Is there a place for psychedelics in institutional portfolios?

“People get a little confused around psychedelics in the sense that they think, ‘Oh, this is just like cannabis’ and it’s not actually. In fact, it’s really a biotech/pharmaceutical type play,” says Eric Foster, a securities lawyer and partner with Dentons Canada LLP. “There’s a subset of very sophisticated institutional investors who focus on the biotech and life sciences industry and those are the institutional investors that I think would be very interested in an investment profile in the psychedelic space.”

Foster emphasizes that the opportunities that may appeal to institutional investors have nothing to do with recreational use. Rather, they’re long-term plays focused on drug development by pre-revenue companies that are filing patents and conducting clinical research and trials, with the goal of commercializing products after receiving approval from health regulators.

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Canadian psychedelic-focused businesses are getting in on the action, listing on the NEO, CSE, TSX and NASDAQ. Meanwhile, big pharma and advanced biotech companies are starting to pay closer attention to this emerging field, in part because companies developing psychedelic drugs have been successfully raising “tremendous amounts” of capital, with new deals announced daily, says Foster.

Institutional investors need to be prepared for peaks and valleys, as with any sector that excites investors, he warns. Other risks parallel those of investing in any biotechnology enterprise: these are early-stage exploration companies that aren’t yet generating revenue and that depend on raising capital to advance drug development. There’s also the possibility that a drug won’t demonstrate the efficacy required to earn regulatory approvals.

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“The psychedelics industry has captured the imagination of the Canadian capital markets,” says Foster. However, he advises institutional investors to focus on identifying sophisticated management teams with a deep understanding of the regulatory framework and an ability to map out a path through drug development to commercialization. Any potential investment should also be backed by strong science and medical advisors.

“Too often, [as] we’ve seen with some other emerging industries, there are stock promoters who jump from industry to industry to try to catch the next big wave, [but] that’s a very different investment profile than what a traditional institutional investor is looking for. Having really reputable management, including really reputable health-care professionals as part of that management team, I think, to a certain extent, would de-risk an investment from an institutional investor’s perspective.”