Seeking Alpha
Long/short equity, insider ownership
Profile| Send Message| ()  

In this article, I will feature one biotech stock that has seen intensive insider selling during the last 30 days. Intensive insider selling can be defined by the following three criteria:

  1. The stock was sold by three or more insiders within one month.
  2. The stock was not purchased by any insiders in the month of intensive selling.
  3. At least two sellers decreased their holdings by more than 10%.

Illumina (ILMN) develops, manufactures, and markets life science tools and integrated systems for the analysis of genetic variation and biological function in North America, Europe, Latin America, the Asia-Pacific, the Middle East, and South Africa.

(click to enlarge)

Insider selling during the last 30 days

Here is a table of Illumina's insider-trading activity during the last 30 days by insider.

Name Title Trade Date Shares Sold Rule 10b5-1 Current Ownership Decrease In Ownership
Jay Flatley CEO Dec 12-26 60,000 Yes 410,509 shares + 50,000 options 11.5%
Nicholas Naclerio SVP Dec 16 2,000 Yes 24,559 shares + 84,000 options 1.8%
Gregory Heath SVP Dec 17 1,875 Yes 26,740 shares + 11,250 options 4.7%
Christian Henry SVP Dec 12 6,000 Yes 30,236 shares + 21,000 options 10.5%

There have been 69,875 shares sold by insiders during the last 30 days. All these shares were sold pursuant to a Rule 10b5-1 plan.

SEC Rule 10b5-1 is a regulation enacted by the United States Securities and Exchange Commission (SEC) in 2000. The SEC states that Rule 10b5-1 was enacted in order to resolve an unsettled issue over the definition of insider trading, which is prohibited by SEC Rule 10b-5. After Rule 10b5-1 was enacted, the SEC staff publicly took the position that canceling a planned trade made under the safe harbor does not constitute insider trading, even if the person was aware of the inside information when canceling the trade. This staff interpretation raises the possibility that executives can exploit this safe harbor by entering into 10b5-1 trading plans before they have inside information while retaining the option to later cancel those plans based on inside information.

For example, a CEO of a company could call a broker on January 1 and enter into a plan to sell a particular quantity of shares of his company's stock on March 1, find out terrible news about his company on February 1 that will not become public until April 1, and then go forward with the March 1 sale anyway, saving himself from losing money when the bad news becomes public. Under the terms of Rule 10b5-1(b) this is insider trading because the CEO "was aware" of the inside information when he made the trade. But he can assert an affirmative defense under Rule 10b5-1(c), because he planned the trade before he learned the inside information.

In general, it is a safer way for an insider to sell shares pursuant to a Rule 10b5-1 trading plan than without it.

Insider selling by calendar month

Here is a table of Illumina's insider-trading activity by calendar month.

Month Insider selling / shares Insider buying / shares
December 2013 70,663 0
November 2013 66,875 0
October 2013 124,450 0
September 2013 146,164 0
August 2013 66,000 0
July 2013 357,134 0
June 2013 204,068 0
May 2013 179,196 0
April 2013 244,397 0
March 2013 26,601 0
February 2013 10,000 0
January 2013 100,500 0

There have been 1,596,048 shares sold, and there have been zero shares purchased by insiders since January 2013.

Financials

Illumina reported the third-quarter financial results on October 21 with the following highlights:

Revenue $356.8 million
GAAP net income $31.4 million
Cash $1.0 billion
Debt $859.5 million

Outlook

Illumina's 2013 guidance is as follows:

Revenue growth 22%
Non-GAAP EPS $1.75-$1.77

Competition

Illumina's competitors include Affymetrix (AFFX), Life Technologies Corporation (LIFE), and Luminex (LMNX). Here is a table comparing these companies.

Company ILMN AFFX LIFE LMNX
Market Cap: 13.73B 614.89M 13.10B 791.72M
Employees: 2,400 1,100 10,000 687
Qtrly Rev Growth (yoy): 0.25 0.01 0.03 0.02
Revenue: 1.34B 322.11M 3.84B 213.80M
Gross Margin: 0.68 0.55 0.66 0.68
EBITDA: 379.22M 26.96M 1.20B 31.54M
Operating Margin: 0.22 -0.03 0.21 0.07
Net Income: 116.55M -37.97M 476.09M 6.23M
EPS: 0.84 -0.53 2.72 0.15
P/E: 129.61 N/A 27.92 123.59
PEG (5 yr expected): 3.49 2.13 2.56 4.96
P/S: 10.38 1.88 3.41 3.67

Illumina has the highest P/S ratio among these four companies.

Here is a table of these competitors' insider-trading activities this year.

Company Insider buying / shares Insider selling / shares
AFFX 0 6,205
LIFE 0 62,010
LMNX 284,284 413,738

Only Illumina has seen intensive insider selling during the last 30 days.

Conclusion

There have been four different insiders selling Illumina, and there have not been any insiders buying Illumina during the last 30 days. Two of these four insiders decreased their holdings by more than 10%. Illumina has an insider ownership of 1.40%.

There are 10 analyst buy ratings, 13 neutral ratings, and zero sell ratings with an average price target of $96.61. Before entering short Illumina, I would like to get a bearish confirmation from the Point and Figure chart. The four main reasons for the proposed short entry are bearish analyst price targets, relatively high P/S ratio, high P/E ratio, and the intensive insider-selling activity.

Source: Illumina: 4 Different Insiders Have Sold Shares During The Last 30 Days