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发帖数: 331 | 1 https://blogs.sciencemag.org/pipeline/archives/2020/08/03/that-kodak-deal
That Kodak Deal
By Derek Lowe 3 August, 2020
Many people have been wondering what’s going on with the announcement by
the Trump administration that Kodak has been contracted to produce
pharmaceutical APIs here in the US. Let’s line up some of the public
statements about all this first, and then take a closer look. Here’s the
press release from Kodak after signing a “Letter of Interest” for a $765
million dollar loan for the deal. They state that:
Once fully operational, Kodak Pharmaceuticals will have the capacity at
Eastman Business Park to produce up to 25 percent of active pharmaceutical
ingredients used in non-biologic, non-antibacterial, generic pharmaceuticals
. . .
The government’s side of this is to be found here, at the US International
Development Finance Corporation. Now, you may not have heard of the DFC
before, but we’ll get to that in just a bit. Their release says that:
The project would mark the first use of new authority delegated by President
Trump’s recent executive order that enables DFC and the U.S. Department of
Defense (DOD) to collaborate in support of the domestic response to COVID-
19 under the Defense Production Act (DPA). . .Today, Kodak is expanding its
traditional product line to support the national response to COVID-19 by
bolstering domestic production and supply chains of key strategic resources.
. .DFC’s loan will accelerate Kodak’s time to market by supporting
startup costs needed to repurpose and expand the company’s existing
facilities in Rochester, New York and St. Paul, Minnesota, including by
incorporating continuous manufacturing and advanced technology capabilities.
Kodak’s current CEO Jim Continenza was joined at the ceremony by DFC head
Adam Boelner, White House Trade Director Peter Navarro, Rear Admiral John
Polowczyk (of the White House Supply Chain Task Force) and Deputy Sec. of
Defence Peter Norquiest. Said Continenza:
“By leveraging our vast infrastructure, deep expertise in chemicals
manufacturing, and heritage of innovation and quality, Kodak will play a
critical role in the return of a reliable American pharmaceutical supply
chain”
Kodak’s Chemical History
OK, that lays the foundation, I’d say. What happens when you dig beneath
the speeches and the press releases? Kodak’s history with film (and for a
time digital) photography is well known. But as for chemicals, George
Eastman himself got into the business in the 1920s so he could source his
own materials. My maternal grandfather, as it happens, moved to the re-built
town of Kingsport, Tennessee to be one of his employees. The company
started to sell to outside customers, and Tennessee Eastman became a major
producer in the fine chemicals business (making, for example, an awful lot
of RDX explosive during World War II on government contracts). The Eastman
chemicals business, though, was spun off in 1994 because it was seen as a
low-margin business compared to film, but is now (by revenue) about ten
times bigger than Kodak. When people think of Kodak and fine chemicals, more
likely than not they’re mixing them up with Eastman in their mental
registers.
And there was a pharma component at one time. Kodak bought Sterling-Winthrop
pharmaceuticals in 1988 for $5.1 billion, in a deal that can only be
regarded as disastrous. Six years later, they sold the prescription drug
business to Sanofi for $1.675 billion and the OTC business to SmithKline
Beecham for $2.925 billion. You will immediately notice that half a billion
dollars evaporated along the way, and that’s not counting the losses Kodak
sustained during the intervening six years. No, it is safe to say that Kodak
does not have a glorious pharmaceutical history. Ex-Sterling people were
scattered all over the drug industry after this debacle, and the ones I’ve
known generally seemed to believe that you could not have hired a gang of
saboteurs to do a more thorough job of destruction than what Kodak
accomplished.
But that Kodak is not the one we see before us today. they’re not an R&D
company any more, for the most part. The company’s stock lost over 99% of
its value from 1997 to when they went through a bankruptcy in 2012, and they
emerged a smaller firm in every way. This 2011 article comparing the
fortunes of Kodak and Eastman in the years after the split mentions that
Kodak’s research spending that year was all the way down to $321 million –
well, it was down to $42 million in 2019. President Trump’s remarks that
he had reached “a historic agreement with a great American company” just
serve to show how out of touch he is – Kodak is a long way from being even
in the Fortune 1000. I mean, this is the outfit that announced in 2018 that
they were now a big cryptocurrency player, complete with a Kodak-logoed “
Kashminer” Bitcoin-mining device, a harebrained scheme that the SEC put the
brakes on rather quickly.
