Over the last couple of months, Wall Street short sellers have been piling into a drug company called Mallinckrodt Pharmaceuticals.
Short sellers bet that a stock’s price will fall. To do so they have to borrow shares from other holders in the market, which they then sell. That’s how we can find out how quickly bets against a company have been stacked up.
In Mallinckrodt’s case, IHS Markit says that demand to borrow shares has jumped 4 fold since January. Currently, borrows (the red line below) sit at 10% of the outstanding stock.
Mallinckrodt has been a topic of debate on the Street for almost two years. At first, the concern was over its business model: a propensity for large acquisitions and big price increases in the drugs it owns drew some comparisons to Valeant Pharmaceuticals, a Wall Street darling that turned into a nightmare. Also, as public scrutiny of drug price hikes grew during the Presidential campaign, the stock was flagged as one that was at high risk should lawmakers try and do something about the issue.
But the short sellers have become much more vocal about their attacks against Mallinckrodt this year. An early short-seller, Citron Research’s Andrew Left has questioned the efficacy of its blockbuster drug, called Acthar.
Kynikos Associates founder Jim Chanos meanwhile has been focusing on Acthar’s distribution system. To sell Acthar, Mallinckrodt relies on pharmacy benefits managers. The largest of these is Express Scripts, and — through various subsidiaries — it helps sell, distribute, and provide patient assistance for Acthar.
The risk to Mallinckrodt is that this is the kind of relationship has legislators in Washington talking on both sides of the aisle as they try to figure out how to lower the price of drugs. Critics worry that, since pharmacy benefit managers take a cut from drugs that make it to their clients, they’re incentivized to pass along more expensive drugs, not cheaper ones.
Mallinckrodt has responded to the attacks, by noting that Express Scripts isn’t its only distributor and that it has trials underway to demonstrate the efficacy of Achtar for uses other than infantile spasms.
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