InFocus: LEK’s Adrienne Rivlin looks at the use of psychedelics in treating mental illness

Adrienne Rivlin, partner in L.E.K.'s Healthcare practice

Mental health issues are a rising global concern, with the World Health Organization (WHO) reporting a 13% increase in mental health conditions and substance use disorders in the decade to 2017. Mental health conditions come with an associated impact on all aspects of a life – both individually and more broadly within the family and in the community. They also come with a negative impact on economic activity. Against this backdrop, Adrienne Rivlin of L.E.K. Consulting contends that psychedelics are emerging as a potential solution that could revolutionise mental healthcare

According to WHO, two of the most common mental health conditions, depression and anxiety, cost the global economy around US$1trn each year yet the global median of government health expenditure that goes to mental health is less than 2%. The market for treating mental illness is forecast to reach more than US$40bn by 2025.

‘I think it’s shameful the way that mental health treatments and therapies have been under-prioritised around the world,’ said Rivlin. ‘We collectively deserve more for our mental health than we’ve had in the past.’

It would be naïve to assume that addressing the world’s mental health issues does not come at a cost but, in two papers published in 2021: The Investment Surge in Psychedelics for Treatment of Mental Health Conditions, and Psychedelic Psychiatry: A Revolution Set to Transform Our Mental Health? Rivlin argues that psychedelics could help lower the economic and social burden of illness and that ‘there are significant and exciting investment opportunities in psychedelics as the sector develops’.

The following largely replicates the L.E.K. Consulting reports on psychedelics, updated to reflect recent developments in 2022.

Revolutionary transformation                                                        

The incidence of difficult to treat mental health conditions such as depression, anxiety, PTSD, schizophrenia, and addiction are growing, a trend that has only been exacerbated by the impact of the worldwide Covid-19 pandemic.

Many sufferers, however, find traditional treatment ineffective, with some medicines coming with unforeseen side effects. Relapse rates are high.

Yet, remarkable successes in psychedelic clinical trials may soon offer hope for patients, particularly MDMA for PTSD and psilocybin for depression and anxiety. And, because of these successes — coupled with US Food and Drug Administration (FDA) breakthrough designation, inward capital investment and improving sentiment towards these treatments — Rivlin says that the world is at the dawn of a new era in treatment for mental illness.

Recognition of the commercial potential of psychedelics in treating mental health is already driving rising levels of investment.

There are over 200 biotech companies in North America and Europe focused on psychedelics, but the large-cap biopharmaceutical companies, like GSK and AstraZeneca, have largely scaled back their research efforts in the psychiatric field — psychopharmacological drug research has dropped by 70% in the past 10‒15 years, largely because of perceived difficulties with conducting psychiatric clinical trials.

Psychedelic investments: a meteoric rise

L.E.K. analysed over 110 financing events from more than 60 companies working primarily within the psychedelic sector between 2018 and 2021. These companies included pharmaceutical businesses focused on discovering, developing, and manufacturing psychedelic drugs; healthcare companies establishing clinic networks and retreats for psychedelic-assisted psychotherapy; and technology companies producing telehealth platforms and electronic health record software specifically for medical practices using psychedelics.

In both 2018 and 2019, around US$60m was invested in psychedelic-focused companies. By 2020, the level of investment had increased almost tenfold as the number of psychedelic-focused businesses and new clinical trials increased rapidly. The 2020 inflows were exceeded in the first three months of 2021, and investment across the whole of the year exceeded US$1.5bn (see Figure One).

‘We had expected investment figures to exceed US$2bn in 2021, but the market correction in biotech stocks affected flows,’ said Rivlin. ‘But I do think interest in psychedelics is an established trend for two reasons: the strength of clinical evidence and an improving regulatory environment.’

‘Investments to date in 2022 have slowed, in line with trends across biotech stocks. Nonetheless, inflection points such as milestone clinical trial results are expected to drive continued investment, albeit not at such breakneck speed,’ she said.

As regulators become more familiar with the efficacy of psychedelics in treating mental health, it will hopefully become easier for manufacturers and developers to progress their products more quickly through the pipeline, she said.

Europe leads the way as a key hub in psychedelic research, accounting for over half of investment every year since 2018. This is largely driven by the success of larger European companies such as Atai Life Sciences and COMPASS Pathways. However, L.E.K. notes that investments in psychedelics companies are increasing more rapidly in the US than in Europe.

‘I think you’ll find some hot spots where legislative or regulatory communities are ahead of the curve,’ said Rivlin. ‘As in Oregon.’

Regulatory authorities in Oregon have acknowledged that there is enough evidence to support psilocybin’s value in a number of different therapy areas. In 2020, it became the first state in the US to legalize psilocybin, the active ingredient in magic mushrooms, for the treatment of mental health conditions in supervised settings.

Other regulators are more reticent, but Rivlin thinks it clear that, ‘as the number of published, serious, peer-reviewed studies increases, communities will likely recognise the advantages of psychedelics and decide on how they are going to regulate these products’.

The psychedelic healthcare value chain

Funding to biopharmaceutical companies represents most of the inward investment in psychedelics. But there has been accompanying growth in clinics and the digital infrastructure that will help lay foundations for the future success of the sector (see Figure Two).

Investment in digital companies is growing rapidly, with many oversubscribed Seed and Series A rounds registered in 2020 and 2021. Funding in this area can be viewed as strategic as it addresses one of the remaining roadblocks to the psychedelics success story — delivery.

‘Digital health is a really interesting space,’ said Rivlin. ‘It makes sense to explore whether treatment can be delivered with a better cost profile by sensibly deploying digital health solutions.’

