Weekly Sector Credit –Psychedelics

• • The Psychedelics sector has excellent implied asset value coverage of liabilities. Its total liabilities/ market cap median of .36x implies an asset coverage of liabilities of approximately 3.7x.
  • However, the issue has always been liquidity. These companies need to maintain quite high current ratios (median of 3.37x) because they are all cash flow negative due to the constant need to fund drug development and clinical trials while generally having little to no revenue. On this basis, we still see a struggle for more than half of the 20 companies in the sector. The median free cash flow-adjusted current ratio of .25x indicates a serious and pressing need for additional funding. Given the high asset coverage, one might think these companies could borrow money, perhaps through a low-coupon convertible. However, with negative cash flow and little securitizable collateral, that avenue is difficult, if not impossible. The general outlook for this sector is consolidation. Large institutions will probably acquire companies with promising stage 2 trials, while those with less promising outlooks may fail.