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Douglas W. House
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  • Another Look at TheMarketFinancial Neoprobe Post 6 comments
    Jan 15, 2011 10:36 PM
    I believe that an important aspect of investing is the full vetting of points and counterpoints on every investment opportunity. All potential investments have a few warts. A full understanding of the pertinent issues should enable better decision making. Personally, I focus on what can go wrong with an investment (or trade). I never know how much I can make on a trade but I can always know (and manage) how much I can lose. This is why I look for anything that looks unusual, atypical or conspicuous by its absence when I’m analyzing an opportunity. Most of these “red flags” are not deal-breakers by themselves but if they accumulate, I usually pass. If I have a particular interest in a company’s business model, though, I’ll usually put them in a “bank” so I can monitor their progress over time. What looks unattractive today may become attractive as their business progresses and changes. My current bank, for example, contains some firms that I’ve been monitoring for over 2 years. I still haven’t pulled the trigger on some of them. I wait until the preponderance of the evidence is tilted IN my favor, not away from it. Company fundamentals and technical behavior, industry and sector health and market sentiment all figure prominently in my evaluation process. If things are tilted my way, I’m inclined to buy. If not, I stay on the sidelines.
     
    Warren Buffet has said there are only 2 rules to investing: 1) Don’t lose money, and 2) Don’t forget rule #1. This is a clichéd statement but it still has a lot of wisdom in it. So when I evaluate a trading opportunity I try to determine what factors will make this candidate a big winner. If I cannot identify this factors (it happens frequently) I don’t invest. Fundamentals drive the stock price.
     
    The stock market, though, is a discounting entity that typically looks ahead ~9 months. Due to the intrinsic optimism of many market participants, the bias is typically UP. This is especially true for small emerging companies. I think this is great. Innovation is the lifeblood of a healthy economy and there is a substantial amount of it occurring in the small/micro cap universe. The number of firms that actually deliver consistent robust fundamentals, though, is quite small. Therefore, most bullish moves that you see relative to companies that have yet to deliver good fundamental results are fake outs. This is the nature of the risk. It isn’t good or bad or right or wrong, it just is.
     
    This is a conundrum for individual investors. If the market discounts the future and I wait for my investment candidate to deliver better fundamental results, won’t I miss the move? Yes, in many cases you’ll miss the initial move off of a long base or downtrend. But if the company’s fundamentals are, indeed, improving then the move should have some staying power albeit with quite a bit of volatility.
     
    The basis for competitive advantage in investing or trading is information. The ones who typically build a position while things still look sketchy are the value investors. They believe that they have superior information based on their thorough analysis, access to leading industry analysts, trade associations, company management and other investing professionals in their network. Unfortunately, individual investors are at the bottom of the information food chain. The only credible exception to this is if a person is a “C-level” executive in a company. In this case, they should possess superior information about that particular company.
     
    Typically, individual investors must rely on public information. Personally, I refer to a firm’s SEC submissions, website and press releases for mine. I also monitor investor-related websites for other opinions on the trades I’ve done or am considering doing. I have a keen interest in opinions or analyses that differ from my own. Did I miss something? Were my assumptions correct? Was my analysis complete enough? Does this person know something I don’t? I’ve found that this is extremely valuable information. There have been many cases where I’ve changed my opinion on a trade based on what I’ve read by others.
     
    When I visit a site like Seeking Alpha I scan the relevant company or industry postings. Based on my experience and background I can do this fairly quickly. If I see something of interest I’ll usually do a quick scan of the subject company (s) to see if it warrants a more in-depth look. When I scanned TheMarketFinancial’s bullish Neoprobe posting I checked the SEC website for their filings and perused their most recent 10-Q. I noted that as of 9/30 they had $2.6M in cash on the balance sheet and they burned $3.6M in continuing operations from January through September. I averaged this burn rate over 3 quarters to arrive at $1.2M/quarter. At this rate, the company has 2 quarters of cash left. This was the basis for my initial comment. As far my investment approach is concerned, I don’t need to look any further. No additional analysis is necessary. I’ll move on to something else that has better fundamentals.
     
    After seeing Neoprobe’s cash position I read TheMarketFinancial’s posting in more detail and I saw many errors and inconsistencies. Since the deck is already heavily stacked against individual investors I decided to submit my more detailed analysis to Seeking Alpha in order to air ALL the issues for everyone.
     
