3 Psychedelic Business Models (and What’s Best for Investors)
October 22nd, 2020
App, Psychedelics, Top News
The psychedelics industry has captured the interest of pharmaceutical companies seeking safer and more effective products to address unmet medical needs in mental health. While psychedelic molecules have shown promise, pharmaceutical manufacturers are likely to require that the molecules be improved through scientific engineering to meet specific therapeutic goals and reduce toxicities.
There are three different business models that psychedelic companies are employing to develop these promising drugs. While clinical development of drug candidates is the most prevalently employed model, some companies are focusing on creating and out-licensing molecules to other companies for development. Still others hope to side-step the entire drug development process by shifting into the less regulated consumer packaged goods markets.
Let’s take a look at emerging psychedelic business models and why MagicMed Industries may be among the best positioned companies in the space.
In clinical development, typical early-stage pharmaceutical companies advance drug candidates through at least Phase I and Phase II clinical trials. If successful, these companies then often seek to partner with a larger pharmaceutical company with the resources and expertise needed to manage Phase III clinical trials and ultimately market the product.
#1: Clinical Development
- High Margins: Pharmaceuticals tend to be high-margin products since they enjoy patent protection and are often paid for by insurance companies rather than individuals.
- Barriers to Entry: Pharmaceuticals tend to have high barriers to entry since they are typically patent protected and there’s a high cost to undergo clinical trials. Notable for the psychedelics industry, many of the companies are not able to secure strong patent protection for the legacy drugs they are developing.
- Large Markets: When significant benefit is provided to unmet medical needs, the market opportunities for pharmaceuticals can rise into the billions of dollars.
- High Cost: Clinical trials cost millions of dollars to run and take years to complete, which often results in high levels of dilution and increased capital risk for the company developing the drug.
- Execution Risk: Most clinical trial programs are ultimately unsuccessful, which means that pharmaceutical companies attempting to develop only a single drug candidate are themselves often unsuccessful.
#2: Creation and Out-Licensing of New Molecules
Some biotech companies focus on drug discovery and out-licensing to help derisk the drug development process for themselves and their partners. Based on proprietary methods and patents, these companies synthesize and validate new molecules. They then out-license the new molecules to partner companies who in turn shoulder the bulk of the development cost and risk. In the psychedelics industry the existing, well-known molecules such as psilocybin, MDMA, LSD, and others are employed as the starting point from which the new molecules are created through derivatization.
- High Margins: Licensing-based business models are high margin since there are only modest capital expenditures required for the creation, patenting and validation processes.
- Diverse & Scalable: Licensing-based business models are highly scalable and extremely diverse as they have the potential to work with multiple molecules and companies and in multiple medical indications.
- Marketing: Licensing-based business models can be difficult to implement since licensees tend to take on most of the execution risk.
#3: Consumer Packaged Goods
Consumer packaged goods, or CPG, companies focus on bringing near-term products to market. Without the need for regulatory approvals, these products open the door to nearer-term commercialization than clinical development or licensing business models. Some companies may also choose to operate in supportive jurisdictions outside of the U.S. or Canada.
- Immediate Revenue: The lack of regulatory requirements translates to a faster time to market and more opportunities for immediate revenue.
- First-Mover Advantage: Early movers in consumer packaged goods can develop their early brands that become market leaders.
- Lower Barriers: Consumer packaged goods aren’t typically protected by patents, which means that it’s easier for competitors to enter the market.
- Lower Margins: Consumer packaged goods typically sell for much less than approved, regulated drugs, because of the lack of patent protection
- Commoditization: Consumer goods can quickly become a commodity if successful, which may put even more pressure on profit margins.
MagicMed’s Unique Approach
MagicMed Industries is building a licensing-based business model to help partners develop a wide range of psychedelic drugs designed to meet specific requirements.
The company’s Psybrary™ is a library of new derivative molecules that it hopes to license to third-parties to develop into patentable commercial products. These partners stand to gain an edge against competitors with molecules that are fully-patented and validated to offer unique pharmacological characteristics specific to the partner’s objectives.
With the goal of onboarding its first partner by the end of the year, MagicMed could begin generating revenue as early as late 2020 or early 2021, with additional revenues from milestone payments beginning in 2022 as the partner companies pursue clinical trials. The company plans on charging customers for research costs and milestone payments, along with long-term product royalties that could pave the way for blue sky potential.
In addition to pharmaceutical partners, MagicMed would be well positioned to diversify into consumer goods in 2022 should regulatory opening up permit it. The move could help a growing number of functional mushroom companies develop patented products to differentiate themselves in a market that will likely experience some level of commoditization.
There are many different psychedelic business models out there, but MagicMed Industries has adopted one of the most promising—a licensing model targeting both pharmaceutical and potentially consumer goods companies. With an experienced management team at the helm, the company is well positioned to generate near-term high margin revenue.
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