Analyzing Last Week's Noteworthy Insider Trades In Healthcare

by: GuruFundPicks

We present here eight noteworthy insider trades last week (April 2nd to 6th, 2012) in the healthcare sector from over 1,300 separate SEC Form 4 (insider trading) filings during the week, as part of our daily and weekly coverage of insider trades (other sectors, including insider filings in the basic materials and energy sectors and the technology sector last week, are summarized in separate articles, that can be accessed by clicking on the above hyperlinks). 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):

Gilead Sciences Inc. (GILD): Gilead is a developer of therapeutics to treat viral, fungal, respiratory and cardiovascular diseases. On Wednesday, Chairman and CEO John Martin filed SEC Form 4 indicating that he exercised options and sold the resulting 145,450 shares for $7.0 million, pursuant to a 10b5-1 plan, and ending with 1.99 million shares after the sale. In comparison, insiders sold 1.87 million shares in the past year.

GILD shares have been extremely volatile in the last two months, in what amounted to a market-cap gain of $5 billion in the early part of February on new preliminary data on its lead hepatitis C drug that were encouraging, followed by a massive near $8 billion market-cap loss when it announced that six of eight patients for which data was available experienced viral relapse within four weeks of completing the hepatitis C treatment. Its shares currently trade at a discount 10-11 forward P/E and 5.3 P/B, compared to averages of 22.2 and 11.3 for its peers in the biotech group.

Ariad Pharmaceuticals Inc. (ARIA): ARIA is engaged in the development of drugs that treat aggressive and advanced-stage cancer by regulating cell signaling with small molecules. It is also developing small-molecule drugs that block signal transduction pathways in cells responsible for osteoporosis and immune and inflammatory diseases. On Tuesday and Wednesday of last week, seven insiders filed SEC Forms 4 indicating that they sold 61,645 shares for $1.0 million, with the large majority of the shares sold having been acquired by the exercise of options, and a portion being sold to satisfy tax withholding requirements. In comparison, insiders sold 0.42 million shares in the past year.

ARIA shares are trading near 11-year highs after being up approximately 100% from the lows in October of last year, bolstered by recent broker upgrades based on the potential of its ponatinib treatment and other drugs in its pipeline. The company recently received negative news two weeks ago that the Oncologic Drugs Advisory Committee voted against recommending Taltorvic (ridaforolimus) for the treatment of adult and pediatric patients with metastatic soft tissue sarcoma or bone sarcoma. However, its shares have continued higher despite that as the main driver continues to be the advancement of ponatinib that the company plans for a marketing approval submission in the U.S. and Europe for Q3 of 2012.

Cell Therapeutics Inc. (CTIC): CTIC is a biopharmaceutical company engaged in the development of oncology or cancer drugs. On Monday, Director Vartan Gregorian filed SEC Form 4 indicating that he sold 77,000 shares for $0.10 million, ending with 0.80 million shares after the sale. In comparison, insiders sold 0.70 million shares in the past year.

CTIC shares recently got a boost last month after the European Medicines Agency's Committee for Medicinal Products for Human Use recommended that Pixuvri be granted conditional approval for the non-Hodgkin's B-cell lymphoma. The expectation among bulls is that Pixuvri will get market authorization for the EU within a few months, a move that can arguably increase the probability of a positive decision by the FDA sometime later this year or early next year.

We have been following CTIC for a while, and the company historically has been a classic case of over-promise and under-deliver. One only needs to look at the long-term chart to realize this, as the stock has gone only one way, down, since peaking in mid-2000 at a split-adjusted price of almost $18,000 versus current prices of $1-$2. On the way down, management and the stock have disappointed legions of believers. As such, we continue to be skeptical on a positive outcome to this long drama. However, the stock has been strong on a technical basis since the positive news last month, consolidating nicely between $1.50 to $2.00, and could easily ride up strongly on positive news, either from the EMA or when the company re-files its NDA for Pixuvri.

On top of these, some additional large insider sales in the healthcare sector last week include:

  • A $6.0 million sale by three insiders at Cooper Companies Inc. (COO), a global medical device company, with its CooperVision business unit providing a range of high-quality contact lenses, specializing in toric lenses that correct astigmatism, and its CooperSurgical business unit focused on supplying products and treatment options for women's healthcare needs;
  • A $5.6 million sale by two insiders at DENTSPLY International Inc. (XRAY), a developer of dental consumable products, dental laboratory products, and dental specialty products worldwide;
  • A $1.3 million sale by two insiders at Vertex Pharmaceuticals (VRTX), engaged in the discovery, development and commercialization of small molecule drugs for the treatment of hepatitis C, cystic fibrosis, epilepsy and other life-threatening diseases; and
  • A $1.0 million sale by two insiders at Insulet Corp. (PODD), a medical device company engaged in the development of insulin infusion systems for people with insulin-dependent diabetes in the U.S.

Furthermore, insiders also reported a noteworthy buy last week in the healthcare sector in:

  • Keryx Biopharmaceuticals (KERX), a developer of novel pharmaceutical products to treat cancer, renal disease and other life-threatening diseases, in which CEO Ron Bentsur purchased 71,400 shares for $0.10 million.

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 of10% or 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 non-public 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 may be 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 were based on SEC filings, Zacks Investment Research, Thomson Reuters and 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.

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our opinions and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.