Mydecine Innovations Group: Initiation report

Mydecine Innovations Group is a biotech and life sciences company developing and commercializing new therapies for mental health and other conditions. The company has three lines of activity – pharmaceutical drug development, natural health

Proactive Published 30/06/2021

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We believe that the drug development pipeline represents the biggest value driver for the stock price over the next two years, and in this report we focus in particular on two therapies that are undergoing Phase II clinical trials. Both of these use Mydecine’s proprietary formulation MYCO-001, which is a purified form of psilocybin, a psychedelic compound found in mushrooms sometimes referred to as ‘magic mushrooms’.

The first clinical trial subject is a novel therapy for post-traumatic stress disorder (PTSD). This addresses a market of around US$1bn annually, and potentially greater if a new treatment proves more effective than existing drugs. Trials are being conducted at locations in Canada, the USA, and Europe. The program is also being conducted in collaboration with military veterans' organisations, and this partnership is a unique differentiator for Mydecine.

The other trial program is pursuing a nicotine addiction therapy, also using MYCO-001. This addresses a global market of around US$20bn, increasing to US$50bn if the same treatment is applied to other addictions which could be addressed going forward. We believe that this program could advance to Phase II / III trials during H2 2021.

Importantly, Mydecine has in place a compelling strategy for ring-fencing intellectual property (IP). This is one of the main challenges in psychedelic medicine as drugs are being derived from compounds that have been known to science for decades. In this report, we examine Mydecine’s position in the emerging psychedelic medicine space, its drug pipeline, and its IP strategy.

A leading innovator in mental health therapies

In delivering on its pipeline of IP, Mydecine will leverage the expertise of a medical and scientific team that includes world-renowned practitioners in psychiatry and psychopharmacology. The company also benefits from a strong network of external relationships with academic research partners and with companies specialised in delivering on pharmaceutical developments. Some of these relationships are detailed on p9.

In terms of share price drivers, we believe the biggest factor will be further progress on the development pipeline. We argue that the current market cap leaves significant upside potential, and we present a 12-month forward valuation scenario on p11 of this report. Our scenario implies 430% upside to the current share price.

Delivering the pipeline, and upside for the stock price

Year end Jun 30 · 2020 · Current · 2022 · 2023

Revenue (CA$-000's) · 59 · 152 · 13,920 · 126,988

EPS (CAD$) · (0.24) · (0.11) · (0.09) · 0.06

Mydecine Innovations Group is a biotech and life sciences company developing and commercializing new therapies from naturally derived sources, for mental health and other conditions. The company is advancing a Phase II clinical trial program for the treatment of post-traumatic stress disorder (PTSD), with a focus on first responders and military veterans. Mydecine also has a development program ongoing focussed on treatment for addictions including nicotine addiction, which we believe could advance to Phase II / III trials during the remainder of 2021. In support of these and other programs, Mydecine has an exclusive partnership with Applied Pharmaceutical Innovations (API), a non-profit organization that provides world-leading resources for the development and commercialization of innovative new drugs.

The company benefits from a number of important competitive advantages:

Health Canada Scheduled 1 Drugs and Substances Dealer’s License with capabilities of cultivation, extraction, full R&D, full import/export and commercial sale. This license allows Mydecine to work with both synthetic and naturally derived psilocybin.
In-house cGMP (current Good Manufacturing Practice) pharmaceutical lab.
Partnership with API, ranked in the top 15 globally for drug discovery.
Partnership with ethica CRO, the world's first accredited CRO.
Partnership with the ProPharma / Weinberg Group, an internationally renowned FDA consultancy.
Partnership with military veterans' organizations to work on therapies for post-traumatic stress disorder and for substance abuse disorders.
Collaborating with the Alberta Machine Intelligence Institute, ranked in the top 5 globally for Artificial Intelligence / Machine Learning.
Two development programs progressing towards Phase II trials.

Investment summary

Mydecine has three areas of operations:

R&D programs into pharmaceutical applications of psychedelic compounds.
Natural health products based on the research in mycology.
A digital health platform that will support psychedelic-assisted psychotherapy protocols.

The following table summarizes the three areas.

Three areas of capability generating revenue and intellectual property

Mydecine capabilities

Source: Proactive Research

We believe that the pharmaceutical applications of psychedelics will become the biggest value driver for shareholders over the longer term, while the Mindleap digital platform could drive substantial revenue generation on a two-to-three year timeframe.

