5/28/2020 Karyopharm Therapeutics: Getting Paid Well For Accepting Uncertainty (NASDAQ:KPTI) | Seeking Alpha

Quick Picks & Lists | Healthcare

Karyopharm Therapeutics: Getting Paid Well For Accepting

Uncertainty
May 21, 2020 10:41 PM ET4 comments | 6 Likes
by: Peter F. Way, CFA

Summary

The rule should be a reward for risk involvement.

Understood, but not always achieved.

How to score better: Bigger, more often, fewer losses?

When uncertainty clouds the picture.

Investment Thesis
Performance improvement first requires standards, then requires alternative paths to
choose between. The alternatives need comparable measurements of what to expect,
how likely those are to be achieved, and what it may cost when they are not.

The equity reward scorecard for investors is kept in financial terms, dividends received
plus price-change capital gains. These days capital gains can be ten times (or more) the
size of dividends, and time-limited holding periods of capital commitments in Active
Investing strategies often can make dividends an accidental occurrence if present at all.

The equity risk scorecard is entirely a function of negative price change.

So what is needed most is forecasts of price change, and appraisals of how reliable those
forecasts may be. Forecasts and appraisals should be ones which are comparable among
investing action alternatives. Ours all come from Market-Maker [MM] firms’ actions and
outcomes.

Risk and Reward Extremes

Choices made intelligently, not stupidly. Like when fate (life’s highwayman) says “Your
money or your life.” There are parallels in healthcare equity investments. Our focus here
on Karyopharm Therapeutics Inc. (KPTI) is one. Its price for one treatment program of one
of its multiple myeloma products is $22,000.

Here is how Yahoo Finance describes KPTI:

Description

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Karyopharm Therapeutics Inc., a pharmaceutical company, engages in the

discovery, development, and commercialization of various drugs directed against
nuclear export and related targets for the treatment of cancer and other diseases.
The company is developing small molecule selective inhibitor of nuclear export
(SINE) compounds that inhibit the nuclear export protein exportin 1. Its lead
compound is XPOVIO (selinexor) tablets for the treatment of patients with heavily
pretreated multiple myeloma. The company develops BOSTON, which is in Phase 3
clinical trial for the treatment of patients with multiple myeloma; STORM, which is in
Phase 2b single-arm clinical trial for evaluating oral selinexor in combination with
standard, low-dose dexamethasone in heavily pretreated patients, relapsed or
refractory myeloma; STOMP, which is in Phase 1b/2 multi-arm clinical trial for the
treatment of ow-dose dexamethasone plus standard therapies, including Velcade,
Kyprolis, Revlimid, and Pomalyst or Darzalex; and SADAL, which is in Phase 2b
clinical trial for the treatment of patients with relapsed or refractory diffuse large B-
cell lymphoma. It also develops SEAL, which is in Phase 3 clinical trial for the
treartment of liposarcoma; SIENDO, which is in Phase 2/3 clinical trial for treatment
of endometrial cancer; and KING, which is in Phase 2 for the treatment of
glioblastoma multiforme brain tumor. In addition, the company has various
investigational programs in clinical or preclinical development, such as Eltanexor
(KPT-8602), KPT-9274, and Verdinexor (KPT-335). The company has collaboration
with PROMETRIKA, LLC to conduct the first randomized clinical trial for low-dose
selinexor (XPOVIOÂ), an XPO1 inhibitor, in hospitalized patients with severe
COVID-19. Karyopharm Therapeutics Inc. was founded in 2008 and is
headquartered in Newton, Massachusetts.”

And as another better-informed Seeking Alpha contributor comments:

Xpovio's BOSTON Phase III data, completed/released in March 2020, showed

materially better convenience & outcomes versus 2nd/3rd line Multiple Myeloma
standard of care (~32,000/patients/year).

Xpovio's list price is $22,000. Gross to net to date has been ~15% (though
Karyopharm has guided to as high as 20%)."

No foolin’ around here: life (or a little more of it) or death. A $700 million market in just this
one line, and KPTI has several. This market was present years before COVID-19 made
the scene, and will persist thereafter.

How to choose between an investment in Xpovio or in Remdesivir, KPTI or GILD? What

are the forecasts, and who makes them? Whom to believe? What is the evidence?

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We don’t know squat about either choice from a medical technology point of view, not like
some SA contributors. To get that part of the story you should read DoctoRx and others.

But part of the COVID-19 problem is that it is relatively new to the existing science, and
according to the scientists it needs time-consuming further research for humankind to gain
control of a menace. Once again, time creating uncertainty.

This sounds like an equity investment problem frequently seen before. One dealt with by
an existing system: The marketplaces, competitors, and arbitrage.

We regularly (daily for over two decades) use the actions of Market-making firms and their
over 100,000 world-wide information gathering and evaluating employees to learn what
are the best current near-term price range forecasts for some 2,500+ equity investment
securities. The histories of outcomes following those millions of daily-evolving forecasts
provide perspective on the likely results of current forecasts, issue by issue.

First step: Reward vs. Risks trade-off

Portfolio adjustment transactions sought by major investing “institutions” require separate
negotiation treatment from investment-public trades (which are mostly handled by
software systems) because of their size and subsequent-price influences. The negotiating
process usually requires MM firms to temporarily have their capital at risk as principals, a
risk neutralized by deal-specific hedging. In turn, the hedging reveals the MM community’s
expectations of price range extremes, upside and downside prospects.

