Psychedelic Drugs as Medicine: Back to the Future

This paper is a primer on the current state of a biotechnology sub-sector focused on the category of medicinal compounds and interventions known as “psychedelics.” It is the story of re-emerging scientific, regulatory, and patient interest in therapeutic solutions that in several cases have been around informally for centuries and in a formal clinical setting since the mid-20th Century. Many of the interventions are based on naturally occurring plants and fungi and there are several parallels with the medicinal cannabis industry.

Lysergic acid Diethylamide (LSD)… was first synthesized in 1938 by the Swiss chemist Albert Hofmann in the Sandoz (now Novartis) laboratories in Switzerland. It was subsequently patented in the US as a medicine for analytical psychotherapy…,

History as a medicine
We know that plant-based psychedelics have been used for hundreds and probably thousands of years for mindful and spiritual purposes. It is the ‘mindful’ aspect that is now exciting modern-day researchers and clinicians. By combining the right natural extracts with the right setting, such as an accompanying ceremony, human consciousness could be altered in a beneficial manner. These traditions were brought into more mainstream medical science in the 20th century when serious, Big Pharma-backed, at scale scientific studies were undertaken into various psychedelic medicines from the end of the 1930s until their complete criminalization in the late 1960’s and early 1970’s as part of the well-documented “war on drugs”. Most prominent was Lysergic acid Diethylamide (LSD), which was first synthesized in 1938 by the Swiss chemist Albert Hofmann in the Sandoz (now Novartis) laboratories in Switzerland. It was subsequently patented in the US as a medicine for analytical psychotherapy and used in psychiatry to enhance psychotherapy through the 1950s and 1960s.

The term ‘psychedelic’ – meaning ‘mind manifesting’ – was coined by British psychiatrist Humphry Osmond who was a pioneer in the use of LSD as a treatment for alcoholism and various mental disorders in the early 1950s. It was through Osmond’s and colleague John Smythies’ study of the effects of another psychedelic, mescaline, on brain chemistry that it was postulated that schizophrenia was caused by a chemical imbalance in the brain, but this was not well received by their peers at the time. By the end of 1960s Osmond and another colleague, now in Canada, had treated around 2,000 patients for alcoholism with LSD with apparently strongly positive results. Other studies took place in the UK with similarly encouraging results.

By the end of the 1960’s, around 40,000 patients in total had received some version of treatment with LSD for mental disorders including substance use disorder (SUD), neurosis, schizophrenia and psychopathy. Many of the trials undertaken lacked the rigor that would be found today but with encouraging results and just as the discipline was gaining wider clinical credit, things were abruptly shut down when LSD slipped into the growing street ‘hippy’ counterculture resulting in a major conservative backlash. It still suffers from that association today.

An important thread running through the studies undertaken before prohibition, that differentiated the psychedelics from other pharmaceutical interventions, was the combination of the medicine with therapy, usually talking therapy together with careful control of the surrounding environment. This focus on ‘setting’ echoes the traditional use of plant-based psychedelics in indigenous ceremonies and it has been carried over to the modern approach to psychedelic therapy treatment today, along with careful attention to the starting mindset of the patient. Hence, today we talk about the importance of “set and setting” in psychedelic medicine therapy.

The US Food and Drug Administration (FDA) has designated both psilocybin for treatment-resistant depression (TRD) and MDMA-assisted psychotherapy for PTSD as Breakthrough Therapies

State of the science today
Interest in psychedelic medicine began renewing in the 1990s as more was learned of the underlying science at the molecular and neurotransmitter level despite the huge frictions to research from the legacy legislation. In fact, legislation is only now starting to loosen. In the US, where much research is now being planned and undertaken, major changes are underway. In November 2020 Oregon became the first US state to legalize psilocybin (extracted from certain varieties of mushrooms) for therapeutic use. In June this year Texas followed Connecticut in legalizing psilocybin for medical research. The same month New York State announced it was considering legislation and there are many more bills at various stages before local legislatures in the US. Perhaps most significantly, at the end of July 2021, the US House of Representatives passed a bill directing federal agencies to undertake and fund research into psychedelic-assisted therapies and the potential benefits of cannabis. This bill is now before the Senate. The fact that these solutions are being used to treat post-traumatic stress disorder (PTSD) within the military veterans community goes some way to explain growing support in the US among conservatives.

