Should You Be Worried About Insider Selling at Threshold?

Fool fans around the globe know that a top metric used by Tom Gardner, CEO and co-founder of The Motley Fool, in making investment decisions is insider ownership. The more executives and directors involved in the business own of the company, the more committed they are to making sure the company succeeds. The opposite of this holds true as well.

That's why when insiders at any given company begin consistently selling shares, many investors start worrying about the company. Should investors be worried about Threshold Pharmaceuticals (Nasdaq: THLD  ) ? Let's take a look.

Cause for worry?
Over 15.6 million shares have been sold by insiders so far in 2012. That reflects a hefty volume when you consider that Threshold only has 55 million shares outstanding. On a percentage basis, it's much higher than the recent dumping of Facebook (Nasdaq: FB  ) shares by Peter Thiel, one of its directors.

But we shouldn't be too hasty to draw any conclusions. Insiders also buy stock in their companies frequently, too. How many insider purchases have occurred this year for Threshold? That total amounts to... zero.

Still, though, we shouldn't be too hasty to worry. Digging into the details a little reveals that the lion's share of these insider sales stemmed from Frazier Healthcare. Frazier is an equity and venture capital firm that specializes in health care investments.

I'm pretty sure Tom Gardner isn't thinking about VC firms when he talks about insider ownership. A VC selling shares is like a furniture store selling furniture. It's just what they do.

What about the remaining 1 million or so Threshold shares sold by insiders so far this year? Those shares were sold by one person -- director Wilfred E. Jaeger. Dr. Jaeger has served on Threshold's board since 2001. He is also a partner with Three Arch Partners, another venture capital firm and was recently reelected to a three-year board stint.

The truth is that we don't know for sure why Dr. Jaeger sold so many shares. But, in this case, high volumes of insider selling don't appear to be cause for alarm. This just doesn't seem as concerning as the uproar over Peter Thiel and Facebook.

Real worries
The real cause for worry on Threshold is whether or not the company will gain FDA approval for its TH-302 drug for treating pancreatic cancer. So far, though, things look good.

The company announced positive results from its phase 2 clinical trial that used TH-302 in combination with Gemzar, a drug made by Eli Lilly (NYSE: LLY  ) . Even better, it earned a $20 million milestone payment from partner Merck KGaA because of the solid clinical performance.

Assuming the FDA approves TH-302, the next worry for Threshold will be how well the company can market the drug against the competition. Pfizer (NYSE: PFE  ) and Novartis (NYSE: NVS  ) both market drugs that treat pancreatic cancer. Competing against the resources of top two global pharmaceutical companies is no small task, which is why Threshold joined forces with Merck to help develop and commercialize the drug.

Knowledge is power
The best antidote to worry is knowledge. When it comes to investing in biopharmaceutical stocks, investors need to know as much as they can about the companies they're buying. That's why The Motley Fool created a new premium report about another high-potential biotech stock, Arena Pharmaceuticals. Learn about Arena's opportunities, risks, and more in this new report. Get your copy now!

A previous version of this article mistakenly referred to Threshold’s partner as Merck instead of Merck KGaA. The Fool regrets the error.

Fool contributor Keith Speights owns no shares in the stocks mentioned above. Motley Fool newsletter services have recommended buying shares of Facebook. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 29, 2012, at 5:58 PM, caution1st wrote:

    You do know Threshold's partnership is with the German company Merck KGaA not Merck USA. They are two different companies. Also the deal is for Merck KGaA to market in Europe not the US.

    The US is still reserved for Threshold to partner or go it alone, which if TH-302 is approved will not be a problem.

    Second, did you also take the time research that Three ArchPartners sold 125,000 shares of THLD in July only to take the proceeds plus some extra cash to buy 811,003 shares of the stock in August. The company is exercising warrants at a price about 25% less than the marketprice. In doing so Three Arch is actually acquiring more stock. The latest stock salesthat totaled 876,000 shares took place in late August. If Three Arch were to repeat the same strategy of converting warrants to stock they could end up adding almost 3,400,000 shares to their existing 4,774,824 shares.

    If this is the kind of information and knowledge to be expected from MF, readers should unsubscribe and forget the website ever existed.

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