Overall, during the past week, corporate insiders traded a number of healthcare stocks, including exercising options just prior to major news as in the case of Inhibitex Inc. (INHX), buying shares as in the case of Illumina Inc. (ILMN) and Celgene Corp. (CELG), or selling significant amount of shares after major news from peers in the group as in the case of UnitedHealth Group Inc. (UNH).
This report, part of our weekly coverage of insider trades by sector (based on last week’s SEC Forms 3, 4, and 5 filings), summarizes last week’s major insider filings in the healthcare sector (for a general discussion on how to interpret insider trades, please look at the end of this article):
Inhibitex Inc. (INHX): INHX develops differentiated anti-infective products to prevent and treat serious viral and bacterial infections, including primarily shingles and chronic infections caused by hepatitis C virus (HCV). Its shares saw a 115% surge on Friday after the company reported positive top-line safety and anti-viral data early Friday morning from the first cohort of its ongoing clinical trial of INX-189 in hepatitis C. Insiders currently hold 22.2 million shares or 28.4% of outstanding shares.
Just ahead of the news, on Wednesday last week, Director Michael Henos exercised options to purchase 36,000 shares of INHX at an average exercise price of 64c. The stock was priced at $3.88 at the time he exercised the options, and it closed Friday at $8.54. It is important to remember here that income from option payoffs (i.e., the difference between the stock price at the time of exercise and the exercise price, in this case $3.88 minus 64c or $3.24 per share) are taxed at a higher rate than the capital gains on stock holdings (i.e., $8.54, assuming the stock closes there at the end of the year, minus $3.88 or $4.66 per share).
In other words, if Mr. Henos had waited until after the release of the positive news on Friday, he would pay the entire higher tax rate on $7.90, and by having incidentally (maybe) sold it ahead of the positive news release, he would pay a higher tax rate on only $3.24 per share and a lower capital gains tax rate on the remaining $4.66 per share. While it is difficult to know anyone’s exact tax situation, or the intent behind a transaction, it is important to examine this information in that regard.
Beside Mr. Henos, another Director, Russell Medford sold 1,250 shares at $4 prior to the positive news release, under a 10b5-1 plan that was adopted recently on August 12th, reducing his holdings to 37,795 shares. All of Mr. Medford’s shares were acquired in 2006, and this was the first sale made on his 10b5-1 plan. Over the past year, corporate insiders have sold 1.49 million shares, and they have not bought any shares during that period.
Illumina Inc. (ILMN): ILMN is a developer of integrated systems for the large-scale analysis of genetic variation and biological function. Its tools are designed to be used to provide information that could be used to improve drugs and therapies, customize diagnoses and treatment, and cure diseases. It derives product revenues from the sale of Microarrays and DNA Sequencing products, and it derives service and other revenues from genotyping and sequencing services as well as instrument maintenance contracts. Insiders currently hold 8.2 million shares or 6.6% of outstanding shares, and on Tuesday, Director Gerald Moeller purchased 3,000 shares at $29.86 per share, increasing his holdings to 8,440 shares. This is a significant vote of confidence from an insider given that ILMN shares got crushed early last month on guiding down revenue for the just-completed September and suspending forward guidance for FY 2011. Over the past year, corporate insiders have sold 0.97 million shares, and they have bought 3,000 shares during that period.
Celgene Corp. (CELG): CELG develops therapies to treat cancer and immune-inflammatory related diseases by regulating cells, genes and proteins. Insiders currently hold 2.4 million shares or 0.5% of outstanding shares, and on Monday, Director Rodman Drake purchased 500 shares at $64.69. Mr. Drake has been accumulating CELG shares since April, adding almost 5,000 shares during that period via open market purchases and exercising options; post Monday’s transaction, he held 10,260 shares of CELG. Besides Mr. Drake, CFO Jacqualyn Fouse has also been a regular purchaser of company stock, adding 7,000 shares to her prior 1,085 shares holdings since June this year. Over the past year, corporate insiders have sold 100,200 shares, and they have bought 36,000 shares during that period.