The US Food and Drug Administration (FDA) has designated both psilocybin for treatment-resistant depression (TRD) and MDMA-assisted psychotherapy for PTSD as Breakthrough Therapies. Worldwide there is an explosion of psychedelic drug studies with more research on-going than at any time in the past. Establishments such as Johns Hopkins University and Imperial College London have set up research facilities dedicated to psychedelic medicine. Others are appearing in respected research universities globally.

The psychedelic medicines that show the most clinical promise currently are as follows.

Psilocybin. This compound occurs naturally in dozens of varieties of mushrooms. Clinical trials and academic studies suggest that psilocybin has potential therapeutic benefit for: PTSD, depression, SUD (including alcohol, opioid, and nicotine), migraines, OCD, anxiety in terminally ill patients, anorexia nervosa and social anxiety for autistic patients. . Exactly how psilocybin works is still being uncovered but recent evidence suggests that the mechanism involves the repair of neural connections. In a study by academics at Yale University published in scientific journal Neuron in July 2021, one dose of psilocybin was shown to increase the number of neuronal connections in mice by 10% and also the size and strength of the connections to a similar extent.

LSD. This infamous compound has shown promise in the treatment of anxiety, depression, SUD, cluster headaches, Tourette’s syndrome, and Alzheimer’s.

Ketamine. Ketamine is a non-naturally occurring synthetic compound that was approved by the FDA for anesthetic use in 1970 and has been available as a medicine since then including as a tranquilizer in animals. It is currently in limited use in academic-established ketamine infusion therapy clinics in the US, Canada, the UK, and Australia (among other places) for various conditions including depression, anxiety, bi-polar disorder, PTSD, OCD, suicidal ideation, chronic pain, fibromyalgia, and reflex sympathetic dystrophy.

Ibogaine. Ibogaine is a compound extracted from the root of an African rainforest shrub Tabernanthe Iboga native to Gabon. It has been studied mostly for potential treatment of SUD including alcohol, opiates, and methadone and private Ibogaine therapy clinics focused on SUD treatment have appeared in countries where it is legal or unregulated, largely in Latin America.

MDMA. MDMA (3,4-methylenedioxy-methamphetamine) is a synthetic compound that stimulates the central nervous system. It is not viewed as a traditional psychedelic compound in that it does not induce hallucinations. One of its classic side effects is that it can generate empathy and it has high potential for misuse. However, as a medicine it has been designated by the FDA as a Breakthrough Therapy for the treatment of PTSD via MDMA-assisted psychotherapy with Phase III clinical trials currently underway in the US and Europe, with interim findings encouraging. It is also being studied as a potential intervention for anxiety in terminal ill patients and social anxiety in autistic adults.

In addition, the compound DMT (N,N-Dimethyltryptamine), most commonly experienced through consumption of an Amazonian ‘tea’ known as Ayahuasca comprising a combination of plants, is being studied for its treatment of many of the psychological problems identified above. It is in widespread informal use across the Americas for such purposes along with spiritual and recreational practices.

The attraction of psychedelic medicines is not merely a function of their potential value as therapeutics. It is also true that many existing pharmaceutical medications such as anti-depressants can have numerous negative side effects. Patients and, to an extent, regulators are receptive to new treatments that avoid these side effects. A similar narrative exists with cannabis, particularly in the area of chronic pain management where heavy-duty opioids are increasingly unpopular with both those stakeholder groups and also for general anxiety indications.

Psilocybin for example cannot be patented and owned by a company.

The role of intellectual property
The bedrock of the pharmaceutical industry, of biotech innovation and of drug development is intellectual property, primarily patents. The rationale for drug development is clear: biotechs and big pharma companies don’t have the incentive or funds to invest tens, sometimes hundreds of millions of dollars in developing and testing a new formulation, drug or therapeutic, that will often – in practice, nearly always – fail in clinical trials or in the regulatory approval process if they receive no intellectual property (IP) protection in return, allowing others to piggy-back or leap-frog without incurring the capital expenditure and risk of failure. The grant of a patent is what draws capital into the biotech arena and what leads to important clinical breakthroughs, just as we have seen with COVID vaccines.

In the psychedelic medicine arena, as it is with cannabis and other natural therapeutics, the situation is complex. First of all, plants, fungi, and products in nature cannot be patented. Psilocybin for example cannot be patented and owned by a company. These naturally occurring compounds belong to the public already and indeed, in patent terminology, they effectively amount to “prior art” that predated the patent application. Secondly, many psychedelics such as psilocybin (from certain fungi), mescaline (from peyote cacti), ibogaine (from an African rainforest shrub) and DMT (the psychoactive ingredient in Ayahuasca) have been used either as therapeutics or in religious or other ceremonies by indigenous peoples for thousands of years, again creating prior art that is legally and ethically challenging for biotechs seeking patents even where that prior art is not written down in a medical journal but based on oral history and cultural evolution.

