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Why Compass Pathways Is Soaring Today

What happened

Last Friday, U.K.-based Compass Pathways (NASDAQ: CMPS) became the first psychedelic medicine company to go public on a major U.S. exchange. The drugmaker's shares promptly rose by an eye-catching 70.5% during their first day of trading on the Nasdaq stock exchange.

Compass' upward momentum, following this historic public debut, appears set to continue today, with the drugmaker's shares up by 10.8% in pre-market action Monday morning. Compass' market cap has thus swelled to over $1.1 billion, making it the most valuable psychedelic medicine company in the world.

Image source: Getty Images.

So what

Compass' IPO has gotten off to a blistering start thanks to interest from top-notch investors like billionaire and PayPal co-founder Peter Thiel. The core reason is that the company's lead experimental therapy for treatment-resistant depression (TRD) -- known as COMP360 and based on the prodrug compound psilocybin found in over 200 species of magic mushrooms -- could be a blockbuster product.

COMP360 is presently in a phase 2 dose-ranging study. Preliminary results from this critical trial may be ready for public consumption as soon as May 2021, according to clinicaltrials.gov. If this phase 2 trial is successful, Compass could have a pivotal phase 3 trial under way by 2022. Early-bird investors are thus looking at a three- to four-year wait for the company to possibly reach the commercial stage of its lifecycle.

Now what

Is Compass worth the risk? There are a lot of moving parts to this story. Apart from the inherent risk associated with a mid-stage psych med, therapies derived from psilocybin are surely going to receive a ton of scrutiny from regulators.

Psilocybin, after all, is currently a Schedule I substance, per the Controlled Substances Act, meaning it has been deemed to have a high potential for abuse and serves no legitimate medical purpose in the United States. This small-cap biopharma stock, in effect, sports some rather unique risk factors, above and beyond the normal clinical-stage drugmaker.

Bottom line: Compass' stock is arguably only suited for risk-tolerant investors who are willing to take a long-term outlook. The reward, however, may be worth the wait.

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George Budwell has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends PayPal Holdings and recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.


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