Since February 2012, Pharmacyclics' (PCYC) price had a run up of 232%. The company's incredible run up was fueled by ibrutinib's incredible Phase III data results, Johnson & Johnson's (JNJ) generous milestone payments, numerous analysts' "buy" recommendations, and ibrutinib's potential to become a billion-dollar blockbuster.
On November 5th, with Pharmacyclics' earnings announcement, the stock price abruptly dropped 19%. Although earnings were slightly weaker than analysts' forecast, what spooked investors was the CEO's announcement that as of November 7th, employees can start exercising their options to sell their shares. Currently, insiders hold 20% of the company's outstanding shares. This is equivalent to the effect of a 20% stock dilution.
On February 12, the FDA gave ibrutinib the classification of "breakthrough therapy" which may potentially accelerate the approval of ibrutinib. Exactly how much is the acceleration, no one knows for sure. However, in response to the "potential" accelerated approval, the market reacted with another 25% jump in stock price with Pharmacyclics trading in the stratospheric $87 range.
In an irrational exuberance, investors are failing to see danger signs that are brewing.
The danger of employees' eligibility to sell their stock since November 7th is still present. Since December 17th, insiders have quietly sold approximately 308,570 shares. However, there were no insider purchases of this stock based on fair market value. Based on institutions' 13-F filings, there was a net decrease of approximately 731,285 institutional ownership of Pharmacyclics' shares. Apparently, both insiders and institutions believe it's time to take profits off the table. What is even more disturbing is that the current trading price is running 10% above analysts' 12 month target price. In a 12 month period, many issues that may adversely impact ibrutinib's development would have been already flushed out and perhaps ibrutinib would have already been approved. The company's current price has already factored in that these events have already occurred.
On the technical side, the company's stock is currently trading well above all moving averages . To give you an idea of how absurd the current price has ran ahead of itself, the 30, 20, and 10-day moving averages are between $68.84 and $71.97. The company's current price is trading 23% above its 10 day moving average. Currently, short percentage of float is 6.98% with a net decrease of 4.79%. Based on the current price, shorts have already been squeezed.
Based on insider/institutional activities along with technical measures, once greed and irrational exuberance settles down, Pharmacyclics' price will drift back down into the $70's. Warren Buffett summed it very nicely when he said: "When others are greedy, be fearful." Now it's time to take precaution with Pharmacyclics. Look for an easy 20% price trim in the near future.