    If I’ve given one person pause in their intent to act on TheMarketFinancial’s posting then I’ve done well. If, after carefully considering all the facts, one chooses to pursue an investment, then so be it. I don’t judge it one way or another. The issue here is to be fully informed.
     
    So, with that preamble, let’s take another look at TheMarketFinancial’s Neoprobe posting. I will attempt to address the comments submitted by others and to reassess my analysis step by step. If I’ve made any mistakes, I’ll readily admit them.
     
    It begins with “Within the $40 trillion US market….” This is a bit of a shaky start isn’t it? The reader isn’t even finished with the first sentence before encountering an egregious mistake. If an author has this bad an eye for detail, how can I rely on the other numbers?
     
    The next paragraph is one of my favorites. The 3rd sentence states: Here is a 20-year old biotech company with stable annual sales that cover all the overhead….Well, stable revenues, yes. The most recent 7 quarters’ revenues were: $2.3M, 2.5M, 2.7M, 2.4M, 2.6M, 1.8M and 2.7M (Q1, ’09). Unfortunately, the company has burned cash in operations in EVERY QUARTER. Neoprobe burned $1.5M in FY09 and has burned $3.6M so far this year. It appears that the situation is getting worse, not better. Take a look at their most recent 10-Q. For the current FY to date, they show a loss of $42.9M. What overhead are they covering? Covering overhead means that you are at least cash flow neutral. TheMarketFinancial’s statement is a complete fabrication.
     
    One respondent states that Neoprobe intends to return to profitability in 2011/2012, now that their cash burn is diminishing. If Neoprobe achieves profitability their cash burn needs to vanish not diminish. Let’s see what the 10-Q says in February to see if they conserved cash in Q4. They have burned more cash in the 1st 3 quarters of 2010 than they did for the entire previous year. I’m sure they are doing their best to address this troubling trend.
     
    The same respondent states that Neoprobe finished Q4 with $8M+ in cash. This person must have inside information because there has been nothing publicized about their current cash position. If you assume that they were cash flow neutral in Q4, then they would potentially have $8.6M (6 + 2.6). We won’t know this until the company releases their Q4 results, probably in early/mid February. I think it’s a stretch to assume that they were cash flow neutral because they haven’t launched Lymphoseek yet and they’ve burned cash every quarter for the past 2 years.
     
    Please allow me to reemphasize a point again: This is not an attack on Neoprobe. This is an analytical rebuttal to TheMarketFinancial’s posting. I’m using the facts about Neoprobe to address the spurious claims that are contained in the posting. I haven’t seen anything in Neoprobe’s press releases that didn’t appear reasonable and customary. I see a lot of things in TheMarketFinancial’s posting that AREN’T reasonable and customary.
     
    Proceeding further along in the same sentence, TheMarketFinancial states: “two diagnostic drugs in phase 3 clinical trials…and target potential sales of $3 billion and $450 million, respectively”. The two clinical trials that are underway are both for Lymphoseek. The NEO3-05 study focused on Breast Cancer/Melanoma. They followed that with the NEO3-09 supplemental study for safety evaluation purposes so they could expand their labeling claims. They intended to submit this as an amendment to their filing but the FDA requested that they include these results in their primary filing.  I believe that this is the reason that Neoprobe’s timeframe has slipped to mid-2012 for their commercial launch (see 10-Q). They now intend to submit their IND application in Q1 of this year.
     
    The delay is result of the pre-IND meetings the company had with the FDA. The regulators want Neoprobe to include the NEO3-09 data with the initial submission. This is not bad news. All companies have these meetings with the FDA in order to clarify exactly what the company needs to do relative to the claims they want to make in order to gain FDA clearance. This should streamline the approval process.
     
    In general, it takes 12-18 months from submittal to clearance. One respondent states that the FDA says that the average approval cycle is 9-12 months. I feel that this is quibbling, but the approval cycle can be ~9 months or several years, depending on the product complexity and claims that the company is trying to get. Also, the 9-12 month timeframe is for each review cycle. If they notify the company that more information is needed, the clock resets. Many times it’s the company’s fault that it didn’t supply the information they need to approve the claims. That’s why these pre-IND meetings are so important. This is also why the regulatory process is so time-consuming and costly. It’s a complex endeavor but you try your hardest to get it right the first time. This is also why almost all companies miss their submission target dates. When I see this, though, I don’t perceive it as a negative. It’s just that it always takes a lot more work to do it than anyone thinks.
     
