Per the consensus of Wall Street analysts, Compass Pathways (CMPS 0.77%) stock is on track for an absolutely stellar 12 months. They see its shares rising by 307% compared to where it is today. For reference, a typical year sees the stock market rise by around 10%, so the bean counters are doubtlessly calculating that the upstart biotech will succeed in its ambitions to commercialize its first psychedelic therapy.
Unlike many frothy estimates, there's actually a credible path for Compass to wow the market to the extent that the analysts anticipate, though the outcome is very far from being assured. Here's what needs to happen.
NASDAQ: CMPS
Key Data Points
Breaking through long-standing barriers
Some of the most important upcoming catalysts for Compass' stock have little to do with its own research and development (R&D) or business development activities.
Lykos Therapeutics, a psychedelic biotech spun out of the nonprofit Multidisciplinary Association For Psychedelic Studies (MAPS), is on the verge of commercializing its first therapy program, which is a combination of MDMA (a psychoactive chemical known by the street names ecstasy or molly) and psychological support intended to treat post-traumatic stress disorder (PTSD).
Lykos has submitted its approval packet to regulators at the Food and Drug Administration (FDA), and it should hear back by Aug. 11 of this year. That means before the close of 2024, the very first experiential psychedelic medicine could be approved for sale, upending decades of prohibition and marking the start of a new age of treating mental illnesses.
If Lykos succeeds, it is very likely that Compass' stock will fly upward. The implication is that regulators will be on board with the general idea that it is possible for psychedelics to be safe and effective. And so when it's another player's turn to have regulators consider their application for commercialization, investors will be able to have some confidence that there will not be an automatic rejection on the basis of the therapeutic modality alone.
Shifts in the disposition of other executive agencies, like the Drug Enforcement Agency (DEA), as well as in the disposition of federal legislators, are practically a given if the FDA gives the green light to Lykos. Each of those shifts has the potential to be another significant catalyst, such as rescheduling psychedelic molecules to be easier to use medicinally and provisioning for federal research dollars to go into psychedelics research.
And that's before even taking Compass' own increasingly mature pipeline into account. The biotech's lead candidate, COMP360, is a pairing of psychological support from trained clinicians and the psychedelic molecule psilocybin, and it's intended to address treatment-resistant depression (TRD). COMP360 is currently in phase 3 clinical trials, with one trial anticipating to report top-line data this summer and another reporting in the middle of 2025.
Impressing the market with strong late-stage data on the program's efficacy would dramatically increase its chances of approval and thus also likely send the stock soaring. As the business has no products on the market currently, the rest of the road to generating recurring revenue will be dotted with similar catalysts. With $248 million in cash, equivalents, and short-term investments, management is signaling that it has enough funding on hand to last it through late 2025, so there is minimal risk of getting diluted by new share issuance, which is a plus.
There are still serious risks
The next two years indeed look like they'll be transformational for Compass and potentially lucrative for shareholders as well. While the estimates by financial analysts still seem a bit over the top, it's important to recognize that there are so many powerful catalysts waiting in the wings that they may well be proven right. But there are still a few obstacles that could derail the endeavor and cause the stock to fall rather than rise.
The biggest risk is that COMP360 does not perform as well as what is hoped for on the basis of phase 1 and phase 2 data. Similar risks are common to all biotech stocks, so don't lose sleep over it with this one.
Another risk is that regulators, legislators, or other key government personnel may sour on the prospect of psychedelic medicines once more. Remember, right now psychedelic therapies are classified as solely investigational in nature, and outside a few strictly controlled medical contexts, they're fully illegal. The momentum appears to be on the side of that status changing promptly in the face of high-quality clinical evidence, but the wave petering out is still entirely possible.
In light of all of the above, will Compass' stock meet analysts' mark? It's unlikely, though possible. The good news is that if FDA approvals occur, this biotech stock could still have plenty enough upside even if it underperforms expectations.