Psychedelic medicine has been undergoing a renaissance over the last decade, and we argue that Mydecine is strongly positioned to become a significant contributor to this field of medical development and to build a portfolio of IP that creates substantial value for shareholders.

Various forms of IP protection across the portfolio

The current drug pipeline includes formulations which will be eligible for marketing exclusivity for specific indications (typically 3-5 years), and also novel molecule formulations which can be eligible for full patent protection (20 years). The following table summarizes the pipeline.

Pharmaceutical pipeline

Source: Proactive Research

The formulations MYCO-001 and MYCO-002 are both candidates for marketing exclusivity, while MYCO-003 and MYCO-004 have multiple layers of patent protection and are novel molecules, therefore candidates for full patent rights.

Addressing Post-Traumatic Stress and addiction disorders

These drugs initially address two categories of medical condition – post-traumatic stress sisorder, and substance abuse disorders – with potential applications in other areas going forward. The two initial target indications represent annual revenue markets totalling over US$70bn.

The following diagram illustrates.

Addressable markets

Source: Proactive Research

The company has two clinical trial programs underway, at seven locations globally - Alberta Canada, Leiden Netherlands, Ontario Canada, Los Angeles, Boston, and San Francisco. The trials cover PTSD and nicotine addiction and are being conducted in conjunction with leading academic institutions, teaching hospitals, and veterans' organizations. We believe the progress in these clinical trial programs could provide a material driver for the Mydecine share price during 2021 and 2022.

The psychedelic drug renaissance

The medical usage of psychedelic drugs was a major field of research in the 1950s and 60s. However, much of this research was terminated in the late 60s when the major categories of psychedelic compounds were classified as controlled substances.

Resurgence in research and investment in the psychedelic drugs space

There has been a significant resurgence in research and investor interest in psychedelics as pharmaceuticals during the last decade. This has been driven by renewed interest in the attractive characteristics of psychedelics, including:

Proven effects on the neurotransmitters in the brain, based on the legacy research.
A well-understood safety profile, with low levels of addictiveness, few harmful side effects, and overdoses almost unknown.

The safety characteristics have been established not only by previous clinical trials but also by studies of the illicit user base for psychedelics. Studies have shown that over 30mln Americans have used psychedelics recreationally. There are almost no reports of people overdosing or requiring addiction therapies.

Furthermore, although the new wave psychedelic-derived pharmaceutical research is at a relatively early stage, there have already been some significant advances for the industry. Important milestones include:

Major milestones in pharmaceuticals from psychedelic sources

FDA awarding ‘Breakthrough Therapy Designation’ allowing expedited drug development for psychedelic therapies using MDMA and psilocybin, for programs being conducted by the Usona Institute, Compass Pathways, and the Multidisciplinary Association for Psychedelic Studies.
FDA approval for a drug called Spravato from Johnson & Johnson for treatment-resistant depression. This is based on the psychedelic compound Esketamine.
The approval for Ketamine-assisted psychotherapy to be administered to patients in Canada under special access programs.

The two clinical trial programs currently being conducted by Mydecine are both based on psilocybin. This is a psychedelic drug derived from fungi sometimes referred to as ‘magic mushrooms’. The company has licences to work with both naturally derived and synthetic psilocybin, whereas some of the main peers are restricted to synthetic versions only. Psilocybin (natural or synthetic) is known to have a good safety profile and minimal to zero addictiveness.

Smoking cessation

Mydecine is developing a therapy for addiction treatment, initially targeting nicotine addiction, using the company’s proprietary formulation MYCO-001 which is a purified form of psilocybin. The same therapy could potentially be used for other addictions in future.

The market for addiction treatment represents a huge opportunity for Mydecine, but even with a focus on smoking alone, this could potentially be a major development for the company. Although smoking has been in decline in western countries over the last two decades, it remains one of the biggest public health issues in terms of costs and human lives. The following graphic illustrates the scope of the problem of nicotine addiction.

The ongoing public health cost of nicotine - figures for USA

Source: Various, as shown

Existing nicotine therapies have unsatisfactory success rates

One of the biggest problems with existing nicotine addiction therapies is low efficacy. The main type of therapy in use is nicotine replacement therapy – patches, gum, and other nicotine delivery systems – but these have been shown to have a success rate as low as 7% (remaining tobacco-free after six months). This rises to 35% for patients who also attend regular group therapy, but even at 35% this does not really represent a solution.

Drug-based therapies (as opposed to NRT) target specific neuroreceptors which are responsible for nicotine craving. According to independent research, the market leader Chantix has a 19% success rate, measured as tobacco abstinence after 12 months. This is better than NRT, but some patients have reported significant side-effects.