    Another clinical trial, NEO3-06, is for the efficacy of Lymphoseek in the diagnosis of head and neck squamous cell carcinoma. It hasn’t begun yet. The company is currently recruiting test subjects from a projected 20 clinical sites. As of Q4 they had 10 sites signed on. They didn’t specify when the trial would actually start (see 10-Q).
     
    All the current and prospective clinical trials pertain to Lymphoseek. TheMarketFinancial’s statement is, again, a complete fabrication. There aren’t 2 products in clinical trials, there’s only one.
     
    Now let’s move forward to the real gems of the posting: the target potential sales of $3B and $450M, respectively. The lower number refers to, I assume, the Lymphoseek market potential. If you refer to TriPoint’s spreadsheet on Lymphoseek’s sales potential, you’ll see that they forecast total sales of $50.2M for 2014 which includes the expanded indications that Neoprobe is working on. Shouldn’t it be closer to $450M? And should the market potential number not match TriPoint’s? Theirs is $373M. One respondent states that the market potential was recently raised to $465M based on increased market share. I’m not quite sure what he means, but could you publish this revised analysis for the group to review?
     
    And what about the $3B? Well, at least I found it. On page 15 of TriPoint’s report it states the Neoprobe projects per dose revenue for RIGScan CR of $6000 as a prognostic for colorectal cancer with a total market potential of $3B. This seems bullish in light of the fact that the FDA rejected it in 1997. The post-rejection analysis involves only 94 patients. It could work out work, though. Subsequent clinical trials will be lengthy and expensive in order to validate their intended claims. I’m sure this is why they are seeking a development partner.
     
    So I was wrong on my statement about the nebulous nature of the $3B figure. I know where it comes from now. How valid is the number? I do know that there is not much potential on the diagnostic front – too many cheap alternatives. On the prognostic front, if they can prove it with a large trial, their pricing power should be better. $6000 seems bullish, though, since a number of companies are working on genetic tests for screening that will cost a lot less. It depends on what claims that they can make ultimately. This one is years away folks.
     
    As I was reading TriPoint’s report, I noticed a curious item on page 4 that pertains to Neoprobe’s gamma detection business. The analyst states that the company is a leader in gamma detection devices with a 70% market share. He then states that the market size is $250M. Shouldn’t this mean that the company generates $175M in revenue? He then states that gross demand (including partner share) is only $20M-$25M which implies a market share of only 8 – 10%. If you assume a 50% cut to the partners then you get a figure close to Neoprobe’s current $10M/year of revenue. The numbers just don’t seem to match up. If anyone else can clarify this please do so.
     
    Moving on, I stand by my original comments (3, 4, 5, 6) relative to TheMarketFinancial posting. One respondent corrected me on the AMEX listing requirement for minimum shareholder equity. This person states that the $4M figure is for initial qualification only and does not apply thereafter. OK. Considering Neoprobe’s $6M equity deal in Q4 they should have $7.1M (6 + 1.1) in SE. If they apply for listing this quarter (or possibly next) they should be able to qualify on this criterion. Their continued losses will erode SE in the “accumulated deficit” area.
     
    Let’s move on to the insider buying area. This one is a lot trickier than you may think. Company executives know how the game is played. They know that there is a global universe of people tracking, analyzing, postulating, pontificating and speculating on insider activity. When executives and board members buy their own stock it’s a sign of support and confidence in the future is it not? Absolutely, if done in a certain way and in sufficient amounts. Considering of the prevalence of stock-based compensation and stock option plans the only purchases that have credibility are the “open market” ones. This is when an executive purchases stock on the open market with their own money. Other forms of acquisition have no predictive value. But you can’t stop there. The open market purchases have the most predictive value when they are made by a “C-level” executive in a MULTIPLE of their base salary. For example, if a CEO makes $500k/year and buys $100k of stock on the open market then it’s most likely window dressing. If this CEO buys $1.5M of stock on the open market, then you’ve something promising to look into. Personally, I follow what the CFO does. They are typically more hard-nosed about the company’s prospects. If a CFO has a salary of $200k and buys $400k of stock then you have something very promising. How often does this happen? In a typical year, I may find only 1 or 2 worth looking into. Like everything else, this takes a lot of work.
     
