Cancer therapy maker Sirtex Medical was recently acquired by Chinese fund manager CDH Investments and China Grand Pharmaceutical for $33.60 per share.
Before the company delisted from the ASX (ASX: ASX) two weeks ago, however, former Sirtex shareholders had experienced a bumpy ride over the previous two years.
After a profit warning was issued on 9 December 2016, Sirtex shares fell 37% that day, from $25.49 to $16.00 and ultimately bottomed at $10.75 in May 2017. The takeover at $33.60 was completed earlier this month so those who purchased after the profit warning and held until the takeover occurred have done quite nicely for themselves.
Profit warnings are commonplace on the ASX but what distinguishes Sirtex’s December 2016 profit warning from others is that it is now the subject of legal action by ASIC.
Former Sirtex CEO Gilman Wong has been charged with insider trading regarding his sale of 74,968 Sirtex shares worth $2.1m on 26 October 2016. ASIC alleges that the former CEO was in possession of inside information regarding disappointing company sales – which ultimately led to the December 2016 profit warning – when he sold the shares.
Investors in Sirtex had previously questioned the timing of the former CEO’s share sales in October 2016, and the company asked its lawyers to examine the sale.
Sirtex’s lawyers provided their report to the Board in January 2017 and, while its findings remain “privileged and confidential”, Gilman Wong was subsequently terminated immediately.
So today’s announcement by ASIC shouldn’t come as much of a surprise.
However, unlike a US judge seeking confirmation as a Justice of the US Supreme Court, Gilman Wong is entitled to the presumption of innocence and to the operation of due process. As such, we wont comment on the possible outcome of the trial.
A red flag
Whatever the outcome, though, this saga provides a good lesson for investors that you should always view insider selling with scepticism.
Unfortunately, insiders – and the company they manage – know this and so they will try to downplay insider sales by providing what they hope appears a reasonable explanation for the sales.
Some common reasons for insider selldowns include “to pay tax liabilities” or “to diversify [the director’s] wealth”.
And for all you know the director in question could actually be telling the truth.
However, directors have better knowledge of the internal workings of a company than anyone else. As such, they will see any deterioration in a company’s earnings and/ or the risk of not meeting consensus estimates earlier than most too.
Moreover, a director will never admit they are selling shares because, for example, the company is likely to issue a profit warning, or is about to lose a major customer, or is about to experience some other event which will materially reduce profits.
So while it is just one piece of information of many to use when analysing a company, insider sales should always be viewed as a potential red flag.