We note also that during June 2021 Pfizer announced that it was suspending distribution of Chantix due to possible contamination concerns (Wall St. Journal June 26th 2021). Our forecasts assume that distribution will resume within a short timeframe.

The following chart shows the market for nicotine addiction therapies by type.

Smoking cessation therapies by type

Source: Proactive research, from market sources

We are forecasting a decline in drug therapies in 2021. This is because Chantix came off patent in 2020, and we expect this to result in a reduction in the dollar value of sales.

Mydecine's new therapy could potentially expand the sum total of the market

This chart does not include any contribution from a new Mydecine therapy entering the market. Mydecine is developing a nicotine addiction therapy that could be on sale by 2023, but our chart aims to show the market as it currently stands. A new therapy entering the market, with a significantly higher success rate than NRT, could potentially expand the overall market quite significantly.

Mydecine’s nicotine addiction treatment

Mydecine is currently finalizing plans for a late-stage study on the use of MYCO-001 as a treatment for nicotine addiction. MYCO-001 is a purified form of psilocybin. Psilocybin has shown promising results in addressing nicotine addiction in independent studies with cessation rates as high as 85% (Johns Hopkins University). Mydecine has also identified nicotine addiction as a potential future application for its proprietary compound MYCO-004 which is a patch-delivered tryptamine compound derived from psilocybin.

We argue that the smoking cessation therapy could be the first opportunity for Mydecine to get a formulation approved and into the marketplace. Progress updates on the trial program during 2021 and 2022 could therefore act as a significant catalyst for the share price in our view.

MYCO-001 could potentially be used for other addiction disorders

Potential to treat other addictions

Once Mydecine has a therapy approved for nicotine dependency, the same therapy could immediately be offered by practitioners ‘off label’ for patients with other substance abuse disorders. Alcohol abuse would be one obvious market, representing a large patient population – some 25mln Americans – and underserved by existing therapies. With further clinical trials, the addiction therapy could also gain marketing approval to target these other addictions besides nicotine. For this reason, we have highlighted the whole global addiction treatment market as a target, at US$70bn, rather than just the North American nicotine addiction market of US$8bn.

Post Traumatic Stress Disorder

Post-traumatic stress disorder (PTSD) is a serious and sometimes debilitating condition that affects some 8mln Americans or 3.5% of the population in any given year. The lifetime prevalence (percentage of population affected at some time during their life) runs at 6.8% of the population. This is a significant public health issue, and there is evidence that cases may be rising, driven by factors including medical staff who have dealt with Covid wards.

Existing drug-based treatments offer only a partial solution for PTSD patients. The main type of drug prescribed are antidepressants such as selective serotonin reuptake inhibitors (SSRIs). These have a 60% success rating, meaning some significant relief from symptoms, but only 20-30% of patients achieve full remission (National Institutes of Health data). Other categories of drug such as anxiolytics (anti-anxiety) and anticonvulsants do not aim to provide a ‘cure’ for PTSD but address specific symptoms.

The following chart shows the existing market for PTSD drugs by category.

Antidepressants and anxiolytics only treat some of the symptoms of PTSD

Drug market for PTSD by type

Source: Proactive Research

PTSD can affect people from all walks of life, and there are a wide range of underlying causes. However, PTSD is more prevalent among professions that regularly encounter traumatic events. The following chart shows the lifetime prevalence of PTSD by occupation.

Lifetime prevalence of PTSD by occupation, USA

Source: Department of Veteran Affairs

Mydecine has a clinical trial program specifically targeted at military veterans with PTSD and is the only psychedelic medicine company specifically addressing this population. The program uses Mydecine’s proprietary MYCO-001 formulation.

The trial is in clinical Phase II, and is being conducted at sites in Alberta Canada, Leiden Netherlands, Ontario Canada, Los Angeles, Boston, and San Francisco.

Mydecine also has a CRADA agreement (Cooperative Research And Development Agreement) with certain veteran’s associations which allows the trial program to provide psilocybin-based treatments under a special access scheme, giving Mydecine a unique opportunity to progress with treating real patients within the trial program.

Mydecine's Tech Arm - Mindleap Health, Inc.

Mindleap Health Inc. is a wholly-owned subsidiary of Mydecine that has developed a Mobile App Platform that offers an innovative new approach to mental health. Their initial platform, launched in September 2021, first facilitated the performance of video-chat psychedelic integration sessions for users following their psychedelic-assisted treatments along with a journal to assist its users to track their daily mood journey. The platform provided mobile apps for both iPhone and Android users as well as a web app for their Mindleap Specialists.

