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. . .