Psyched Wellness - The drink of the gods
Psyched Wellness is a health supplements company focussed on the production and distribution of products from medicinal mushrooms, including psychedelic mushrooms, to promote a healthier body and mind. The functional mushrooms market is a large and growing segment in consumer health, currently running at around US$30bn per year globally.
Within the sector, many companies are looking at ways to work with psychedelic mushrooms, which are believed to offer physical and mental health benefits when consumed at low doses. There are significant obstacles, however, as varieties such as psilocybe mushrooms (magic mushrooms) are illegal in most jurisdictions.
Psyched Wellness is developing products using a mushroom called Amanita Muscaria, which has psychedelic properties but which has never been a scheduled substance in the USA or Canada. Amanita Muscaria has been used since ancient times for medicinal or spiritual purposes in many different cultures, and formed the basis of the ritual beverage soma — ‘the drink of the gods’.
Business plan:
The company is developing a range of dietary supplements, starting with a tincture. The products will require regulatory approval only as novel foods, rather than a more time-consuming pharmaceutical trial process that would be required if Psyched Wellness wanted to market Amanita Muscaria products as medicines rather than wellness products. On p8 we examine the approval roadmap.
The company has plans in place for a rapid ramp-up of manufacturing via a contract manufacturing organisation, and distribution through bricks and mortar retailers and e-commerce channels. We expect first commercial revenues in Q4 2021 and scaling up during 2022.
A unique position in psychedelic health products
We argue that Psyched Wellness offers shareholders a compelling investment proposition, with key points including:
- A unique product offering based on a mushroom that has psychedelic properties but which is not a controlled substance.
- An executive team with a breadth of experience to execute on the main elements of Psyched’s business plan — product development, extraction and production processes, marketing, and finance (details p6-7).
- A strong financial position, with about C$7.5mln of cash on the balance sheet providing comfortable headroom to fund activities through to revenue generation (details p8-9).
The share price has gained 49% since the company listed in October 2020. We believe this is a result of increased investor awareness of the company, reflected for example in the inclusion of Psyched in the Horizons Psychedelics ETF (exchange-traded fund). Other potential catalysts for the share price in 2021 include:
- Potential inclusion of Psyched in other indices or ETFs.
- Regulatory approvals, and milestones in the approvals process.
- Details to be announced on the retail strategy, including retail partners.
We argue that these catalysts offer potential upside during the remainder of 2021.
Investment catalysts, and conclusion
Functional mushrooms are among the fastest-growing segments in the consumer wellness and neutraceuticals space. We estimate that demand in North America has grown by more than 10% annually over the period 2018-2020.
Consumers use functional mushrooms to achieve a variety of health benefits — immune system support, digestive health, antioxidant, mood enhancement, and many others. A number of the more popular mushroom varieties have origins in Asian tradition medicine — varieties such as Cordyceps, Turkey Tail, and Reishi. Mushrooms and extracts are sold in a wide variety of different formats — tinctures, dried mushrooms, mushroom jerky, mushroom coffee, and skincare and beauty products.
The following table outlines some types of functional mushrooms:
The functional mushrooms market
A wide range of functional mushrooms are sought by consumers as a wellness product
Functional mushroom categories
Source: Proactive Research
We have made a distinction here between psychedelic and non-psychedelic mushrooms, as this is crucial to Psyched Wellness’ business case.
Psychedelic mushrooms
Psychedelic mushrooms have significant potential benefits for health and mental health, but usage of most varieties is highly restricted
Several market-listed companies are now working with psychedelics, usually varieties of psilocybe mushrooms, also known as ‘magic mushrooms’. Research has been conducted going back to the 1950s regarding potential therapeutic applications of psilocybin from these mushrooms, but much of this was discontinued in the late 1960s amid public concerns about recreational drug use. More recent research has provided good evidence that psilocybin could be of value in treating mental health conditions and substance addictions; however, there are significant regulatory hurdles for these therapies as magic mushrooms and psilocybin remain scheduled substances and therefore illegal for sale in the USA or Canada.
Psyched Wellness is working with a mushroom variety called Amanita Muscaria. This occupies a select category within the functional mushroom space — mushrooms that contain psychedelic compounds but which have never been a controlled substance or scheduled substance in the USA or Canada.
The overall market for functional mushrooms is now approaching US$30bn per year. We estimate that 25% of this market is in North America. The following chart illustrates the growth in the global market for functional mushrooms.
The functional mushroom market is growing at 8.5% annually
Global market for functional mushrooms
Source: HAVN Life Sciences
Psyched Wellness can target a significant share of this market due to the unique positioning of the company’s product but also, the Psyched Wellness product range is likely to appeal to consumers who are currently using supplements such as cannabidiol (CBD) or melatonin, and this extends the target market for Psyched beyond only the functional mushroom consumer.
