Echelon Capital Markets launched coverage on Wednesday of Canadian pharmaceutical company Mindset Pharma Inc (Mindset Pharma Stock Quote, Charts, News, Analysts, Financials CSE:MSET), starting off with a “Speculative Buy” rating. Analyst Stefan Quenneville said Mindset’s first-mover advantage in the quickly-developing psychedelic therapeutics space should set it apart from the crowd. Headquartered in Toronto, Mindset Pharma is a drug discovery and development company focused on patentable psychedelic drugs for the psychedelic-assisted psychotherapy (PAP) industry. PAP uses psychedelics such as psilocybin, DMT, MDMA and ibogaine to treat a range of conditions such as treatment-resistant depression (TRD), post-traumatic stress disorder (PTSD), anxiety, alcohol use disorder and end-of-life angst. The PAP field is getting more attention as research continues to show the benefits of the practice and healthcare professionals become more aware and accustomed to its use. Mindset’s approach is to develop neuro-pharmaceutical drugs built upon known chemical scaffolds of naturally-occurring compounds, aiming to create next-generation drugs with better effect, pharmacokinetics and safety profiles, notably including a lessening of the hallucinogenic properties of the naturally-occurring varieties. Quenneville says this strategy is likely to give Mindset a leg up on the competition. “While the next-gen psychedelics landscape is highly competitive, Mindset has the first-mover advantage with regards to patenting its innovations and arguably has one of the strongest IP positions in the space,” Quenneville wrote. “Indeed, Mindset’s recent collaboration agreement with Otsuka Pharmaceutical, the first big pharma deal in the space centred around psilocybin- and DMT-like molecules, serves as critical validation of its strong IP position. Mindset has also developed a patent-pending synthesis process that offers cost-effective, large-scale synthesis of cGMP psilocybin to serve the increasing number of ongoing psilocybin studies and human clinical trials,” he said. On the Otsuka partnership, announced in January, 2022, MSRD, a division of Otsuka Pharmaceuticals, has paid US$5 million upfront and agreed to cover all development expenses through the Phase 1b trial for Mindset’s shorter-acting Family 2 (psilocybin-inspired) and Family 4 (DMT/5-MeO and DMT-inspired) drug candidates, which is both a major validation of Mindset’s IP portfolio and a source of non-dilutive financing, according to Quenneville. Mindset has granted MSRD a right of first refusal on any asset sale or licensing or collaboration agreements related to Mindset’s two lead candidates, MSP-1014 and a second drug not yet selected by Mindset from the DMT-inspired family, as well as a right of first negotiation with respect to a possible merger, acquisition or asset sale. “This means that MSRD will have the first right to negotiate a new deal to expand the collaboration and continue co-development after the release of the Phase Ib data. If no right of first refusal is consummated, MSRD will be eligible to receive single- digit percentage royalties on sales of the drugs if ultimately approved by regulators,” Quenneville wrote. On Mindset’s capital structure, Quenneville noted that Mindset closed its March 2022 quarter with $11.3 million in cash, no debt and about $28.3 million available from the exercise of 43.7 million currently outstanding warrants and options with weighted average exercise prices of $0.78 and $0.49 per share, respectively. The analyst said that while the MSRD/Otsuka partnership will fund Mindset’s lead candidates through Phase 1b, another deal or partnership to bring MSP-1014 through human clinical trials and to market would bring in additional upfront cash and/or reduce the cash burn through a cost-sharing agreement. Without such a deal, Quenneville said he expects Mindset to be seeking an equity raise of between $10 and $15 million by the end of the company’s fiscal 2023 (June 2023). On its shares, Quenneville said insiders own about 11 per cent of shares outstanding, with the stock being in the majority owned by retail shareholders, leaving plenty of runway for adoption by institutional investors, he said. “Given that the Company’s valuation is driven in large part by its drug candidates’ likelihood of regulatory approval, its market capitalization ought to increase with each de-risking event (publication of positive safety/efficacy data, advancement to successive clinical development stages), creating a virtuous cycle in which each de-risking event raises the valuation. This dynamic enables successively large financings at less dilutive prices to fund each stage of development,” Quenneville wrote. On valuation, Quenneville is uses a probability-adjusted discounted cash flow model with a 14 per cent discount rate, with five per cent residual growth and ten per cent probability of approval of its lead asset for TRD and end-of-life cancer angst. The result is a $1.25 per share target price, which at the time of publication represented a projected one-year return of 279 per cent. Quenneville said his “Speculative Buy” rating reflects anticipated share price volatility as well as the inherent clinical trial risks.