Source: Company Website
COMPASS Pathways (NASDAQ:CMPS) is a London-based psychedelic drug company advancing a single pipeline candidate for treatment-resistant depression (TRD). CMPS filed an IPO on September 18, 2020, and netted US$136.4M through an upsized initial public offering on the Nasdaq of 8.6M American Depositary Shares (ADSs) (including full exercise of the overallotment) at $17 per ADS. Each ADS represents one ordinary share. The company originally planned to sell 6.7M ADSs at a range of US$14-16 per ADS. Since then, the stock has rallied 210% as of today. I have doubts about its commercial success, and therefore, I am not comfortable with its current valuation. I am planning to watch it from the sidelines.
Source: Image created by the author based on the information presented by CMPS
CMPS is developing psychedelic therapy called psilocybin (COMP360) to treat treatment-resistant depression. Psilocybin is a psychoactive substance administered in conjunction with psychotherapy conducted by a registered mental health professional.
Psilocybin is now in clinical development for TRD in the US, Canada, and Europe. CMPS recently announced safety data from an exploratory phase I study (EudraCT 2018-000978-30) that evaluated the feasibility and safety of simultaneous psilocybin administration with 1:1 in-person psychological support. The COMP360 received a Breakthrough Therapy status by the FDA, which could lead to a faster six-month review and extra support from the FDA during clinical development. If everything goes well, the COMP360 psilocybin therapy will be approved and launched around 2023-2024 in the US and Europe.
Source: Company IR presentation * Note: *5-HT2A = 5-hydroxytryptamine 2A; DMN = default mode network; mPFC = medial prefrontal cortex
Psilocybin belongs to a class of drugs referred to as psychedelics (‘mind-manifesting’). According to the company, partial agonism of 5-HT2a receptors is a key mechanism that induces neuroplasticity, leading to a change in mood and behavior.
History of Psilocybin:
Psilocybin was used in psychiatric research and psychodynamic-orientated psychotherapy from the early 1960s until it became a Schedule 1 substance in the US in 1970. More recently, several small studies have indicated the efficacy of psilocybin on depression.
Source: Company Website
Various investigator-sponsored studies in psilocybin did show some level of benefit. For example, studies by Johns Hopkins University and Imperial College London showed improvement in symptoms, and the effect lasted up to six months for some participants. Studies demonstrated that Psilocybin was well tolerated, and there were no reports of serious adverse effects during the trial. I will discuss these trials in detail later in this report.
I think the key value propositions of COMP360 over the standard-of-care medications such as second-generation antipsychotics, anti-depressants, and Esketamine are:
The aforementioned benefits can indeed be considered a competitive advantage, especially the long duration of action, compared to the standard-of-care therapies. However, COMP360 has many unfavorable characteristics that negate all these benefits. I will further explore the clinical landscape in this report and explain why I am skeptical about COMP360's commercial success.
I will analyze three key questions to guide investors:
What is depression, and what is the science behind it?
Source: Rosenblat JD, et al. ANZJP 2020
Depression is a long-term recurring condition where it has serious disruption to normal function and often has no trigger. It is different from regular sadness, which is just a normal emotion in a specific situation. 6-10% of patients suffering from depression attempted suicide in the past 12 months. According to the NIH study in 2010, MDD has the highest-burden amongst mental and behavioral disorders.
Source: NIH study, 2010
MDD is a common debilitating disorder affecting 10%–15% of the population per year. Despite advances in understanding psychopharmacology and the introduction of several novel classes of antidepressants, merely 60%–70% of patients respond to antidepressant therapy. 10%–30% of the patients who do not respond to antidepressants exhibit treatment-resistant symptoms, coupled with social and occupational function challenges, a decline of physical health, suicidal thoughts, and increased healthcare utilization. Treatment-resistant depression represents a dilemma for healthcare providers.
Definition of treatment-resistant depression:
Treatment-resistant depression is defined as an MDD with a poor or unsatisfactory response to two adequate (optimal dosage and duration) trials of two different classes of antidepressants.
