Market for psychedelic drugs to treat mental health gets a buy signal

Thursday’s announcement that Eli Lilly will acquire AtaiBeckley, a clinical-stage maker of psychedelic drugs, for up to $3.8 billion indicates Big Pharma’s increasing embrace of a long-stigmatized class of medications as alternatives for treating an array of mental health conditions. The news comes on the heels of positive clinical trial results of several different psychedelics, as well as President Trump’s executive order in April fast-tracking reviews of such drugs by the Food and Drug Administration. 

AtaiBeckley’s lead asset, BPL-003, is a synthetic form of 5-MeO-DMT — derived from the venom of Sonoran Desert toads —administered as an intranasal spray for treatment-resistant depression, a severe form of the illness that ​does not improve after standard treatments, which affects around four million Americans. A year ago, Atai reported results of its Phase 2b study of BPL-003, which demonstrated rapid and durable reductions in TRD symptoms. AtaiBeckley is developing several other psychedelics, including one related to MDMA, colloquially known as ecstasy. 

BPL-003 has been granted Breakthrough Therapy Designation by the FDA, a program that expedites drug development and review, and is currently in Phase 3 trials. “Phase 3 success by early 2029 could open up a $1-2 billion opportunity in TRD,” Jefferies analysts wrote in a note. More generally, they wrote, “our KOLs (key opinion leaders) confirm psychedelics could represent the biggest change to psychiatry and are possibly a paradigm shift, with patient demand already seeming insatiable.” 

5-MeO-DMT joins several other psychedelic substances — LSD, psilocybin (aka magic mushrooms), MDMA, ayahuasca and ibogaine — that biopharma disrupters have formulated and are successfully testing to treat depression, post traumatic stress disorder, anxiety, eating disorders and alcohol and drug addiction. 

Psychedelic drugs appear to temporarily loosen the brain’s rigid patterns of communication, allowing regions that don’t usually “talk” much to connect in new ways. In that more flexible state, especially when paired with therapy, people may be able to revisit trauma, depression or addiction from a different perspective and form healthier mental pathways. Some experts refer to this process as “rewiring” the brain. 

“There’s enough data generated so far that suggests that this class of drugs can deliver something more meaningful than what the orals have been able to do so far,” said Ami Fadia, a biotech analyst at Needham, referring to SSRIs and SNRIs, medications widely prescribed for more than three decades to treat a broad range of psychiatric illnesses. “A few years ago, some investors would not want to touch (psychedelics), but now I rarely hear that,” she said. 

Indeed, it’s been a long, strange trip for psychedelics. Psychiatric scientists began studying them in the 1960s, producing promising results. But they also became popular recreational drugs among the counterculture (next month marks the 57th anniversary of Woodstock), leading Congress to pass the Controlled Substances Act in 1970. Psychedelics were designated as federally outlawed Schedule I drugs deemed to have no medical benefit. Research projects came to a halt. 

After languishing in the R&D doldrums for years, the drugs found their way back into researchers’ labs and clinics beginning in the late 1990s and early 2000s, a reemergence documented by nonfiction author Michael Pollan in his 2018 best-seller, “How to Change Your Mind,” in which he wrote that “after several decades of suppression and neglect, psychedelics are having a renaissance.”

Recent clinical trial boost for psychedelics

The clinical trial path of psychedelics has featured notable stumbles in recent years, most notably in August 2024 when the FDA denied approval of an MDMA-assisted therapy for PTSD developed by Lykos Therapeutics. This marked the first time the agency had considered a Schedule I drug for medical use, so the denial was not only a blow to Lykos but to the wider movement to bring psychedelic drugs into mainstream. “It’s a huge blow to the field,” said Dr. Boris Heifets, an anesthesiologist at Stanford University whose lab studies psychedelics, at the time. 

Despite that setback, clinical trials for psychedelics have continued apace with positive outcomes. For example, Definium Therapeutics released positive results from its Phase 3 clinical trials of the company’s LSD-based drug, DT120, showing that it significantly helped patients with major depressive disorder. The biopharmaceutical startup’s shares skyrocketed by 50%.  

The data’s “effect size is the largest I’ve ever seen,” said Jefferies analyst Andrew Tsai. “What’s special about Definium is that that same drug, LSD, has already shown very profound anxiety data as well, and we’re going to get two more Phase 3 studies (for general anxiety disorder) this month and in September,” Tsai said. 

If those results prove to be similarly robust, the company can file what’s called a New Drug Application with the FDA within the next six to nine months, said Definium CEO Robert Barrow. “Even under an expedited review,” he said, referencing the president’s executive order, “the review lasts about eight months.” 

Importantly, because LSD is still a banned Schedule I drug, Definium also will need the Drug Enforcement Administration to reclassify it. Barrow expects that DT120, “presumably with all its safety controls in place, to be scheduled certainly below Schedule I,” he said. Individual states will have to reclassify LSD in this case as well. 

Another hurdle in bringing psychedelics to market is having them covered by insurance, which requires coding for each drug, a process overseen by the Centers for Medicare & Medicaid Services. “Coverage is going to be necessary for patients to get treatment,” Fadia said. “Each company will need to negotiate with payers about the cost of the drug.”

J&J’s ketamine blockbuster sets the standard

While ketamine is not considered a traditional psychedelic, Fadia pointed to J&J’s Spravato — a nasal spray for adults with a major depressive disorder that is difficult to treat and which is derived from the drug — as the market model.