Mindleap continues to build on the platform with its Mindleap 2.0 set for release in July 2021. Mindleap 2.0 is a virtual health platform that provides users with inner wellness resources to assist them in their daily mental-health journey. Mindleap 2.0 features a community of professionals, a private health journal, and a growing content library that includes meditations and psycho-education materials from experts in mental health. Mindleap 2.0 provides the space for users to video conference with professionals who can support them in psychedelic integration, as well as their inner wellness journeys more broadly. The Mindleap infrastructure is designed to foster the conscious and trustworthy adoption of psychedelics into a widely accepted approach to mental health and inner wellness.

While already providing for the user purchase of video conference with Mindleap Specialists, Mindleap 2.0 now adds the subscription for users to consume the content library at a low monthly subscription fee, providing Mindleap with a substantial recurring revenue opportunity while facilitating enhancement of the more complete mental health journeys of its users, regardless of their current place in their journey.

The following illustration provides an overview of Mindleap 2.0 capabilities. Details can be found at https://mindleap.com/

The Mindleap platform

Source: Mydecine Innovations Group

Mindleap already has over 80 participating mental health providers, with plans to expand this to over 1,000. Mindleap 2.0 brings with it the subscription for users. Further enhancements over the next 12 months will include wearables data integration for data analysis in clinical trials as well as further advances for the integration of clinics and their organizations and the introduction of Mindleap’s B2B business model as well.

With Mindleap 2.0’s subscription model, we are forecasting strong growth in subscriber numbers in the 2021-2023 timeframe based on ongoing additions to the product offering and a growing base of user data that Mindleap will use to help acquire and retain further users. We are forecasting 1,000 subscribers at the end of 2021, 200,000 by the end of 2022, and 1.2mln by the end of 2023. On this basis, we are forecasting revenues of C$127mln for FY 2023.

We argue that Mindleap represents a technology platform that will garner significant revenue from both their subscription model as well as their specialist video-chat sessions, while it will also allow Mydecine to accelerate the implementation of new therapies across a broader patient base than could be addressed using only face-face sessions. Mindleap’s B2B business model will enhance this potential even further.

Key people and collaborations

In order to deliver on all aspects of its development and commercialisation activities, Mydecine has built an executive team and scientific team with the skills and experience needed to build a market leading global healthcare enterprise.

The following summaries outline some of the key people:

Joshua Bartch, director, CEO, and chairman

Bartch has an extensive career building innovative businesses. He co-founded AudioTranscriptionist.com in 2009 and also founded the Denver-based dispensary, Doctors Orders. Following these ventures, he founded a boutique investment firm that operated throughout the US and Canadian markets. In 2014, Bartch co-founded Cannabase.io, the USA's most significant legal and sophisticated cannabis wholesale platform. Bartch took successful exits from AudioTranscriptionist.com, Doctor’s Orders and Cannabase.io

Damon Michaels, director, COO & co-founder

Prior to joining Mydecine, Michaels was a consultant for various hemp businesses through his company, Emerald Baron. Before that, he served as GM for the leading multi-platform cannabinoid research and technology firm based in Colorado called ebbu, which was acquired for C$429mln by Canopy Growth in November 2018. Outside the cannabis industry, he developed a national snowboard brand with his team, built a successful glass recycling company, and was on the business development team for a Google Ventures Company.

Robert Roscow, MA, CSO & co-founder

As a geneticist, Roscow has spent his academic and professional careers looking for valuable and unique medicinal molecules found in nature, most recently at Canopy Growth and at ebbu where he ran the genetics divisions. His work has resulted in multiple patent filings and accolades in publications ranging from Nature to Rolling Stone.

Dr Rakesh Jetly, OMM, CD, MD, FRCPC, chief medical officer

Jetly is currently the Head of the Centre of Excellence on Mental Health in Ottawa, Ontario, and an associate professor of psychiatry at Dalhousie University (Halifax), and the University of Ottawa. He has published numerous articles in professional journals and presents nationally and internationally on such topics as post-traumatic stress disorder and operational psychiatry.

William Cook, CEO, Mindleap Health, Inc.

