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.  The street seems to be justifying a bad earnings report based on the excuse that NextRX synergies have not yet materialized.  In our opinion this is simply a rationalization of bullish analysts to justify their bad call.

Conservative accounts should keep in mind that the street is uniformly bullish on $MHS and $ESRX.  As such we advise maintaining the core position but taking profits on dips and adding on spikes. We have already taken profits on our $MHS position, but will establish a short position again if the stock spikes up.

For our reader’s convenience, an earlier post is repeated below:
We have been short with a very long term perspective on pharmacy benefit managers $MHS and $ESRX. The point of ZYX Change method is all about catching the change ahead of the crowd. Our theory is that in the long term pharmacy benefit managers will be disintermediated and their opaqueness will move their clients to other newer pharmacy benefit managers who provide price transparency to their clients.

Recent earnings from $SXCI support the opaqueness theory.

Now, today following is the news from $WAG:

Delta in talks over prescription drug plan, sources says – DJ (34.39 ) : DJ reports Delta Air Lines (DAL) is in talks with Walgreens for the drugstore giant to offer prescription drugs directly to Delta employees, according to sources familiar with the matter. If the companies signed a deal, it would enable Delta to bypass the pharmacy-benefit-manager model that most major employers use to manage their prescription-drug programs. Delta could then negotiate pricing directly with Walgreen instead of paying a PBM to handle that part of the business in an effort to save on prescription drug costs. It would also be the second time Walgreen has worked directly with a company to supply prescription drugs.

We will continue to add to our short positions in $MHS and $ESRX on spikes up

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