The top five executives at the biotech company Moderna have sold more than $89 million of stock so far this year — initiating nearly three times as many stock transactions than in all of 2019 — as the company’s share price has soared on hopes for its Covid-19 vaccine.
The trades, which led to about $80 million in profits, were prescheduled through a legal program that allows company insiders to buy and sell shares at a later date.
But the volume and timing might prove alarming to Moderna’s shareholders, especially in light of the company’s May decision to raise more than $1 billion in a stock offering. If Moderna’s early-stage vaccine can one day prevent coronavirus infection and the company’s best days lay ahead, why are insiders selling?
Jay Clayton, the chairman of the Securities and Exchange Commission, has cautioned companies against selling stock during the coronavirus pandemic, which has led to market volatility and inflated the valuations of biotech companies like Moderna. There may be “idiosyncratic circumstances” that might lead executives to sell shares during the crisis, Clayton said on CNBC last week, but doing so risks an optical nightmare.
“We’ve said for a long time in this volatile time, please practice good corporate hygiene,” he said. “… Why would you want to even raise the question that you were doing something that was inappropriate?”
Moderna did not respond to a request for comment. CNN reported on sale of stock by two of the executives last week.
The idea behind programmed trades, initiated under an SEC rule called 10b5-1, is to allow executives to diversify their holdings. Leaders of public companies often have most of their wealth tied up in stock. Selling shares under 10b5-1 plans allows them to get some liquidity. And for a company like Moderna, whose valuation hinges on the unpredictable process of drug development, selling some stock is probably a prudent financial decision, said Thomas Lys, a professor of accounting at Northwestern University’s Kellogg School of Management.
“There’s always that other possibility — that these guys really know this whole thing is bogus and they’re selling while the selling is good,” Lys said. “But you can’t tell from the data which one it is, and they certainly have plausible deniability.”
Tal Zaks, Moderna’s chief medical officer, began the year with nearly 100,000 shares of the company. In late February, days before Moderna announced that its coronavirus vaccine was ready for human testing, he began dumping 10,000 shares a week. Over the next 11 weeks, as the pandemic pushed Moderna’s share price from $18 to $50, Zaks liquidated his entire position, making $3.4 million in the process. Once he ran out of stock, he began exercising options priced at $12.21 per share. Over the next two weeks, he sold more than 250,000 more Moderna shares at an average price of $67. Zaks profited more than $18 million from his 2020 trades. He currently holds zero shares of Moderna stock.
Juan Andres, Moderna’s chief technical officer, employed a similar plan. Beginning on Feb. 27, when Moderna’s share price was around $34, he executed weekly trades in which he exercised options and immediately sold stock. Over the course of 10 transactions, he sold more than $12 million worth of shares for a profit of roughly $9.3 million. As of his most recent trade, when Moderna was worth $67, Andres holds no shares of the company.
Other Moderna executives still have sizable stakes in the company. Chief Financial Officer Lorence Kim, who made about $37 million selling stock in 2020, retains about 1.2 million shares. Moderna President Stephen Hoge, who has sold $2.4 million in stock this year, holds more than 2 million shares. Stéphane Bancel, Moderna’s CEO, sold more than 400,000 shares for a $13.6 million profit, but that represents a minute fraction of his roughly 9% stake in the company, which puts his personal net worth at more than $1 billion.
To Nejat Seyhun, a professor of finance at the University of Michigan’s Ross School of Business, the Moderna trades “do not represent a worrisome trend.” The majority of the sales were at prices below Moderna’s current value, suggesting the executives were more concerned with liquidity than profit, Seyhun said. And each transaction was done through a 10b5-1 plan, meaning the executives weren’t trading on inside information.
But a closer look at 10b5-1 trades offers some cause for alarm about the practice in general. A 2006 study from Stanford University analyzed more than 3,000 planned insider trades and found that executives’ stock sales reliably came just before bad news and right after good, maximizing returns and minimizing losses. A 2012 study from Harvard University looked at two decades of irregularly timed trades — subtracting the ones pegged to the calendar — and found a similarly concerning result. Those transactions beat the market by as much as 25% each year, researchers found, suggesting insiders have a demonstrable edge over outside investors.
“Unfortunately we will never be able to separate liquidity trades from information-based trades, because we cannot easily look into the mind of the insider,” said Andrew Lo, a professor of finance at the Massachusetts Institute of Technology Sloan School of Management. “That’s part of the challenge of these 10b5-1 sales: There is no right answer for all circumstances. And that’s one of the reasons we have the SEC.”