    Let’s assess Neoprobe. The spreadsheet in the posting lists insider transactions by 10 executives. Six of these are board members. Almost all companies require every board member to purchase company stock. By having some “skin” in the game they will hopefully act in the shareholders’ best interest. You’ll notice that all the purchases are for relatively modest amounts. Of the remaining executives, Mr. Bupp is the only one who has purchased Neoprobe stock on the open market. He spent $54k on 5/3 and $26k on 11/15 for a total of $80k. His base salary in 2009 was $335k so, assuming he didn’t get a raise this year, his purchases represent ~24% of his base compensation. So, based on experience, there is no predictive value here at all. Purchases are certainly better than sales, though, so it is a net positive, just not a much of one as you may think.
     
    So there you have it folks. I’ve looked at this issue as closely as I care to. If anyone can refute my facts, please speak up and show me (and the group) your analysis. For those of you who already have a position in Neoprobe, I hope you based your decision on the positive developments in the company instead of the posting by TheMarketFinancial. As I stated earlier, the biotech area is, by far, the most difficult area to consistently make money in. It takes a tremendous amount of work to sort through all the noise in the pursuit of the truth and to the pot of gold. Tread carefully.
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  •  
    (dwhouse) If I've given one person pause in their intent to act on TheMarketFinancial's posting then I've done well. The issue here is to be fully informed.

    (RESPONSE) I totally agree, and appreciate this opportunity to clarify certain points. While it appears that you may have an issue with TheMarketFinancial, we hope that your outlook on Neoprobe itself wasn't tainted just because TMF chose to do a write-up on the company. In response to a few of the last points you mentioned:

    1) It begins with "Within the $40 trillion US market…." This is a bit of a shaky start isn't it? The reader isn't even finished with the first sentence before encountering an egregious mistake. If an author has this bad an eye for detail, how can I rely on the other numbers?

    (RESPONSE) 2009 GDP was around $14 Trillion, so it's most likely a typo ($40 v. $14). I'm not sure if I would discount an entire article for a typo. But, okay…

    2) The next paragraph is one of my favorites. The 3rd sentence states: Here is a 20-year old biotech company with stable annual sales that cover all the overhead….Well, stable revenues, yes. Unfortunately, the company has burned cash in operations in EVERY QUARTER…. For the current FY to date, they show a loss of $42.9M. What overhead are they covering? Covering overhead means that you are at least cash flow neutral. TheMarketFinancial's statement is a complete fabrication.

    (RESPONSE) It's not fabrication. Overhead is the ongoing administrative expenses of a business which cannot be attributed to any specific activity, but it necessary to keep the doors open. Overhead doesn't include R&D.

    Neoprobe generates adequate cash flow from it's medical device sales to cover all corporate overhead, outside of R&D on it's investigational drugs.

    Consider 2009's numbers
    Sales - $9.5M
    COGS - $3.1M
    SG&A - $3.2M
    Operating income = $3.2M

    2.bp.blogspot.com/_DRy...

    The $3.2M positive cash flow allows Neoprobe to partially fund R&D in new products. R&D is not corporate overhead, as it is an expense that can be adjusted if needed, and is not required to keep Neoprobe operational.

    With regard to the $42.9M loss, if you'll review management's explanations in the10-K's for the past several years you will see significant 8-figure losses. However, they were almost all non-cash losses.

    Neoprobe's largest shareholder (Montaur/Platinum Partners) cancelled their notes and converted all debt into preferred shares to take an equity position. This transaction resulted in huge accounting adjustments to the balance sheet, and the company incurred substantial non-cash losses.

    3) One respondent states that Neoprobe intends to return to profitability in 2011/2012, now that their cash burn is diminishing. If Neoprobe achieves profitability their cash burn needs to vanish not diminish… they burned more cash … in the 1st 3 quarters of 2010 than they did for the entire previous year. I'm sure they are doing their best to address this troubling trend.

