Tuesday, June 23, 2009

VFC's Take on the BDSI Insider Sells

A lot has been made of the large number of recent insider sells at BioDelivery Sciences (BDSI) who, as we know, received notification from the FDA of a minor delay in the pending approval decision for BioDelivery's treatment for pain in cancer patients, Onsolis.

I usually take Insider trading activity into consideration when deciding whether to buy or sell a particular stock and, admittedly, the recent selling activity would give me pause if I was just now looking at purchasing the stock. However, I do believe that this is one of the rare cases where insider selling is a non factor.

While insider buying is almost always a positive sign, insider selling is not always so cut and dry. Insiders are investors, too, and their investment decisions are not always based on how the shareholders will react to their transactions; rather their decisions are often based on what makes the most financial sense for them. Insiders are limited by insider trading laws which stipulate that they cannot buy or sell stock based on news that has yet to be made public and often times that stipulation dictates when they can buy or sell their shares without raising too many eyebrows.

Based on that fact, if insiders were selling now because they have received indications that Onsolis is not going to be approved, it would be illegal. However, illegal insider trading does occur, as Martha Stewart and the dimwits at Enron could attest to, and only some get caught. I don't think that this is the case with BioDelivery.

More than likely the insiders sold simply to realize significant profits. A few short months ago BDSI was trading for under two dollars only to repeatedly set new 52-week highs in May and June. Most estimates place BDSI between eight and twelve dollars after an Onsolis approval, so with the stock trading as high as it has lately, the insiders who sold into the spike were being smart investors by banking significant gains- gains that were not too far off the mark from where the stock would trade on approval. Also, none sold out of their positions completely and are in good position to benefit if a bigger move were to follow.

While approval of Onsolis looks promising, nothing is a sure thing in the stock market and it is always smart to realize profits while you can, even when you think that a stock will continue to rise. A few weeks ago I noted here that I had sold off a portion of my position in this stock to realize profits and ensure that I was playing on 'house money' from that point on. Even if BDSI were to drop to zero, I would break even on my investment in the stock and it wouldn't surprise me if the insiders, who are also looking out for their own best financial interests, did the same thing.

Also, the insiders sold right at the point where news of approval was originally supposed to be released, so they were probably holding until that point. When the delay came they may have sold into the price spike to ensure that they had cash on hand. It is summer time, maybe they had vacations to take. I know I recently sold some stock in another company (that I didn't want to sell) because sometimes the good life calls and it takes cash, not stock, to fly off to a great vacation destination.

Remember, Insiders are investors too. They've got bills to pay, vacations to take and gains to realize. Smart investors bank profits as a stock rises, even when they feel the stock will continue to rise, and many insiders are also smart investors.

I completely understand why common shareholders are nervous after all the insider sells. Even though negative news may not have been released yet, the general 'tone' of their correspondance with the FDA could have been such that influenced their decision to sell.

In my opinion, nothing has changed with the prospects of Onsolis and BioDelivery Sciences, so I'm holding onto my remaining shares in anticipation of news of approval.

Disclosure: VFC is long BDSI

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