Mind Medicine: Great Potential But Questionable Business Model

Summary

• MindMed's CEO has sold almost 25% of his shares in recent months.
• Tabernanthalog, 18-MAC, ME-18-MC could erode 18-MC's potential.
• Conducting LSD-assisted psychotherapy via videoconferencing is potentially hazardous and could result in lawsuits.
• The underlying fundamental potential is enormous if the company steers in the right direction based on Bayesian scenarios.

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Thesis

Mind Medicine (MindMed) Inc (NEO: MMED and OTCQB: MMEDF) has an interesting pipeline that could potentially revolutionize opioid-addiction treatment and anxiety-treatment via the use of psychedelic-inspired medicines. However, several competing molecules to its flagship molecule 18-MC (18-MAC, ME-18-MC, Tabernanthalog) could erode its competitive advantage and future margins, and interestingly, MindMed has future plans to conduct LSD-assisted phychotherapy via telehealth.

The CEO has also sold almost 25% of his shares, which raises doubts about an imminent Nasdaq uplisting in Q1 of 2021. If a Nasdaq uplisting is postponed, there is a high likelihood of price collapse. While MindMed has great potential, it is based on a questionable business model. I would suggest abstaining from investing until there is more clarity from management's side.

MindMed Pipeline

Source; MindMed investor presentation

I will primarily focus on analyzing two indications MindMed currently pursues;

• 18-MC for opioid-use-disorder (OUD)
• LSD-assisted psychotherapy for anxiety

18-MC

18-MC is a derivative from psychedelic Ibogaine. Ibogaine, on its own, shows tremendous potential in extinguishing opioid-addiction at its roots, unlike traditional opioid-replacement-therapies (ORT), such as Methadone. Methadone is a synthetic and long-acting opioid that a physician prescribes as a substitute therapy for opioid addiction.

In other words, addiction is not extinguished with Methadone, merrily substituted with a legal opioid. Ibogaine has therefore been used in some countries, mostly in "Ibogaine-clinics," in the treatment of OUD. However, Ibogaine has some negatives making it unsuitable for some individuals in the treatment of OUD. First, it is potently cardio-toxic, rendering it unsuitable for individuals with prior existing heart conditions (Ibogaine can cause death in those with heart conditions). Secondly, it is a very long-acting psychedelic. Its effect ranges up to 72 hours and leads to severe immobility and incapacitation.

Therefore, Ibogaine-sessions necessitate medical personnel's supervision and can be quite expensive. 18-MC lacks cardiotoxic effects in studies and is devoid of psychedelic effects while keeping the beneficial addiction-extinguishing properties of Ibogaine. 18-MC is also unscheduled in the U.S. and internationally, leading to less red tape in research and potential future commercialization.

MMED purchased the IP of 18-MC in July 2019 from Savant Addiction LLC for 5.5m USD.

18-MC derivatives & Tabernanthalog

Red circle, 18-methoxycoronaridine (18-MC) - IP held by MindMed. Blue circles, derivatives of 18-MC. - Source: Wikipedia

Several derivatives of 18-MC have been developed, with several of them being superior to 18-MC itself, the methoxyethyl congener ME-18-MC being more potent than 18-MC with similar efficacy, and the methylamino analog 18-MAC being more effective than 18-MC with around the same potency. Mind Medicine is currently the only company in phase-2 clinical development of a non-toxic and well-tolerated Ibogaine congener - 18-MC. MMED, acquiring the IP of 18-MC for the tiny sum of 5.5m USD, poses several questions about whether it's a question of time before a competing company acquires the other congeners' IP. On top of that, new research has unveiled a novel compound.

Tabernanthalog

Source: Author Made

In early December of 2020, a study in Nature's scientific journal explored a novel Ibogaine analog with non-toxic cardiac effects and devoid psychedelic effects: Tabernanthalog.

Interestingly, Tabernanthalog is easier to synthesize from a chemical standpoint than Ibogaine and 18-MC. While it takes several steps to synthesize Ibogaine and 18-MC, Tabernanthalog can be synthesized from a single step. Production costs and ease of synthesis are important factors to consider for a biotech-company. If competing molecules - such as Tabernanthalog, pose easier synthesis-routes, it is a question of time before a competitor buys the IP of other derivatives and Tabernanthalog and develops it for OUD.

Most importantly, Ibogaine, 18 MC, and 18-MAC, ME-18-MC, and their metabolites sequester in fat, contributing to their anti-addictive properties many months after initial use. This should theoretically reduce the dosage requirements and only lead to the occasional use of 18-MC as a future anti-addictive substance. Consequently, this will reduce the company's margins unless the pricing is very high per dose.