    (RESPONSE) You are correct. It was an unusual period of high burn rate. However, it's not a trend, and it was expected. During that period Neoprobe had two ongoing Phase III clinical trials, they were finalizing production and validation of their RIGS biologic, and they were preparing a RIGS SPA proposal.

    The high burn rate will subside in 2011. The RIGS biologic is complete, one of the Phase III trials ends next month (Feb 2011) and the last trial is expected to finish by year-end (Dec 2011). Neoprobe's CEO has stated on numerous investor calls that the company anticipates a significant reduction in R&D and a return to profitability once these projects are completed.

    4) The same respondent states that Neoprobe finished Q4 with $8M+ in cash. This person must have inside information because there has been nothing publicized about their current cash position.

    (RESPONSE) No insider information. I listen to all conference calls and investor presentations. To be completely accurate I should have stated that Neoprobe had $8M+ cash "in Q4". As stated by the CFO on the Neoprobe Q3/2010 investor conference call on November 10th, the company "Ended Q3-10 with $2.6M in cash, which coupled with the recent financing net proceeds which closed earlier today would be $8.1M."

    www.investorvillage.co...

    You can also find verification of this from Slide #17 of this PowerPoint presentation given by management on Analysts Day (12/13/2010) stating $8.1M in cash.

    neoprobe.com/AnalystDa...

    5) In general, it takes 12-18 months from submittal to clearance. One respondent states that the FDA says that the average approval cycle is 9-12 months. I feel that this is quibbling, but the approval cycle can be ~9 months or several years, depending on the product complexity and claims that the company is trying to get.

    (RESPONSE) The Lymphoseek NDA is being filed under PDUFA and PDUFA guidelines stipulate that priority applications be responded to within 6 months, and standard applications within 10 months. A review of the most recent PDUFA progress report shows that over the years the median times for these approvals have slightly exceeded those guidelines, but the FDA has established a goal of 90% compliance to meet their own guidelines in 2010 and beyond.

    Additionally, Lymphoseek is a comparatively simple diagnostic compound, aimed at replacing another compound that has been used off-label for lymphatic mapping for many years. Because of this, and the fact that Lymphoseek is not a therapeutic with all of the long term safety and side affect concerns inherent to therapeutic drug applications, Neoprobe management expects the review process to be less time consuming than the typical therapeutic drug review. Management has stated a period of 6 months, based on discussions in pre-NDA meetings with FDA.

    6) Also, the 9-12 month timeframe is for each review cycle. If they notify the company that more information is needed, the clock resets. Many times it's the company's fault that it didn't supply the information they need to approve the claims. That's why these pre-IND meetings are so important.

    (RESPONSE) I absolutely agree, and that's the reason Neoprobe management has worked diligently to conduct numerous on-site pre-NDA meetings (3 or 4) with the FDA and allowed for as much pre-review as possible, in order to ensure that the every module of the Lymphoseek NDA is complete and accurate. The clock doesn't necessarily reset with requests for additional information, but it can be expected to extend the review cycle by some 90-120 days.

    7) Another clinical trial, NEO3-06, is for the efficacy of Lymphoseek in the diagnosis of head and neck squamous cell carcinoma. It hasn't begun yet.

    (RESPONSE) Actually, the Head & Neck trial (H&N) commenced May, 2009.

    neoprobe.com/pr/PDFs/0...

    There are 13 sites recruiting patients

    clinicaltrials.gov/ct2...

    During 2010 on several investor calls/presentations Neoprobe's CEO stated that the Lymphoseek H&N trial thus far had "no misses".

    8) All the current and prospective clinical trials pertain to Lymphoseek. TheMarketFinancial's statement is, again, a complete fabrication. There aren't 2 products in clinical trials, there's only one.

    (RESPONSE) - Yes and no. This may be a matter of interpretation. RIGS has already completed all three clinical trials. A BLA was filed with the FDA. Although the drug met the trial endpoints, the FDA has requested documentation of the patient survival differential and/or how the use of RIGS altered patient management. That BLA remains open, pending additional data submission.

    Neoprobe is now designing an additional clinical trial to document the information requested by the FDA, and it is expected to be filed under a SPA request in Q2/2011. Clinical trials will resume (with a partner) after receipt of that approved SPA.