Source(s): CDC (NHANES); NCHS; ID 815352 - Statista
According to GlobalData, the MDD market is set to rise to US$5.8B by 2025, at a compound annual growth rate of 6.1%. If we focus on the "treatment-resistant depression" segment where COMP360 is targeting, it is estimated to be US$1B in 2018 and reach US$1.4B by 2027, according to Credence Research. I see this as an attractive market size and growth rate with a high unmet need.
Depression is not a curable disease; therapy aims to prevent symptoms from aggravating and keep the patient well through pharmacological therapies. Therefore, the treatment is divided into two phases.
What are the pharmacological interventions currently used widely?
Source: Depression treatment algorithm based on CANMAT guideline (2016)
According to CANMAT guidelines, the first-line therapies are SSRIs, SNRIs, and Atypical antidepressants such as Bupropion, Mirtazapine, and Vortioxetine. Second and third-line agents include TCAs and MAOIs.
Source: Lancet, Comparative efficacy and acceptability of 21 antidepressant
The main reason these agents are divided into first-line and second-line categories is their tolerability level, not because they are more effective at reducing depression. As shown in the study above, all of the first to third line agents are effective; however, only a few agents have a tolerable side-effect profile. That being said, we can categorize currently approved drugs on their tolerability and efficacy, as shown below.
Source: Cipriani A, et al. Lancet 2018; 391:1357–66
Therefore, the standard-of-care agents' key success factor is the "tolerability" determined by the drug's adverse event profile.
For the "treatment-resistant depression" arena, there are no clear winners yet.
After the first-line agent's failure due to side-effect concerns or if the depression is not well controlled, clinicians will either have to try a second-line drug or neurostimulation treatments. There is no clear evidence to suggest one strategy over another. This was shown through the STAR*D trial in 2010, which was designed to give guidance in selecting the best next-step treatment for the patient who fails to get sufficient relief from the first-line therapy.
Source: STAR*D trial in 2010
As the level goes up on the figure above, the investigators switched the patient to various agents to see which agent works the best after failing the first-line agent, Citalopram (SSRI). As shown from the data above, as the level increases, remission rates decrease, but there was no difference in effectiveness between various treatments and treatment levels. After patients drop out of the first-line antidepressant therapy, the pharmacological difference between agents did not translate into significant clinical differences, although tolerability differences were evident.
The bottom line is that there is no clear winner for the treatment-resistant patients, and prescribers tailor the therapy based on patient-specific factors and what they can tolerate. The key considerations that I usually think of are the side-effect difference amongst agents, the drug's half-life, adverse effect profile, and severity of the discontinuation syndrome, etc.
Source: Company IR Presentation
Currently, third-line therapies include
Because of the complex nature of COMP360, where it needs to be combined with a physical therapy session, a significant competitive advantage must be shown to compete with other options that do not require a psychotherapy session.
COMP360 uses a very similar mechanism of action with already approved antidepressants with a low level of differentiation
The cause of depression is not clearly understood, but genetic, biological, and physiological factors affect depression. A hypothesis widely accepted by the clinician is "the monoamine deficiency theory." Based on this theory, if our brain has a deficiency of certain neurotransmitters, it could cause depression.
Three types of neurotransmitters are:
If we could increase these neurotransmitters in the neural pathways, then we can treat depression.
Source: American Society of Clinical Psychopharmacology Duman RS, et al., biol Psychiatry. 2000;48:732-739
There are two main ways of increasing the serotonin level in the neural pathway:
COMPASS Pathways' candidate COMP360 uses the second strategy. COMP360 is a partial agonist of 5-HT2a receptors.
However, based on the pure mechanism of action standpoint, COMP360 looks weak compared to other already approved candidates for two reasons.
Source: Viibryd Monograph
For example, Vilazodone is a partial agonist of the serotonin receptor and a serotonin reuptake inhibitor. In my view, COMP360 is a soldier only armed with a handgun, while Vilazodone is a soldier armed with a handgun and a rocket launcher.