LSD-assisted therapy for anxiety

In layman's terms, anxiety & depression from a neurobiological perspective is due to certain neuronal networks' death (atrophy), particularly in the hippocampus, the PFC, and amygdala. These areas are all bidirectionally interconnected.

A reduction in neuron/synaptic-signaling gives rise to the symptoms of depression in specific brain areas. Therefore, metaphorically speaking, depression is similar to neurodegenerative diseases such as Alzheimer's and dementia. These diseases, too, present reductions in volume and atrophy of neurons in specific brain regions. Antidepressants such as SSRI have a delayed action mechanism in the antidepressant effect of upwards to 6-8 weeks. This is the time it takes before neurons, synapses, and dendrites start growing.

Psychedelics, such as approved Spravato (S-ketamine) by Janssen, LSD are potent antidepressants because the growth of neurons, synapses, dendrites occurs instantaneously compared to traditional antidepressants. The antidepressant mechanism of action, namely the rapidly altered neuroplasticity, is tied to the stimulation of a single receptor that virtually all psychedelics stimulate. Stimulation of the 5HT2-A receptor leads to downstream effects on the protein mTOR, which massively raises neurotrophic factors such as BDNF and NGF, leading to neurogenesis synaptogenesis, and dendritogenesis in specific brain areas affected by anxiety & depression. This is the reason why psychedelics are considered to be of the rapid-acting-antidepressant class.

LSD on its own has shown massive effect size in the treatment of anxiety associated with life-threatening diseases.

Therefore, there's a very high degree of likelihood of approval for all psychedelic compounds targeting depression/anxiety/PTSD, as S-ketamine, Spravato being an already approved 5HT2-A agonist proves. The importance of understanding this relationship bears monumental consequences, partly explained by the severe degree of overlap of diagnoses in psychiatry. This is also referred to as "co-morbidity".

Source: Author created using comorbidity data

In the illustration above, we can see single disease states, such as PTSD, OUD, Depression, Anxiety. Thereafter, there are several combinations a person can have.

It is common that PTSD is associated with OUD. This makes intuitive sense since a person with trauma often engages in substance abuse as a coping mechanism to numb distressing emotions and traumatic flashbacks. Likewise, depression is very commonly associated with anxiety as it displays very high comorbidity. There are also instances in where a person is depressed, anxious, has PTSD, and OUD all at the same time. Psychedelics, by their nature, have shown efficacy in treating a wide range of indications, including those I have drawn as examples. In reality, there are many more comorbidity combinations than those I have exemplified.

Therefore, one psychedelic could simultaneously treat other indications. J.R. Rahn, the CEO of MindMed, has publicly stated that LSD has assisted him in overcoming an addiction to cocaine and alcoholism, originating in childhood trauma.

While this is an anecdotal story, it is one of many and supports psychedelics' historical use in addiction treatment, especially during the 1950s and 1970s. This means that if a psychedelic is approved for treating one indication, it can paradoxically treat simultaneous other indications that are comorbid to it just by treating the approved condition it is intended to treat.

It is very likely to assume that psychedelics will also be regularly prescribed off-label for indications outside of their approved use. For example, psilocybin for anxiety (approved indication; depression) and mescaline (approved indication; alcoholism) for depression.

If one considers the current pace of psychedelic companies with various compounds in clinical trials, one can easily identify that the vast majority of them are indeed 5HT2-A agonists. Consequently, this will have material effects on Mind Medicine's potential revenue-streams on their LSD-assisted psychotherapy as they will be reduced due to extreme drug-cannibalization of competing compounds due to future off-label use. In addition, market size potential could be slightly reduced due to the prevalence and intersection of comorbid indications being treated simultaneously by a psychedelic compound.

Spravato (S-ketamine) as an example of psychedelic-therapy

If we look at the only approved 5HT2-A agonist - Spravato and analyze its effects, one can identify that Spravato has a concise duration in terms of psychedelic effects - mainly 45-60 minutes, with lingering after-effects of 1-2 hours. Also, medical supervision is required 2 hours after the psychedelic effects have subsided to safely let the patient go home after Spravato-therapy.

Source: MindMed phase 1 study

If we analyze the duration of LSD among different dosage ranges of 100-200μg from MMED's phase 1 study, it becomes apparent that the duration can be upwards of 12 hours as a mean. 100-200μg seems to be the dosage range MindMed is seeking to employ in LSD-assisted psychotherapy based on phase I studies and earlier press-releases.