UnitedHealth Group Inc. (UNH): UNH is a diversified health and well-being company, serving more than 70 million Americans. Insiders currently hold only 8.9 million shares or 0.8% of outstanding shares, and last Friday (reported on Monday) EVP & CFO, President of UHG Operations, David Winchmann exercised options and sold (regular sale) the resulting 300,000 shares at $48.88 per share for $14.7 million. After the transaction, Mr. Winchmann holds 218,787 shares, so the shares sold represented more than half of his holdings in the company. UNH stock fell 6.7% last week amid negative earning news in the sector from peers Coventry Health Care (CVH) and Cigna Corp. (CI) on early Friday morning, October 28th. Over the past year, corporate insiders have sold 3.64 million shares, and they have bought 3,000 shares during that period.
Bristol-Myers Squibb Co. (BMY): BMY develops branded pharmaceuticals for the treatment of cardiovascular, virological and other infectious diseases. Insiders currently hold 4.9 million shares or 0.3% of outstanding shares, and on Monday, Director James Cornelius exercised options and sold (regular sale) the resulting 440,188 shares at $31.87 per share. Following the transaction, Mr. Cornelius owns 1.43 million shares of BMY, so the shares sold were a significant part of his overall holdings in BMY. Over the past year, corporate insiders have sold 0.69 million shares, and they have bought 900 shares during that period.
Gilead Sciences Inc. (GILD): GILD is a developer of therapeutics to treat viral, fungal, respiratory and cardiovascular diseases. Insiders currently hold only 5.6 million shares or 0.7% of outstanding shares, and last week three insiders exercised options and sold (automatic sale) the resulting 105,320 shares at between $41 and $43 per share as part of their 10b5-1 plans. This included 92,320 shares sold by Chairman and CEO John Martin, 8,000 shares sold by EVP of Corp & Med Affairs Gregg Alton, and 5,000 shares sold by SVP of Human Resources Kristen Metza. Over the past year, corporate insiders have sold 1.32 million shares, and they have bought none during that period.
Pharmasset Inc. (VRUS): VRUS develops pharmaceuticals to treat viral infections. Its primary focus is on developing treatments for chronic hepatitis C virus (HCV) infection and HIV. Insiders currently hold 22.2 million shares or 28.4% of outstanding shares, and on Tuesday, Chief Medical Officer Michelle Berrey exercised options and sold (automatic sale) the resulting 3,124 shares at $74.56 per share, as part of a 10b5-1 plan established following award of the grant of 25,000 pre-split (50,000 post-split) options in October, 2007. After that transaction, Ms. Berrey does not have any holdings in VRUS. Over the past year, corporate insiders have sold 0.35 million shares, and they have bought none during that period.
Alkermes Plc (ALKS): ALKS, an integrated biotech company, develops injectable and oral products for the treatment of central nervous system (CNS) disorders, addiction, diabetes and autoimmune disorders. Insiders currently hold only 0.5 million shares or 0.5% of outstanding shares, and on Friday last week (reported Monday), Directors Floyd Bloom and Robert Breyer sold (automatic sale) 20,000 and 6,050 shares at $18 per share as part of their 10b5-1 plans. Of the 6,050 shares sold by Mr. Breyer, half resulted from the exercise of stock options.
Seattle Genetics Inc. (SGEN): SGEN is a clinical biotech company focusing on the development of monoclonal antibody-based therapeutics for the treatment of cancer and autoimmune diseases. Insiders currently hold 8.0 million shares or 7.0% of outstanding shares, and on Tuesday, President and CEO Clay Siegall exercised options and sold (automatic sale) the resulting 15,000 shares at $21.89 per share, as part of a 10b5-1 plan established in December of last year. Following the transaction, Mr. Siegall still owns 1.05 million shares of SGEN. Over the past year, corporate insiders have sold 0.91 million shares, and they have bought 3.12 million shares during that period.
