Is Compass Pathways Stock a Buy?
Despite an IPO just three months ago, Compass trails (NASDAQ: CMPS) is already up 224% from its IPO price of $ 17. If you invested $ 10,000 in its very first public offering, that investment would be worth over $ 32,400 today, far surpassing the S&P 500gain of 11.3% over the same period.
Despite being a small fish in the biotech ocean, Compass Pathways is backed by billionaire tech investor Peter Thiel with a stake of 10 million euros. Anything that could spark so much interest in a start-up business with just a pipeline candidate?
What is it really about?
The hype surrounding Compass Pathways comes from COMP360, which is under Phase 2 investigation to target treatment-resistant depression (TRD). COMP360 consists of synthetic psilocybin (colloquially known as ‘magic mushrooms’), a substance known to induce hallucinations and induce effects close to spiritual arousal.
In 1971, the Nixon administration banned psilocybin as part of the War on Drugs initiative. It is still labeled as a Schedule I substance, a classification generally reserved for drugs with high potential for abuse and without medical benefits, such as heroin.
However, recent scientific studies have shown the opposite. In four out of five clinical trials (the others lacked efficacy data) evaluating psilocybin for the treatment of psychological distress and depression, patients taking the substance demonstrated remarkable relief. The results had robust statistical significance. In addition, the efficacy provided by psilocybin has exceeded that of commercially available antidepressants such as citalopram (Celexa), fluoxetine (Prozac) and sertraline (Zoloft) by a very wide margin compared to historical studies.
Clinical trials are limited by their small scale, as they only recruited a total of 120 patients in total. Compass Pathways takes the findings one step ahead. His Phase 2 results will likely be released by the end of 2021. Previously, in Phase 1, he found that COMP360 did not cause serious adverse events when given to healthy volunteers. The substance also caused psychedelic effects which generally correlate with therapeutic benefits.
Is the stock a buy?
Since Compass Pathways is a single drug developmental biotech, investors aren’t betting so much on the stock’s financials as it is on its science. If it proves that the COMP360 can treat depression, it would be able to tackle a global patient market of over 320 million people and become a multi-bagger stockpile. Otherwise, the company would likely trade at levels close to $ 0, as it only has around $ 196.5 million in cash compared to a market cap of $ 1.98 billion.
Based on the results of previous surveys, I believe the company has a good chance of advancing the COMP360 to success in clinical trials at a later stage. If approved, it would also be able to protect and market its findings.
While there’s nothing new about psilocybin, the company’s synthetic variant has received patents. It could also benefit from market exclusivity, as regulatory authorities have previously not approved psilocybin for the treatment of any type of depression. Compass Pathways estimates that it can enjoy up to 7.5 years of intellectual property protection in the US and up to 11 years in the EU for COMP360.
Ultimately, stock is a good choice for investors with a high risk, high return mindset. Others who don’t particularly like the upcoming binary and volatile movements of the stocks they own might consider other biotechnology actions rather.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.