In July, three top Seres Therapeutics executives sold $2.5 million in company stock after the company's infectious disease drug failed during the clinical trails. The stock fell almost 70 percent, yet the executives avoided almost $2 million in paper losses and did not cross into illegal territory, according to STAT.
Legally, executives can buy and sell shares if they set the trades up ahead of time. The legislation aims to stop company executives from reaping profits off information not accessible to the public, but some researchers have discovered many biotech executives are playing the system and "outperform the broader market."
Seres Therapeutics is not alone, with Juno Therapeutics also avoiding huge losses in July. Three patients died in the company's novel cancer therapy trials, which resulted in the company pausing development and the stock dropping more than 30 percent. However, the CEO Hans Bishop sold $4.4 million in the Juno Therapeutics' stock only days before pausing the trial. STAT reported Mr. Bishop avoided more than $1 million in losses. The company and Mr. Bishop did not comment to STAT.
Securities and Exchange Commission created 10b5-1 plans which allow executives to schedule these trades in advanced and automate them to buy or sell shares at specific dates or when the stock is at a certain price. As per plan regulations, executives can only create these plans when they don't know any "valuable secrets."
Stanford (Calif.) University researchers analyzed more than 3,000 planned insurer trades to determine if executives were exploiting the system. They discovered stock sales typically occurred right before 'valuable' news. Boston-based Harvard University researchers also looked at deals spanning two decades and found these sales exceeded the market by more than 25 percent annually, which indicated "insiders have a serious edge over external investors."
On the other hand, David Sable, a biotech investor at Special Situations Life Sciences Fund, argued these concerns are amplified. Ron Renaud, former CEO of Idenix Pharmaceuticals, which Merck bought in 2014, said not all trades have bad intentions and although the plans draw criticisms, "they're difficult to game."
However, many argue for more transparency to ensure the system is in tact and individuals privy to information will not cheat the system.
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