COMPASS: The Landscape Is Changing Quickly; Risk Is Up And Potential Down

Since I first wrote about COMPASS Pathways (NASDAQ:CMPS) in Aug 2022, the competitive landscape has changed enormously. At that time, the market seemed wide open to the disruptive power of Psychedelic drugs, and they were passing trial after trial with flying colors. The road to FDA approval seemed clear and looked short. The FDA gave fast-track designation for COMPASS's main drug, COMP360; the commercial success of an approved drug seemed off the charts in the trillions of dollars, and the whole investment thesis seemed to be a no-brainer.

Since then, things have changed dramatically; Spravato, a pseud psychedelic (an anesthetic drug with hallucinogenic properties), has been approved for Treatment-Resistant Depression (TRD) (which is the target for COMPASS) and has since been approved for a second condition, moderate depression with suicidal ideation. Atai Life Sciences (ATAI) had one of its main drug candidates fail to meet its endpoints, and a further trial draws into focus the entire concept of psychedelic drug testing and the impossible nature of a double-blind test. Evidence is growing that the methodology of how psychedelic drugs work is still poorly understood, and the possibility that a combination of any psychedelic drug and good therapy plus patient expectation may be the reason for all of the positive trials we have seen so far.

A price war may greet any newly approved drug as the Big Pharma Janssen pushes to turn its Spravato drug into a blockbusting earner.

I am downgrading my view of COMPASS to sell; there are still some positives, but the increase in questions concerns me.

Spravato

Ketamine is not a classical psychedelic drug; it has been used as an anesthetic since the 1970s. However, a study of 7 people in 2000 brought attention to the drug's potential to treat psychiatric disorders. When I first wrote about CMPS, I did not consider Ketamine a Psychedelic drug and, as a result, did not use it in my article; new research has suggested that decision was an error.

Ketamine comprises two enantiomers (mirror images of the same compound) commonly known as S-Ketamine and R-Ketamine. Janssen, part of the big pharma company Johnson & Johnson (JNJ), started working on S-Ketamine; they received breakthrough therapy status for the drug in 2013 for the treatment of TRD and in 2019, received approval from the FDA for the drug using the brand name Spravato, by 2021 the FDA had approved its use to treat Major Depressive Disorder with suicidal ideation.

Due to the hallucinogenic side effects of the drug, its REMS (risk assessment) limits the use to inside a certified healthcare setting, and patients must be monitored for at least two hours. Of course, limited to the clinic when Spravato was released during the Covid years, it made little commercial progress.

Spravato has struggled to become the expected blockbusting drug. The UK health authority (NICE) has refused to allow it to be prescribed as part of the NHS, saying S-ketamine was unlikely to be an acceptable use of resources.

The Canadian Agency (CADTH) also thought the drug would not be cost-effective, saying it would need a price cut of 60% versus oral anti-depressants. CADTH attributed an annual cost of CAD $18564 - 45591 per year. It is not just the cost of the drug (from CAD$590 per 56mg table and 11 tablets per course) but the medical professional time needed.

Data regarding Spravato has continued to be positive phase 3b trial results, released Nov 22 looked at patients with TRD, and compared Spravato with a standard of care anti-depressant. Spravato met its primary and secondary endpoints of no relapse out to 32 weeks. Spravato achieved 55% of patients in remission v 37% for the market-leading Quetiapine.

For me, the readout for this study was a game changer; Spravato beat the standard of care by a wide margin. I am sure this additional phase 3 trial will change minds in the UK and Canada; it certainly changed mine.

Testing failures and the double-blind problem

The gold standard of medical testing is the double-blind test; neither the patient nor the clinical staff knows who is receiving the drug and who is getting a placebo. This is impossible with a Psycadelic, the 4 - 8 hour hallucinogenic trip is a bit of a giveaway. The FDA recently issued guidelines in this area, but recent testing made me rethink what seemed unimportant.

R-Ketamine

Early research suggested that the lower anesthetic properties of R-Ketamine (S-Ketamine is four times as powerful, remember S-Ketamine is Spravato) would make it suitable for at-home use. Atai Life Sciences (ATAI) tried to develop the drug in its candidate PCN - 101; small-scale early research and testing were promising; however, in January, ATAI announced that PCN - 101 had failed its primary endpoint and they would not continue with it. It was a big fail; down to the endpoints, it sought a statistically significant improvement via a placebo. Patients will not have been sure if they had a placebo or the Psychedelic as PCN 101 is not trip-inducing. This event has shaken my belief in Psycadelics, a very promising drug that missed its endpoints when compared in a double-blind test. This may be the beginning of a trend.

Ketamine may have also had a similar double-blind flop

Trial of Ketamine Masked by Surgical Anesthesia in Depressed Patients

In this test, 40 patients with clinical depression undergoing surgery received either a placebo or Ketamine. The drug or placebo (Saline) was administered during anesthesia for surgery. The primary outcome was MADRS scale reduction (a measure of depression).

