Weekly Sector Credit – Psychedelics

• The bloom is off the rose with regard to psychedelic equities. The group has the worst LTM performance of the eleven public company categories we chart each week in the Viridian Deal Tracker.

• The sector’s biggest credit issue has always been liquidity. Ostensibly, the median current ratio of 2.88x would seem to indicate solid balance sheet liquidity. However, a more accurate picture is presented by our free cash flow adjusted current ratio, where we subtract annualized free cash flow from the numerator of the standard current ratio. The sector drops to a median of .09x on that basis, a figure that indicates a constant need for fundraising as clinical trials and drug discovery are massively cash-burning activities.
• With poor liquidity and negative cash flow, one might assume the credit picture here would be hopeless, but that neglects the market assessment of asset value. Suppose we algebraically rearrange the sector’s median total liabilities to market cap ratio of .26x. In that case, we can find that the Market value of Assets/ Liabilities is 4.84x, indicating substantial asset value coverage of liabilities. We haven’t seen PIK debt used as a financing method in the sector, but this metric seems to suggest that it might make sense. It wouldn’t be the craziest thing we’ve seen.