Psyched Wellness focus product - Amanita Muscaria
Amanita Muscaria, also known as the fly agaric mushroom, is a mushroom species that is widespread across temperate and boreal regions of the northern hemisphere, growing symbiotically with pine, spruce or birch forests. The fly agaric is notable for its iconic fairy tale toadstool appearance with a bold red cap and white spots.
Amanita Muscaria, or Fly Agaric
Source: Psyched Wellness
A.Muscaria has a rich history of usage as a ritual and medicinal ingredient
Amanita Muscaria has been used for medicinal and ritualistic purposes for many centuries. The earliest known reference is in a Hindu text called the Rig Veda dating from 1,000 B.C.
“We have drunk Soma [a brew from A.Muscaria] and become immortal; We have attained the light, the Gods discovered. Now, what harm may foeman’s malice do to us? What, O immortal, mortal man’s deception?”
The Amanita Muscaria mushroom appears in the folklore and literature of numerous cultures, from Viking elixirs of invincibility to the size-changing mushroom in Alice in Wonderland.
The history of the use of Amanita Muscaria in ritualistic practices is rooted in the neurochemical effects of the mushroom’s main active compounds.
Psychedelic properties - muscimol
Amanita Muscaria contains three main active compounds — Muscimol, Ibotenic Acid, and Muscarine. Of these Muscimol is of the most interest from Psyched Wellness’ perspective.
Muscimol produces mood-enhancing effects by binding to the GABA receptor
Muscimol and the GABA neurotransmitter
Source: Proactive Research
Muscimol has chemical similarities to the neurotransmitter gamma-aminobutyric acid (GABA). This allows muscimol to act as a GABA agonist, binding to the GABA receptors in the brain and leading to an altered state of consciousness if ingested in a sufficiently high dose.
Toxicity
A.Muscaria is often falsely perceived as being a poisonous variety of mushroom. Consuming the mushroom raw will indeed lead to a person feeling unwell. Nonetheless, it has been consumed for centuries, with toxic compounds first being broken down by processes such as sun drying or boiling in brine.
Psyched has developed a proprietary extract called AME-1
Psyched Wellness has developed a proprietary method for producing an extract from Amanita Muscaria, to be called AME-1, which contains muscimol but eliminates all toxicity.
Psyched product strategy
Psyched Wellness will use its proprietary extraction methodology to produce an Amanita Muscaria extract called AME-1, which will be used initially in tinctures, with plans for capsule and tea products to follow. The company has filed patent applications for the extraction process. The initial tincture product will contain muscimol at below hallucinogenic doses, effectively offering a micro-dosing formulation for muscimol.
Psychedelic microdosing is becoming a mainstream concept
Microdosing is a popular concept within the emerging psychedelics industry, with companies evaluating the benefits of microdosing with LSD, psilocybin, and DMT. The potential benefits of microdosing are being widely reported in mainstream media:
The major regulatory hurdle for companies developing psychedelic microdosing therapies is that compounds such as LSD and psilocybin remain illegal in the USA and Canada even in small doses. Because muscimol has never been a scheduled substance, Psyched Wellness will only need to navigate the ordinary novel foods approvals.
Psyched has engaged the services of KGK Science to guide the company through the dietary supplement and NHP regulatory processes with the Federal Drug Administration (FDA) and Health Canada, respectively. KGK Science is a full-service contract research organisation (CRO) based in London, Ontario with a focus on the nutraceuticals industry, and will assist Psyched Wellness with processes including: Generally Recognized As Safe (GRAS) conclusions, New Dietary Ingredient Notifications (NDIN), master file applications, product licence applications, FDA citizen petitions, label claims, guidance on regulatory matters, and federally-compliant marketing for health and wellness products.
To bring the product to market, the company will need to secure approval of Amanita Muscaria as an NHP in Canada, by submitting a product licence application with the NNHPD. To secure approval in the United States, the company must submit an NDIN dossier on identity and safety with the FDA. We include a projected timeline showing some of the key milestones in this process on p8.
A well-defined pathway to manufacturing and distributing the product
Once the product is approved, Psyched intends to purchase mushrooms from international suppliers, and then to manufacture the end product using the services of a contract manufacturing organisation (CMO). The company has exchanged letters of intent (LOIs) with a CMO based in Ontario, with the intention of entering into a contract of service closer to the product launch later in 2021. The CMO that Psyched is working with holds ISO 9001 Quality Management, ISO 22716 Cosmetic cGMP and ISO 17025 Accredited Lab Facility (Testing and Quality Inspections) certifications, and an NHP Site Licence with NNHPD, which satisfies the regulatory requirements to manufacture the company’s products.
The company’s products will be distributed in the USA and Canada through bricks-and-mortar retailers and e-commerce platforms. Psyched has exchanged LOIs with a company called Coldhaus based in Ontario which offers complete logistics solutions including managing route to market, delivery fleets, warehouse facilities, inventory management, customer delivery, batch tracking on the invoice, marketing material delivery, and order collections.