    9) Now let's move forward to the real gems of the posting: the target potential sales of $3B and $450M, respectively. The lower number refers to, I assume, the Lymphoseek market potential. If you refer to TriPoint's spreadsheet on Lymphoseek's sales potential, you'll see that they forecast total sales of $50.2M for 2014 which includes the expanded indications that Neoprobe is working on. Shouldn't it be closer to $450M? And should the market potential number not match TriPoint's? Theirs is $373M. One respondent states that the market potential was recently raised to $465M based on increased market share. I'm not quite sure what he means, but could you publish this revised analysis for the group to review?

    (RESPONSE) Certainly. See managements Slide #9 indicated $450 million in total sales potential.

    neoprobe.com/AnalystDa...

    With regard to the logic as to how management arrived at that figure, you would need to listen to the dialogue of several of the 2010 investor conference calls for the complete thought process but, at the risk of over simplifying, the increases were the result of several factors, including,
    a) price increases in Technesium (Tc99m - a key component in the tracer),
    b) prices of the competing off-label drug,
    c) Lymphoseek's superior performance over the competing tracer in clinical trials and,
    d) input from Cardinal Health after it conducted a market survey in anticipation of the product rollout.

    Regarding TriPoint's analysis, that report uses an older $373M figure (Sep/2010), which Neoprobe management has since revised upward as noted.

    I can't speak to TriPoints sales assumption for 2014, but it appears that he is allowing for a reasonable market penetration and graduated sales over the years. Certainly no drug rolls out at 100% potential in year 1...

    10) And what about the $3B?… On page 15 of TriPoint's report it states the Neoprobe projects per dose revenue for RIGScan CR of $6000 as a prognostic for colorectal cancer with a total market potential of $3B. This seems bullish in light of the fact that the FDA rejected it in 1997.

    (RESPONSE) The FDA did not reject RIGS. As mentioned earlier, they've requested documentation regarding survival differential and/or how it alters patient treatment and outcome. The efficacy of RIGS is not in question, and the BLA remains open.

    Regarding the pricing structure, Neoprobe conducted numerous market studies, using third party consultants, to determine realistic pricing for RIGS. Different studies ranged from $4,000 to $8,000. The $6,000 figure appears to be a reasonable average, considering the RIGS advantage that came to light as a result of the Schneebaum study.

    A percentage of traditional colon cancer surgery procedures leaves microscopic traces of tumor that later results in disease recurrence. RIGS is a surgical adjunct to insure that surgeons remove all of the cancerous tissue. The Scheenbaum study conducted a follow up on the patients from the last RIGS Phase III trial, and found the following survival differential (patients with all cancer removed are labeled as RIGS negative - blue line):

    4.bp.blogspot.com/_DRy....

    11) Subsequent clinical trials will be lengthy and expensive in order to validate their intended claims. I'm sure this is why they are seeking a development partner.

    (RESPONSE) You are correct. Cost estimates for the final trial range from $25-$30M. Neoprobe has spent almost $100M to get RIGS to this point, and all of their SEC filings confirm their intent to use a partner from this point on, letting the partner fund the final trial, and entering into some type of revenue sharing arrangement for the future revenues once RIGS is approved.

    12) $6000 seems bullish, though, since a number of companies are working on genetic tests for screening that will cost a lot less. It depends on what claims that they can make ultimately.

    (RESPONSE) Remember, RIGS is not a diagnostic to determine if you have colon cancer. Like you mentioned, there are already screening tests for that. RIGS is for surgical use with patients who have confirmed colon cancer, to help the surgeon remove every trace of the colon cancer tissue during surgery.

    13) As I was reading TriPoint's report, I noticed a curious item on page 4 that pertains to Neoprobe's gamma detection business. The analyst states that the company is a leader in gamma detection devices with a 70% market share. He then states that the market size is $250M. Shouldn't this mean that the company generates $175M in revenue? He then states that gross demand (including partner share) is only $20M-$25M which implies a market share of only 8 - 10%. If you assume a 50% cut to the partners then you get a figure close to Neoprobe's current $10M/year of revenue. The numbers just don't seem to match up. If anyone else can clarify this please do so.

