Biotechs working on psychedelic-based treatments have long been a staple in retail investors’ portfolios. Now, several are poised to gain federal approval, potentially turning them from cash-burning to money-printing. 

Saturday, President Trump signed an executive order that would expedite approvals of psychedelic substances to treat mental illness, specifically calling out ibogaine, a plant-derived substance used in other countries to treat post-traumatic stress disorder. 

“Can I have some, please?” Trump said from the Oval Office. The executive order sparked from a text exchange with Joe Rogan, the popular podcast host, the president said. 

Food and Drug Administration Commissioner Marty Makary said priority review vouchers, which allow for a fast-tracked review process, would be given to three psychedelics treatments this week. Shares of psychedelic biotechs — such as Psyence Biomedical, Compass Pathways, Definium Therapeutics, and GH Research — rallied on the news. 

The sector had already been on the rise over the past year after a series of encouraging late-stage clinical trial results from some major players in this space. Their treatments use psychedelic compounds derived from plants, mushrooms, and toads to treat a range of mental health conditions. The drugs are administered at specialized clinics where patients remain under observation for several hours after a dose is given.

Dan Ahrens, manager of the AdvisorShares Psychedelics ETF, said institutional money is starting to enter a space that has been historically dominated by retail investors. Large banks like Deutsche Bank and Morgan Stanley have initiated coverage of psychedelic biotechs, which are predominantly covered by boutique research firms. 

“We are seeing a clear pickup in interest around PSIL and, more importantly, a shift in who is engaging with the space,” Ahrens said in an email. “What had largely been a retail-driven, high-beta theme is beginning to draw meaningful institutional attention.”

Ketamine paves the way

Companies developing psychedelic treatments face several hurdles, including the logistics of testing substances that are often considered dangerous drugs by the federal government, and at times an unfriendly FDA. 

In September 2023, the FDA put GH Research’s GH001 on clinical hold, saying there wasn’t enough information on the potential risks to human test subjects. In 2024, the FDA rejected an application from Lykos Therapeutics for MDMA as a treatment for post-traumatic stress disorder. According to STAT, Trump administration officials vetoed the FDA’s plan to accelerate Compass’ drug candidate late last year.

The FDA reversed course on GH Research’s drug in December. That same month, Tiffany Farchione, director of the FDA’s division of psychiatry, told attendees on an American Brain Coalition webinar that reviewing new psychedelic drug applications accounts for a whopping third of her workload.

In February, Compass announced that its second late-stage trial for its flagship psilocybin-based treatment met its primary endpoint. The company said it would be launch-ready by the end of 2026 — likely becoming the first psychedelic to be approved by the FDA. 

The FDA has already approved a form of ketamine (which is technically not considered a psychedelic, though that’s a subject of debate) for treatment-resistant depression, called Spravato, which is a nasal spray sold by Johnson & Johnson. It’s expected to sell $2 billion worth this year. The active compound is esketamine, a component of the anesthetic and party drug ketamine. 

Spravato, like most of the psychedelic-based treatments potentially coming to market, is administered at a clinic and requires a multi-hour monitoring period. When the drug first came to market in 2019, it faced steep reimbursement challenges, in part because providers lacked the necessary billing codes to be compensated by insurers for the administration and monitoring process. When Spravato first came to market, there were also only a few hundred centers where the drugs could be administered, compared to over 7,300 now.  

Steve Levine, Compass’ chief patient officer, said he expects that any center that delivers Spravato will be able to deliver Compass’ COMP360 treatment.

“We’ve had the fortune of being able to learn many lessons from the initial commercialization of [Spravato] because that was not smooth,” Levine said. “It really took a few years for them to learn some hard-fought lessons.”

COMP360 will be able to benefit from the infrastructure in place, and has the added edge that it is able to be administered less often than Spravato. Spravato is administered twice a week for four weeks, then once a week for three weeks, and every two weeks going forward. COMP360, meanwhile, may only require two to four treatments in a year.

However, psilocybin is a Schedule I drug, putting it in the same bucket as heroin, whereas ketamine is already in a schedule that allows it to be prescribed by a doctor. That distinction adds some regulatory hurdles to commercialization, though the executive order signed Saturday also directs the Department of Justice to reschedule substances that have successfully passed clinical trials “as quickly as practicable.”

Because COMP360 is a pharmaceutical-grade synthetic version of psilocybin, it will need to be rescheduled first federally and then individually across all 50 states before it can be prescribed. Then the company will have to do all the rest that comes with bringing a new drug to market, like educating payers and building sales forces. 

“It means a lot of work,” Levine said.