Currently, it’s hard to tell how much of Kodak’s business comes from fine
chemical manufacturing itself, although it isn’t much. Their most recent 10
-K form breaks it down only as far as “Film and Chemicals” (see Note 15 at
that link). That segment comes in at about 13% of revenues, but it also
includes industrial film for making printed circuit boards and the good ol’
professional and consumer film businesses. Apparently one customer of the
latter accounts for 20% of the revenues of this whole category, so that
revenue isn’t coming from chemical sales. And after listing those, the
report says that this category “Includes related component businesses:
Polyester Film; Solvent Recovery; and Specialty Chemicals“, so chemical
production per se is basically the last thing on the list, for what that’s
worth. The terms “pharmaceutical”, “drug” and “API” appear nowhere in
the filing, nor in their 10-Q for the first quarter of this year. I conclude
that the company has basically no business in making pharmaceutical APIs at
present. They don’t appear to have any revenues from cryptocurrency either
, in case you were wondering.
They do, though, have speciality chemical manufacturing in Rochester, and
well-known chem-blogosphere guy Chemjobber has mentioned their presence at
trade shows and his knowledge of their business. The people who jumped on
the idea of Kodak as a pharma manufacturer because “they’re a camera
company” are wrong – as mentioned, it’s not a huge part of their
business, but they do have capacity and they are actively engaged in fine
chemical manufacturing. There are other reasons – plenty of them – to
wonder about this deal, but the basic Kodak-making-chemicals part is not the
place to start. Making pharmaceutical ingredients is another sort of
business, of course, with a very different regulatory environment, but Kodak
can indeed make chemicals. That said, the mention of a manufacturing
facility in St.Paul is interesting, since no such operation is listed in the
company’s most recent annual report (see Item 2, Properties). The Kodak
Polychrome Graphics business has a footprint in Minnesota, but I can’t find
anything about chemical manufacturing there. Or not yet?
How Many APIs? And How Much?
So let’s ask a broad question: how many APIs come from foreign suppliers,
and in what volume? It’s actually a very difficult question to answer,
because there are a lot of suppliers out there, many of whom are (at least
at times) middlemen for yet other manufacturers. We saw this in action
during the sartan contamination story, when it turned out that material from
a single supplier could show in various places. The companies involved know
who they’re buying from, but that could (and does) change as market
conditions change, and they don’t have to tell you about it, either.
Pharmaceutical supply chains can be rather convoluted, with one ingredient
in a given pill being made partly over here and finished off over there,
combined with other ingredients from totally different sources, with the
whole thing being mixed up and turned into tablets in yet another location.
Here’s a good C&E News article on the foreign and domestic API situation,
and it features Janet Woodcock basically throwing her hands up in the air:
“We cannot determine with any precision the volume of API that China is
actually producing, or the volume of APIs manufactured in China that is
entering the U.S. market, either directly or indirectly by incorporation
into finished dosages manufactured in China or other parts of the world”
That’s about the size of it. Problem is, when you talk about “25% of the
ingredients”, do you mean by number of total APIs? By volume? By revenue,
even? It’s just not clear, and that makes a fuzzier situation even fuzzier.
I was hoping to get some back-of-the-envelope estimates going, but it’s
not possible at present.
But let me highlight another factor: a finished API is going to be made
from something else, of course. Where do you get that something else, and
how far back in the synthesis will you be going? Anyone who knows industrial
chemistry will tell you that you’re going to bang into issues of Chinese
and Indian supply, especially the former. Let’s take hydroxychloroquine,
which Kodak has mentioned specifically, as an illustrative example. I
continue to believe that it’s basically useless for coronavirus patients,
but it is definitely a needed generic drug (I know someone who just started
taking it for lupus, for example). How do you get hydroxychloroquine?
Well, you get it from 4,7-dichloroquinoline; the last synthetic step is an
amine displacement. Where do you get 4,7-dichloroquinoline? It’s in a lot
of catalogs, but remember, almost all of those are people who are selling
you material that they bought from somewhere else, which as far as I can
tell, is somewhere that is not in the United States. There are a lot of
places to source chemicals – here’s one web site that will give you the
idea. If you click “Manufacturer” and “ton” to narrow things down, you
will still see 3 4.7-dichloroquinoline sources listed as “United States”:
Crescent Chemical, Ivy Fine Chemicals, and Kingchem. But from what I can see
, Crescent (out on Long Island) is a distributor for other producers – I
can’t see any sign that they have domestic production facilities that will
make you tons of dichloroquinoline. The only listing they have for it on
their website is in 25-gram bottles from Millipore-Sigma. Ivy (in Cherry
Hill, NJ) does list dichloroquinoline, but they also look like they are
going to contract that order out to “one of their well-established partners
all around the world, as they say. And while Kingchem has their own
facility for that sort of thing, it’s in Liaoning. So you can technically
produce hydroxychloroquine right here in the good ol’ USA, but unless you
reach further back you’re going to be producing it from starting materials
that you buy overseas and very likely from China.