Assuming that you need 1 hour of preparation and 2 hours of medical supervision after the trip, the entire psychedelic treatment sessions length can be upwards of 15 hours. Therefore, taking LSD early in the morning and being under the influence until its effects wear off in the evening is to be expected. Cost-wise, Spravato is at an average of 32 000 $/year. LSD-associated psychotherapy costs could be in this range or higher due to the lengthy duration of LSD compared to Spravato.

Interestingly, MindMed has future plans to conduct LSD-assisted psychotherapy via telehealth. This is achieved by the patient undergoing the psychedelic experience in the confines of his home whilst being under the supervision of a psychiatrist via Zoom and a trained nurse in psychedelic-therapy that can be on standby if the user experiences negative effects. It is unclear if the nurse would be present at all times or only arrive if the user experiences distress in his home.

MindMed's recent acquisition of HealthMode aims to expand MindMed into being a telehealth company alongside a biotech-company to scale the use of psychedelic therapies to remote locations.

There are several extreme and potentially hazardous issues with this approach, as a psychedelic journey, especially of such long duration as in LSD, is a very intimate and personal experience. It necessitates and requires the presence of people that the user trusts that could potentially oversee and aid the user if the psychedelic experience becomes unpleasant. It is very doubtful if a nurse or psychiatrist, via distance, would invoke such a crucial element of safe and trusting people for the user and a stable set & setting that is necessary for a successful and transforming psychedelic experience.

It has been mentioned that the use of MindMed's "LSD-neutralizer" technology would greatly aid and assist in cases of "bad trips." A fancy marketing word, MindMed's "neutralizer" is nothing more than a simple 5HT2-A antagonist, specifically - Ketanserin.

It is something you'd get if you were to have a full-blown bad trip and end up at a hospital - a simple - antipsychotic medicine.

The issue of using an antipsychotic is multifold. How do you determine if there's a need to take Ketanserin?

Psychedelics themselves create periods of anxiety during peak psychedelic effects that usually dissipate on their own. If anxiety becomes severe, the presence of a trusting person that can soothe the user is enough to turn the trip into becoming a powerfully transformative and cathartic experience.

If one were to take Ketanserin as soon as anxiety or fear arises quickly, the user would prematurely risk missing out on a therapeutic-session and the beneficially necessary neurological effects of LSD in anti-anxiety treatment.

Therefore, reducing the otherwise so long duration of LSD via the use of Ketanserin has risks on its own that are not easily quantifiable. Costs for the patient are likely to rise if the psychedelic journey is aborted, as additional sessions would be necessary to re-wire specific brain-networks to reach anti-anxiety efficacy since optimal BDNF, NGF levels have not risen sufficiently to alter neuroplasticity positively.

Management & Reddit

Recent price rises have been primarily attributed to rampant speculation on a potential Nasdaq-uplisting. Reddit widely believes that a potential Nasdaq-uplisting will lead to extreme price increases in the share as /WSB will allow discussions on stocks that are not considered OTC. MindMed filed for a Nasdaq uplisting back in September, which is currently under review.

While a logical basis exists for this assumption, it is not helped because the CEO, J.R., has sold almost a quarter (23%) of his position in the latest months. This does not inspire overall confidence in an imminent Nasdaq-uplisting. If the Nasdaq-uplisting is postponed for any reason, there's a very high probability that the share price can completely collapse. Source: Simply Wall Street platformSource: Simply Wall Street platform

Financing & valuation

Source: Press-releases

MindMed has been primarily financed by bought deals from boutique Canadian investment banks. It is also imperative to understand that institutional backing via bought deals does not indicate that banks believe in the sector - it merrily means that they see that there will be increased future demand for the stock. Bought deals are built on the principle of the institution going long and then unwinding its position or dicing large positions and selling to other market participants.

It is no secret that biotechnology companies do not produce any meaningful revenue in the first years as they have to go through 3 stages of clinical trials; phases 1,2 and 3. Therefore, currently projected cash-expenses for MindMed for the next few years look like this (-30,63m $ for 2021, -37,815m $ for 2022 and -47,75m $ for 2023).Source: Simply Wall Street platform.

In other words, MindMed follows the classical profile of biotech-companies in its cash expenditures.

Source: Toptal

If one were to analyze the amount of cash on hand they have, it would equate to $144.4m as per their latest press-release earlier this year. This should theoretically be enough until 2024, but it is difficult to gauge cash-expenses as they could rise in the future depending on management's action leading to altered expense estimates.