    (RESPONSE) Yeah, that confused me too. It was poorly written. Gamma Guided devices is a specialized niche market. Most of the studies conducted by Neoprobe and others pegs the annual market demand somewhere between $25-40M annually. Neoprobe products do about $20M of that. Neoprobe sells its devices on a wholesale basis to its distributor for about half price, so the company recognizes some 50% of the $20M in retail sales (hence the $9.5-$10M in annual revs to Neoprobe).

    14) Let's move on to the insider buying area. …For example, if a CEO makes $500k/year and buys $100k of stock on the open market then it's most likely window dressing…. You'll notice that all the purchases are for relatively modest amounts.

    (RESPONSE) There's only one reason to buy stock on the open market, and that's because you believe the stock is going higher. Neoprobe is a small company. The execs and board members aren't 7-figure salary types. They've never invested in NEOP just for window dressing, and I'm confident that they're too conservative to be buying if they were concerned the stock would go down. I believe it's a stretch to expect someone who makes $500K and gets free stock options to spend more than $100K using after tax cash to further invest in the same company. But that debate starts getting away from the facts, and much more into opinions.

    At any rate, I appreciate the chance to discuss this further and hope that at some point you may even consider adding NEOP to your "bank" and following our progress over the next year.

    DDbuyerhere@yahoo.com

    www.investorvillage.co...
    16 Jan 2011, 02:42 PM Reply Like
  •  
    Geez, your post was almost as long as mine. Fair enough. I think we've batted this one around enough. Your comments are informative and logical. At the end of the day, the ability to hold onto and persevere with an investment almost totally depends on having a high degree of confidence with the information about a company and its prospects. Clearly, you do with Neoprobe. You appear well-informed about its activities and market potential. This is all that really matters. This is the beauty of the market. There are many many choices. Good luck with your investment. I wish you the best of success.
    16 Jan 2011, 06:33 PM Reply Like
  •  
    dwhouse: thanks for this post. Very useful for me. I have several questions that would help me out a bunch (really) if you could answer.

    1) insider purchases. Why do you think that stock option exercises are not that worthwhile? I mean, there is an outlay of cash on the insider's part--there is there own money at stake.

    2) why do you find biotech the most difficult investing sector? And is this perhaps a good thing? Ie. Higher level of difficulty might mean that more stuff is unaccurately priced, which can give good profit opportunities.

    And also, what's the easiest sector to make money in in your opinion?

    3) is investing your full-time job and main source of income?
    18 Jan 2011, 12:26 AM Reply Like
  •  
    Hi, atrickpay. Thanks for the message. I'll do my best:

    1. Stock options and stock-based compensation have been a pervasive form of executive pay packages for some years now. It's a way for companies to pay market rates to recruit and retain talent while mitigating their fixed (salary) costs. It also, of course, is supposed to establish the alignment of interests with management and shareholders. When a company employee exercises an option most of the time they immediately sell the stock and pocket the difference. The IRS considers this ordinary income. Most employees take this route. If you are fortunate enough to be sitting on a nice gain it’s hard to resist not taking the profit versus waiting on it. You may notice that the option exercise transactions you see on finance.yahoo.com, for example, do not specify whether or not the employee cashed in or not. It just states that the option was exercised. Holding onto the stock in anticipation of further gains would be bullish, especially if the amount was large, but there’s no way of knowing until much later when the executive would actually sell the shares.

    Any time you see an exercise for an odd number of shares, say 1573, it almost always signifies that this is part of their compensation package. The option award is typically a percentage of the profits or based on the person achieving certain performance goals.

    The key here is having something of predictive value. This is something that can be statistically differentiated from randomness. 99.8% of insider activity is just noise based on this criterion. This is why it’s a needle-in-the-haystack endeavor if you’re looking to buy on this basis. You look for something unusual. When an executive buys a block of stock with his own money in an amount that is a multiple of his salary then you may actually have something worthy of a closer look. This doesn’t happen but a handful of times each year among the thousands of publicly-traded stocks. Everything else is just window dressing. The execs out there know how the game is played. They know that there is a universe of people around the world looking at insider buying. This why I said that most insider open market purchases are a net positive just not as much of one that you might think.

    A good book that I would recommend for you is: Investment Intelligence From Insider Trading, by H. Nejat Seyun (MIT Press, 1998). He’s one of the foremost experts in the world on insider trading. He’s analyzed thousands of transactions.

