Kodak used to be king when it came to cameras and film.
Kodak's got the instant camera y ou've been waiting for.
Instant color photographs, that's what the handle's for.
So carry on.
In the 1970s, Kodak had a near monopoly of the U.S.
photography market, accounting for 90 percent of film and 85 percent
of camera sales. Kodak's share price peaked around the mid-1990s, but
shortly after, it fell off a cliff.
The move to digital photography in the early 2000s hit the company
hard. Ironically, Kodak actually invented the first digital camera
back in 1975.
But at the time, film was the company's golden egg and executives
were hesitant to change.
Most of the rank and file of the company had built their careers on
being really good at chemistry, on developing chemical processes and
advancing the chemical photosensitive photography.
And so a future that didn't include them was a really tough pill to
swallow. By 2012, Kodak was a shadow of its former self.
Eastman Kodak filed for bankruptcy today in a bid to survive a
liquidity crisis.
The company has had years of falling sales and the decline of its
film business. Kodak emerged from bankruptcy in September of 2013 as
a much leaner company, mostly focused on high-speed digital printing
technology and flexible packaging for consumer goods.
After a short stint in phone and tablet making, Kodak raised eyebrows
in 2018 after it announced its foray into cryptocurrency.
Kodak, the once premiere humbled camera company, is the latest to jump
on the crypto craze. Kodak today announced a partnership with WENN
Digital to launch a, " major block chain initiative and
cryptocurrency." The announcement gave Kodak stock a temporary boost,
but as the novelty wore off, so too did the stock market's
excitement. Now, as coronavirus sweeps across the world, Kodak has
another opportunity to revive its business.
With this new agreement, m y administration is using the Defense
Production Act to provide a $765 million loan to support the launch
of Kodak Pharmaceuticals.
Kodak will now produce generic, active pharmaceutical ingredients.
The film and photo industry actually developed many of the analytical
chemistry techniques needed to make those very high purity chemicals.
And so applying those expertise to pharmaceutical manufacturing is a
strong application of that of that expertise.
But the company is already hitting some major speed bumps.
The $765 million government loan falls under the Defense Production
Act, a law that allows the president to control the production and
distribution of scarce materials deemed "essential to the national
defense." Kodak was already making hand sanitizer, face shields and
parts for ventilators in the fight against Covid-19, but this loan
would have Kodak manufacturing critical pharmaceutical components
that have been identified by the FDA as essential but have lapsed
into chronic national shortage.
More specifically, under this loan, Kodak would make key starting
materials known as KSMs and active pharmaceutical ingredients, or
APIs for essential drugs at the company's existing manufacturing
facilities in Rochester, New York.
KSMs are key starting materials.
So that's the first step before you even start to make an API.
And because we're talking about oral, solid drugs, in the simplest
words, they chemicals that you start with and then you manufacture
active pharmaceutical ingredients and then you make the finished
goods where the API is converted into a form that can be
administered. The current situation has brought a lot of awareness to
how vulnerable and how outsourced and how fragile the pharmaceutical
supply chain is.
So the idea to domesticate production of a lot of these drugs came
from taking a hard look at where all these drugs come from due to the
demand shock brought on by the pandemic.
However, once that production is in place and the capacity is
domestic, it should be able to make drugs for all kinds of different
things. Kodak says it's already making key starting materials.
The key starting materials we're doing today, t here's regulated and
unregulated. We've been making the unregulated ones for other
pharmacies , we can't disclose who they are, the last couple of
years. So, we are doing this today.
And then we'll get certified to do the regulated as we build up the
facilities. The U.S.
currently depends on China for the majority of its pharmaceutical
ingredients. We do produce some API in the U.S., but it's largely at
higher cost than can be produced in China and India.
And that's the reason why U.S.
production for the generic industry has declined.
But if the U.S. can bring API production home, there's lots of money
to be made. The global API market size in 2018 was around $164
billion. By 2026, that market is expected to grow to $261 billion.
A senior government official told CNBC that KMS production currently
makes up about three percent of Kodak's revenue.
As part of the deal, Kodak is expected to eventually produce as much
as 25 percent of the country's ingredients for generic
pharmaceuticals. On the day the deal was announced, Kodak's chief
executive reportedly said that he expects pharmaceutical ingredients
to make up 30 to 40 percent of Kodak's business over time.
But the loan is still far from a done deal.
In its latest quarterly earnings report, Kodak reiterated that the
loan has not gone through and that it's just a letter of interest,
which means it's non-binding.
Now, government scrutiny over the deal is putting Kodak's future as a
drug maker into question.
Kodak's potential deal for a government loan to help make generic
drugs is being put on hold.
In a tweet late Friday, the International Development Finance
Corporation, a US government agency, says the recent allegations of
insider trading raise serious concerns and the deal will not proceed
until they are cleared. The SEC is reportedly in the early stages of
a probe, and Kodak said Friday it is conducting an internal review.
Those Kodak shares down 40 percent in the pre-market.
The initial loan announcement sent Kodak stock soaring and the
company's valuation skyrocketing.
The valuation of the company before the announcement was something in
the neighborhood of $100 million, $112 million.
After this announcement, and when the stock at one point was a $60
stock, this was a $4.5 billion company.
For a stock that was basically flatlined over the past two years,
Kodak's spike raised eyebrows, both from investors and officials.
And what's even more puzzling is that Kodak stock saw massive
movement a day before the government deal was announced.
