Recently, the healthcare sector was abuzz with excitement over the potential of using psychedelic substances to treat mental health conditions. Tiffany Kary and Bloomberg, writing for Fortune magazine, noted how this industry had been inspired by Michael Pollan’s 2018 book “How to Change Your Mind,” along with their changing legal statuses such as LSD, psilocybin and ayahuasca, seemed poised for a renaissance; yet that early optimism has since dissipated and several companies in this sector are now struggling with meeting payroll obligations.

Cody Shandraw, managing partner at Ambria Capital, explained to Fortune that this downturn is a classic example of emerging industries’ life cycle: initial investment surge and company formation followed by saturation point forcing weaker companies out. According to Kary and Bloomberg data, investments surged from $62 million in 2019 up to $617 million by 2020 before reaching an all-time high of $1.6 billion by 2021; by 2023 however they had returned back down to $570 million investments.

Shandraw describes this period as the “shakeout stage,” when many firms sell off intellectual property or even cease operations altogether. According to Fortune, only those companies possessing robust IP portfolios will be able to weather this storm successfully.

Kary and Bloomberg point out that the industry reflects biotech as a whole. Initial excitement surrounding psychedelics – propelled by Netflix shows like “Have a Good Trip” and “Fantastic Fungi” – resulted in many preclinical stage companies going public; unfortunately this proved costly (an estimated $474 million for preclinical work, with another $1.1 billion needed for clinical trials), yet only 12% of drugs that make it to clinical testing ever reach pharmacy shelves.

Infrastructure-focused companies aiming to establish locations where drugs might be administered have also experienced difficulty. According to Fortune, Field Trip Health, which ran ketamine clinics and had plans for expanding to offer other substances such as MDMA or psilocybin, recently sought creditor protection in Canada.

Shandraw told Fortune that by late 2024, many companies will have midstage results from their clinical trials and there is much anticipation about whether MDMA, also known as Ecstasy, may be approved by the U.S. Food and Drug Administration as a treatment for post-traumatic stress disorder; an initiative spearheaded by Multidisciplinary Association for Psychedelic Studies (MAPS).

Kary and Bloomberg voice optimism regarding traditional pharmaceutical companies entering this arena; an example being Otsuka Pharmaceutical Co. investing in Mindset Pharma Inc.

Not all companies are suffering in today’s environment; Lucy Scientific Discovery Inc. recently purchased Wesana Health Holdings Inc. assets to develop its drug candidate that combines psilocybin and cannabidiol (CBD), used to treat major depressive disorder and migraines among other conditions. Lucy attempted to acquire Pasithea Therapeutics Corp. but their offer was declined.

Conclusion: The psychedelics boom in healthcare is experiencing growing pains. Companies are consolidating, investments are shrinking and many firms are finding themselves struggling to meet payroll. Yet as Fortune reports, industry insiders remain optimistic for its future – they believe the results of ongoing clinical trials due in 2024 could spark a comeback and deliver on its initial promise.

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