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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.
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.