Eight Capital, a Canadian investment bank that got in early on the cannabis rush, is now looking toward a new industry: psychedelics.
The bank in April initiated coverage of Mind Medicine, the first company in the psychedelics industry to trade publicly. MindMed trades on the NEO Exchange, a Canadian stock exchange. It listed earlier this year by taking over a defunct company, which is also known as a reverse takeover.
The bank also works as an adviser and underwriter for MindMed. The bank's research is independent of its investment-banking business, a spokesperson said.
MindMed is researching the use of psychedelic substances like LSD and ibogaine as treatments for patients with anxiety disorders and opioid addiction. The company has developed an ibogaine-based synthetic compound, 18-MC, that it says maintains the drug's medicinal properties while removing the characteristic hallucinogenic properties associated with the psychedelic.
Eight Capital estimates the total market for mental-health treatment is about $100 billion. It said MindMed's 18-MC could win part of the $4 billion market for the treatment of opioid-use disorder.
That estimate is from an April 28 note from analyst Ammar Shah titled "Taking a trip into commercializing psychedelic medicine." He gave the company a buy rating and C$2 target price. The stock trades at about $0.48 a share.
Shah, who's the first analyst at an investment bank to cover the psychedelics space, also follows healthcare and biotech companies.
Eight Capital is an investment bank that advises companies in industries like metals and mining, energy, and healthcare in North America.
As the cannabis rush started, Eight Capital joined other Canadian investment banks like Canaccord Genuity and PI Financial in advising cannabis firms, capitalizing on a market that bigger banks were reluctant to touch at the time.
Shah said the opportunity to initiate coverage of MindMed came because the psychedelics industry has seen "an improved prominence" in recent years.
JR Rahn, the founder and co-CEO of MindMed, told Business Insider that soon before the company went public, Eight Capital brought in a large investor from San Francisco, who invested about $6 million.
In his note initiating coverage of MindMed, Shah said he thinks the company is likely to win a breakthrough-therapy designation from the US Food and Drug Administration for its compounds, though he does not calculate this assumption into forecasts. He also predicted that the company would benefit from collaborations with pharmaceutical firms.The FDA has already granted breakthrough designations to psychedelic-based treatments from three companies: Johnson & Johnson, Compass Pathways, and the Usona Institute (a nonprofit organization).
Shah said he expected to see more publicly traded companies in the psychedelics space.
"As you continue to see interest from institutional capital and interest from other forms of capital, whether it be strategic investors or even global industries, it gives more of a reason for these companies to pursue a public route," Shah said.
Eight Capital's note came out the same week that Compass Pathways announced an $80 million funding round that included mainstream investors like Otsuka Pharmaceutical. Compass Pathways is developing psilocybin as a medicine for treatment-resistant depression.
Companies developing psychedelics-based medicines have gained increasing attention and funding recently. The top nine startups in the space have collectively raised almost $300 million in just a few years, Business Insider previously reported.
Rahn said that since Eight Capital's report was published, the company has received inquiries from other equity analysts at Canadian investment banks, whom he declined to name.
Preparing to initiate coverage for a psychedelics company isn't much different from doing the same for a company in healthcare or biotech, Shah said. You still have to understand how the company stacks up versus the rest of the space, future drivers, and the FDA's role.
There are indications that the mental-health space has been underserved for a while, Shah said, adding that's one of the reasons why he thinks the future of the space is important.
"The addressable market is incredibly large, and we're still in the early innings of what any sort of psychedelic treatment could do to resolve some of these important issues," he said. "There's been one breakthrough, right? And that's been Johnson & Johnson's Spravato, and I think that's really carved a path for companies like MindMed."
"We're still very early in terms of what their true potential is, what other indications they could pursue," he added.
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