shut down, CMS announced new reimbursement codes for digital interventions in mental health… A similar situation may occur with psychedelics. That’s the bet big pharma is taking so far - happy to let the pioneers do the hard experimentation and ready to swoop in once the market is more established and reimbursement is secured.
There are some niche opportunities to develop infrastructure businesses. While the big bets on drug development will get all the attention, there will be lots of great opportunities to build small to medium-sized businesses that support this emerging ecosystem.
Alright, that’s all for this week. I hope you found it valuable.
Huge thanks to Valentine Assal for all her input and Elizabeth Hong for her research. Also, many thanks to Michael Windo, Mattias Serbrinsky, Josh Hardman and Nicolas Grundmann for guiding my thinking on this space.
As always, reply to this email and let me know what you think.
Keep fighting the good fight!
Steve
Founder of The Hemingway Group
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