A day before the public announcement, the company sent the press
release to a few media outlets in Rochester, New York, where Kodak is
based. The company said that it meant for that release to include an
embargo time. But since it didn't, journalists published the
information. The stories were pulled shortly after, but by that
point, the cat seemed to be out of the bag.
Trading volume of Kodak shares jumped from about 117,000 shares on
July 20th, to about 1.6 million shares on July 27th, the day before
the announcement. The incident prompted an SEC investigation into
Kodak's disclosure of the loan.
But questions are also swirling around Kodak's executive compensation
practices and possible insider trading.
Filings show that the executive chairman, as well as one other board
man, bought stock about a month prior to the announcement of that
deal, when negotiations were already underway.
Additionally, the executive chairman was granted 1.75 million
additional options that can be converted into stock the day before
that deal was announced.
So some, including Senator Warren, have asked for an investigation
into the timing of the announcement, as well as the timing of the
compensation. In an emailed statement to CNBC, a Kodak spokesperson
said Mr.
Continenza has regularly purchased Kodak shares with his own money
since joining the company in 2013.
Because he strongly believes in the long term success of the company,
Mr. Continenza has purchased shares at nearly every available window
in which he is eligible since he joined the company.
He has not sold a single share of stock during his time at Kodak.
The timing seems extraordinary.
Obviously, on a day-over-day paper gain, we're talking about tens and
tens of millions of dollars that were gained by the executive
chairman based upon where the stock moved to and even where the stock
sits today. Amid the controversy, President Trump is also now
distancing himself from Kodak.
I wasn't involved in the deal.
The concept of the deal is good, but I'll let you know.
We'll do a little study on that.
We'll find out if this if there is any problem.
We'll let you know about it very quickly.
But I wasn't involved in it.
At first glance, choosing a camera company to produce pharmaceuticals
may seem odd, but experts say it's not that far-fetched.
In fact, there's precedent.
Fujifilm has been Kodak's main nemesis in the photography space
forever, and they successfully pivoted into pharmaceutical
manufacturing many years ago.
And now they are a prominent manufacturer of both precursors and
pharmaceuticals in the United States, t oday.
When an outbreak of Ebola ravaged Africa in 2014, Fujifilm produced
Avigan, an antiflu drug, to treat the disease.
Now, Fujifilm has also mobilized in the fight against Covid-19.
In July, the U.S.
government awarded a $265 million contract to Fujifilm to expand the
country's coronavirus vaccine manufacturing capacity at its facility
in College Station, Texas.
At its North Carolina facility, Fujifilm is already working to supply
Novavax with bulk drug substance for a coronavirus vaccine.
Kodak also has some experience in pharmaceuticals.
In 1988, Kodak purchased Sterling Drug Inc., which made Bayer Aspirin
and other pharmaceutical products for about $5.1 billion.
Kodak later sold Sterling to SmithKline Beecham to concentrate on its
core businesses.
Both photography chemical development and pharmaceutical development
is an iterative process where you take a set of known building blocks
and combine them in different arrangements to produce a wide,
combinatoric library of chemicals that you can test either for their
photosensitivity or for their safety and efficacy as a drug.
And so being able to work with many, many combinations of your
starting materials is a key competence of both of those fields.
In addition, both photo and drug chemical development need to be
highly controlled. In fact, Kodak's chemical processes were so
perceptive it even accidentally discovered the U.S.
was testing the atomic bomb.
When the United States tested the first bomb at the Manhattan Project
in New Mexico, s ome of the minute, minute radiation signatures from
the blast in New Mexico made it all the way to their production
facility and essentially ruined a batch of film because their process
was so sensitive and so carefully controlled that they were able to
monitor that. Finally, Kodak also has the space to expand this part
of its business. Our vast infrastructure of Eastman Business Park
includes a wide variety of industrial utilities, including steam,
gas, electric, wastewater treatment, access to 13 miles of rail in
the park, as well as fire safety and security services.
It still remains to be seen if Kodak can get its hands on the
government's $765 million loan, but even if it does, the company
faces several challenges in establishing a foothold in the
pharmaceutical market.
From producing KSMs to producing API is not a big jump, but it
probably requires a different type of toolkit that a company may need
to have in terms of the type of talent that they have in the
manufacturing and R&D department.
When Fujifilm got into the pharmaceutical industry many years ago,
they still had many of their innovative people in photo chemistry
still at the company. And so it would have been a really great idea
for Kodak to do it many years ago as well.
It remains to be seen whether they still have the expertise in their
company to pull it off at this point.
Even for an existing pharma company that makes API or makes products
of one type, for them to go on and venture into making a different
type of product, that requires a bit of a learning curve or that
requires them doing R&D, getting the requisite approvals from the
FDA, making sure that their facility and their manufacturing
processes are CGMP compliant.
And the process to get even a single product approved requires an
individual application to the FDA.
But perhaps the biggest challenge for Kodak will be competing with a
foreign pharma market, where labor costs are cheaper and regulation
laxer. Unless there is a line-of-sight that there's willingness to
absorb that additional cost in order to be self-reliant as a country,
I think that it will be hard to see a lot of players in the industry
jump in. These challenges may be why the government is not putting
all of its eggs in one basket.
A senior government official told CNBC that the idea all along was to
give loans to a number of companies in an effort to bring generic
drug production back to the U.S..