Investors are starting to bet big on psychedelic medicine

Key Points
  • Psychedelic substances were once viewed as "drugs of abuse," but now regulators and investors are coming around to their potential therapeutic uses. 
  • Federal regulators just approved a variant of ketamine to treat depression after years of clinical studies. 
  • And now, a group of European investors have come together to fund new targets to treat mental health disorders, including arketamine (another variant of ketamine) and psychedelic mushrooms.
Marc Bruxelle

Psychedelic medicine is having a moment.

Just weeks after the U.S. Food and Drug Administration approved approved Johnson & Johnson's ketamine-like nasal spray for depression, a group of European technology investors just got together for the largest-ever private financing round for a psychedelic medicine biotech company, ATAI.

Psychedelic medicine involves research and investigations into mind-altering substances to treat mental illnesses including addiction, depression and post-traumatic stress disorder. After recreational use of psychedelics became popular in the 1960s, the U.S. government classified most of them "drugs of abuse" with no real medical value. However, recent clinical studies show mounting evidence that some psychedelics can help patients with certain mental illnesses, either in combination with traditional therapies or in cases where nothing else has worked.

Now health and technology investors are paying attention.

German company ATAI Life Sciences announced on Tuesday that it has raised more than $40 million in new financing. The round valued the company at $240 million, according to a person familiar, making it both the biggest round and the most valuable company in the young space. (There are well established nonprofits, like MAPS in California, but relatively few for-profit ventures.) ATAI is also targeting a potential initial public offering for the end of this year, the person said, which would draw further attention.

ATAI is currently funding clinical trials for what it refers to as "formerly stigmatized compounds," including psilocybin, the active compound in psychedelic mushrooms, and arketamine, a different variant of ketamine from the one Johnson & Johnson researched, as potential treatments for depression. Its portfolio also includes a technology arm called Innoplexus, which it describes as delivering "big data and AI solutions" to big pharma and biotech companies, as well as its own drug development.

ATAI is also the largest investor in a start-up called Compass Pathways, which is setting itself up to be the first legal provider of psilocybin. ATAI invested alongside Peter Thiel, the iconoclastic Silicon Valley investor and Facebook board member who's increasingly dabbling in health and biotech. ATAI co-founders Lars Wilde and Florian Brand are both affiliated with Compass; a third founder, Christian Angermayer, is a German entrepreneur and investor.

'A regulatory path forward'

Biotech investors believe that psychedelic medicine will experience a revival in the wake of recent research studies as well as some early signals of support from regulators.

Last year, for example, the U.S. Food and Drug Administration (FDA) gave Compass a "Breakthrough Therapy" designation for its research into psilocybin for depression, allowing legal clinical trials to start. The FDA also expedited the approval process for esketamine, which is derived from the anesthetic ketamine, because many patients with depression don't respond to normal treatments.

Adding further legitimacy to the space, Johnson & Johnson, the pharma giant, puts years of investment into studying into the benefits and potential side effects of esketamine. Its approval by the FDA represented the first new drug for depression in decades, although the medical establishment has stressed that more research is needed to better understand the long-term use of ketamine.

"A decision (like that) by FDA is the ultimate signal for investors," said Brad Loncar, a biotech investor with Loncar Investments, who specializes in cancer and rare disease. "It shows that there's a regulatory path forward for this class of drugs, which typically causes a flood of investment in the area."

Others say that private investment in the space needs to be coupled with research into their social impact, as well as programs to support and guide patients.

"People are getting behind psychedelic-assisted therapies because they are desperate for real solutions that actually work, and for many, this treatment does," said Liana Gillooly, a development officer at MAPS, a non-profit investigating the therapeutic uses of psychedelics, with an early focus on MDMA as a potential treatment for PTSD. But Gillooly said that funding needs to be set aside for "safe contexts" for these treatments to be administered, and not just for-profit drug development.

ATAI's funding, which totals $43 million, comes from Michael Auerbach's New York-based Subversive Capital, but also includes investors ranging from Apeiron Investment Group, which is Angermayer's family office; Bail Capital, a private equity firm; and Efrem Kamen, founder of the health care fund Pura Vida Investments. Prior investors include billionaire investor Mike Novogratz and the Icelandic businessman Thor Bjorgolfsson.

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