In other words, expense estimates tend to change. Many questions have arisen regarding patents and IP-protection of 18-MC, LSD, and Ketanserin. These questions are important to address as they are critical in estimating the potential period of revenue-flow MindMed experiences in the event of full FDA-approval of their compounds and when they will diminish due to increased competition as a result of lost exclusivity.

Drugs can be classified as having patents and drug-exclusivity. These are separate and do not necessarily have to co-occur. Patents in the U.S. are given for 20 years, while drug-exclusivity differs between 3 and 7 years.

In MindMed's case, it is likely they will receive drug exclusivity for a period of 3-5 years, as the indications (anxiety & OUD) they are pursuing are not characterized as being orphan. Orphan drug-status would give 7 years of drug-exclusivity. It is also possible to patent "processes" as MindMed is pursuing in various dosage-regimens in their LSD-trials. It is difficult to quantify how this would influence the potential future revenue-streams of MindMed, as little information exists in this matter.

Analyzing it conservatively to reduce model complexity, I chose to build a DCF-model based on rNPV that is the most commonly used methodology in biotech-valuation.

rNPV modeling requires careful consideration of each clinical phase's statistical probabilities of success. The total probability of success in psychiatry is based on an average of 6.7% for all phases (1,2,3 and approval-phase). This is exceptionally misleading and fails to consider the existing clinical data for each indication pursued and current & historical uses of equal or similar substances in molecular structure.

Phase 1 is generally concerned with human safety and dosage studies. 18-MC has already passed this phase, according to the company.

Phase 2 and 3 generally concern with efficacy in comparison with a placebo. Interestingly, given the historical use of psychedelics, particularly during the 1950s-1970s and the large existence of positive anecdotal evidence, it is prudent to assume that the cumulative probability of success of 18-MC & LSD is in the vicinity of 80-90%. 18-MC is so structurally similar to Ibogaine that success's probabilities are very high.

In contrast, one could argue that the absence of psychedelic effects of 18-MC renders it slightly less efficacious in treating OUD, some claiming that the psychotherapeutic insights obtained from the psychedelic experience of Ibogaine show the user errors that led up to the addiction during the experience.

There is also a neurobiological basis for this argument as 18-MC, unlike Ibogaine, does not affect the neurotrophic factor GDNF. Whilst, 18-MC could prove to be slightly less efficacious in the treatment of OUD, this could theoretically be mitigated by increased and prolonged use of 18-MC to compensate for its reduced efficacy in a longer period of use.

LSD and its 5HT2-A agonistic action also deserve a very high probability of success. The currently approved 5HT2-A agonist Spravato (S-ketamine) and currently pending clinical trials for psilocybin in TRD by Compass Pathways and psychedelics historical use in the 1950s-1970s suggest a high likelihood of clinical trial success for LSD.

I proceeded to create an excel-model based on APV. While it does not accurately model the expenses for MindMed's future years prior to revenue flows beginning, this can be compensated by utilizing a slightly higher WACC.

MMED- APV- Excel - rNPV and scenarios

Source: Excel spreadsheet

Source: Excel spreadsheet

The entire model is built on the possibility of putting in various assumptions critical in biotech valuation and seeing how various scenarios pan out based on different inputs (Bayesian modeling). By doing this, we are able to model hundreds of scenarios using different intervals of assumptions, such as:

WACC, tax-rates, costs, potential market size, market growth, market penetration, sales price, clinical trial probabilities. This is necessary to do since we are dealing with uncertainty.

I did a quick calculation for a 7-year exclusivity period, manipulating market penetration rate & drug-price, and arrived at a range of market caps for MindMed (see spreadsheet for detailed calculations).

Market cap estimates, ranging from conservative to optimistic:

LSD-assisted psychotherapy

2.15b - 85.16b$

18-MC

1.42b - 60b $

Even if we take extremely conservative estimates, the company's value should be at 2.15+1.42=3.57 b USD, and this is solely by looking at LSD-assisted psychotherapy and 18-MC for OUD.

We have not factored in ADHD. If one were to factor in preventive use of 18-MC after being prescribed opioids from a physician, the value of the company would be enormous.

Arguably, one can tinker with the WACC as I used a very small WACC of 13%. In addition, one could also criticize my estimates for calculating 7 years and not 3-5 as it is unlikely that 18-MC or LSD will receive orphan drug status as the conditions they are pursuing do not meet that criteria.

One can delete the years in my spreadsheet and see what the market cap would be for 3-5 years, but I chose 7 years as a balance of trying to quantify the potential upcoming patents on processes (dosing regimens) they're pursuing whilst keeping it very conservative in terms of establishing a total cash-flow period before the competition enters.