We believe that two different types of retailer will represent the biggest bricks-and-mortar retail channels – health stores, and smart shops/head shops. The following illustrates the routes to market.
Route to market
Source: Proactive Research
Potential to use different branding and pricing for different customer verticals
We believe that the company could potentially opt for different branding to target the different retail markets. We believe that competing with CBD could potentially allow a higher pricing point for Psyched’s products, while traditional health products may offer a larger volume market. We believe that both channels would offer a high gross margin for Psyched. We expect more details of the marketing strategy later in 2021.
Psyched also has an additional revenue driver in the shape of a joint venture (JV) with another company that will use AME-1 in a new formulation that will be used in a separate product line to be marketed by the partner. This JV further broadens the route to market.
Key people
Delivering on Psyched’s ambitious business plan requires the company to execute many strategic objectives — completing product development and regulatory approval, delivering on the production ramp-up, and maximising the impact of the marketing strategy. The company has assembled an executive team with very strong credentials across the necessary disciplines.
Jeff Stevens, chief executive
Stevens has over 20 years of capital markets experience and has been an officer and director with several public companies. He has taken three companies public, built teams and structured multiple M&A transactions while building successful businesses.
Michael Nederhoff, chairman
Currently acts as president of JUUL Labs in Canada overseeing Canadian operations including product launches, organisational structure and profit & loss responsibility. Previously served as GM for CytoSport, Inc. overseeing the Canadian launch of Muscle Milk and was one of the first 10 employees at Red Bull Canada where he held senior sales roles.
Terry Booth, director
Booth is a global cannabis industry pioneer and founder of Aurora Cannabis (TSX:ACB). He has served as president/CEO of six other highly successful businesses, including several of Canada’s top 50 fastest-growing companies.
Professor David Nutt, director
David Nutt is a psychiatrist and the Edmond J. Safra Professor of Neuropsychopharmacology in the division of brain science at Imperial College London. He was previously president of the European Brain Council, British Association of Psychopharmacology, British Neuroscience Association and European College of Neuropsychopharmacology. Professor Nutt currently sits as the chair of the Scientific Advisory Board for COMPASS Pathways and chair of the Scientific Advisory Board for AWAKN Life Sciences. He is also a member of the Medical Advisory Board of Opiant and sits on the board of Lundbeck Institute Campus
Peers
There are a number of stock market listed companies within the functional mushroom space, some of which also have exposure to psychedelics. The following table gives an overview of some of these peers.
Psyched is the only listed company working with a non-scheduled psychedelic mushroom
Peers
Source: Proactive Research
We have listed Pure Extracts Technologies (PULL) as a peer stock although it actually is not competing directly in any class of mushrooms. This is because PULL is focussed on extraction technologies and could potentially address any of the categories, as a service provider.
For the rest of the peers, they compete within two market segments:
- Psychedelics (controlled substance). Over time, we believe that psilocybe mushrooms could become very big business but there are significant regulatory hurdles whether companies are looking at consumer wellness applications, pharmaceuticals, or recreational use. This segment will take time.
- Non-psychedelics. This is a fast-growing market, but there is a significant existing competitor base.
By contrast, Psyched Wellness will be the only player offering a microdose product based on a psychedelic mushroom that is already legal, which can be brought to market relatively quickly assuming that Psyched can obtain the necessary novel foods approvals. We believe that competitors would then be likely to start trying to produce products with Amanita Muscaria, but this could still leave Psyched Wellness with a 1-2 year head start.
Timeline and financing
Psyched Wellness continues to make steady progress on the path to certifying its first Amanita Muscaria product as a food supplement with the FDA and Health Canada. We believe that the company remains on track for a 2021 product launch. The following diagram illustrates some key points on the time line.
Timeline
Source: Proactive Research
In addition to regulatory milestones, during the coming months we expect Psyched Wellness to sign contracts for CMO and distributor agreements, and during the remainder of 2021 to announce retail partners and details of the e-commerce strategy. We believe that each of these milestones represents a potential catalyst for the share price.
A strong balance sheet position, with no requirement for further financing
Financing
Psyched Wellness has a strong balance sheet position, and we believe the company can finance its activities through to the revenue generation stage. The company has cash balances of around C$7.5mln (est.), compared with monthly cash utilisation of around C$50,000.
Capital position, March 2021 est.
Source: Proactive Research
Conclusion
We assert that Psyched Wellness offers shareholders a compelling investment proposition, with key points including:
- A unique product offering based on a mushroom that has psychedelic properties but which is not a controlled substance.
- An executive team with a breadth of experience to execute on the main elements of Psyched’s business plan — product development, extraction and production processes, marketing, and finance.
- A strong financial position, with approximately C$7.5mln of cash on the balance sheet providing comfortable headroom to fund activities through to revenue generation.
We believe that 2021 is a pivotal year in the development of the company, with the potential for significant upside to the share price as the strategy moves forward.