My Crystal Ball, FWIW

Compadres

Much has been made about the anaemic inside buying after the blackout was lifted. Most posters seem to think that this indicates that the insiders have a lack of faith in the stock and a belief that the share price is heading lower. A closer analysis of recent trading appears to indicate the opposite, i.e. that the stock is likely heading higher. Here's the reasoning.

Market direction is most reliably predicted by the buying patterns of the insiders. When the insiders are unloading, it's time to bail. When the insiders are backing up the truck to load up, investors are wise to do the same. So what to make of insider buying in the last 6 weeks?

The key is not to focus on the volume of buying, rather, the key is to look at HOW the shares were bought. Let's take a closer look at who bought what and how.

1. Dr. Norman Wong

Over a two week period (December 19, 2008 to January 2, 2009), Dr. Wong accumulated 29,700 shares. The interesting thing is HOW he accumulated them. He did so on the open market at prices ranging from $1.58 to $2.15.

When I saw these trades, I thought that it was a fait accompli that Dr. Wong would be exercising his options, given that most of the trades on the open market were above the option strike price ($1.60). To my surprise, Dr. Wong let 440,000 options expire on December 27, 2008.

So, you have to ask yourself this question: if Dr. Wong wanted to accumulate 29,700 shares, why would he pay more on the open market for these shares than what it would cost him to exercise 29,700 options (in addition to the commissions)? This is especially intriguing because had Dr. Wong exercised 29,700 options, $47,520 (29,700 x. $1.60) would have gone into RVX's coffers? Why would Dr. Wong not help out himself and the company? Why?

The answer is very encouraging for shareholders.

When options expire, they go back into the "option pool". These options can, eventually, be re-issued at a different price at a later date. Some posters speculated that the options would be re-priced lower and that the insiders were lining themselves up to benefit. Dr. Wong's buying pattern over the last two weeks refutes that conclusion. If he thought the share price was going to drop, he wouldn't have been buying on the open market. He would wait and pick up shares below $1.60. His actions were completely consistent with someone who believes the share price is going up.

Options have value to a corporation. They reward good performance and they bring cash to the corporation when they are exercised. Obviously, a corporation wants as much for these shares as possible. I suspect there was pressure from within the corporation to let the options expire. Why?

RVX does not want to dilute the float for a mere $1.60 a share. RVX would rather wait until the share price increases so that when the option is exercised, more money goes to the corporation. By encouraging Dr. Wong to buy his shares on the open market, for prices mostly above $1.60, RVX appears to be making the following two statements:

First, we think the share price is going higher, so we want you allow us to re-issue those options at a higher strike price.

Second, we are not desperate for cash.

Could it be that Dr. Wong was buying on the open market to prop up the stock and protect the value of his remaining shares (he had over 4M when he started buying)? I doubt it. I don't think he's the type of person who would manipulate the market. I prefer the simpler reasoning: he is the person closest to the science, he knows the science is solid and he thinks RVX is severely oversold. Let's revisit the last time Dr. Wong went on a buying spree.

Do you remember the dog days of summer in 2006? Although the science seemed to be humming along beautifully, the stock was trading at a year low. Other than disposing of 90,000 shares privately on March 11, 2004, Dr. Wong had never bought a share of RVX on the open market. That changed in the summer of 2006.

Between June 21 to 26, Dr. Wong accumulated 25,500 shares at prices ranging from $5.90 to $6.65 and then from July 21 to August 9, he accumulated another 18,900 shares at prices ranging from $5.30 to $6.65. Dr. Wong managed to call the market bottom. We all know what happened next. In mid-September, the stock started its meteoric rise, topping out at $29.50 at the end of February in 2007. All the while, Dr. Wong did not sell a single share. What did he know?

I believe that Dr. Wong accumulated shares in the summer of 2006 because he knew the stock was severely oversold. He knew the science was solid and that pharmas were interested. I think he rode the stock up to $29.50 and then back down again because he knew that a deal would eventually come. Obviously, a deal failed to materialize; however, it doesn't discount the fact that Dr. Wong timed the market perfectly when he was buying.