| Investors in the psychedelics industry have long said its companies are like biotech stocks, but with an edge. Here's how the thinking went: Due to decades of underground use of LSD, magic mushrooms, MDMA and other substances, there was a body of anecdotal evidence that spoke to the safety and efficacy — or at least appeal — of such drugs. But as psychedelic stocks slump and the industry braces for a shakeout and consolidation, it's not clear they're all that different from classic biotech companies.
Read More: The Psychedelics Stock Universe Is Shrinking, Despite the Hype Clinical trials are expensive, and it turns out that anecdotes about all the tripping on 'shrooms you did with friends in your backyard don't exactly hold muster with the US Food and Drug Administration. Companies now need the agency to review their studies on those drugs' ability to treat conditions such as PTSD, depression and addiction. In fact, psychedelic stocks have an extra hurdle to clear with the regulator, since many studies show that the drugs' true effectiveness comes in conjunction with therapy. This means that companies may need the FDA to do something it's never done before: Approve not just a drug, but a behavioral treatment to go with it. "The bubble valuations got squeezed out last year, and now the leading names trade like any other small-cap biotech stock," said Chris Yetter, founder of Dumont Global, a fund that invests in cannabis and psychedelics. That's problematic, because biotech companies overall aren't doing well. RA Capital estimated in a July 1 report that 25% of all development-stage public biotech companies trade below their cash value, while 72% will likely need to finance in the next year. Just like with psychedelics, a shakeout is underway as companies fail or consolidate. The report found there were 40 fewer "core biotechs" (those owned by at least one biotech specialist fund) at midyear than there were at the start of 2023. The investment management company, which specializes in healthcare and life sciences, predicts that 2023 is on track to become one of the biggest years on record for the number of deals carried out, as well as the total value of companies acquired and the transaction premiums. As more psychedelic companies fail, it will be interesting to see if the industry diverges from traditional biotechs. The cannabis industry — often compared to psychedelics given its trajectory from illegal party drug to pharmaceutical hopeful — has seen an interesting dynamic due to the still-thriving underground market. As illicit trade continues in California and other states, struggling companies have sold "legal" out the back door into the black market. In New York, legal companies are suffering from competition with the illicit market, too. Ketamine has seen a black-market dynamic, as well. If psychedelics fail to win FDA approval and no industry materializes, it's possible the cultural movement continues. Oregon has been training "facilitators," or those licensed to administer the drugs, and therapists have been taking courses in "psychedelic-assisted therapy" for treatments that aren't authorized or legal. Even if such drugs are never proven effective at treating serious mental health ailments, if research shows they're not serious health risks, the interest is bound to continue. | 
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