And yet, there is a patent goldrush on-going around psychedelics as the biotech companies that have entered the space – as many as 200 currently – jockey for protection around their solutions and to raise capital. Much of their IP activity focuses on new or altered molecular compounds or new formulations of the base compound that improve on the natural source drug. Others focus on novel uses, novel delivery mechanisms or on novel manufacturing methods. Patents have already been issued and it is raising a debate about the ethics of ring-fencing what many see as ‘Nature’s gift’.

Whilst it is hard to argue against the patent-R&D trade-off in the biotech arena, the area where the public have a very legitimate interest in allowing natural solutions to flourish is in pricing. As we have seen before, the end pricing of novel pharmaceuticals is often such that only insurers can afford to cover their cost. And in a not-so-virtuous circle, only FDA-approved drugs will typically be accepted by insurers, effectively locking out natural solutions even where the efficacy and safety have been proven over perhaps thousands of years. In the US this leads to super-high premia for healthcare cover. In other countries where drug price controls are more actively policed, or in single payer systems like the UK’s NHS, where budgetary concerns remain a constant political issue, regulators face a tough choice between allowing natural therapeutics to enter the mainstream clinical space without the same level of clinical trial rigor but keeping pricing low or only allowing highly tested, regulated and IP-protected but high-cost therapeutics to dominate. In virtually no other domain – with the possible exception of cannabis in the future, when big pharma inevitably steps in – is this debate going to color our field of vision more than psychedelic medicines.

There are several companies listed on NASDAQ and NYSE with Psychedelic medicine as their core solution…

Some commentators believe that the psychedelic market can be greater than US$100bn and/or bigger than medical cannabis.

Psychedelics as an investment opportunity
There are several companies listed on NASDAQ and NYSE with psychedelic medicine as their core solution including two, COMPASS Pathways and Atai Life Sciences, with billion-dollar market caps. With the experience of cannabis fresh in the memory, many investors have identified psychedelics as the next big thing. Some commentators believe that the psychedelic market can be greater than US$100bn and/or bigger than medical cannabis. They identify the vast and exponentially growing incidence of mental ill health, from PTSD in the military to TRD (with existing pharmaceutical solutions ineffective and/or unpopular with patients) to an epidemic of general anxiety and depression fueled by modern lifestyles and the recent pandemic. Clearly, the cost to society is vast and estimated to be north of US$1 trillion when reduced to economic factors. With all that in mind, there will be many winners. Equally, as we saw with cannabis, anytime there is a goldrush mentality among investors, not every company will succeed or provide investors with the reward their risk-taking required. Sub-sector and company selection, timing and luck will all have their say.

As it stands, a large proportion of the companies seeking funding are chasing the same patients through their own therapeutic solutions, many patent pending. Some are segregated by target jurisdiction, with competition held back pending international expansion through additional regulatory approvals and patents. It seems inevitable that there will be well-funded losers as well as winners as the competition plays out and product overlaps crystallize. New sub-sectors are emerging, as they did in cannabis before, focused on cultivation, production technology, testing, certification support, logistics and so on and only as the industry matures will it be evident where the innovation, IP, competition, and margins unlock most value in the entire value chain.

As far as discernible trends go for would-be investors to track, the following stand out.

Isolates vs Natural Compounds. As trailed in the IP section above, it’s not yet certain that patented synthesized molecular compounds (isolates) will achieve the efficacy, safety and regulatory approvals required to dominate the medicinal arena or whether the natural compounds, in combination with clinical psychotherapy approaches, will gain more traction with insurers, clinicians, therapists and ultimately patients. There is a parallel analysis with cannabis where, several years after legalization in more than 30 US States and close to 50 countries, the vast majority of expenditure on medicinal cannabis (perhaps over 99%) is on full spectrum (naturally occurring) solutions rather than isolates. Part of this is about pricing and part the absence of Big Pharma (to date) but there is also strong efficacy-related science potentially at play with studies suggesting that the so-called ‘entourage effect’ whereby the dozens of cannabinoids, terpenes, and other active ingredients of the entire plant act in concert to generate better results by contrast with the synthesized sub-molecular compounds that currently exist. For this situation to translate to psychedelics, there will need to be significant investment and innovation in industrial scale cultivation and production technology and infrastructure that can produce consistent, pharma-quality products from plants and fungi. Equally new regulatory frameworks will need to be established that accommodate the production, storage, transportation, and dispensing of these products and at the same time provide patients and the public generally with the safety standards expected of any medicine. Having seen this happen with cannabis, there should be no reason why those same regulations cannot be expanded to psychedelic compounds.

