It’s déjà vu all over again, right?
No, this is different.
My colleague Nick Riso penned an incredibly timely article on Monday. The piece, titled, “Why The Psychedelic Boom Is All but Inevitable” discussed the coming boom of various psychedelic treatments to address a growing mental health crisis.
You would have thought that he knew something was up when shares of Mind Medicine (MNMD) shot higher by more than 50% yesterday. I always say that luck prefers the prepared trader… And Nick was just trying to prepare you.
Why is Psychedelic different?
The early 2000s saw a surge in the number of cannabis stocks as they moved to get ahead of the market. Investors were attracted, but really didn’t see a catalyst for long-term growth.
For decades, the market had been focused on the medicinal benefits of the drug, and frankly, it was hard for many to prove. But the recreational uses were clear. And they meant money for the states willing to think progressively.
Then California and Denver came along. Starting in 2016 and continuing to this day states like California, Colorado, Oregon, and just last year, Ohio, decided to allow cannabis use to solve another problem… Income.
That was the cannabis industry’s big win, the “monetization moment” as I call it. But it could have been so much better.
It could have been better. Much better. That’s where MindMed and other psychedelic companies come in.
As Nick pointed out, the boom in this industry is inevitable, but this isn’t cannabis 2.0. Instead, my base case for the sector involves a number of these small biotech companies being purchased by Big Pharma.
Think about this: InBev (BUD)’s market cap sits at $107 billion. Eli Lily (LLY)’s market cap $741 billion. InBev and several beverage companies are finding homes for some of the cannabis companies as the product matriculates into our social scene.
Companies like MindMed are different, as you can think of these companies more like incubators for the Big Pharma names. Companies like Pfizer (PFE), AbbVie (ABBV) and Eli Lilly are going to start taking small investments in the psychedelic pharma names as they develop, test, and trial their treatments.
This is an alternative to the Big Pharma companies developing their own expensive and time-consuming product pipelines, but they’ve got an end game in mind.
Let’s go back to MindMed. Yesterday was huge for the company. The stock rallied more than 50% after the company announced another round of positive trial results from one of their anxiety disorder treatments “MM120.”
Additionally, the company also received “breakthrough therapy designation” from the U.S. Food and Drug Administration (FDA). The designation allows the FDA to prioritize the review of the trial data as the therapy may show substantial treatment advantages over existing options for patients with serious or life-threatening diseases.
The breakthrough designation is not a statement of efficacy or a fast track for the drug, but it does suggest that Mind Medicine’s treatment is showing promise.
As for yesterday’s stock move, we’ve seen bigger return days for MNMD stock.
In August 2022, the stock surged more than 80% on the announcement of promising trial data just like yesterday. The stock also had the tailwind of seeing two large Wall Street firms initiate coverage of the company.
That was your first hint that something good was going to happen: Wall Street wanted in.
We saw the first wave of investors flock to MNMD and other alternative treatment stocks – that’s what you’re going to find the Big Pharma companies calling it at some point – as “traders” sniffed an opportunity. I say “traders” because it saw relative short-term money that was trading into the stock.
The buzz died off and the traders took profits causing MNMD shares to fall from $80 to $2.50.
With the stock preparing to cross back above $10, I’m expecting different results.
MindMed is no longer a “flash in the pan” stock. The company has taken the time to develop its pipeline – they are several therapies under development – and they continue to work their way through the FDA trial process.
The company’s management also announced the pricing of an underwritten offering of 16,666,667 common shares of stock. That’s the company raising cash to fund their research and development (R&D) pipeline and operations. I worry about companies that raise cash on pops in their stocks when their business models are failing, not budding.
The move above $10 will undoubtedly attract new coverage from Wall Street. Canaccord Genuity initiated MindMed stock with a “buy” recommendation and a $9 price target in December. We’ll see more analysts adding MNMD to their buy list, which drives the stock price higher.
Bottom Line
We always say that the $10 level is critical for any stock.
Stocks rising above this level gain more traction as institutions and large investors take notice. I expect this to be the case with MNMD. The stock should see some resistance at $12 but then make a clear run to $15.
Keep in mind that some speculators will be piling into the stock. As I always tell you, speculation is good, it’s what drives the market. If investors weren’t willing to speculate on MNMD shares, it would be sitting at $0.02.
The long game here is that I consider MNMD a “company of interest” for some big-cap player that will look to benefit from the sales of their treatments after the FDA gives its nod of approval. That will be the big payout for the long-term bulls.
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About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.