Insiders made noteworthy buys (see definition below) in three healthcare stocks this past week (May 29th to June 1st, 2012), and sold six others. These were selected based on a review of over 1,200 separate SEC Form 4 (insider trading) filings last week, as part of our daily and weekly coverage of insider trades. The filings are noteworthy based on the dollar amount sold, the number of insiders buying or selling, and based on whether the overall buying or selling represents a strong pick-up based on historical buying and selling in the stock (for more info on how to interpret insider trades, please refer to the end of this article):
Valeant Pharmaceuticals (VRX): VRX develops primarily branded drugs to treat central nervous system disorders, pain and cardiovascular disease. On Wednesday, Director Paul Laurence filed SEC Form 4 indicating that he purchased 5,700 shares for $276,600, increasing his holdings to 48,097 shares. This was on top of the purchase of over 21,000 shares by insiders last month. In total, corporate insiders purchased 0.31 million shares in the past year.
VRX shares took a dip last month, along with the rest of the market, after a strong rally nearly doubled its price from the lows last fall. The company, in its latest Q1, on May 3rd, beat analyst revenue estimates ($856 million vs. $795 million), and guided FY 2012 earnings higher ($4.45-$4.70 vs. $3.95-$4.20). The company seems to be outperforming on many levels, and with shares trading at 9-10 forward P/E and 3.6 P/B, they are a discount to the averages of 12.1 and 4.3 for its peers in the pharmaceuticals group, while earnings are projected to grow strongly from $2.93 in 2011 to $4.88 in 2013 at an annual growth rate of 29.1%. Analysts are also very positive on the company, with 15 of the 19 analysts that cover the company rating it at buy/strong buy, three at hold, and the remaining one at underperform, with a price target of $52, above current prices in the $47 range.
In addition to VRX, insiders also reported noteworthy buys last week in the healthcare sector in the following two stocks, of which the first one like VRX above is projected to exhibit strong revenue growth going forward:
- Mako Surgical Corp. (MAKO), that develops proprietary advanced robotic arm solutions and orthopedic implants used in minimally invasive orthopedic knee procedures, in which Director William Pruitt filed SEC Forms 4 indicating that he purchased 5,000 shares for $117,399, in comparison to insiders purchasing 18,700 shares in the past year. Analysts project that revenues at MAKO will more than double in two years from $85 million in 2011 to a projected $179 million in 2013.
- Mannkind Corp. (MNKD), a developer of treatments for cancer, diabetes, inflammatory and autoimmune diseases, with its lead product candidates the AFREZZA dry powder insulin formulation and its proprietary light, discrete and easy-to-use AFREZZA inhaler through which the powder is inhaled deep into the lungs, in which Corporate VP Juergen Martens filed SEC Form 4 indicating that he purchased 21,667 shares for $36,400, in comparison to insiders purchasing 55,412 shares in the past year.
On top of these, insiders also reported noteworthy sells this past week in the healthcare sector in:
- Alexion Pharmaceuticals (ALXN), a commercial-stage biotech focused on serving patients with severe and ultra-rare disorders, in which two insiders filed SEC Forms 4 indicating that they sold exercised options and sold the resulting 136,400 shares for $12.5 million, in comparison to insiders selling 1.03 million shares in the past year;
- McKesson Corp. (MCK), a provider of ethical drugs, health and beauty care products and medical supplies and equipment to pharmacies and hospitals, in which two insiders filed SEC Forms 4 indicating that they exercised options and sold the resulting 80,250 shares for $7.0 million, in comparison to insiders selling 0.87 million shares in the past year;
- Cerner Corp. (CERN), which develops medical record, clinical workflow and financial management software applications for healthcare providers, in which EVP Zane Burke filed SEC Form 4 indicating that he exercised options and sold the resulting 70,000 shares for $5.6 million, in comparison to insiders selling 0.49 million shares in the past year;
- Watson Pharmaceuticals (WPI), developer of generic and branded drugs, including oral contraceptives, analgesics, and smoking cessation aids, in which four insiders filed SEC Forms 4 indicating that they sold 72,467 shares for $5.3 million (with part of shares sold resulting from the exercise of options), in comparison to insiders selling 0.18 million shares in the past year;
- Mylan Inc. (MYL), one of the world's leading developers of generic and branded drugs, providing products that cover a vast array of therapeutic categories to customers in over 150 countries and territories, in which Director Randall Vanderveen filed SEC Form 4 indicating that he exercised options and sold the resulting 90,000 shares for $1.9 million, in comparison to insiders selling 0.97 million shares in the past year; and
- Amarin Corp. (AMRN), a clinical stage Ireland-based global pharmaceutical group which develops novel drugs for the treatment of cardiovascular diseases using its proprietary advanced oral and trans-dermal drug delivery technologies, in which CEO Joseph Zakrzewski filed SEC Form 4 indicating that he exercised options and sold the resulting 150,000 shares for $1.8 million, pursuant to a 10b5-1 plan.
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.
Credit: Fundamental data in this article and company descriptions are based on SEC filings, Zacks Investment Research, Yahoo, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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