Cook graduated from West Point, and has built a career as an award-winning engineering leader and has led teams that sold and developed four multi-billion dollar projects, all with built-in AI. Leadership achievements included Starbelly.com architect (US$240mln sale); Raytheon’s Patriot C2 Mgr, Litton’s chief engineer for THAAD BM/C3I (230 engineer team); founder and president, Intelligent Systems Research, Inc; founder & CEO, Tempi.com. In parallel, Cook did his masters in marriage and family therapy and has since helped conduct thousands of hours of individual and group therapy, especially focused on deep trauma-healing.

In addition to having the right pool of expertise in-house, Mydecine will also leverage a network of external relationships to extend its knowledge base and its market reach. The following summarises some of the key relationships:

Clinical trial partners:

University of Alberta, Canada: Clincal trials using psilocybin for PTSD. Also in conjunction with its work with the University of Alberta, Mydecine has formed an exclusive partnership with Applied Pharmaceutical Innovation, a not-for-profit organisation that supports the development of innovative new drugs.
University of Western Ontario, Canada: Clinical trials using psilocybin for PTSD.
Leiden University, Netherlands: Clinical trials using psilocybin for PTSD.

Other academic partners:

Macquarie University, Australia: World’s first trials in a laboratory setting to measure the neuro-cognitive effects of microdosing with psychedelics.
Imperial College, UK: Partnership with Principal Investigator Dr. David Erritzoe to research psychedelic medicines.

Other partners:

ProPharma Group is a leading provider of regulatory and compliance services to the pharmaceutical and biotech industries, engaged by Mydecine to assist the company in its FDA approval processes.
ethica CRO is a leading Contract Research Organisation (CRO), engaged by Mydecine to manage the company’s clinical trial processes.

Financial outlook

We are forecasting small revenues in 2021e, with significant growth in 2022e and 2023e driven by the Mindleap digital mental health platform. We believe that revenues from the psychedelic pharmaceutical programs will begin from 2024.

We are forecasting a gross profit margin of 36% in 2021e, converging towards 50% by 2023, which we believe is the steady-state margin for Mindleap.

We are forecasting increases in operating expenses in 2022e and 2023e as the company continues to invest in the next phases of clinical trials, marketing for the Mindleap platform, and other capabilities. Our forecast for increased gross profit drives the group to positive profitability at the EBITDA level (and the net profit level) by 2023e.

Our full forecasts are on p12-14. The following charts provide a summary.

P&L summary

Source: Proactive Research

In terms of financing the continued growth of the company, we are forecasting additional equity capital raised. For 2021e we have modelled on the basis of an additional C$7.5mln of equity, in addition to C$18.2mln raised YTD. For 2022e we are modelling on the basis of an additional C$65mln of equity raised.

Our capital raise assumptions are included in our financial models on p12-14.

Competitor comparison and valuation

Pharmaceutical innovation companies are valued by the market based on a discounted estimate of the value of their drug pipeline. Some of the factors informing this valuation include:

The size of the markets which will be addressed
The maturity of the pipeline
A view of the defensibility of the intellectual property

These criteria are difficult to translate formulaically into a hard valuation. However, we find it instructive to compare Mydecine’s state of development with some of its larger (by market cap) peers.

The following table summarizes:

Comparison with major peers

Source: Proactive Research

We argue that Mydecine offers investors attractive exposure to the emerging science of psychedelic-based medicines. The company benefits from:

Two clinical trials in progress, and a strong pipeline of IP, with a strong framework in place for IP protection.
Partnership with military veteran organisations.
A Schedule 1 dealers’ licence from Health Canada allowing the company to work with both natural and synthetic psilocybin.
A network of value-enhancing external relationships with academic and medical institutions as well as partners in regulatory clearance and trial execution.

In terms of potential valuation upside, as a scenario, we consider the potential valuation that the market could apply 12 months from now, and we identify two main components of value:

We expect that the Mindleap platform will be generating material revenues by July 2022, allowing the market to attribute a valuation multiple to this business. Investors could potentially apply a 12x EBITDA multiple on one-year-forward forecasts. Based on our forecast of C$21.3mln of EBITDA (2023e), this would imply a value of C$256mln.
We believe that the company will have two programs in Phase II clinical trials – the nicotine and PTSD therapies. Investors could value this IP in line with another listed peer. Based on the market cap of Cybin (the lowest figure in the table above), this would equate to a value of C$401mln.

Putting these two components together, one would arrive at a market cap of C$657mln, or CAD2.10 per share based on our forward estimate share-count. This represents 430% upside to the current share price.

Financial forecasts

Income statement

Source: Proactive Research

Balance sheet

Source: Proactive Research

Cash Flow

Source: Proactive Research