A biotechnology company called Seres Therapeutics bad news late last month: Its important infectious disease drug failed in a clinical trial, sending its stock price down roughly 70 percent. Investors took a bath.
However, in the two days before the ruling was made public, three senior executives Seres sold a combined total of dollars in company shares $ 2.5 million. They made a small profit. They avoided almost $ 2 million in paper losses.
And it was totally legal.
The article continues after the announcement
That’s because executives took advantage of an obscure federal regulation that allows insiders to buy and sell shares if the trades were established beforehand.
Theoretically, it prevents the leaders of the company to benefit from information not yet made public. But researchers digging through thousands of such operations have shown that consistently outperform the broader market, suggesting bigwigs biotechnology could game the system at the expense of investors every day.
“Biotech is often very turbulent events, and whenever you see any kind of insider information at the same time, just stinks,” said Brad Loncar, an independent biotechnology investor. “One wonders if the system is fair.”
There is a long list of examples in recent history of biotechnology. Last month, Juno Therapeutics revealed that three patients died in the main trial of a novel cancer treatment, forcing to temporarily suspend the development and delivery of falling share price more than 30 per cent. Days earlier, CEO Hans Bishop sold $ 4.4 billion in securities Juno, avoiding what would have been over $ 1 million in losses. Juno and the bishop declined to comment.
A similar story when playing lead Tetraphase antibiotics failed last fall, and when Vertex released disappointing data cystic fibrosis in 2015. The executives of those companies and Seres also declined to comment.
Each sale of insider securities, however irritating to investors, legally made through what is called a 10b5-1 plan.
Some background: It is against the law for executives selling shares when they have important information company that is not yet known to the public, as well as the failure of a drug trial. But the inhabitants of C-suite, especially in biotechnology, they get a lot of their compensation in shares, and the Commission Securities and Exchange recognizes that it would be a little above them stay with him until you quit or are fired.
So the SEC came up with a solution in 2000 with the invention of 10b5-1 plans. In such plans, managers can schedule operations prematurely, automating them to buy or sell shares, either on specific dates or whenever the stock reaches a certain price. But they can establish the plans when they have no valuable secrets, like right after your company releases its quarterly earnings. If the SEC comes after a question about a suspicious trade, companies must demonstrate that the plans were established in good faith.
is supposed to be an orderly mechanism that allows executives to exercise their rights as shareholders without playing an unfair advantage. But there are no exploitable holes in that idea, or executives are very fortunate.
How CEOs beat the spread
A 2006 study from Stanford University examined more than 3,000 internal operations provided in all industries and found that stock sales executives systematically arrived just before the bad news and right on the heels of good, helping to maximize returns and minimize losses.
And if trades that some executives scheduled to be executed at the same time each year is subtracted, still it looks fishy. A study by Harvard University 2012 reviewed two decades of insider trading irregular timed. These transactions hit the market by up to 25 percent each year, the researchers found, suggesting in have a serious advantage over foreign investors.
These two findings are particularly relevant in biotechnology, an industry known for its volatility of the shares, said Alan Jagolinzer, study author from Stanford and is now a finance professor at the University of Colorado. A company can be completely wiped out by a bad clinical trial and increased fivefold for a good one; the timing of a trade can vary tens of millions of dollars.
So how are the executives who beat the spread?
One possibility, Jagolinzer said, is by taking advantage of a wrinkle in the law: Holders of 10b5-1 plans can cancel at any time and for any reason, and not have to disclose that to the public. (Besides, are not required to disclose the existence of their plans ahead of time.)
Let’s say a CEO of biotechnology learns that, in two days, your company will announce clinical results will surely increase its share price. She can not legally buy a lot of shares of the company at that time – it would be the bad kind of inside information -. But you can cancel a scheduled sale 10b5-1 to avoid social dumping just before its price rises
“That is a strategy that can be technically compatible with the rule,” Jagolinzer said.
‘easy targets’ for critical
Some biotech executives and insiders say 10b5-1s concerns are exaggerated.
Most legal insider transactions do nothing to arouse suspicion, said David Sable, an investor in special situations biotechnology Life Sciences Fund. And if ever there is a whiff of impropriety, “as an investor, can vote with your wallet,” Sable said.
Ron Renaud, who was CEO of Idenix Pharmaceuticals traded before Merck bought in 2014, never used a 10b5-1 plan itself. But many of his colleagues have done, said, and for understandable reasons. Needed money for tuition bills, house payments, and perhaps the odd divorce.
Some seem suspicious transactions can not be, Renaud said. For example, investors could bid up the shares of a biotechnology company in the week prior to an early release of data from clinical trials. That could trigger a sale the CEO had set long ago to be executed at a certain price action.
If the company announced the next day that the trial had failed, the action would likely sink. That would make the recent sale of shares of the executive look dubious, but it was not necessarily bad intentions, Renaud said.
The 10b5-1 plans are “easy a white” for criticism, but in reality, “which are difficult game,” he said.
Scholars who have studied them are not so sure.
While executives do not control the winds and rains of the results of clinical trials, have a say in when the news is disclosed. A CEO can opt for a press of time before or after a pre-planned operation, depending on how it will affect the stock price. Companies have four business days to announce important information after learning according to SEC rules , which create a potential window cunning.
that’s why some critics pushing for greater transparency on 10b5-1 plans, with publication as an executive preplanned operation is canceled.
“In the same way they have to disclose trades, they should have to disclose these plans and when they are finished,” said Lauren Cohen, professor of finance at Harvard and co-author of the study, 2012.
a series of random operations
Back to Seres. The company unveiled its clinical failure in a press release before the market opens on July 29 CEO Roger Pomerantz and Chief Technology Officer John Aunins executed sale of shares previously planned on July 27, according to the documents, and medical director Michele Trucksis did the next day.
How long knew about the failed test before Seres issued its press release? In a statement sent by e-mail, the company said it released the results “very soon” after receiving them and declined further comment. 10b5-1 plans executives settled months before the trial concluded, SEC records show.
Similarly, the fortuitous trade Juno CEO was scheduled more than three months before the trial of the company is put on hold, according to SEC filings. Juno said said it expects, sending stocks plunging, the day after the Food and Drug Administration ordered the trial stopped because three patients receiving experimental cancer treatment company had died.
Other lucrative trades planned in advance, include the sale of $ 440,000 in shares of the company last September Tetraphase Operations Director Craig Thompson, a few hours before a test result wrong sent the price down about 70 percent . At the summit, executives sold more than $ 4 million in shares in the days before announcing the survey data in March 2015 that he would send highly valued by 6 percent population. Both companies declined to comment.
While everything may look suspicious, conspiracies are more easily described to date, said Michael Gilman biotechnology veteran, who bought shares and sold through 10b5-1 plans when it was an executive at Biogen. Overall, he said, he plans to do its job :. Allowing executives to diversify their reserves and the risk of balance
“But, you know, I’m sure these things can be a squirrel if someone really wants to be a squirrel with them,” Gilman said, whose last company, Padlock Therapeutics, sold to Bristol-Myers Squibb in April.
and the inherent volatility of biotechnology creates many opportunities for at least the appearance of impropriety in comparison to other industries, he said. “You look at Procter & Gamble – the population is not going to be driven by the successful launch successful or unsuccessful a new toothpaste or whatever”. Gilman
Some executives seem to have said “a wonderful sense of timing,” said Ira Loss, covering actions in biotechnology and pharmaceutical Washington Analysis. “But this is the way the system is.”