However, due to the complex nature of depression, a large-scale clinical trial is warranted to understand the drug's full clinical effect as other unknown mechanisms of action of COMP360 may exist.
Source: Anesthesiology. 2011;115(6): 1291-1298
Another unclear area is whether the COMP360 is the main driver of efficacy or the in-person psychotherapy driving the benefit. Various non-pharmacological therapies like CBT, interpersonal therapy, and psychodynamic therapy have already shown evidence as an effective option. If psychotherapy drove most of the benefit, then COMP360 is useless.
Even if I assume partial serotonergic agonism, combined with in-person therapy, somehow creates a synergistic mechanism, because many other drugs share the serotonergic pathway, the entrance barrier for other competitors seems very low. Except for Bupropion and Ketamine, all the major antidepressants currently approved and used widely are serotonergic drugs. That means that other companies can easily start another combination trial with similar psychotherapy and pump out stronger clinical data. It is unrealistic for the COMPASS Pathways to file a patent for a psychotherapy session as it is a procedure, not a drug. For example, you don't see any surgeons filing patents to prevent others from providing certain procedures that they have invented.
Source: Jacobson, S., et al. (2007), Clinical Manual of Geriatric Psychopharmacology
Previous investigator-initiated trials (IITs) showed some level of evidence supporting the feasibility of Psilocybin. Using the various IITs demonstrated below as a benchmark, I think Psilocybin will show some evidence in combating depression. However, I think the COMP360 has various drawbacks that will limit its wide adoption and only capture a tiny portion of the market share.
1. University of California, Los Angeles (2011):
Source: Pilot Study of Psilocybin Treatment for Anxiety in Patients With Advanced-Stage Cancer - Subjective effects of psilocybin as measured by the 5-Dimension Altered States of Consciousness profile (5D-ASC).
Psilocybin was studied as a treatment for anxiety in patients with advanced-stage cancer; some of the data revealed a "positive trend" toward improved mood and anxiety. However, I am not too confident that it will demonstrate significant benefits over other marketed antidepressants.
2. Imperial College London (2016, 2018):
Study design: An open-label feasibility trial where the investigators looked at 12 patients (six men, six women) with moderate-to-severe, unipolar, treatment-resistant major depression. Patients received two oral doses of psilocybin (10 mg and 25 mg, 7 days apart) in a supportive setting.
Source: Depression severity (BDI) over time, by the patient - New York University
All patients showed some clinical improvements for at least 3 weeks after the treatment; enduring improvements beyond 3 weeks were not observed universally. Moreover, 40% of the patients showed a degree of relapse at 3 months. No serious or unexpected adverse reactions were observed during the trial.
3. Johns Hopkins University (2016, 2020)
Source: Figure 4: Effects of psilocybin on clinically significant response rate and symptom remission rate assessed with clinician-rated measures of depression and anxiety.
Psilocybin was administered under psychologically supportive, double-blind conditions in patients with life-threatening cancer and diagnosed anxiety or depression disorder. A single dose of psilocybin demonstrated improved quality of life, decreased anxiety, and depressed mood (overall rate of clinical response at 6 months on clinician-rated depression and anxiety was 78% and 83%, respectively). The effects endured at least 6 months according to the ratings by patients, clinicians, and community observers. I find this long duration of benefit a huge advantage over other types of other therapy.
In conclusion, these small-scale studies have shown the feasibility of this novel approach, and multi-site studies in a larger and more diverse patient population should be conducted for more conclusive evidence.
In the next section, I will explain my concerns that may limit COMP360's commercial success.
1. The side-effect profile of COMP360 may limit its commercial success. Two patients treated in phase 2b have experienced serious adverse reactions that may be drug-related. One patient experienced an adjustment disorder that led to hospitalization. The investigator deemed the event, which happened more than a month after treatment, to be of moderate severity and possibly related to the drug. Moreover, another patient was hospitalized with suicidal ideation. There could be a lot of unknown safety risks that may emerge during the large-scale trial. Having only one drug to support the current valuation is highly risky for a small-cap biotech company. Any negative readout will destroy the stock price as there is no other pipeline candidate to fall back on.