In its quarterly earnings last week, J&J reported Spravato sales were up 40% year-over-year for a total of $584 million. The drug was first approved by the FDA in 2019 for treating major depressive disorder and treatment resistant depression and analysts estimate that Spravato will generate more than $2 billion in sales this year. 

“They did a lot of heavy lifting to make it happen,” Fadia said, “but they’ve proven that it can happen.” 

Besides Definium, founded in 2019 under the name MindMed, and AtaiBeckley, several other public and private startups have been launched over the past decade, including Compass Pathways, Transcend Therapeutics, Helus Pharma, GH Research, Psyence BioMed and the nonprofit Usona Institute.  

Lilly is not the only Big Pharma company to jump onto the bandwagon. Japan’s Otsuka Pharmaceuticals acquired Transcend for $1.2 billion in June and AbbVie purchased Gilgamesh Pharmaceuticals’ next-generation psychedelic compound last year for $1.2 billion.

The psychedelic drugs market size was valued at $4.08 billion in 2025 and is estimated to grow from $4.63 billion in 2026 to reach $8.75 billion by 2031, at a CAGR of 13.55%, according to market analysis firm Mordor Intelligence.  

Compass has created a psychedelic drug, COMP360, a synthetic form of psilocybin, that earlier this month scored strong Phase 3 results for treating TRD. The company plans to release its final Phase 3 results in the fourth quarter. Compass is one of the three biotechs that Trump’s executive order granted a so-called Commissioner’s National Priority Voucher from the FDA to accelerate its approval. 

“We will be launch-ready by the end of this year,” said CEO Kabir Nath, “in the sense that all the commercial preparation will be done.” That includes educating providers and the general public about the drug and assembling a sales and marketing field force of “somewhere around 250-300 people,” Nath said. If all goes well, the product will be on the market “in the first part of 2027,” he said. 

COMP360, under a brand name that Nath declined to reveal, would thus become the first psychedelic to hit the market. “That in and of itself should draw meaningful interest across the institutional retail space,” said Tsai, who expects COMP360 to produce “about $50 million in sales for the full year.” 

Transcend is in clinical trials with its TSND-201, a formulation of methylone, to treat PTSD. Methylone is similar to MDMA, but also has distinct properties, said John Kraus, chief medical officer for Otsuka, Transcend’s new parent company. Results of its Phase 2 trial, released in February, found statistically significant, rapid and durable improvements in symptoms of severe PTSD.  

“I haven’t seen results that are as encouraging as (those),” Kraus said, comparing methylone to the only two approved drugs for PTSD, Paxil and Zoloft. 

Like Compass, Transcend has also received a fast-track voucher from the FDA. “It will help our engagement with the regulatory authorities in terms of trying to get this (drug) to patients as quickly as possible, if indeed the Phase 3 studies perform as we would expect,” Kraus said, adding that the Phase 3 trials are underway. “I’m hoping for data at least by early next year,” he said, though wouldn’t speculate on when the drug might be on the market. 

The only psychedelic substance identified in the president’s executive order and the Oval Office signing event was ibogaine, a naturally occurring compound found in the roots of the African shrub iboga and used for centuries in spiritual and healing ceremonies. It’s recently gained interest from researchers for its potential to treat substance use disorders, but unlike other psychedelics, ibogaine has not undergone large-scale clinical trials. 

Several biotechs are studying ibogaine and derivatives, including AtaiBeckley, Gilgamesh, Psyence and DemeRx. DemeRx founder and CEO Deborah Mash has developed non-hallucinogenic noribogaine, the active metabolite of ibogaine. The company’s immediate plan, Mash said, is to complete a small alcohol-interaction study and then begin a Phase 2 trial with patients with alcohol use disorder. 

The FDA, Mash said, has allowed DemeRx’s noribogaine studies under an IND (investigational new drug) authorization. To proceed with additional trials, “the agency has to have successful Phase 2 data, demonstrate that there’s a robust efficacy signal and that the drug is well tolerated,” she said. 

Natural ibogaine has gained attention lately for its use in treating veterans with PTSD. A 2024 study by Stanford Medicine showed an 88% decrease in PTSD symptoms among a cohort of 30 special operations veterans with a history of traumatic brain injuries. Last year, Texas allocated $50 million in state funding for ibogaine clinical trials. 

Nonetheless, critics have warned against serious cardiac risks associated with ibogaine treatments. Mash said she is keenly aware of that caveat, adding that the company has conducted extensive cardiac testing with noribogaine and has not found clinically significant QT prolongation, a delayed heart reset between beats. “We know that ibogaine has a cardiac risk,” she said, “but we also know that the benefits may outweigh the risks when noribogaine is administered safely.” That, of course, will need to be proven in the drug’s ongoing clinical trials to the satisfaction of FDA reviewers.

The National Alliance on Mental Illness, citing federal data, reports that 23.4% of U.S. adults — or about 61.5 million people — experienced some type of mental illness in 2024. That creates tremendous opportunity for makers of psychedelic drugs to offer alternatives to traditional medications currently being prescribed.  

But that doesn’t necessarily translate to cutthroat competition within the psychedelics sector, Tsai said. “Big picture, I don’t think this is a winner-take-all market by any means. When you look at history, multiple SSRIs can become blockbusters, multiple antipsychotics can be become blockbusters. So I do think multiple (psychedelics) players can win,” he said. “This is a very big market.”