If you’ve ever been depressed, you know how difficult it can be to get back on your feet when you return to normal. To help people with depression and other mental illnesses Compass paths (NASDAQ: CMPS) prepares psychiatric therapies based on chemicals such as psilocybin. While its interventions can never be used as widely as today’s first-line depression treatments, such as cognitive behavioral therapy (CBT), they can simply offer hope.

But hope is not enough when it comes to making fruitful investments in biotechnology. Shares of Compass have fallen more than 25% since the beginning of the year, and there is no guarantee that they will recover. Let’s take a look at this company և its shares to see if the market is wrong.

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Evaluation is not an exact science

Since its initial public offering (IPO) in September 2020, Compass has been developing its own psychotherapy. Since it does not yet have any approved products for sale, it does not currently have any revenue or revenue to talk about. Thus, it is impossible to use standard valuation criteria such as price-to-sales (P / S) or price-to-earnings (P / E) ratios to see if its current price is in the right range for prospective buyers. .

But with a little analysis, we can still get a rough idea of ​​how Compass evaluates his biotechnology peers. With its flagship program, the company aims to tackle treatment-resistant depression (TRD), which is estimated to affect more than 100 million people worldwide.

Compass treatment with COMP360 consists of psilocybin, which is administered in combination with targeted speech therapy. Early studies have shown that the combination is highly effective in treating TRD. The program is currently in phase 2b of clinical trials, which means that it is quite likely that in a few years it will compete in the TRD market.

By definition, people with TRD have already tried at least two other interventions, which means that the standard set of options like traditional antidepressants has not helped. In addition, there are some more invasive approaches, such as electroconvulsive therapy (ECT), that are not used for more severe depression but can be used to help patients with TRD.

However, these therapies tend to have complex side-effect profiles և they are far from panic. Therefore, if the strong efficacy of COMP360 continues to be confirmed by clinical evidence, և a favorable profile of its side effects will make it more attractive to patients, then it will have an advantage over other treatments on the market.

Let’s look at a quick calculation to get an idea of ​​the stock prices that TRD’s future COMP360 approval can provide. According to a report by Credence Research, the global TRD treatment market will cost $ 1.39 billion by 2027. The average selling price of the biotechnology industry is 4.7. Thus, if Compass manages to capture only 10% of it annually, it could bring in $ 139 million in revenue. Assuming it trades at the industry average P / S ratio, its shares could be worth at least $ 15.66.

Shares of Compass are currently trading at around $ 35. This means that the shares are either massive overestimatedor that there are other potential sources of income that the market calculates at its current price.

Psilocybin may be helpful for more common types of depression

In the long run, COMP360 may be useful for a broader indication of depression և related disorders. The company is already conducting research with partners to evaluate the effectiveness of therapy for major depressive disorder (MDD), suicidal ideation and bipolar disorder. If COMP360 works well in these other niches, it means that it can enter a much more targeted market than just TRD.

And having a bigger market will work wonders for valuation. According to Mordor Intelligence, the global drug market will cost up to $ 17.23 billion by 2026. Capturing even 5% of that market will cost $ 861.5 million a year, which could put Compass at about $ 97 a share in the average level of the biotechnology industry. P / S ratio estimation.

So, if we assume that the company can take its initial success with COMP360 և TRD և repeat them with the MDD, then it is reasonable to say that currently the shares are massively undervalued. Only the results of future clinical trials will tell the story with confidence.

Meanwhile, I am still comfortable buying stocks today. Whether or not this is necessarily a speculative-risky move, the scientific evidence I have seen shows that psilocybin is indeed a promising cure for many different mental illnesses, especially depression. And it is possible to have a better product than the competition at the end of the day, even if there is still work to be done to prove it.

This article presents the opinion of a writer who may disagree with the position of the “official” offer of Motley Fool Premium Consulting. We are motley! Questioning an investment thesis, even our own, helps all of us think critically about investing, making decisions that will help us become smarter, happier, and richer.