Best Idea Show – Doron Junger, Sanvia Capital – US Biotech | #422

Episode Summary

Executive Summary: Doran Junga argues U.S. biotech is in its deepest ever drawdown, driven by weak post-COVID investors, higher capital costs, risk-off markets, regulatory delays, and a collapse in M&A. He frames the opportunity as a valuation crisis, not an innovation crisis, and highlights selectively owned, well-financed companies with near-term catalysts in gene therapy, oncology, and psychedelics.

Main Topics: Biotech sector collapse and causes (Priority: 5/5): The discussion opens with the severity of the biotech bear market and the mix of macro, sector, and capital-market factors behind it: post-COVID rotation, inflation and higher WACC, regulatory slowdowns, weak M&A, and negative clinical news flow. How biotech investing differs from other sectors (Priority: 5/5): Junga explains that biotech is a catalyst-driven, milestone-based industry where enterprise value, cash runway, trial data, and FDA decisions matter more than conventional valuation multiples. Portfolio construction and risk management (Priority: 4/5): He outlines Sanvia’s long-short framework: longs with de-risked catalysts and strong balance sheets, shorts with weak financing and no near-term catalysts, plus a set of core and tactical positions. Viracta as an oncology long idea (Priority: 5/5): Viracta is presented as a core position because of promising EBV-linked lymphoma and solid tumor data, a negative enterprise value, and upcoming pivotal readouts. Crystal Biotech as a platform gene-therapy play (Priority: 4/5): Crystal is described as a redoseable HSV-based gene-therapy platform with a near-term FDA filing and broad optionality across dermatology, pulmonary disease, and potential aesthetic uses. Compass Pathways and psychedelic medicine (Priority: 4/5): Compass is highlighted as the most advanced psilocybin company, with encouraging depression trial data, multiple future indications, and key questions around commercialization, reimbursement, and patent defensibility. Long-term biotech innovation and historical analogs (Priority: 3/5): The conversation ends with broader reflections on orphan drugs, platform technologies, and historical winners like Alexion and GW Pharma, plus reading and conference recommendations for serious biotech investors.

Key Arguments: Biotech’s current slump is mainly a valuation and capital-markets problem, not a collapse in scientific innovation. The sector is heavily dependent on external capital because most public biotech companies are not profitable and spend cash to reach milestones. Lower stock prices have not yet translated into broad M&A because many targets are now too beaten down for a board-approved premium. Private biotech capital flooded into preclinical and crossover-stage companies during 2018-2021, later pulling capital away from public biotech and worsening public-market underperformance. A good biotech long is not simply a cheap stock; it should have strong cash, de-risked data, and a catalyst that could revalue the company before dilution occurs. Negative enterprise value can be attractive, but only if the company’s cash runway extends beyond its next meaningful catalyst. Viracta’s EBV-positive lymphoma opportunity is compelling because its data show responses in a hard-to-treat subgroup with upcoming pivotal data readouts. Crystal’s redoseable HSV platform is more scalable than one-and-done gene therapies because repeated dosing could expand utility across multiple indications. Compass’s psilocybin formulation may be commercially viable if it overcomes manufacturing, patent, and adoption hurdles, and if the therapeutic effect is durable enough to justify reimbursement. Historical examples like Alexion show that rare-disease drugs can build very large businesses by expanding into multiple related indications.

Data Points: Public biotech universe: about 450 companies - Junga’s estimate of publicly listed biotech companies with sufficient liquidity for institutional investors Global pharma universe: about 20 companies - Large global pharmaceutical companies included in the therapeutics universe Sector decline in 2022 YTD: XBI down 39% through May 31 - Performance cited for the biotech ETF during the current year of the interview May 2022 performance: XBI down 7% - Additional monthly decline in the biotech ETF Peak-to-trough decline: 60%+ - XBI decline from the February 2021 peak to the interview date Bear market duration: 14 months - Length of the biotech downturn described by Junga Sector level reached: Back to January 2017 levels - The XBI drawdown had erased more than five years of gains Viracta cash runway: about 9 quarters - Estimated runway into approximately the middle of 2024 Viracta 52-week high vs. current price: over 5x higher - Junga notes the stock traded more than five times its current level within the prior 52 weeks Cryptal/Crystl gene-therapy company filing timing: this month / by year-end FDA decision possible - Crystal’s planned BLA submission and expected regulatory timeline Compass depression trial dose design: 25 mg, 10 mg, and 1 mg - Psilocybin trial arms used to preserve blinding while testing efficacy Compass patient screening ratio: about 1 in 10 - Only about one out of every ten applicants entered the psilocybin trial Compass market potential: about 1 million patients - Estimated global market for treatment-resistant depression Alexion approval expansion: 4 total indications - Soliris grew from its original rare-disease approval to multiple uses EBV-linked lymphoma share: 10% to 15% of lymphoma cases - The proportion of lymphoma cases associated with Epstein-Barr virus

Pivotal Quotes: "The crisis, as I see it in biotech, is not a crisis of innovation, but a crisis of valuation." — Doran Younga: Central thesis on why biotech stocks have sold off despite strong scientific progress "You can invest in companies that are trading below their net cash... but in biotech, that is not where you are at rock bottom. That’s more like you’ve hit a melting ice cube." — Doran Younga: Explaining why negative enterprise value alone is not enough for a strong biotech investment "If you have a really profoundly efficacious and safe drug on your hand, you can charge accordingly for it." — Doran Younga: On orphan drugs and the potential for rare-disease companies to build large businesses

Implications: Biotech may offer unusual upside now, but only for investors who can underwrite trials, cash burn, and regulatory risk. The best opportunities are likely in distressed names with real catalysts, not broad passive exposure.