Will ATAI’s IPO Help Or Hurt Compass Pathways?

  • Compass Pathways’ September IPO was a major industry catalyst for psychedelic stocks
  • When ATAI Life Sciences goes public in 2021 it will be an even bigger sector catalyst – but perhaps not for Compass Pathways?

Major IPOs can be big investment drivers. Not just for the company going public, but sometimes as a catalyst for the entire sector.

Case in point: Compass Pathways’ (US:CMPS) September IPO in the psychedelics space.

Compass has performed strongly, rising from its initial trading price of $17 per share to (recently) as high as $54 per share. But that IPO was also a catalyst for the entire sector.

After months of sideways trading (on low volume), most psychedelic stocks have exploded higher since September. And trading volumes have risen radically with several of these companies.

Psychedelic Stock Watch predicted that the Compass IPO would have this impact across the industry.

ATAI’s IPO will be a new sector catalyst

Now ATAI Life Sciences has announced it is going public in early 2021. This is expected to be a significantly larger IPO than even that of Compass Pathways.

Once again, this major announcement can be expected to be an important sector catalyst. But will everyone benefit from ATAI commencing public trading?

Psychedelic Stock Watch has gone on record as saying we expect MindMed Inc (CAN:MMED / US:MMEDF / GER:MMQ) to be one of the big beneficiaries. In fact, we believe that the ATAI IPO announcement is already driving MindMed stock.

Why An ATAI IPO Is Driving MindMed Stock

Why should investors connect a sudden jump in MindMed stock (on very heavy volume) with excitement over the upcoming ATAI Life Sciences IPO?

Let’s suppose you’re a forward-thinking investor who has just projected the likely trading pattern with ATAI stock after it goes public.

You’re very interested in taking a position. You like the big-tent ATAI business model. It offers a multitude of potential R&D winners, thus adding upside potential and diversifying risk.

But you’re not prepared to ridiculously overpay to elbow your way in.

What is the alternative? MindMed Inc.

The ATAI announcement has drawn even more attention to psychedelic drug stocks. As investors do their due diligence on ATAI – and its peers – they discover MindMed, looking somewhat like a smaller, less-capitalized version of ATAI itself.

You want to enter ATAI. But you’re not sure that you will be able to purchase a block of shares at an attractive price.

MindMed is the obvious alternative to ATAI Life Sciences

Call it an “insurance policy”. Call it the “second choice” of many investors in psychedelic stocks.

But could the ATAI Life Sciences IPO actually have a negative impact on some psychedelic drug stocks?

Why the ATAI IPO could hurt Compass Pathways

Ironically, after Compass’ own IPO drove gains across the psychedelics space, it could actually be one of the losers from the ATAI IPO. Consider this.

First of all, as most investors already know, ATAI holds a big piece of Compass (>20%). So investing in ATAI still gives investors significant exposure to Compass. But ATAI is much more.

Psychedelic Stock Watch has described ATAI as “the kingmaker” of the psychedelic drug industry.

Its business model is a big-tent R&D platform that already features nine research partnerships (including ATAI’s partnership with Compass). ATAI is the best-capitalized entity among private companies, having just raised $125 million in its Series C financing round. Going public will further amplify ATAI’s financial clout.

By itself, ATAI will give investors broad exposure to the psychedelic drug industry.

In contrast, Compass is more of a one-trick pony – at the moment.

Investor focus, and the company’s own focus is squarely on Compass’ lead R&D initiative: its psilocybin-assisted therapy for treatment-resistant depression. This has progressed to the Phase 2 clinical trials stage. The research further benefits from Breakthrough Therapy designation by the FDA.

It’s the most highly-regarded individual psychedelics R&D initiative today. But beyond that, Compass’ R&D pipeline is much less advanced – and drawing little attention from investors or the media.

Investors with a micro-focus on psychedelics to treat depression or on psilocybin-based therapies may still prefer Compass over ATAI. But beyond those narrow demographics, ATAI appears to clearly be the more tempting option.

Anemic recent trading with Compass

After strong gains and heavy trading volume during its first month of public trading, investor interest in Compass has tailed off.

Trading volume dropped dramatically beginning in late October. Compass stock has recently spiked, moving from $33.82 (November 20th) all the way to $54+ to begin December. But it made this move on below-average volume.

If investors were bidding up Compass as a reaction to the ATAI IPO announcement, they were not doing so with much conviction. Not surprisingly, Compass gave back much of those gains on Friday (-8.36%).

Compare this to MindMed.

Immediately, after the ATAI announcement MMED spiked from CAD$1.65 all the way to CAD$2.58 – on three consecutive days of near-record trading volume. That’s conviction.

Volume has since slipped back to average, but MindMed has hung onto most of those big gains. Conversely, without an uptick in trading volume, Compass’ recent jump looks less sustainable.

How an ATAI IPO might help Compass

One of the reasons why Compass has seen waning investor interest in recent weeks is the lack of news-flow. The problem with Compass’ singular focus is that it doesn’t generate a lot of investing milestones.

In contrast, ATAI’s much broader business model will generate a lot stronger news-flow to drive the stock – and keep the company closer to full value more of the time. This is another reason why experienced investors will likely favor ATAI over Compass.

However, investors also need to remember that Compass is cash-rich after its $146.6 million IPO financing. This is far in excess of what Compass needs to pilot its Phase 2 clinical trial and fund other research in its pipeline.

There has been considerable speculation within the industry that Compass will start deploying some of this capital via acquisitions. But when?

With ATAI’s IPO announcement, Compass itself may suddenly be feeling more pressure to pull the trigger on a deal. If that ‘peer pressure’ results in Compass being more aggressive in M&A – and it executes effectively – then the IPO announcement may indirectly serve to boost investor interest in Compass.

Major IPOs are often a broad investment catalyst for different sectors. But not for industry players who are perceived to be standing still.

If Compass becomes more active in its operations (one way or another) and rekindles trading volume, then it could (will?) be one of the winners from the upcoming ATAI Life Sciences IPO.

However, if Compass remains relatively quiet as ATAI gets ready to open its doors to retail investors (and provide them with a second NASDAQ-listed option), it’s a different picture.

Compass Pathways starts to look like “yesterday’s news” – and one of the potential losers from an ATAI IPO.

DISCLOSURE: The writer holds shares in MindMed Inc.

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