    2. The reason that biotech is so difficult is because of the high multiples that get priced into the “next big thing”. Check out Dendreon (DNDN). It sports a $5B market cap and only has a sliver of sales the past 12 months. The flawless ramp up of its therapeutic vaccine, Provenge, is already priced into the stock. Unfortunately for unwary investors, you’re one press release away from a 20, 30 or 40% (or more) haircut. There’s a high probability that there will be some bad news sometime in the future. If you don’t have a world-class entry you could get clipped severely. I worked in the biotech arena for more than 20 years so I consider myself more well-informed than most and these valuations scare the daylights out of me. The risk reward equation rarely lines up for me. Ideally, the best way to do this would be to assess the technology early on to see if it had potential and then to scale up from a modest position based on the company’s progress. I’m not qualified to do this. This is why many Wall Street biotech analysts are MD’s and/or PhD’s. They are.

    There are profit opportunities everywhere for the intrepid investor. My point is that it takes a tremendous amount of work. There are no shortcuts. This is why I cringe when I see so many stock-pumping postings on line. Almost all are noise.
    Build yourself a database on all the recommendations, pro or con, that you review. Record the date of the posting, the symbol, the stock’s closing price that day, the market’s close (if it’s a biotech, use the NASDAQ) and why this story interests you. Record the price every month or quarter over the next 12 months. Compare how it has performed relative to the market and to the recommender’s forecast. This will be very educational.

    There aren’t any “easy” industries/sectors to make money in. It’s all hard work. Other industries, though, sport more realistic multiples based on their fundamental performance. There is more of a margin of safety, in my opinion. I focus my efforts on growth companies that are currently producing stellar results (see Investors Business Daily). Fundamentals drive the stock price. Fundamentals have more staying power than stories or forecasts.

    3. Trading is my full-time occupation. I’m a position trader. My holding period is anywhere from one day (if a stock moves against me) to forever if the stock is behaving itself. I don’t do day trading. This takes the fun out of the endeavor, in my view. This is, by far, the most challenging thing I’ve ever tackled. Why? Because that guy that stares at me in the mirror is a formidable adversary. Hope springs eternal….
    18 Jan 2011, 01:52 PM Reply Like
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    Hi Dw, thanks for the answers!
    A few things.
    a) << You may notice that the option exercise transactions you see on finance.yahoo.com, for example, do not specify whether or not the employee cashed in or not>> OK. But if you look on the actual form 4's you can see whether the common stock obtained thru option exercise was sold!

    b) thanks for the tip on the book. Depending on what my investing strategy turns out to be for this year, I might read it.

    c) congrats. Since it's your full-time work, how are you doing profit-wise? Are you on net making money? And are you confident this will be something that you can make consistent profits for years to come? I'm very curious on this all, because I'm currently trying to make investing/trading my full-time source of income, but I'm finding it really difficult at the moment. I don't enter many positions (sit in cash a lot) because a lot of stuff I find just too risky. And I should add that I focus just on biotech right now. I might be getting out of the sector though. Just finding it so difficult. Also, one thing that I'm curious on that I just thought of is...what amount of capital do you employ and what annual % return do you target to achieve? I wonder if I might have too little capital at the moment, which makes me perhaps take on too much risk so that I can make enough to cover my monthly expenses.

    If to any of these questions you don't want to put the answers up in public here, could you answer me via sending me a private message on SA here?
    Thanks a lot!
    19 Jan 2011, 02:26 AM Reply Like
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    Yes, you can find out what the disposition was on options via Form 4's. It's a good point about having to do a bit more work to obtain more useful info. If you haven't decided on what investment approach to pursue, don't worry. This is typical. I went through the same thing. Read everything you can get your hands on about investing. Your area of interest will become clearer over time. For example, you may be unsure about whether to pursue value versus growth investing. One characteristic of top flight value investors is patience. They typically hold onto a position for 3-5 years (or more). Patience I ain't got. So I would never get the satisfaction with the value approach even I my results rivaled Mr. Buffett. I focus on growth. Your approach should be a good marriage with your personality profile. It'll be a lot more fun if it is. I've done quite well for myself since I've been trading. Hopefully, I can keep it going.
    19 Jan 2011, 12:36 PM Reply Like
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