Johnson & Johnson (JNJ): JNJ is a provider of healthcare products and related services to the consumer, pharmaceuticals and medical markets. Insiders currently hold 2.9 million shares or 0.1% of outstanding shares, and last week three insiders exercised their options and sold (automatic sell) the resulting 447,900 shares at between $64 and $66 per share. This included 298,300 shares sold by CEO William Weldon, 123,300 shares sold by VP General Counsel Russell Deyo and 26,300 shares sold by Corporate Controller Stephen Cosgrove. Over the past year, corporate insiders have sold 0.80 million shares, and they have bought 4,000 shares during that period.
General Discussion on Insider Trading
The reports in this series identify last week’s insider trades of noteworthy significance by sector or industry group, either by virtue of their timing, their size, the number of insiders buying or selling, based on who is buying or selling, or by the trend of their buys and sales over the long-term. The rest of the series by sector and by week can be accessed from our author page.
What is Insider Trading?: Insider trading as defined here (and by the SEC) includes not just corporate insiders such as company executives and key employees, but also directors and large shareholders that have access to non-public information. Large shareholders are defined by the SEC for this purpose are those that having beneficial ownership of ten percent of more of the firm’s equity securities (including institutional investors). Also, in the U.S., “insiders” are not just limited to corporate officials and major shareholders, but also when a corporate insider “tips” a friend about material non-public information, the duty the corporate insider owes the company is now imputed to the friend who is now in violation of a duty to the company if he or she trades on the basis of that information. The U.S. is generally viewed as having the strictest laws against illegal insider trading, and makes the most serious efforts to enforce them.
While most insider trading is legal, the term is commonly used to refer to the illegal kind when a corporate insider trades based on material non-public information that can have an effect on the company’s share price. By law, insiders are prohibited from trading based on nonpublic information, but most believe that such trading does occur around the edges. The thinking goes that corporate insiders, because of their access, have the most up-to-date information on the health of their companies and the industries they operate in. Investors, as a result, can benefit from the timely knowledge of insider transactions. In fact, one University of Michigan study found that when executives bought shares in their own companies, the stocks tended to outperform the total market by 8.9% over the next 12 months. Conversely, when they sold shares, the stock underperformed by 5.4%.
Timeliness of Information: Like in the 13-D and 13-G filings for Institutions, the SEC Forms 3 and 4 on insider filings are extremely timely, and hence of greater significance, as they must be reported within two business days of the trade.
Insider Buying More Informative than Selling: As a rule, insider buys are more informative than sells. This is because insiders sell often, and they sell for a variety of reasons that may be completely unrelated to the health of the company, including, for example, to diversity their holdings or to pay for an upcoming personal expense. In contrast, insider buying is relatively uncommon, and since they have an exclusive window into their own company’s performance, it is reasonable to presume that they probably have good reasons based on information at their disposal when they are risking their own assets to buy company stock.
Regular and Automatic Trades: Insider trades maybe regular trades, or they may be automatic trades made under SEC Rule 10b5-1. It is generally believed that regular insider share purchases and sales carry more predictive value as they are made voluntarily by the insiders. Conversely, trades made under SEC Rule 10b5-1, called “Automatic Buys” and “Automatic Sells”, are part of a pre-determined plan or contract, and it is assumed that the plan was created before the insider had any privileged non-public information. Generally, almost all automatic trades are sells, not buys.
Furthermore, even automated trades made under 10b5-1 have some informative or predictive value due to loopholes in the rule that, for example, allow the insider to cancel the trading plan without any penalty or legal liability. So, the insider could set up a 10b5-1 trading plan before they have inside information (for example, from a quarterly report and guidance) while retaining the option to later cancel the plan based on the inside information. So, in effect, the execution of an automated trade also carries some predictive value as insiders retain the option under the existing rules to cancel their trades without penalty or legal liability.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.