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May 22, 2017

S3 Research: Jim Chanos Promotes Mallinckrodt & Express Scripts Short Trades at SALT

At last week’s SALT Conference renowned short seller Jim Chanos of Kynikos Associates promoted his short positions in drug maker Mallinckrodt PLC (MNK US) and pharmacy benefit manager Express Scripts Holding Co (ESRX US). MNK is the 10th largest short in the Pharmacy sector, but is the most profitable short in the sector in 2017, while ESRX is both the largest short in the Health Care Services sector and the most profitable in the sector in 2017.

Chanos called the partnership between the two companies a “murky alliance” that increases drug prices, primarily referring to Mallinckrodt’s Multiple Sclerosis drug Acthar which sold at $40 per 5 mm vial but now sells at $35,000 per 5 mm vial by Questcor Pharma, which was acquired my Mallinckrodt in 2015. Chanos also identified several other inter-relationships between Mallinckrodt and Express Scripts subsidiaries: ESRX’s Curascript runs MNK’s distribution; ESRX’s Accredo health runs MNK’s mail order and ESRX’s UnitedBioScience runs MNK’s patient assistance program.

Chanos believes that MNK is a likely candidate for Congressional review over excessive pricing and since it derives most of its revenue from its Acthar drug, Chanos thinks MNK’s target price is “zero”. Both Andrew Left of Citron Research and David Einhorn of Greenlight Capital are also MNK short sellers.

ESRX would also suffer a price decline from its MNK relationship. In addition to potential liability from MNK, ESRX is being sued by its largest customer, Anthem Inc. (ANTM US), for $3 billion in supposed overcharges. ANTM is not expected to renew its ESRX contract which expires in 2019.

Short interest in both MNK and ESRX is up $1.2 billion, or 72%, this year. Short sellers have made almost $1 billion in mark to market P/L in 2016-17 and with short interest continuing to increase, they are looking to increase their profits in the coming year.

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Head of Research, S3 Partners
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