July 29, 2010

As our readers know, we have a long term short thesis on $PBMs. Our thesis that in the long run $MHS and $ESRX risk disintermediation and more transparency in pricing has strengthened based on earnings this week.  We are adding to our long term short position on $ESRX right here at $44.80 and will add more based on technicals if the stock goes higher.

$MHS (Medco Health) earnings this week shows that our long term prediction is proving correct. Its margins fell to 6.35% as we had predicted compared to consensus of 6.8%.  $ESRX (Express Scripts) managed to maintain its gross margins for the quarter, but a careful review shows that margins are likely to come down in the coming quarters.