There are indeed manufacturers of APIs here in the US, don’t get me wrong.
In fact, here is the the Bulk Pharmaceuticals Task Force, an industry group
of API manufacturers that looks into supply chain issues like this. Kodak is
not a member, presumably because they don’t really have any API business,
as mentioned. So why, if you are talking about giving out huge loans to
encourage such manufacturing, would you not turn to companies that are
already doing it?
The Kodak Loans
That takes us back to the subject of the Kodak deal itself. There are a
number of people who have been digging into this, for example, this article
at the stock-analysis site Epsilon Theory (h/t “Diogenes” on Twitter, nom
de guerre of a well-known short seller). This is when such bears come in
handy – they have an incentive to look at the bad news, and I’ve always
thought that is a useful bit of seasoning to have in the broader world of
stock promotion.
One thing that the Epsilon Theory folks draw attention to is the source of
this loan money. The DFC is supposed to be in the business of loaning money
out for projects in lower- and middle-income countries, not doling out the
cash here in the US. But on May 14, the president signed an executive order
mandating that the DFC look into domestic supply chain issues relating to
the coronavirus epidemic, so here we are. As with the recent stimulus money
from the Treasury, the worry here is that this has the potential to be used
as a piggy bank to reward friendly businesses and donors – and before any
fans of the current administration jump on that, let me note that this is
always the case, with any government agency under any administration, when
it starts to hand out money to private ventures. The books should be open,
because the political and financial temptations are present every time.
How about this time? Well, it’s for sure that the management at Kodak did
extremely well off of this deal. The press has already noted the large stock
and option awards granted just in the last month or so, and you can see
those grants for CEO Jim Continenza, VP Randy Vandagriff, General Counsel
Roger Byrd, and CFO David Bullwinkle via their recent SEC filings. This
financial blogger believes that Kodak was already signaling by these moves
that something big was coming, and interviews with the CEO and other seem to
fit with that timeline. To say the least, awarding your corporate insiders
big whacking stock and option grants in advance of a hugely favorable
government contract is a bit. . .off. As that post notes, the timing of
these grants was quite different from Kodak’s usual awards, almost as if
they were rushing to meet some sort of deadline. The grants were option-
heavy (not the company’s past practice) and had very aggressive strike
prices, well above Kodak’s normal trading in the $2 range.
Now, as for that trading, many noticed that the day before this announcement
that Kodak suddenly jumped up on much higher volume. This doesn’t appear
to be illegal trading, though, or at least it doesn’t have to be explained
that way. Local station WROC had a story Monday about an imminent deal,
which was pulled, but not before many people saw it. No, I think that stock
activity that’s worth watching in Kodak is (sadly) entirely legal, and it
has to do with all those grants from a friendly board of directors. All we
know about the political side is Kodak’s CEO saying “We got connected to
the White House and we said we’re trying to bring pharmaceuticals back“.
We also know that Kodak’s largest shareholder (by far) is Southeastern
Management, who must be quite relieved that their position is no longer with
a company that has a fresh “going concern” warning, but instead has had a
gigantic stock leap thanks to a lucrative government transaction. Edit:
originally I had some material here about Southeastern and a connection to a
company associated with someone (Ted Suhl) whose sentence for bribery
President Trump recently commuted. But although these two companies have
almost identical names, one is an Inc. and the other is an LLC, and there is
no relation. I have seen the same mistake made elsewhere on the web – the
more famous Southeastern Asset Management (a large investment firm from
Memphis) is indeed a big Kodak shareholder, for sure, but has no connection
to Ted Suhl, friend of Mike Huckabee and beneficiary of Donald Trump.
Let’s keep an eye on this deal, then. Chemically, financially, and
politically. I don’t think, frankly, that it’s some weird or special case
– a lot of stuff like this happens, all the time. But it’s one that
impinges on the pharma industry, and it’s a subject that many of us know
about. So we’ll see. . . |
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