Insiders Are Buying Biotech. Should You?

The AMEX Biotechnology Index has plunged again today, giving up much of yesterday's gains. It's down a whopping 25% over in a little more than two weeks. Biotech is a risky sector, and drops by single companies after clinical trial results or FDA rejections are common.

But they usually don't all trade so drastically together. It looks to me like some pretty good companies got thrown out with the bathwater.

Some insiders seem to agree
On Monday, Celgene (Nasdaq: CELG) CEO Robert Hugin picked up an additional $527,000 worth of the company's stock. Sure, he controls more than 40 times that, but that's still a substantial financial commitment even for a guy as rich as he is.

And here are a couple of other substantial purchases over the last few days.

Notable absences
During its conference call on Monday, Keryx Biopharmaceuticals' (Nasdaq: KERX) CEO Ron Bentsur said, "We view the pullback of the stock as an opportunity for stockholders to potentially buy into Keryx's unique risk reward opportunity of having two phase 3 compounds and three phase 3 studies, with a potential blockbuster opportunity coming out of the data readout from our colorectal study expected later this year."

Bentsur is right. The potential value-adding event -- the phase 3 readout of perifosine in colorectal cancer -- should help support the value of Keryx and its development partner Aeterna Zentaris (Nasdaq: AEZS).

But the executive has yet to put his money where his mouth is. He was likely prohibited from buying given the earning release on Monday, but I don't see any recent Form 4 SEC declarations for him today.

There's only one Form 4 listed for executives of Dendreon (Nasdaq: DNDN) after the company said it wouldn't come close to making its 2011 earnings guidance: a sale by Dendreon's Chief Medical Officer Mark Frohlich. The poor guy likely had an automatic trading plan that sold his vested options the day after the earnings blowup. He still made money on the transaction, but not nearly as much as he would have the day before.

It's curious that with shares now down 70%, no executive at Dendreon sees value in the company. I don't know if that means they expect shares to fall further or if they think there's plenty of time to buy in because there will be a slow recovery. Neither sounds that appealing.

You could also argue that they also just don't have the cash to buy shares, but that wouldn't seem to be the case for President and CEO Mitch Gold. He sold more than $725,000 worth of shares the week before the earnings release.

Follow their lead?
Executives have more insight into their business than we do, so their purchases should give you a little more confidence that the business is sound. That extra assurance is helpful for companies like Celgene and Optimer with drugs on the market.

For companies with upcoming binary events, I'd give the purchases a little less weight. Predicting FDA decisions and clinical trial results is still pretty hard even with a little inside knowledge.

If you do decide to follow them, keep in mind that the executives aren't necessarily great market timers. Both the BioSante and the Optimer purchases were made last week, and shares of both companies are trading below where the executives bought them. If you're investing for the long term and have done your due diligence, following an executive buy isn't such a bad idea. Just remember, in this market, it's a little hard to call a bottom.

Did I miss any insider buys you're planning on following? Let us know in the comment box below.