Source: Image created by the author with data from the company website and Escitalopram trial.
Psilocybin can alter the perception of space and time and cause euphoria, visual distortions, and mystical experiences; this can be problematic. According to the phase 1 trial, approximately 97% of the patients reported adverse events for both 10mg and 25mg doses. Even if there were no serious adverse event-related withdrawals, the presence of hallucinations and illusions and the frequency of these side-effects worries me. Side-effects such as hallucination and illusion were reported 500% more frequently than with placebo agents. In comparison, the side-effect profile of escitalopram, a first-line SSRI agent, has a milder side-effect profile, and hallucination or illusion has not been reported. Even if the median duration of these side-effects is one day, due to the risk of dependence and abuse, some patients and prescribers may be reluctant to initiate COMP360.
2. Negative stigma may limit its market penetration. Even if the research began as early as the 1950s, psychedelic therapies were continuously hampered by the scientific community as having no medical value and ruled illegal. According to a survey in 2017, it was found that only half of adults in the United States supported allowing researchers to study illegal psychedelic substances in medical trials.
3. Even if COMP360 shows superior efficacy over the standard of care antidepressants, in-person psychotherapy's complex nature may limit its market penetration.
Source: Company IR presentation
Before therapy, patients need to be screened, and this process requires three meetings with a therapist, including several 3-6 weekly preparation sessions and a "washout period." During the "washout period," the patient tapers their antidepressant therapy to avoid potential drug-to-drug interaction with COMP360. Furthermore, the patient needs to go through a 90-minute baseline assessment a day before treatment. A day after a long 6-7 hour session where the patient finally receives the drug, the patient needs to re-visit the therapist for further assessment and discuss their experience. I think COMP360 is likely the most complex and time-consuming treatment for depression.
Another big hurdle that I see taking place is antidepressant discontinuation syndrome during the wash-out period. This includes flu-like symptoms, insomnia, nausea, imbalance, sensory disturbances, and hyperarousal. Many patients may drop out in the middle of the study due to these symptoms and choose to continue the standard-of-care antidepressants they used to take, as discontinuation syndrome is rapidly extinguished with the reinstitution of antidepressant medication. If many patients continuously drop out, and the success rate is low, providers may become reluctant to recommend it widely. Another factor is that COMP360 will likely require many follow-ups from the prescriber, and that complexity annoys many physicians, further hurting their prescribing volume.
4. Another big aspect is reimbursement, COMP360 will be significantly more expensive compared to another standard of care pharmacotherapy, and it may be difficult for it to be reimbursed by insurance companies. Without adequate insurance reimbursement, there will be a meager volume of prescribing taking place.
5. If COVID-19 continues to be a problem during the next few years, it may negatively impact clinical trials' feasibility. The in-person therapy sessions in a closed room setting may increase COVID-19 infection risk. For example, the trial was halted in March due to the pandemic for two months. If there is a second wave of COVID-19, there is a high probability of enrollment being halted again, further delaying the launch date. If COMPASS Pathways can somehow replace in-person therapy sessions through technology (Zoom or smartphone app), they may go around this problem. However, will that have the same benefit as face-to-face therapy? Can a licensed psychotherapist be able to charge for their service if it is virtual? I do not have a clear answer for that.
Source: Company website - Therapist training
6. Psychotherapists must be registered mental health professionals (mental health nurses, clinical psychologists, or psychiatrists). Because the expected patient volume may be low, I expect very few mental health professionals to volunteer for this training program unless paid by the company. The training program would likely take weeks and has a mandatory in-person class component. It may not make economic sense for healthcare providers to dedicate a couple of weeks to training for a therapy that very few patients would receive. For example, as to date, COMPASS Pathways was only able to train 65 therapists. I see therapist training being the bottleneck and hindering COMP360's market penetration and patient accessibility. Only a handful of patients with both expensive private insurance and a registered Psilocybin therapist nearby will be able to benefit from it. If the company covers expenses related to the training sessions, this will further hurt the profitability of COMPASS Pathways.
