In 1938, the Swiss scientist Albert Hofmann accidentally discovered the psychedelic drug lysergic acid diethylamide (LSD), notes Tony Daltorio, editor of Market Maven.

After returning from World War II, English psychiatrist Humphrey Osmond learned of Hofmann's research, and between 1954 and 1960, he treated 2,000 alcoholics with LSD. The results were impressive: 40% to 45% of the alcoholics who were treated with LSD had not returned to drinking after a year.

Despite the early success of psychedelics in treating addiction, research abruptly stopped in the late 1960s — for political, not medical reasons. Psychedelics had become very popular with counter-cultural hippies who used psilocybin (the compound in magic mushrooms) and LSD recreationally. The fear was that people using these drugs would no longer want to fight in the Vietnam war.

And so the U.S. outlawed LSD in 1968, and psilocybin was banned in the U.S. as part of the 1970 Controlled Substances Act. Research into psychedelics stopped for decades.

Psychedelic research slowly started to return to the mainstream of science and medicine in the 1990s. The Multidisciplinary Association for Psychedelic Studies (MAPS), a non-profit organization, was founded by Rick Doblin in 1986. It has handed out millions of dollars to pick up the research that left off in the 1960s.

And now, spurred by the huge increase in deaths from mental-related illnesses in the past few years, support for psychedelics is gathering speed.

For example, in the summer of 2021, the National Institute of Health awarded John Hopkins University a grant to study the impact of psilocybin on tobacco addiction. This was the first grant awarded for research in psychedelics in 50 years!

Psychedelic Drug Stocks

With legal restrictions finally easing, psychedelic drug companies have been able to go public in the past two years. In October 2020, Compass Pathways (CMPS) listed on the Nasdaq with a $544 million valuation.

Then in June 2021, Atai Life Sciences (ATAI), backed by Peter Thiel, listed on the Nasdaq for $3.19 billion, the largest listing for a psychedelics company to date. Just a month later, to much less fanfare, Cybin (CYBN) listed on the New York Stock Exchange.

One of the main problems all of the companies in this sector face is this: managing the duration of the "trips." LSD trips can last up to 12 hours, while psilocybin trips, which don't usually start for about an hour, can last six.

However, dimethyltriptamine (DMT) is undergoing its first clinical trial to treat depression. DMT is the active ingredient in South American hallucinogen ayahuasca and acts fast. The trip starts in just seconds and last less than 30 minutes.

These companies do face another problem, similar to what cannabis firms face: psilocybin products are still illegal on the federal level, and there is a mishmash of regulations on the state level. Oregon is the first state to widely legalize psychedelics, through legislation that comes into force at the start of 2023. A variety of other states and cities are starting to decriminalize possession of psilocybin products or explore their use in medical therapies.

So how are these companies progressing? Cybin has created its CYB003 molecule derived from psilocybin. It is designed to have less variability, with a faster onset of its effect, as well as a shorter duration. Phase 1 trials have started this summer to investigate its efficacy in curing major depressive disorder and the results are expected by the autumn.

The company has also developed CYB004, which is derived from DMT. The hope is that it will extend the length of the trip. A phase 1 trial will soon be conducted on 50 smokers to see whether it can help them break the addiction.

Compass Pathways is ahead of Cybin in the clinical trial process. In May, it completed a phase 2 trial of its COMP360 molecule, in the largest randomized control trial study of psilocybin ever completed.

The study showed a "highly statistically significant reduction in depressive symptoms" from patients that received a 25mg dose compared with those that received 1mg. The patients received the drug in conjunction with psychological support from specially trained therapists.

Despite their promise, these companies are all pre-profit businesses — a designation has not been good in 2022. Valuations have also been badly hit by the sell-off in growth stocks. Currently, Cybin's share price has fallen 54%, while Compass Pathways' share price dropped 31% and Atai Life Sciences dipped by 50%.

With phase 3 trials far from completion and approvals likely to be years away, cash will not be flowing arriving anytime soon. Wall Street doesn't expect Cybin to produce any revenue until after 2026, according to FactSet consensus. At Compass Pathways, which is further though the trial process, analysts expect it to generate $79.3 million of revenue by 2025 before jumping to $272 million in 2026.

However, the huge potential for these companies remains. Estimates are that the U.S. psychedelic market is currently worth $190 million, and could grow to a $2.4 billion market by 2026.

All three companies are highly speculative. But while the other two are still hovering near their lows, Compass Pathways is well off its low of $6.54. This stock can be bought a little bit at a time, on weak market days. Accumulate the stock slowly, building up to a larger position. It could pay off big in a few years.

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