Is Now the Right Time to Buy Compass Pathways? | The Motley Fool

Do you ever get the feeling the stock market isn’t reading the same news that you are? Compass Pathways (CMPS 3.07%) shareholders know that feeling. The clinical-stage drugmaker recently told investors its psilocybin-based treatment hit high marks in a closely watched depression study. Yet instead of the stock rising as you might expect, it fell hard.

Was this just a case of investors selling the news, or is there something else rubbing Wall Street the wrong way about Compass Pathways? And is this latest dip a warning, or an opportunity to buy a top psychedelic stock at a discount?

Image source: Getty Images.

Psilocybin reduced depression

On Tuesday, Compass Pathways made public the news that its lead candidate, COMP360 — a purified version of the primary active ingredient in magic mushrooms — had succeeded in a groundbreaking phase 2 clinical trial. 

During the study, 233 patients with treatment-resistant depression were randomized to receive 25 milligrams, 10 milligrams, or 1 milligram of COMP360 psilocybin just once. The ineffective 1 mg dose was used instead of a standard placebo to fool participants and avoid a “nocebo” effect.

Patients didn’t just go and pick up purified psilocybin capsules at a pharmacy. The treatments were administered with psychological support from therapists trained to deal with people experiencing the effects of a psychedelic drug for the first time.

On average, patients given the 10-milligram dose didn’t show a measurable improvement compared to the 1-milligram dose at the three-week checkup. Patients given the 25-milligram dose, though, showed a strong 6.6 point improvement on the MADRS depression scale. 

Challenges ahead

Even if its treatment is eventually approved, Compass Pathways’ intellectual property rights aren’t going to stop nature from producing heaps of psilocybin. Shareholders of GW Pharmaceuticals learned about a similar market exclusivity issue the hard way in 2018 when it launched a purified cannabidiol (CBD) tincture for patients with severe epilepsy.

At the time, investors thought the CBD tincture, called Epidiolex, would become a blockbuster drug delivering well over $1 billion in annual sales. Jazz Pharmaceuticals acquired GW Pharmaceuticals earlier this year, and sales of Epidiolex sales reached a less inspiring annualized run rate of $642 million in the third quarter.

Compared to psilocybin, CBD is as innocuous as cotton balls. Plus, treatment with Epidiolex doesn’t require concurrent therapy with a specially trained therapist. In other words, even if regulators give it the green light, COMP360 could be an extremely challenging drug to sell. Those challenges ahead aren’t insurmountable, but investors don’t want to dismiss them outright.

A buy now?

Luckily, Compass Pathways stock doesn’t have a rousing success for COMP360 already baked into its price. The company’s market cap of $1.4 billion at the moment isn’t terribly high for a clinical-stage drugmaker heading for…