As a result, one can clearly identify that there is tremendous potential for the company, given the large degree of ranges at which the market cap can finally settle, but this is largely contingent on the direction management takes the company in.

Summary

There's a real risk that competing firms acquire the IP of ME-18-MC, 18-MAC, and Tabernanthalog. Therefore, competing firms could pursue their own clinical trials on these compounds as anti-addictive substances in the treatment of OUD. As a result, future-cashflows would decline substantially.

Therefore, it would be prudent from MindMed's side to purchase the IP for all 18-MC derivatives, especially considering the low-cost they acquired 18-MC at (5,5m USD), raising the likelihood that IP of the derivatives is cheap as well. This would shield and solidify MindMed's position against potential future competition and substantially increase the value of the company.

The value would considerably accelerate higher if 18-MC gained FDA-approval, as the molecular similarities of ME-18-MC, 18-MAC to 18-MC would massively increase the likelihood of them showing efficacy in the treatment of OUD and potentially other indications.

There are also question marks regarding the IP-protection 18-MC has. 18-MC was developed in 1996, and 20 years would have passed in 2016. Unless MindMed has other protection or pursues unique-drug delivery mechanisms that could extend protection, it is likely that it will have to solely rely on drug exclusivity. If this is the case, then the period would range between 3-5 years, as orphan drug-status is 7 years.

In regard to MindMed's plans of conducting LSD-assisted psychotherapy via scale and doing it via telehealth, it seems to be very risky, considering that the average duration of LSD is 12 hours. At the same time, one can certainly understand the need to scale treatment; doing it via telehealth and nurses risks colliding with the crucial set & setting that is paramount for a transformative psychedelic experience.

Arguably, the confines of one's home are probably a place where people are safe, but this has to be weighed against being present by a nurse you barely know or being monitored on Skype/Zoom of a psychiatrist.

Paradoxically, this could lead to an unsafer psychological environment due to impersonal social connections through the nurse and psychiatrist, and increase the risk of a bad-trip and the propensity to utilize Ketanserin as a trip-stopper, and therefore necessitate additional trips and increase costs.

If the nurse would not be present, there's a risk that the user during a bad-trip exits his home before the nurse arrives. In the event the user already had a Ketanserin-pill at home, there is no guarantee that he would take it under the influence of LSD, as thought-patterns can abruptly change to the negative and convince the user during the LSD-state that it is not worth taking it, which would exacerbate the bad trip.

All of this poses a lot of question marks and could open up MindMed as a company to lawsuits if something bad were to happen to a user during a therapeutic session conducted via Zoom/Skype. Therefore, the entire direction of scaling it via telehealth needs to be revised or potentially abandoned. JR. Rahn's inexperience in management and zero experience in the biotechnology field poses risks and questions as to whether he is capable of managing a company of this size.

In addition, it raises a lot of questions as to why a CEO sells almost 25% of his shares of what is supposedly an imminent Nasdaq uplisting. Investors obtaining information from Reddit should also be aware of the prevalence of PR firms and coordinated actions of accounts in trying to influence price and sentiment in psychedelic OTC-stocks, and this is not only attributable to MindMed.

The presence of institutional interest via bought-deal financing does not signal that institutions necessarily believe in psychedelic companies' ideas or business models - including MindMed. Instead, it should be interpreted as that they perceive a higher degree of demand in the future for the shares they purchased, which they can then sell to other market participants.

If one tries to model MindMed via the use of rNPV and Bayesian modeling, it becomes evident that the IP of MindMed has the potential to change the treatment of substance abuse disorders completely.

Striking examples of valuation would be seen if 18-MC were to be used as a preventive measure after patients discontinuing legally prescribed opioid-prescriptions. This could potentially de-risk users of facing withdrawal and spiraling into an illegal opioid-addiction.

Projected expenses could potentially be higher, resulting in increased equity-issuance, depending on the way management steers the company. Therefore, it is prudent to assume additional equity-offerings during the next years, as is typical of biotechnology shares.

All in all, MindMed is a company with fascinating compounds but with a lot of unaddressed questions. Fundamentally, the company could be an enormous success, but this is contingent on competent and sound management and clear communication to shareholders.

Unfortunately, I believe the board has to revise and rethink their latest initiatives in telehealth and have an internal discussion on the selling by the CEO. Therefore, I would abstain from purchasing MindMed at this moment and wait until there is more clarity.

Analyst’s 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.