Treatable Conditions. As more research is completed the number of indications for which psychedelic medicines may be approved will determine the ultimate market potential. Tackling various forms of depression alone will render the sector of blockbuster potential. Equally, translating successful medication to the clinical setting may give rise to a paradox that tamps down the potential market size. Some studies have shown that single doses of psilocybin can provide long-term relief from anxiety and depression, echoing early work with LSD for alcoholics. This has also been seen with Ibogaine treatments for SUD. Such findings reduce the potential revenue opportunity for the medications at work.

Clinical Setting. An adjacent point relates to the overall delivery mechanism for treatment. Much research suggests that “set and setting” have a crucial role to play in the effective administration of psychedelic therapies. Set refers to the mindset of the patient entering the therapy and setting the physical environment where administration of the medicine and therapy occurs. Both emphasize the role of a holistic approach rather than a traditional pharmaceutical one. Collectively set and setting are likely to sustain the private clinic and therapy setting models that have traditionally favored natural compounds rather than pharmaceutical isolates, to an extent leveraging the scientific practices of the 20th century and even the original context of the use of psychedelics by indigenous peoples.

Regulatory Overhaul. Perhaps most significantly, the investable market is ultimately a function of the regulatory market. Although the legislative developments referenced earlier are deeply encouraging, as we have seen with cannabis in the US, which remains federally illegal even for medicinal purposes, until a jurisdiction rolls back its long-held conviction about the misuse of drugs, patients cannot become customers. Moreover, with some psychedelic biotech valuations already sky high, investors will wish to understand the extent to which regulatory relaxation is already priced in to some stocks.

One thing seems clear, the market is real, large, fulfils an important societal need and consequently is here to stay. It is investible today with the right guidance and opportunity and it is inevitable that significant returns will be made by many that have those factors covered.

In a May 2020 study conducted by Prohibition Partners of 1,000 adults from the US and UK (500 each) 51% agreed with the statement ‘I support the legalization of psychedelics for medicinal purposes’, and only 13% disagreed.

A note on stigma
Psychedelic compounds and their natural sources remain illegal in most jurisdictions around the world, primarily as a result of the US-led “war on drugs” from the late 1960’s and early 1970’s. In the US, the foundational legislation is the Controlled Substances Act of 1970, in the UK it is the Misuse of Drugs Act 1971 and internationally there is the UN Convention on Psychotropic Substances of 1971. Other countries have their own criminal frameworks, many extremely draconian. For many individuals, funders and indeed regulators and law-makers that is enough to turn away from this sector, as it has been with cannabis before. Even casual observers feel the stigma of association with mere intellectual enquiry. Yet this approach is both deeply unscientific and inconsistent with the legal status of many prescription-only drugs such as Fentanyl and other opioids that continue to be accepted within our pharmacopeia despite enormous abuse both within a regulated clinical environment and “on the street”. There are other startling inconsistencies to be found in some European countries where euthanasia is available to patients with certain psychological suffering conditions, but the use of psychedelic medicines is not!

Moreover, as with cannabis, the psychedelic medicine train has already left the station, driven by deep scientific study showing efficacy and safety. Public opinion in, for example, the US or UK is already and surprisingly in favor of greater loosening of restrictions, especially but not exclusively around clinical research. In a May 2020 study conducted by Prohibition Partners of 1,000 adults from the US and UK (500 each) 51% agreed with the statement “I support the legalization of psychedelics for medicinal purposes”, 36% were unsure or don’t know and only 13% disagreed. In the case of cannabis, the intellectual dishonesty still perpetuated among some interest groups as regards comparisons between cannabis-based medicine and opioid medicines for indications such as chronic pain management, especially of the related side effects, is palpable. In my opinion, and each has their own, we are now at the “wrong side of history” point for those seeking to deny access to these life-changing therapeutics or even those who merely fear engagement with the intellectual debate. Now is the time to educate ourselves on the opportunities psychedelics (and cannabis) offer for medical advancement and the issues that must be confronted to provide safe and reliable access for patients.


By Tom Speechley