Please see Figure 1.

Figure 1

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Source: Author

This map locates securities at the intersection of prospective price gains (green horizontal
scale) and potential price drawdowns (red vertical scale) based on market-maker hedging
behavior to protect their necessary endangerment of firm capital as they enable volume
trades. Desirable conditions are down and to the right.

The “frontier” of best advantage runs from SPY at location [7] to GILD at location [6], to
XLRN at [8].

While Figure 1’s comparisons provide a perspective on many of this group’s alternative
investment candidates, several conditions contribute to reward and risk. A principal
question for both are “how likely are these to happen” and “can their impact be improved?”

Figure 2 presents the MMs’ price range forecasts and the histories of all outcomes from
those of the same up-to-down prospects in the past 5 years of daily forecasts for the 5
best of those ETF candidates under the portfolio management discipline known as
TERMD, explained by the article How To Better-Than-Double Your Capital Gains (From
Stocks Alone) By Using TERMD Portfolio Discipline in my SA blog.

That discipline seeks the largest, most likely, quickest to be captured net capital gains with
the least interim exposure to price drawdown on the way to target reward attainment.

Figure 2

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Source: Author

Contributing to that evaluation are the demonstrated odds of a profit-successful forecast in

column [H], its complement of 100 – H, or loss frequency, size of net gain attained [I] and
size of worst loss experience [F] so that when appropriately weighted in [O] and [P] they
produce the Net of [Q]. Respecting the power of compounding, [Q] converted into basis
points per day [J] of capital commitment at [R] presents a highly comparable figure of
merit (fom) for investing preferences.

[S] presents a simple measure of the size of the MMs’ forecasts as an indication of the
presence of future uncertainty. Figure 2 is row-ranked on column [R].

GILD is included because of its bordering therapy interests and as a contrasting

investment outlook to KPTI, despite its involvement in the COVID-19 disruption.

Price Analysis of KPTI

The principal appeal of KPTI now lies in the MM price range evolving over the past few
weeks despite the market attention drawn to the corona-virus disruption to the world
economy.

In late February, KPTI made announcements which drove the stock up from below 15 to
over 27, with price range expectations following. Shortly thereafter, the virus disruption
pushed the stock back down to where it had been earlier, around 17. After an interim rise,
its price now has retreated to the earlier low, but the downside of the forecast now is less
of a threat.

Those trends are shown in Figure 3.

Figure 3

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Source: Author

Market-maker [MM] price-range forecasts, the vertical lines, are implied from their self-
protection hedging while facilitating institutional-client big-volume block trades in KPTI.
The heavy dot in each vertical is the stock’s closing market quote on the day of the
forecast. It splits the forecast range into upside and downside price change prospects.

The rate of KPTI price changes following these daily forecasts of the past 5 years is seen
in Figure 4, with rows striated by the up-to-down RWD:RSK forecast proportions.

Figure 4

Source: Author

The pink 71 count of forecasts in the 5:1 row indicates the current forecast balance, and
the triple-digit annual price gain rate in holding periods up to 10 weeks (50 market days)
corresponds well to KPTI’s Figure 2 “Days Held” data of 46 in [J].

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A more favorable forecast might have produced somewhat better rates of gain, but the
present 5:1 (a Range Index of 13) still looks attractive. Far better than the 5-year buy&hold
average of the blue row 1:1 at 10% to 12% CAGR.

Conclusion
Karyopharm Therapeutics Inc. is an attractive buy here.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in KPTI over the next 72
hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than
from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: Peter Way and generations of the Way Family are long-term providers of
perspective information, earlier helping professional investors and now individual investors, discriminate between
wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family
but do provide pro bono consulting for a limited number of not-for-profit organizations.

We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and
time investments in their personal portfolios. So, our information presents for D-I-Y investor guidance what the arguably
best-informed professional investors are thinking. Their insights, revealed through their own self-protective hedging
actions, tell what they believe is most likely to happen to the prices of specific issues in coming weeks and months.
Evidences of how such prior forecasts have worked out are routinely provided in the SA blog of my name.

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Comments (4)

jon lovit
PREMIUM Marketplace
very helpful article..thank you

23 May 2020, 02:13 AM

jpatt
Marketplace
Peter,
Great article, as per usual. Back in 2016/17 I was a regular subscriber to Blockdesk lists; I recently started back
up. I find the additional "odds-weighted" columns that you provide in Figure 2 quite helpful. Any reason the Top 20
lists only include the single, combined odds-weighted column? Also, Figure 4 is a very valuable tool. Any chance
getting access to a defined number of those as a part of the list purchase, similar to the Volatility, Risk-Reward,
and Odds-Payoff charts? Thanks for your work.

22 May 2020, 01:31 AM

Scootto

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Why try and over complicate a development stage biotech companies valuation. The simplest estimate to
valuation is the potential of its pipeline to the target disease and size of the market potential.

22 May 2020, 01:03 AM

jpatt
Marketplace
the real question is "why make a negative comment without reading or attempting to understand the
article?" he never once attempted to value any of the companies named. he shows you how the Market
Makers value them through their hedging activity. but you've got it figured out with your "simple"
evaluation of a drug company's potential pipeline ... Good luck with that

22 May 2020, 01:39 AM

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