Famed short-seller Jim Chanos of Kynikos Associates is betting against drugmaker Mallinckrodt (MNK) and drug-distributor Express Scripts (ESRX).

During a presentation at the SALT Conference, Chanos contended that the companies have a “murky alliance” that may lead to “performance-enhancing drug prices,” but investors may “feel the blues.”

Chanos, who bet against Valeant Pharmaceuticals (VRX), described last year as a “watershed moment” in the specialty pharmaceutical space and pharmacy-benefit managers (PBMs). That’s because Congress and the public woke up to the problem of drug pricing, he explained. Importantly, it generated a rare agreement from both sides of the aisle. Even President Trump has referred to prices as “outrageous,” the presentation noted.

Mallinckrodt

Mallinckrodt’s drug Acthar, an injectable hormone used to treat autoimmune disorders and infantile spasm, is the “epitome of excessive drug pricing,” according to Chanos.

Acthar drug was approved by the FDA in 1952, but it’s seen its price per vial shoot up to more than $35,000 from just $40 in 2001.

Mallinckrodt paid close to $6 billion in 2014 to buy Questcor, the company that had purchased the rights to Acthar in 2001 for about $100,000. He added that Actor was unprofitable until Questor increased the price per vial to $23,000 in 2007 from $2,000. Then, in 2013, Questcor purchased Synacthen, a synthetic derivative of Acthar, for $135,000 in what he says was a way to limit competition for Actor.

Acthar accounted for approximately 31% of Mallinckrodt’s revenues in 2016 and 94% of its earnings before interest and taxes (EBIT).

“This drug is the company, and it’s important to know that,” Chanos said.

Express Scripts

What makes this interesting is Mallinckrodt’s relationship with their neighbor, a company called Express Scripts.

Express Scripts is the largest PBM. PBMS have been viewed as a primary source for drug price inflation. They make money off their rebate system, which incentivizes high drug prices.

Numerous agencies have investigations into ESRX’s PBM practices, including the Attorney General of New Jersey and the US Attorney’s Offices of Massachusetts, Southern New York and Rhode Island.

“The 10-K reads very ominously,” Chanos said.

“But even worse, for those of you who know the Valeant story, and I expect a number of you do, as we dug deeper we found some disconcerting aspects between the two companies.”

Express Scripts has three subsidiaries: United BioSource, which runs ESRX’s patient assistance programs, including for Acthar; Accredo Health an internal mail-order specialty pharmacy that sells Acthar; and CuraScript which is an exclusive distributor of Acthar.