Novel mental health treatments are long overdue. Psychedelic based treatments, particularly psilocybin, show a lot of promise for conditions such as depression, anxiety, and PTSD. Since 2020, I have closely followed various companies that are developing psychedelic treatments for mental health disorders. Among them are Mind Medicine, Cybin, and Compass Pathways. There are many others, and the truth is practically none hold a candle to Compass Pathways. Many are frankly sketchy, underfunded, screw over retail investors via share dilution without a second thought, and will probably never commercialize any of the treatments they are working on. I mean they are largely penny stocks so this isn’t really surprising. However, I believe Compass will be the first to bring a psychedelic based treatment to market.

Compass Pathways is a UK based biotech company that includes financial backers such as Palantir’s Peter Thiel. They are primarily focused on developing a new therapeutic for treatment-resistant depression. COMP360, the drug they are working on, is a proprietary, synthetic form of psilocybin (the active compound found in psychedelic mushrooms). Phase 2b data published in the New England Journal of Medicine showed that a single 25mg dose of COMP360 psilocybin, in combination with psychological support, was associated with a highly statistically significant reduction in depressive symptoms after three weeks (p<0.001), with a rapid and durable response for up to 12 weeks. COMP 360 for treatment resistant depression is now in Phase III clinical trials, with top-line pivotal trial data expected in late Q4, though there is a possibility this could be slightly delayed until January 2025. Additionally, they have separate clinical trials ongoing for PTSD and anorexia. Something that sets Compass apart from competitors, and why I like them so much, is their focus on high-quality clinical research. This is in stark contrast to other companies such as Lykos which recently had their MDMA based drug for PTSD rejected by the FDA due to flaws with their clinical trial design (among many other issues). This is only my opinion, but Compass never really was a meme stock like Mind Med either. They tend to avoid “hype culture” that competitors like Mind Med have happily fuelled, often to the detriment of retail investors. In other words, they are a serious, data focused company.

Aside from promising trial data, Compass has a very solid financial position with well over 200 million USD in cash on hand. Given their cash burn rate, this will ensure that they will be able to conclude clinical trials, maintain their operations, and not have to worry about raising capital for a couple years.

Why I’m especially bullish on the near term: Biotech companies that report positive Phase III clinical trial results can see major upward movement in their stock prices. For those who are new or unfamiliar, this happens because Phase III trials are the final hurdle before regulatory approval (e.g., FDA approval), and successful results significantly increase the likelihood of a new drug reaching the market. To give just a couple examples, in December 2019, Axsome Therapeutics reported successful Phase III results for its drug AXS-05 for the treatment of major depressive disorder which caused the stock to surge 84% within a single trading session. Similarly, shares of Sage Therapeutics soared 70 percent after the company announced positive results in the testing of a major depression treatment.

The Federal Reserve lowering interest rates will also likely help the broader biotech sector. This is because biotech stocks tend to outperform the market when rates are high and falling: their far-out cash flows make them more sensitive to changing rates, they majorly benefit from cheaper financing costs, and they’re more likely to be acquisition targets when rates are calmer.

I believe that some combination of interest rate cuts and positive Phase III results will be enough to significantly increase the price of Compass. Like many other biotech companies, Compass is down substantially from its all-time high (about 87%). Positive Phase III data is a pivotal moment that could result in a major rebound and the consensus among analysts is bullish. For instance, RBC Capital Markets initiated coverage on Compass Pathways with an “Outperform” rating citing the potential for $2.3 billion in peak revenues from its lead psilocybin-based therapy program and setting a near term price target of $23. Canaccord Genuity maintains a buy rating on Compass Pathways with a price target of $48. Morgan Stanley also rates Compass a buy with a $23 price target, with their analyst stating that “based on the data generated & stage of development for COMP360, Compass appears significantly undervalued and we find the risk/reward skewed positive into data catalysts in 2024/2025 that we believe could drive significant appreciation in shares.”

My position: Opportunities like this are rare. 32c 7.50Call Feb2025 as well as a few hundred shares (and I will be adding more shares weekly for the rest of the year). I intend to ultimately build my position to 50 calls and 800 shares. Will likely hold some shares indefinitely as I truly believe they will be the first to commercialize a psilocybin-based treatment for depression and if they are successful, they could very well be acquired by a major pharmaceutical company like Johnson & Johnson. However, I also want to capitalize on near term catalysts such as successful phase III clinical trial data, hence call options. This is my first DD on here so even though it’s probably far from perfect, I hope some of you found this insightful, and will consider adding Compass to your portfolio.