I am skeptical of the US equity markets right now. With the flash crash and immediate recovery caused by one comment of a hacked Twitter account on Tuesday, I think any prudent investor should be. As these markets have been propped up by various market makers and other high frequency traders, insiders, particularly management of many large publicly listed corporations have been selling their shares like mad.
But few have been as blatant as Vertex Pharmaceuticals (VRTX). The company's share price increased from $52.87 on April 18th to $85.60 by the end of the day on April 19th based on positive Phase II data for their drug VX-661 in the treatment of cystic fibrosis. I am not an expert in the field, but the $7 billion increase in the company's market capitalization seems quite extreme to me just for Phase II data. Especially for a company that will not have a monopoly and has already seen steady declines in sales from their existing drugs that are in the market. Perhaps some investors see the combination of VX-661 with ivacaftor as an unstoppable force in the treatment of the disease. Or perhaps market makers inflated the stock price for one reason or another.
My jaw dropped when I saw their latest Form 4 filings for their insider transactions. The numbers are so large it's hard to believe that they are real, but that is what is currently being reported. On April 19th, Executive Vice President and Chief Financial Officer Ian F. Smith exercised 739,643 options at $28.84 and promptly sold 745,685 shares at $81.50. According to the documents he has 24,168 shares left. Considering the 740K option exercise and immediate sale, he made $52.66 per share or nearly $39 MILLION. Paul Silva also exercised and sold 22,549 options that day, but that's relatively small compared to the CFO's transaction.
Looking at these numbers this is not just a case of someone taking some profits to feed his family. He could have easily sold a mere 70K shares at $52.66 a share profit and pocketed nearly $4 million. No, he sold all the options exercised plus an extra 6K shares to boot. How can anyone have any confidence that Vertex will maintain a stock price in the $80's when the CFO clearly does not?
Jim Cramer recommended VRTX Tuesday night. This is in direct opposition to the TheStreet Wire article about VRTX from January 31, 2013. Their computer-based rating determined that the company needed to be downgraded to a sell based on a steep decline in EPS, a lower than desirable gross margin, revenue that declined significantly faster than the industry average and a decreasing ROE that is a signal of weakness in the company. But now as the stock price has nearly doubled and has added billions in market cap, apparently it's perfectly fine to buy based on positive Phase II data.
VRTX releases their Q1 financials on April 30th. I wonder if The Street's computer-generated rating system will come to the same bearish conclusion this time around? Perhaps we need to ask the CFO?