Kudos to Kodak on Finding a Viable Industry to Operate In

July 29, 2020 4:49 PM UTC
Shares of Eastman Kodak are seeing a second day of triple-digit gains as the company pivots to the manufacture of generic drugs.
  • Kodak received a $765 million loan to launch a pharmaceutical division.
  • It could grow to 35-40% of the company in short order.
  • It makes the prospect of another bankruptcy unlikely.

Shares of Eastman Kodak Company (NYSE:KODK) shot up over 200% Tuesday and are up triple-digits again today. Why? Because the company, best known for being in the photography business, has now received a lifeline from Uncle Sam to manufacture drug ingredients at home.

Kodak Becomes a Repatriated Supply Chain Story

The government, via the Development Finance Corporation, provided Kodak with a $765 million loan. That’s an amount of money higher than the company’s market cap before the deal was announced, which explains a big chunk of the rally in shares this week.

Shares have exploded higher over the past two days as Kodak received a $765 million loan to build a drug manufacturing division. | Source: Yahoo Finance

The purpose of the loan is to allow Kodak to develop a new line focused on producing critical pharmaceutical components.

The deal is part of a broader Defense Production Act order designed to ensure that critical items are produced domestically for national security reasons. That order came about as it was revealed that most drug manufacturing came from China. The exact numbers are hard to tell, as even organizations such as the FDA can’t provide a specific answer.

President Trump, who has repeatedly called for repatriating American manufacturing in China, and who had started to see a rise in manufacturing jobs domestically at the start of the year, took a victory lap in a press conference on Tuesday:

Today, I’m proud to announce one of the most important deals in the history of U.S. pharmaceutical industries.  My administration has reached a historic agreement with a great American company — you remember this company; it’s called — from the good, old camera age, the old days — to begin producing critical pharmaceutical ingredients.  It’s called Kodak.  And it’s going to be right here in America.

A New Beginning for an Old Industrial Name

Kodak may be best remembered for being the dominant name in photography, in the days before digital cameras and cell phone cameras.

It may also be remembered for going bankrupt in 2012 and having to restructure. Kodak’s new version has also been on several potential bankruptcy watchlists, but this latest government contract may finally give the company a thriving industry to work in.

While producing generic drugs isn’t necessarily a high-profit-margin business, Kodak will be able to ramp up the volume. Generic drugs make up about 80% of the total drug market compared to branded drugs. Under the Trump administration, the FDA has sought to increase that percentage to keep drug prices down.

Eighty percent of prescriptions are written for generic drugs, allowing Eastman Kodak to build up sales volume quickly in this space. | Source: Bloomberg

Even better, it puts the company in a space where there’s far more consistency of profits compared to the old photography business. The government doesn’t expect its money back for 25 years, so that’s plenty of time for a rapid buildup now, with a likely early payoff within a few years.

Time will tell how the company will fare as it builds a new division from scratch. Judging from the reaction by the stock market, this looks like a runaway win for existing shareholders.

Once it’s up and running, this old giant and potential bankruptcy candidate may become one of the top performers of the next decade, and investors may want to consider investing, once the news-headline hype dies out.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.

Sam Bourgi edited this article for CCN.com. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

Last modified: July 29, 2020 7:33 PM UTC

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@AndrewTPacker

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