Mental Medicine Inc (NASDAQ: MNMD) is a high-risk security with virtually no prospects that investors should avoid. Its mediocre fundamentals and the lack of progress in the development of drugs make it a value to avoid, in order to limit exposure to risk of long-term price depreciation.
Mind Medicine Inc is a New York-based biotechnology company that specializes in the psychedelic field of medicine as a mode of therapeutic treatment, treating mental illness and various forms of addiction. The company’s strategy is to ensure the development and eventual marketing of treatments targeted at this increasingly growing niche of the pharmaceutical market.
Mind Medicine Inc’s existing pipeline consists of several early-stage treatments that aim to challenge the traditional, conventional approach to treating mental illness and addiction. These innovative treatments are composed of various psychedelic substances such as DMT, MDMA, LSD, Psilocybin, as well as 18-MC. While none of these candidates are currently in serious clinical trials beyond second-phase studies, the company says these next-generation treatments will be a game-changer.
Founded in 2019 and listed on NASDAQ in April 2021, Mind Medicine Inc is a relatively small company. It employs a total of 22 people within its organization and has a market capitalization of less than $400 million as of April 2022.
Within the broader healthcare market, the niche of psychedelic drug users has great potential for growth. Market research of last year indicates growing demand that will value the market at nearly $11 billion worldwide by 2027. Taking into account the growing acceptance of mental health treatments such as those for depression, analysts point to a CAGR of 16.3% over the seven years to 2027.
Despite this promising growth potential, the market is far from saturated, with only a handful of capable players having entered this market, due to the high risks that are associated with the pharmaceutical development of drugs in general. This risk factor is greatly increased in an emerging market for drugs such as psychedelics and hallucinogens, where industrial acceptability remains low. Additionally, obtaining regulatory approval for candidate treatments by psychedelic biotechnology companies remains challenging, resulting in a low number of market players, especially compared to other biotherapeutic areas.
Three main factors point to improving opportunities for the psychedelic market in the future. The first factor is the mainstreaming of public opinion regarding addiction and mental health. There is a upward trend seen in developed parts of the world, where treatments are sought for a wide range of mental disorders. The continuation of this trajectory indicates growing demand that will lead to a large market in the near future, pointing to broader opportunities for stocks such as MNMD. Second, there has been a general relaxation of regulation and policy in relation to mental health treatment, indicating a broader societal shift where mental health care is treated like other specialized areas of medicine. And finally, there is a clear gap in the drug markets vis-à-vis increasingly prevalent mental health issues such as ADHD, bipolar disorder, substance abuse, and more.
While all of the factors discussed above point to the growing opportunity inherent in markets offering innovative solutions to mental health issues, the psychedelic health industry in particular still has a long way to go. Those who take long bets on the psychedelic industry say it will rise from the fringe to the mainstream, just as it had with marijuana stocks. Skeptics, however, argue that psychedelic stocks such as MNMD are forged with a high degree of risk, with investors better positioned to invest in alternative growth industries. The link between the acceptability of mental health and the growth of the psychedelic industry is still unclear.
MNMD News and Price Movements
Mind Medicine Inc. is a relatively new company in the business arena and barely holds a year of being listed on the NASDAQ stock exchange. The price trends seen throughout this brief period could shed light on how the stock has performed since its IPO.
Looking broadly at the 9-month performance from June 2021, a strong downtrend can be seen with investors losing nearly 77% of their capital investments to price depreciation. Having not generated revenue and costs increasing every year, the MNMD chart is largely consistent with the company’s significant cash burn rate.
Throughout this period, announcements relating to the company have proven to be significant in influencing the price of MNMD, leading to brief increases that are shortly followed by subsequent declines. A jump of almost 51% in prices had been observed from the end of January 2022 to mid-February. This followed a crucial crisis approval by the Utah Senate, regarding a study on psychedelics, which had already obtained a majority in the chamber.
However, this optimism remained short-lived, with the stock maintaining its bearish slide through April 2022. I believe this was due to the diminishing perception regarding MNMD, which was deemed unable to respond to the broader opportunities presented.
In early April 2022, remarks by Nora Volkow, director of the National Institute on Drug Abuse (NIDA) clarified the wide range challenges faced by the industry as a whole. She added that there is a need for a greater degree of cooperation between industry and regulators such as the FDA. Since the announcement, MNMD has fallen more than 15%, through 20and of April, with no clear indication as to when a reversal might occur.
Risks inherent to MNMD
Mind Medicine, being a company with a limited operating history, not extending over more than three years, is exposed to several risks, which raise questions about the sustainability of its activity.
The most immediate concern that validates skepticism towards MNMD is that it currently has zero earning potential. This is due to the fact that the stock has no marketed launched products or ongoing large-scale clinical studies. As a result, market demand for MNMD is based solely on bullish anticipation with little substance to anchor it.
Since the company’s inception, Mind Medicine has consistently incurred losses on a downward trend, which the company expects will continue for the foreseeable future. This is reflected in the consolidated statement of income and comprehensive loss of Mind Medicine Inc, reported March 28, 2022:
As can be seen, there is an increase in operating losses over the years, with the share of administrative costs increasing in relation to research and development costs. On average, the net loss for each year increases nearly three times, indicating the substantial burn rate it holds, with no clear outlook as to when break-even will be anticipated. This is extremely uncertain, given that the business is currently in its lifecycle phase where it has never generated revenue or profit in any form.
Given the high costs of pharmaceutical drug development, both in terms of time and resources consumed, the company shows a significant need to raise additional capital. This is understandably a challenge for Mind Medicine, given its low market capitalization and lack of positive cash flow generated previously. This presents challenges both in terms of debt and equity financing. Even without the existence of earnings in its historical statements, the company additionally lacks successful product candidates likely to see a successful launch.
Finally, it is important to note that the set of problems faced by Mind Medicine is compounded by the nature of the products it aims to provide. Sensitivity to public perception is extremely high for the company, and negative press on psychedelics could severely impact the financial potential of these products if launched.
With such challenges, the business can rightly be considered a high-risk investment. Given its risk profile coupled with its degraded financial performance, investors would do well to steer clear of this bet which shows no promising signs.
Conclusion and remarks
I have established above that the psychedelic drug industry in the broader healthcare market is one that, despite the substantial opportunities associated with mental health treatment, is characterized by significant risk. Given the opportunity that market participants associate with the psychedelic market in general, some investors may consider holding MNMD for an extended period, anticipating a future rally. However, I believe that such a decision will only lead to disappointment, with a significant opportunity cost. MNMD in particular is a stock to avoid, given its high-risk profile and poor financial performance.
MNMD is a stock that has consistently generated losses and has yet to launch serious clinical studies that investors can latch onto. Its pipeline consists of a few early-stage trials with a low probability of success and a series of regulatory hurdles that make the stock a tough bet. Even in the event of an industry turnaround, which many anticipate, MNMD as a sole proprietorship shows no promise, and investors would be better off opting for a comparable psychedelic stock that offers better prospects.