Investors Should Sell Overvalued Bright Minds Stock

By Larry Ramer

The shares of drug maker Bright Minds Biosciences (DRUG) went on a dizzying upward ride in the last several weeks, soaring from just over $1 per per share at the beginning of October to about $44 at Monday’s close.  As a result, the company now has a market capitalization of nearly $306 million. 

Bright Minds' drug candidate that appeared to spark most of the tremendous gains is a potential pain treatment called BMB-201. The firm has obtained intriguing data about BMB-201 based on the animal study that it conducted, and the molecule certainly appears to have a great  deal of potential. 

Nonetheless, data regarding the impact of drugs on animals may not accurately reflect their efficacy for humans. That may be particularly true for pain which is difficult to quantify in human beings, let alone in animals. What's more, the vast majority of drug candidates that have not yet been tested on humans never get approved by the FDA and consequently never generate any revenue.

In light of all of these points, I believe that DRUG stock is tremendously overvalued because its risk-reward ratio is extremely negative. Consequently, I recommend that investors sell the shares.

Intriguing BMB-201 Has a Lot of Potential

BMB-201 targets a serotonin receptor called 5-HT2A/2C. According to Bright Minds, the molecule has a relatively low risk of triggering side effects because of its " minimal activity at the 5-HT2B receptor." Moreover, the firm reports that the drug candidate is able to trigger the pain-dulling "potential of serotonin modulation" without causing the " hallucinogenic effects" that usually occur when the  5-HT2A receptor is targeted.

What's more, in pre-clinical trials involving rats,  BMB-201 "had similar efficacy to morphine," as the rats that were given the molecule showed " superior reductions in pain-related behaviors," Bright Minds reported. Finally and importantly,  the firm suggested that BMB-201 may not pose the high risk of addiction and dependency that morphine and other opioids carry.

Certainly, since roughly 10 million Americans abuse opioids each year,  the U.S. badly needs strong, non-opioid painkillers. 

Given all of this information, I believe that BMB-201 is intriguing and has a great deal of potential.

BMB-201 is Unlikely to Ever Be Approved

BMB-201 is considered a preclinical drug candidate at this point, and over 90% of preclinical drug candidates historically are never approved. So statistically, the odds are daunting for BMB-201.

Further,  BMB-201's supposed efficacy as a pain treatment for rats may very well not translate to it relieving pain effectively in humans. 

There are two main points which support the latter assertion. First, studies of drug candidates that involve animals generally don't accurately predict the extent to which those molecules will be safe and effective in humans. Secondly, pain is notoriously difficult to objectively measure even in humans who, unlike animals, can describe their pain verbally. Therefore, I believe that the  accuracy of the data on pain relief which was obtained from the study is questionable at best.

It's also important to realize that animals which are used in drug studies undergo many types of trauma, which " cause significant and prolonged elevations in (their) stress markers." For example, animals are traumatized by " human-produced noises," watching other animals suffer, and being caught and removed from their cages. 

As a result, I believe that it was likely difficult or impossible for the pain relief of rats to be accurately measured using the "pain-related behaviors" that were relied upon in the study of BMB-201.

Bright Minds reported that female rodents which received BMB-201 "experienced a marked improvement in... guarding behavior" compared to the rats that were given other painkillers. 

But it's possible that the reduction in guarding behavior was caused by many other factors, such as reduced noise in the area where these rats were kept and/or their reduced exposure to the suffering of other rats compared to the rodents that received the drugs besides BMB-201. Although Bright Minds likely tried to prevent these intervening variables from becoming a factor, it was probably difficult to eliminate them altogether.

Finally, it was likely difficult if not impossible to determine whether the rats that received the drug candidate suffered from "hallucinogenic effects." 

Bright Minds Completed a Phase 1 Study of Another Drug Candidate

Last year, the company reported the results of a Phase 1 study of its BMB-101 drug candidate. BMB-101 is " being developed for the treatment of refractory epilepsies, psychosis, addiction, and impulse control disorders." But the drug was only tested in 12 humans. Moreover, it does not appear that the drug's efficacy was tested, as it seems that only safety, tolerability, and the presence of a hormone called prolactin were measured.

As a result of these points, I believe that BMB-101 also currently has a low chance of being approved by the FDA. BMB-101 is the firm's only drug candidate which has advanced beyond "preclinical studies."

High Valuation of DRUG Stock

My research indicates that most other drugmakers with only early-stage drug candidates have a much lower market capitalization than Bright Minds. For example, Ocean Biomedical (OCEA), which is "moving towards Phase 1 clinical trials of patented antibodies for the treatment of NSCLC," has a  market capitalization of $32 million. EnteraBio (ENTX), whose most advanced candidate is an osteoperosis drug candidate that underwent a Phase 2 trial, has a market capitalization of $67.56 million. And Pieris Pharmaceuticals (PIRS), which is developing early-stage cancer treatments and is partnering with Pfizer (PFE), has a market capitalization of $22.44 million.

On Nov. 4, Bright Minds closed on a $35 million private placement. While the funds will likely enable the firm to keep developing its drug candidates for a long period of time, they are not nearly sufficient to justify the company's gigantic valuation. 

Risks to My Sell Thesis

Bright Minds could announce additional data that could cause another strong rally by its shares. Or Bright Minds could disclose that it has obtained a favorable designation by the FDA or that it has reached a partnership deal with a large drug maker. Finally, hedge funds could decide to foment another huge, largely unexplained rally by the shares. 

Disclaimer: The author did not hold a position in any of the securities mentioned above. The information provided in this article is for educational and informational purposes only and should not be construed as investment advice. Always conduct your own research or consult with a licensed financial professional before making any investment decisions. Past performance is not indicative of future results.