20-year-old investor who made $110 million on a meme stock is now pushing for change at psychedelics company MindMed

The group, FMC MM Holdings LLC, sent a letter to the MindMed board in late September, proposing measures to enhance value that include a greater focus on using capital to speed the development of drug candidates, while cutting costs to reduce annual cash burn.

The group was irked by a recent dilutive equity offering that was priced at a 30% discount to the stock’s prior-day closing price. The move reduced FCM’s stake to 4.3% from 6.1% and sparked a steep selloff in the stock that has led it to underperform peers, according to Freeman.

See: Stock of psychedelics company MindMed slides 50% after it sells fresh shares

MindMed’s stock has fallen more than 90% in the past 12 months, compared with losses of 79% for Atai Life Sciences N.V.
ATAI,
-1.16%
and 73% for Compass Pathways PLC
CMPS,
-1.15%,
two rivals in the psychedelics space. The benchmark S&P 500
SPX,
-0.74%
has declined 15%.

“Most biotechs are cutting back on spending and trying to conserve cash in a bear market, while MindMed is increasing its cash spending,” Freeman told MarketWatch in an interview.

MindMed disagreed, noting that many biotechs, and especially those that are still in the clinical phase, are under pressure in the current market.

“FCM’s proposals are not realistic and demonstrate a lack of understanding of how an emerging growth biotech company such as MindMed will ultimately deliver value to shareholders,” Chief Executive Rob Barrow told MarketWatch in emailed comments.

Read also: ‘Magic mushrooms’ may help alcoholics drink 83% less — or stop drinking entirely, research suggests

FCM says MindMed needs to drastically reduce the development time for two of its key product candidates, dubbed MM-110 and MM-120. Both are forms of LSD with the former currently in a trial as a treatment for opioid-use disorder and the latter as a treatment for anxiety.

“Our plan to improve MindMed centers on the strategic deployment of cash on selected programs so core drugs are expediently progressing towards FDA approval, a reduction of unnecessary cash burn, and a plan to raise capital in a manner that does not adversely affect the company’s share price,” FCM wrote in the letter to the board.

MindMed is currently in Phase 2 dose-finding trial for MM-120 with the view to initiating a Phase 3 trial. FCM would like the company to seek FDA authorization to move straight to a Phase 3 trial and skip Phase 2, using data from trials completed by MindMed collaborator Matthias Liechti, whom Freeman says is a leading expert in the field of psychedelics.

Liechti, identified on the MindMed website as a professor of clinical pharmacology and internal medicine at the University of Basel and an attending physician at University Hospital Basel, “recently published a randomized placebo control study regarding LSD and anxiety which showed a 99.993% confidence in the result,” said the FCM letter. “In addition, Professor Liechti has performed several dose finding studies to assess LSD safety which have successfully identified an effective dose to safely treat anxiety. This allows MindMed to leverage its collaboration with Dr. Liechti to potentially skip the Phase IIb phase in its entirety. ” 

MindMed CEO Barrow disputes that claim. “There is no basis for the claim that we could skip our Phase 2 study for MM-120 and go directly to Phase 3,” he told MarketWatch. “Doing so runs several risks, including Phase 3 failure given we would not have identified an optimal dose, the FDA rejection of our new drug application even after a successful trial, and delays, assuming — as is likely — the FDA were to reject our proposal to go directly into a Phase 3 program.” 

FCM includes Freeman’s uncle, Scott Freeman, a biotech entrepreneur and MindMed co-founder, who is suing fellow co-founder Stephen Hurst. The suit alleges that Hurst ousted Freeman from the company and then engineered a deal that transferred valuable intellectual property to a rival.

Hurst responded to a MarketWatch request for comment with this statement: “There is no factual basis to Dr. Freeman’s claims.”

Barrow said the allegations in the Freeman-Hurst litigation “relate to years-old occurrences and individuals who were involved in MindMed well in the past.

“They have no bearing on the company today. Importantly, FCM’s statements about our intellectual property for our lead program, MM-120, are unfounded. We have not given away any intellectual property rights to our drug candidate.”

Dr. Szu-yin (Jennifer) Wu, clinical assistant professor at the University of Buffalo’s school of management, said microcap and penny-stock companies have long been considered risky investments and more opaque in the information environment.

“They are subject to less external force of the monitoring due to ownership structure and less coverage by the financial analysts. However, shareholder rights in a penny-stock company are equally as important as in a megacap company from corporate-governance perspectives,” she said.

FCM said it originally asked for one seat on the board but is now looking to hold a special shareholder election to appoint a controlling slate of three directors, as permitted under Canadian law.

“Cash is at a premium in the bear market, so we want to get in while the company still has cash and we can get a good management plan in place,” said Freeman.

The topic of psychedelics and their potential for use in mental-health disorders has become popular of late, in part boosted by a Netflix documentary with Michael Pollan, “How to Change Your Mind,” which features promising stories of cancer patients losing their fear of death and veterans overcoming post-traumatic stress disorder.

But researchers caution that there are unknown risks to the therapy and that not every patient responds the same way.

Read now: The promise and the perils of the billion-dollar industry blossoming around psychedelic-assisted therapy

Still, Oppenheimer is a fan of MindMed, with analyst François Brisebois rating the stock outperform with a $52 price target. The stock is currently trading below $3.

“Despite competition from several emerging psychedelic biotechs, we believe MindMed is a well-capitalized leader poised to disrupt the large, growing mental health market,” he wrote in his initiation of coverage in August.

About one-fifth of U.S. adults have been diagnosed with a mental-health disorder, and about 21% have a prevalence for anxiety, and, Brisebois wrote, “it doesn’t take much market penetration for a rapid-onset and durable treatment to enter blockbuster territory (despite its longer treatment duration [of approximately] 10 hours).”