Are Mind Medicine Investors Tripping?
Mind Medicine (Nasdaq: MNMD) has been riding high on the psychedelic medicine wave.
Often called MindMed, the company is developing novel therapies derived from psychedelic compounds to treat brain health disorders, with a focus on anxiety and addiction.
Like cannabis-based medicine before it, psychedelic medicine has garnered quite a bit of attention, and the hype has pumped up MindMed’s stock.
As you can see in the chart, shares skyrocketed from their late 2023 lows of around $2.50 to a peak above $11.50 earlier this year – an incredibly fast 360% gain in under six months.
The stock has since retreated to about $7.50, but it’s still up significantly from its lows. The question is… has the stock’s valuation gotten a bit too trippy?
Let’s run this biotech through The Value Meter to find out.
MindMed’s enterprise value-to-net asset value (EV/NAV) ratio of 5.78 is well below the average of 10.95 for companies with positive net assets. Not bad at first glance.
The real red flag is MindMed’s cash burn.
The company has recorded negative free cash flow in each of the past four quarters. On average, it’s burning through the equivalent of 15.32% of its net assets each quarter.
While that’s better than the 24.19% average for firms with similarly poor cash flow, it’s still concerning.
MindMed’s first quarter financials also seem to paint a clear picture.
The company reported a net loss of $54.4 million, more than double its $24.8 million loss in Q1 of 2023. Research and development expenses totaled $11.7 million, while general and administrative expenses jumped to $10.5 million.
To be fair, though, biotech is notoriously cash-hungry, and MindMed’s lead candidates are still in the clinical trial phase.
Without approved products generating revenue, the company relies on investor capital to fund operations.
MindMed raised approximately $175 million in Q1 through an offering and private placement. This significantly boosted its cash position to $252.3 million as of the end of March, which provided some breathing room, but it came with the cost of significant share dilution.
MindMed’s supporters tend to argue that its potential psychedelic-derived treatments justify its current valuation. For example, the company’s lead candidate, MM-120 (a proprietary form of LSD), recently showed promising results in treating generalized anxiety disorder during a Phase 2b trial.
The thing is, drug development is a long, expensive, and risky process. Even with positive early results, there’s no guarantee MM-120 or other candidates will make it to market. The road from Phase 2 to FDA approval is littered with once-promising drugs that didn’t pan out.
When we balance the company’s intriguing yet unproven pipeline against its precarious finances, the current valuation looks hard to justify. The market seems to be pricing in a best-case scenario with little room for setbacks.
That doesn’t seem very wise.
For risk-tolerant investors who believe in the long-term potential of psychedelic medicine, MindMed might be worth watching, but I’d wait for a significant pullback before considering a purchase. While the company’s research is fascinating, the stock price has gotten way ahead of the fundamentals.
The Value Meter rates this one “Extremely Overvalued.”
What stock would you like me to run through The Value Meter next? Post the ticker symbol(s) in the comments section below.
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