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Pulse Biosciences: Notes on insider behavior

August 13, 2017

Private investor Robert Duggan’s recent buys extend the window to February before he can sell shares.

Duggan’s PLSE buys, when viewed in the context of $3.5 windfall from his 2015 sale of Pharmacyclics, are small in scope.

Duggan’s investments in two other companies this year are much larger than his PLSE commitment.

PLSE’s chief science officer is about to sell 200,000 shares.  A significant event in this small company with so few filing insiders.

 

There are those who claim they have “formulas” that, once combed through the bulk of insider data, can identify repeatable abnormal returns. Though the claims may be a somewhat effective marketing ploy, I must say I heartily disagree. Having experimented with numerous such studies over the years, and having spent many thousands of Thomson Reuter’s capital in the process, I firmly believe that handicapping insider actions/behavior is anything but a simple quantitative game. There are simply too many variables affecting each insider decision, which must be taken into account before assessing significance. I will be expanding on this “qualitative” aspect of handicapping insider behavior in future articles so please stay tuned. For now however, allow me to expand on the recent attention drawn towards latest open market purchases by Robert Duggan, et al.

Between August 1 and August 5, Robert Duggan and colleague Maky Zanganeh picked up another 362,360 Pulse Biosciences (NASDAQ:PLSE) shares in the wake of a recent 33% tanking in their price. Robert Duggan’s entrance to the PLSE shareholder scene in February shook up the scene has he has been celebrated by many for his successful trade in Pharmacyclics, where he had accumulated a significant stake at prices below $10/share, between 2004 and 2008, before selling them for $261.25 each through the sale of that company in 2015.

Although the share counts look impressive on the surface, there are items of note to consider while handicapping the significance of these insider decisions.

Dugan’s June decision required another $2.42 million investment, raising his total cash outlay for his PLSE position to date to $28.17 million. Zangeneh’s new purchases cost her $690,000. Make no mistake, there are some interesting positives to the timing of these buys as they extend the required six month holding period an insider must wait before selling shares recently purchased. This in order to comply with Section 16-B of the Securities Act of 34. This rule is widely followed by the legal community and there are many available references to it. The rule can be complex when it comes to option or share grants. In its most basic form however, which applies to the Duggan situation, insiders who buy and sell their companies shares, or vice versa, within a six month window are required to disgorge any profits realized back to the company involved.

These latest trades mean that we should not see Duggan and Zanganeh sell any shares until at least early February. Combine this with the fact that Zanganeh’s recent purchase of another 5,000 shares in the name of her minor son brings her total purchased in his name to over 90,000 shares; a rather rare event in itself and one to serve as a certain caveat to those looking to time shorts. Insiders rarely buy for children if they sense storms on the horizon.

But there is a lot of admiration for Duggan, not only for his successful Pharmacyclics experience but also for his lecturing on the subject of “genius” where he personally highlights the 24 characteristics of genius on his own website, Traits of Genius. With all the hype and surrounding Duggan, not to mention how her association with him has inured to her benefit (She pulled in $124 million in her earlier dealings with Duggan (see below) one can see her playing the “roll the dice” game here again. So, you have the smiley face side of the trades. Now it’s time to handicap them: PLSE is not the only horse Dugan has put in the races this year. In fact, two other moves have involved much more invested capital than what he has, thus far, spent supporting the price of PLSE shares:

Achaogen (AKAO) – On March 28 of this year, Duggan filed his initial 13D announcing he had acquired a 5% stake (2.04 million shares) in this clinical-stage biopharmaceutical company for $41.15 million. He bought this entire position in the open market between 1/11 and 3/24 at prices between $16 and $25. The shares have since traded lower to below $19.

Aurinia Pharmaceuticals (AUPH) – On May 1, Duggan filed his initial 13D announcing is acquired 7.2% stake in (5.77 million shares) for $43 million. As was the case in Achaogen, he bought his entire stake in a hurry, picking up the shares between 3/14 and 4/28 of this year at prices between $6.79 and $8.85. These shares have drifted lower since and are now in the $6 range.

To all of the above, let’s consider the magnitude of Duggan’s investments here in light of the $3.5 billion he pulled in by selling Pharmacyclics to AbbVie (NYSE:ABBV) in May 2015 for $21 billion, or $261.25/share. The story of this position build is somewhat legendary as he had picked up his large initial stake in the $10 range in 2004, only to see the shares fall to $1 in the 2008 chaos. Then he doubled down. It seems that the Genius moniker has apparently not been lost on him as he has named one of his LLC partnerships holding PLSE shares, called Genius Accelerated.

Let’s now consider the relative magnitude of Duggan’s PLSE position. At just over $28 million invested, said position is not one that can break his $3.5 billion bank and, frankly one that is not something to keep him from sleeping at night. He has, however, invested incremental amounts (somewhat akin to as he did with Pharmacyclics) that have helped support PLSE shares through declines.

Even in the wake of his support of PLSE shares, that investment is not as large as his $41.5 million sunk into AKAO or the $43 committed to AUPH, both of which, having traded down since his early buys and possibly in need of some propping the likes of which he has supplied PLSE recently.

Although we would continue to submit that the insider picture in PLSE should not be considered extremely negative at this time, some new evidence has surfaced to show what could indicate a crack in the armor: On July 31 Newbem Corp. the company owned by Dr. Richard Nuccitelli, filed a 144 filing indicating its intent to sell 200,000 shares. This is where Nuccitelli’s entire PLSE stake is held. Though Newbem’s initial Form 3 filing for PLSE indicates Nuccitelli as a “service provider” to the Company, he is far more than that. In fact, he is the Company’s chief science officer operating under agreement entered into November of 2014. Though not an “executive officer” under federal securities laws, his agreement provides him an annual base salary of $200,000 plus, according to a company disclosure:

… discretionary bonus and equity awards commensurate with other executives of the company, as determined by the board of directors and management. Dr. Nuccitelli also will be entitled to participate in any other employee benefit plans that we maintain. The agreement provides that upon severance of employment for death, disability, other than for cause, or for good reason, Dr. Nuccitelli will be paid compensation equal to one year’s base salary then in effect, any awarded and outstanding equity awards he holds will be accelerated to be fully vested and will have continuing employee benefits, to the extent provided during his employment, for regular post-employment statutory periods.

To the above, we should note that it is becoming rarer, these days, to see accelerated vesting of all equity awards in a severance package. This practice, common in past years, has become frowned upon in recent governance discussions. Whatever the case, we expect to soon see evidence of Dr. Nuccitelli’s actual sales of what he has indicated via his 144 filing last week. It would represent 20% of his PLSE holdings.

So, to summarize: Duggan’s Pharmacyclics success has heightened his status to guru-like in the eyes of much of the media and investment community. He is hardly spending big on his PLSE shares relative to his level of available capital. Moreso he is spreading his bucks around and has other recent investments that significantly exceed his PLSE commitment and may require similar propping up, the likes of which he has been doing with PLSE. Then there is the pending 20% position sale by PLSE’s chief science officer, which will no doubt garner attention.

Although we do not expect to see either Duggan or Zanganeh selling until at least February, we are keeping an eye out for any others who may be looking for the exit door, as this is a very small company with few filing insiders.

http://bit.ly/2vubJ0L

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