Due to the strong headwinds caused by the current bearish sentiment, COMPASS Pathways (CMPS) shares have fallen sharply since the start of the year, losing around 70%.
Regardless, I’m bullish on this stock.
Shareholders are rightly dissatisfied with the stock’s performance. I wouldn’t give up though, as further development of the company’s treatment-resistant depression solutions could be a powerful stimulus for a stock price recovery.
COMPASS Pathways
COMPASS Pathways is a developer of treatments for mental health problems in patients where other treatments have not had the desired effect.
Specifically, COMPASS Pathways is working on a psilocybin-based therapy that aims to administer the company’s psilocybin (synthetic) ingredient called COMP360, in combination with psychological support.
The company says COMP360 has been named a Breakthrough Therapy for the Treatment of Resistant Depression (TRD) by the U.S. Food and Drug Administration.
COMP360 represents an improvement over existing therapies toward specific clinical goals, and has the potential to treat severe mental illness.
COMPASS is headquartered in London, UK, and has two offices in the U.S., in New York and San Francisco.
Psilocybin
Psilocybin is a psychedelic tryptamine found in some hallucinogenic mushrooms. It acts on the central nervous system, exerting psychedelic or hallucinogenic effects.
Development Status of COMP360
Last year, the company completed a second Phase B clinical trial of COMP360 in the treatment of drug-resistant depression, enrolling more than 230 patients across Europe and North America.
The most important result of this geographically comprehensive study shows a statistical and clinical improvement in the severity of depression at the end of three weeks of COMP360 therapy.
Treatment-resistant depression generally refers to a common phenomenon in mental healthcare settings, where more than half of patients with mental health problems do not have an appropriate response after treatment with antidepressants.
Q1 2022 Results
The company suffered a net loss of $0.50 per share on higher R&D spending, coupled with a rise in general and administrative expenses, but it beat analysts’ median estimate by $0.19.
Catalysts
The treatment’s breakthrough therapy status means that U.S. regulators can speed up the drug’s approval process if subsequent studies confirm or improve results.
COMPASS Pathways is currently completing the design of a Phase III clinical trial evaluating COMP360 as a treatment for drug-resistant depression.
The market should get more information about this sometime in the second half of 2022. We’ll know things like the number of subjects to enroll and their ages, the study sites, and the dose and length of the treatment.
If the regulator advises the same 25-milligram dose of psilocybin compared to the 1-milligram placebo dose (which was already used in the second phase B clinical trial), or a higher dose, the recommendation will address investors’ concerns regarding the safety of the medicinal product.
The stock could then experience a sharp growth spurt as product safety concerns could be behind the lack of momentum, at least partially.
Balance Sheet
The company is not yet profitable as the treatment is not currently on the market, although it has a good chance of commercialization given its breakthrough therapy label.
However, the company’s financial position appears to be in good shape to fund the research on COMP360, which is being studied primarily for resistant depression.
As of March 30, 2022, the balance sheet shows cash on hand of approximately $244 million, far exceeding the total debt of nearly $3 million.
This financial headroom should sustain research and development activities, and cover general and administrative expenses, for a few years.
Wall Street’s Take
In the past three months, four Wall Street analysts have issued a 12-month price target for CMPS. The company has a Strong Buy consensus rating based on four Buys, zero Holds, and zero Sell ratings.
The average COMPASS Pathways price target is $78, implying a 1,004.8% upside potential.
Valuation
COMPASS Pathways has a market cap of $299.3 million, and a 52-week range of $6.74 to $49.52.
The stock has a price/book ratio of 1.32, and a price-to-free-cash-flow ratio of -6.9.
Conclusion
The stock has performed very poorly so far this year, but an update on the development of the company’s lead therapy candidate for treatment-resistant depression could see the stock price rally strongly.
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