7. There are other potential competitors currently developing treatments for TRD that can disrupt the therapeutic landscape (i.e., NV-5138, AXS-05, PSIL-201). PSIL-201 is another psilocybin therapy that is currently developed by the Usona Institute and Signant Health that is going through a phase 2 trial. Any of these agents can outcompete COMP360 considering their progress.
Joseph Edelman, portfolio manager at Perceptive Advisors and widely regarded as the greatest biotech investor of all time, typically places a 3x peak sales multiple on potential drug candidates. In some cases, he has applied multiples of 6x or more.
Using a conservative multiple of 3 to justify the current valuation of US$1.2B, the company needs to produce peak sales of US$400M. I will explain why this is an unlikely target for COMPASS Pathways to achieve.
Limited Pricing Power
Considering that the generic SSRI agent fluoxetine usually costs around US$46 a month, and even the brand name product, Celexa, costs $94 a month. COMP360 pricing power will be around this range. Esketamine is indeed marked at US$30-49k a year; however, this expensive price-tag prevented Esketamine from receiving reimbursement and impeded its market penetration.
Moreover, investors should keep in mind that the drug must be administered with approximately 10 hours of in-person session with a psychiatrist and therapist. Assuming the therapy session will cost between US$50 and $100 per hour, the total payment would be around US$500-1,000 on top of the drug. This makes the whole treatment many times more expensive than the standard-of-care antidepressants (i.e., SSRI, SNRI). With this expensive price tag, I doubt that any public and private payers will reimburse for COMP360.
For COMPASS Pathways to generate US$400M of peak sales (as the revenue would likely come only from the drug, not the therapy session), I estimate that the company would need to capture 100% of the projected market of treatment-resistant depression in 2027. This is highly unlikely to happen.
Source: Number of citalopram prescriptions in the U.S. from 2004 to 2017 (in millions): AHRQ; ClinCalc; ID 781811
Another comparison would be to compare its peak sales to the currently approved first-line agent. The number of prescriptions of citalopram in the US is around 24.43M in 2017. Each prescription would be around US$70 (90 days supply); this makes an annual sale of around US$1.7B.
US$400M is close to 25% of the US sale of citalopram. This is a highly unrealistic target for a second/third-line agent with a brand-new mechanism of action to achieve. Citalopram is a validated medication with 20+ years of long-term clinical evidence. Especially in psychiatry, antidepressant sales are sticky as prescribers are reluctant to change to a new drug when patients are stable on a standard-of-care treatment like citalopram.
What should be the target price of the COMPASS Pathways?
The 2017 peak sale of Viibryd, a second-line agent that shares a similar mechanism of action to COMP360, is around US$300M. I believe an appropriate valuation of COMP360 should be around half of Viibryd, based on the in-person therapy's cumbersome nature. Using a peak sales multiple of 3, the intrinsic value of the COMPASS Pathways should be around US$450-500M, which is very close to the IPO valuation of the company.
Considering that 34.8M shares are outstanding, my 12-month target share price for this company is US$13-15/share.
BiotechValley's rating is "hold" or "sell" with a target price of US$13. Through analyzing the current market landscape, COMP360's mechanism of action, and previous trials of Psilocybin based treatments, I am not very optimistic about COMP360's commercial success. That is why I am planning to watch it from the sidelines. Even if I am fairly bearish about this company, I wouldn't recommend the readers to short this ticker as it seems like there are lots of retail hype and speculation on this name like the cannabis producers. I look forward to reading the results from their Phase II/III P-TRD trial. I expect that there will be no significant catalyst until their Interim reporting on Q4 2020.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.