So, while investment has traditionally focused on biopharmaceutical research and development (R&D), there is an increasing trend to distribute funding more broadly across the value chain.

Companies primarily focused on development are investing in the infrastructure required for clinical trials and the delivery of psychedelic-assisted psychotherapies, establishing networks of clinics and digital platforms.

This approach has two immediate advantages to investors. Firstly, it generates short-term revenue from diversifying the uses of assets, and secondly, it allows companies and investors to reduce the level of risk inherent in developing new drug therapies.

L.E.K. points to Mydecine, which is focusing on drug development and technology, as an example. The company is committed to developing psilocybin for smoking cessation and PTSD, with assets currently in Phase I and II clinical trials. Mydecine are also working on shorter-term projects such as software-as-a-service digital therapeutics, through their subsidiary Mindleap. This model of establishing digital platforms, as well as the creation of clinic networks by other companies, alongside pharmaceutical R&D is a growing trend within the sector, through either organic growth or acquisition.

From 2018 to 2021, around 80% of investment in the psychedelic sector has been in companies focused on R&D, either of existing psychedelics in new therapeutic forms or in the generation of new derivatives (see Figure Three). There are a range of compounds in the commercial spotlight, although psilocybin leads the way, driven by promising scientific results and the beginnings of a legal therapeutic framework.

Biopharmaceutical R&D attracts investment

The largest proportion of funding is in developing the drugs that treat mental illness. Some companies focus on a range of mental illnesses, from depression and anxiety to PTSD and eating disorders, while others work within specific areas such as alcohol use disorder or cancer-related anxiety and depression.

Entheon Biomedical is developing treatments for addiction through DMT-assisted psychotherapy. The company is also developing a predictive biomarker response platform to ensure the safest psychedelic treatment possible. COMPASS Pathways is initially focusing on psilocybin therapy for treatment-resistant depression but also plans to develop into other areas of unmet need in mental health.

Many companies also have neurology streams alongside mental health, focusing mostly on neurodegenerative conditions. Others are realising the anti-inflammatory potential of psychedelics, as well as the connection between physical and mental health.

The wide variety of proposed use cases for psychedelics is supported by an increase in basic research.

Investor dynamics

Some investors see psychedelics as the newest frontier in investing, and others are drawn to the therapeutic potential of these drugs, often due to a personal experience with mental health issues. Both groups are unlikely to have had prior experience investing in the pharmaceutical space but represent the key players in Seed and Series A rounds.

The third group is the more traditional biopharma investors, which typically invest in later-stage companies.

A major driver of the huge increase of investment in 2020 and 2021 has been the growth of public offerings by psychedelics companies: COMPASS Pathways launched a US$147m IPO in September 2020, and in June 2021 Atai Life Sciences issued US$225m of shares on NASDAQ and GH Research priced its US$160m IPO. Currently, there are 60 publicly traded companies focused on psychedelics.

Despite the rise in public offerings, exposure to the sector for larger investors is still limited and, as a result, most institutional investment originates in the private market.

A notable trend in the past 12 months has been the increased range of investor types entering the private market, although there is likely even more heterogeneity to come as the sector matures.

Outside of investment funds, direct investors in psychedelics can be grouped into three main archetypes, each with different motivations and investing behaviours (see Figure Four).

L.E.K.’s predictions for the future of psychedelic investing

Continued steady flow of investment

While the rate of large private funding rounds and IPOs seems to have slowed, we expect continued investor appetite in the sector. We expect to see new seed rounds for recently launched companies across the value chain, as well as peaks in investment following the publication of clinical trial results.

Growth in healthcare and digital

We expect to see the continued growth of healthcare and digital platforms to fill gaps in the psychedelic value chain, which so far has been skewed towards early-stage pharmaceutical development. These areas will provide short-term revenue for pharmaceutical companies engaged in the development of next-generation psychedelics. They will also help establish the foundation for the anticipated approval of psychedelic-assisted psychotherapies, beyond ketamine and its derived compounds, expected from 2023. We expect investors will continue to distribute their investments across the full value chain of the industry.

Greater scrutiny of clinical results as funding increases

Investors are likely to place increasing emphasis on the ability of companies to deliver on their clinical programmes. Pivotal clinical trial results are set to be reported throughout 2022, but investors are already scrutinising psychedelic programmes to understand their scientific promise.

Continued growth in Europe

Europe’s leading role in the psychedelic industry will be consolidated, with continued levels of investment anticipated in 2022 due to the strong performance of both public and private companies. Investment from the US will no doubt continue apace as well.

Traditional biopharmaceutical investors and established pharmaceutical companies move in

As companies work on developing next-generation psychedelics with improved properties and increased patentability, we expect more traditional biopharma investors to enter the space. There have been some notable recent examples of this trend. For example, in January 2022, Otsuka invested U$5m upfront in Mindset Pharma, via the McQuade Center for Strategic Research and Development, adding to its previous investments in the psychedelics sector through Atai Life Sciences and Compass Pathways. This trend is likely to continue, according to L.E.K.

‘Certainly, some of the larger, more established pharma companies are looking at this space and wondering whether they should be involved and in what part of the value chain they could participate in,’ said Rivlin. ‘We might start to see large pharma looking at acquisitions, licensing, partnering or developing competing products.’


The rate of growth of the psychedelics sector is likely to increase as lead candidates across several large companies edge their way towards pivotal clinical trial results and launch.

This will further propel interest and investment in an industry that holds a promise of hope to many patients in desperate need of alternative, effective therapies.