WATERTOWN, Mass. (TheStreet) -- Craig Thompson's stock sale was very well timed. Miraculous might be the best way to describe it.
On Sept. 8, Thompson, chief operating officer at the biotech firm Tetraphase Pharmaceuticals (TTPH) , exercised 10,000 company stock options priced at $14.45. He immediately sold the Tetraphase shares at an average price of $44.08, according to an SEC filing. The insider sale netted Thompson just under $300,000.
On the same day, just after the market closed and hours after Thompson's stock sale, Tetraphase announced negative results from a pivotal study of its experimental antibiotic eravacycline. Within minutes, the bad news sent Tetraphase's stock price plummeting 70% from its $44.78 close.
The next day, Sept. 9, Tetraphase opened for trading at $9.49 per share, erasing $1.3 billion in market value. Tetraphase shareholders lost a lot of money. Thompson, an executive at the company since February 2014, profited.
Thompson's insider sale was fortuitous but legal because it was conducted under a 10b5-1 trading plan. 10b5-1 plans allow corporate executives and other insiders to schedule sales of company stock in advance, thereby insulating themselves from the risk of insider trading. 10b5-1 plans can be set up to trigger stock sales on a specific pre-specified date or when a stock hits a certain price.
The 10b5-1 plan covering Thompson's Tetraphase stock holdings was established on March 13, 2015, according to an SEC filing.
The use of 10b5-1 trading plans is a common Wall Street practice, but the timing of Thompson's insider sale of Tetraphase stock -- just hours before the company's market value crashed -- still raises questions about ethics, fairness and whether these plans are truly independent.
Tetraphase was in possession of the eravacycline phase III study results "at the end of last week," meaning Sept. 3 or 4, according to CEO Guy McDonald, speaking on a conference call held after the news of the failed study was disseminated on the night of Sept. 8.
The eravacycline study results were material, stock-moving information known to executives inside the company days before the information was released to the public. Yet Tetraphase still maintained an open trading window for its executives, through which Thompson exercised options and sold stock.
"As stated in the Form 4, Mr. Thompson sold shares under a 10b5-1 Plan which he put in place in March 2015, prior to IGNITE2 completing patient enrollment in May 2015," said Tetraphase spokesman Mike Beyer in response to a question about the timing and circumstances of Thompson's stock sale. IGNITE2 was the name given to the eravacycline phase III study.
But ordinary investors also holding shares of Tetraphase but not privy to the details of the eravacycline study results before Sept. 8 were not as lucky as Thompson. 10b5-1 plans are supposed to inure executive against allegations they use inside information to enrich themselves at the expense of ordinary shareholders. Too often, however, these plans seem to do the opposite.
Earlier this month, Ariad Pharmaceuticals (ARIA) stock price soared on market reports about a possible takeover by pharma company Baxalta. Ariad shares fell almost as fast when the takeover chatter was debunked, but not before Ariad Pharma Chief Financial Officer Ed Fitzgerald was able to sell company stock through a 10b5-1 plan, according to an SEC filing.. The timing of Fitzgerald's stock sale -- at the apogee of Ariad's fleeting stock-price spike -- helped him make approximately $100,000 in additional proceeds.
In July 2012, six Amarin (AMRN) executives and directors sold, via 10b5-1 plans, a combined $12 million in company stock just one day after the U.S. approval of a new medicine to treat high levels of fat in the blood. To this day, Amarin's stock price has never traded at a higher price.
With the future of the antibiotic eravacycline uncertain, it will be long time before Tetraphase shares once again reach $44, if ever. That's a big problem for Tetraphase shareholders holding underwater shares, not so much for COO Thompson thanks to his 10b5-1 trading plan.