One of Wall Street's most hated drug makers is tanking after getting bashed by an ally

Andrew leftBloomberg screenshotAndrew Left, founder of Citron Research

Mallinckrodt Pharmaceuticals is getting crushed after executives at one of its key distributors were cited bashing the company’s blockbuster drug.
The comments were made by senior executives at Express Scripts, which distributes Mallinckrodt’s top selling drug called Acthar.
I don’t think it’s a very great — it’s a pretty poor drug with a very limited need,” said Everett Neville, an Express Scripts Senior Vice President said on a call hosted by Citigroup analysts.
The comments were first highlighted in a report by short-seller Citron Research. Mallinckrodt shares are down more than 8% after Citron published a note on the comments, and fell to their lowest in the four years they have been publicly traded.
Here’s more from Neville: I think Steve [Miller, Chief Medical Officer Express Scripts] and I both would agree, and I think everybody in our company would agree, that the product is vastly overpriced for the value.”

Miller did agree.

“If you look at the data, the indications for the drug are really – while it had, in the compendium, it’s listed under a lot of indications, its real use should be very, very limited,” he said. “It’s an old drug. There’s better products in the marketplace and so we’re going to continue to be very vigilant in our utilization management.”

Express Scripts is a pharmacy benefit manager, and the distributor of Acthar — a drug that has become one of the top 20 most expensive drugs for Medicare.
Its “murky” relationship with Mallinckrodt has garnered it attention from other short sellers too.

We’ve written about the issues for Acthar and the risks they pose to Mallinckrodt shareholders before.
In summary: the drug is old enough that it predates the kind of FDA approval we see today. Its primary indication is for infantile spasms, but it’s also marketed as a treatment for 19 indications that cost Medicare — a program for the elderly — half a billion dollars in 2015.

Who’s is the real customer here, the payer or the drug company?

Pharmacy benefit managers like Express Scripts, the largest one in the country, are supposed to help keep prices down. However, critics say that since they get a cut of every prescription they sell, they are incentivized to do the opposite.

On the call Express Scripts claimed that it doesn’t even make that much money off of Acthar.

We should note that the comments were made in May but went unnoticed because in a transcript of the call the drug being discussed was spelled “Aksar.” The company confirms that they were talking about Acthar (and we can confirm there is no other drug called Aksar).

Express Scripts executives said they make more money blocking clients from buying Acthar than they do distributing exclusively through its subsidiaries, CuraScripts and Accredo Health.

“I know that there’s some talk about rebates and — but I will tell you the rebate on this product is a very low percentage rebate. The vast majority of claims are not even rebate eligible because our criteria, it is so far beyond what is allowed to rebate. And, you know, we are talking a total rebate here probably total rebate, something — we’re running the numbers, but preliminarily I’d give it about $US10 million total rebate, give or take a few million, which means the Express Scripts keep on the rebates, just using our normal 11%, puts it at about $US1 million,” said Neville.

Express Scripts representatives said that Neville was quoting a “ballpark” figure and could not give Business Insider a more precise number. Either way, if it selling an admittedly bad drug doesn’t make the company much money, why sell it?

What is Acthar actually worth to the company? It’s unclear, but distributing the drug and taking a cut isn’t all Express Scipts does. Express Scripts also handles any patient assistance reimbursement for the drug through another subsidiary called United BioSource.

United BioSource features heavily in famed short seller Jim Chanos’ presentation about Express Scripts and Mallinckrodt last month, where he called their relationship a “murky alliance.”

“UnitedBiosource ensures reimbursement of Acthar, helping to eliminate the individual’s share of Acthar cost and bypass the other formulary restrictions other PBMs may enforce,” his presentation said.

Patient assistance programs across the pharmaceutical industry have been criticised for their assistance programs. The Justice Department and Attorney Generals around the country are investigating them, and they have caught the attention of powerful legislators like Sen. Elizabeth Warren (D-MA) and Sen. Claire McCaskill (D-MO).

Express Scripts had no comment on whether or not it has communicated concerns or discussed changing its relationships with Mallinckrodt. Mallinckrodt had no immediate comment for this story.

If any of that changes, we’ll let you know.

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