The treatment method blinded the patient to the drug. As they were under anesthetic, they will not have known if they had a hallucinogenic trip, nor will the clinical staff. Both cohorts saw a similar and statistically significant improvement in their MADRS score. Indeed the lead investigator said the improvement in the placebo was enough to get Saline approved by the FDA.

This result suggests that expectation and therapy drive the outcome (both groups reported a more than 50% improvement).

The trial will be repeated with Psilocybin soon.

Psilocybin Test Results

CMPS funded a phase 2 trial into Psilocybin. I have summarised some key results from the release in November 2022

In my mind, the high numbers of patients withdrawing for the 1mg and the 10mg add to the issues around double-blind tests for these drugs. The patients may have realized they had not been given the full medication and had no reason to continue. All patients received the same after-treatment therapy and the 12-week results, although not statistically significant, suggest the impact of the therapy may be very important.

The conclusion of the study was

Longer and larger trials, including comparison with existing treatments for depression, are required to determine the efficacy and safety of Psilocybin for treatment-resistant depression.

The comparison with existing treatments is, at least for me, critical. It is a COMPASS-supported study casting doubt on the efficacy of the COMPASS drug. I believe COMP360 must be tested against existing treatments, including Spravato, to make any real regulatory headway.

How do psychedelics work?

A recent paper published in March 2023 entitled "Role of Psychedelics in Treatment-Resistant Depression" said:

The evidence for the classic psychedelics TRD is limited at the present time; early studies however show promising results. There is also recognition that psychedelic research may be subject to a "hype bubble" at the present time. Future studies focused on delineating necessary ingredients of psychedelic treatments and the neurobiological basis of their effects, will help pave the way for the clinical use of these compounds.

There appears to be substantial disagreement about how these compounds affect the brain and what is causing the perceived improvement in mental health conditions. How important is the expectation? The therapy, and does it matter which drug people have?

A further study questioned the entire mechanism of how these compounds work and suggested that much of the medical theory proposed by the drug manufacturers may require further research.

We recently reported that pharmacologically diverse anti-depressants, including fluoxetine and Ketamine, act by binding to TrkB, the receptor for BDNF. Here we show that lysergic acid diethylamide (LSD) and psilocin directly bind to TrkB with affinities 1,000-fold higher than those for other anti-depressants, and that psychedelics and anti-depressants bind to distinct but partially overlapping sites within the transmembrane domain of TrkB dimers.

A study in Mice suggests that all Psychedelic drugs may have a similar method of operation.

The takeaway from these studies is that all of the Psychedelic drugs may be binding to the same receptor in the brain, and may all have the same effect meaning it matters little which one you take.

Financials

As with all the articles I write, this is my opinion, and analysis of CMPS financials suggests that ARK investments disagree with me completely. Their holding in COMPASS is up from 0 to $425 million this last year. The ARK trade tracker shows consistent buying of CMPS but very little if any, buying of its competitors.

In the Q1 2023 earnings call, the CMPS CEO said

Since the beginning of this year, we've raised roughly $28 million from sales under our ATM facility, including a large block trade in April.

The CEO may have been discussing ARK when he mentioned ongoing discussions with investors in this space, but I have no evidence, other than the trade data, to prove this.

A summary of the balance sheet shows that CMPS has less than one year of cash.

Likely, CMPS is still 3-4 years away from revenue, implying they will need as much as $31.8 million x 16 = $508 million in additional funding.

The current market cap is around $450 million; they will need significant investment plus debt and to cut expenditures to meet their cash needs.

The dilution suggested by the cash need will likely put significant pressure on the stock price.

Conclusion

Spravato likely has a three-year head start to establish itself as the primary Psycadelic standard of care for the patients targeted by the CMPS drug COMP360. An analyst in the Q&A section of the recent earnings call brought this up.

The CEO said he saw the drug as a positive. He mentioned its breakout revenue of $100 million in Q1 with a strong growth trajectory, implying initial skepticism towards the drug is waning. The positive, he thought, was that the industry would likely accept other Psychedelic drugs with less resistance in the future.

I think he is probably right. Any Psycadelic approved for other conditions (such as COMP 360 and Anorexia Nervosa currently in Phase 2 testing) may find a receptive audience, and clinical settings have already been developed to deliver the drug.

It may make it much more difficult for Psychedelics targeting the same conditions being treated by Spravato. It also puts a cap on price, and when COMP360 needs as much as four times as long in the clinic, so likely 400% more expensive it will be a hard sell.

If CMPS can prove in a phase 3 trial that COMP 360 performs better when measured against Spravato, then it will benefit from Spravato developing the clinical centers to deliver Psycadelic drugs and see a much easier rollout. As far as I am aware, no such test is being planned.

With all this in mind, I am downgrading my rating for CMPS; It is short of cash and has a Big Pharma competitor with a 3-year head start plus a price advantage.

I will review it again when CMPS publishes its phase three results sometime next year.