This article is a follow up of one written on August 9, on The Chairman's Blog titled "Eastman Kodak holds a digital patent yard sale while reporting financial results"

Last week the Rochester, NY based firm reported a severe decline (27%) in revenue) but with Quarterly Earnings improving for its Commercial and Consumer segments by a combined total of $82 million while reporting a net loss of $299 million, compared to $179 million in the second quarter of 2011. On a good note was its cash balance of $1.257 billion.

However, the firm was looking to the auction of its 1,100 patents to lift it out of bankruptcy and to bolster its cash reserves as it flushes out its operations further with expense reductions. This was viewed as a key component in their ability to not only emerge, but the continue on as a company. Reported on multiple media sites was the projected value of $2.2----$2.6 billion of the portfolio of digital imaging patents. Reportedly the initial bids from two potential buyer groups, each reportedly led by Apple, Inc. (AAPL) and Google, Inc. (GOOG), are said to have come in between $150 million and $250 million.

Now as the auction period is extended, analysts do not see a positive picture emerging. If the amount of net proceeds from the auction is significantly lower, the company may have to file a new or significantly altered plan to emerge from chapter 11 proceedings. With a current quarterly loss as reported at nearly $300 million, the company could be in much worse financial condition than earlier perceived.

Even with expense reductions, the losses will be tough to overcome in the next 12-18 months. This also does not take into consideration how research and development and new product offerings will be affected. The core reason that the 131-year-old company has struggled and fallen into a dire financial in the first place, was due to its inability to transform itself into a digital company from being a film photography company. New and imaginative products are needed to stay afloat in the ever-fast paced world of digital technology. Those products need funded in order to emerge. Eastman Kodak may survive but has a tough road ahead of it to do so. Based on recent news developments and the markets declining response of the past few days events, it looks like Eastman Kodak may be company of the past and not a forward thinking firm to invest in.

 As any experienced CEO will acknowledge, you can never save a company by cutting expenses alone. 

Republicans, with their newly found status in the U.S. Congress, and now democrats alike are focused on reducing the budget deficit and doing so in a dramatized manner for political gain along the way.   Perhaps with all good intentions, but you can only reduce expenses to a point.  Without sufficient revenue growth and expansion, such reduction is a failed effort. The continued economic recession has front row in the lives of all Americans.  While long-term deficits matter, they are long-term.  Anemic Gross Domestic Product GDP growth rate is what matters today. Increase the GDP growth rate and you produce jobs, tax revenue, and investment. The U. S. real gross domestic product increased at an annual rate  of 2.0 percent in the third quarter of 2010, (from the second quarter to the third quarter), according to the "advance"  estimate released by the Bureau of Economic Analysis. In the second  quarter, real GDP increased 1.7 percent.   China's GDP growth rate is  approximately 9%.

Cutting expenses on a mass level does achieve lower expenditures, but also reduces services to millions of people who are already over their heads in trying to make ends meet.  Unable to live a productive life and pay for the life’s essentials, major cuts in programs further reduce revenue from their taxes had they been working and spending on discretionary items. For some, survival is at stake here. 

A higher GDP growth rate causes revenue, that causes tax revenues, and that causes deficit reduction.

Companies increase their revenue in a variety of ways.  They may invest funds on research and development (R&D), subsequently bringing a product to market and generating new revenue. Other methods include introducing enhancements and variations to existing successful products.  A warm customer is a good customer to re-sell to.  The cost of that sale is far less than new customer development. Yet a third proven method is the fast track way to market share and revenue---company and product acquisitions.   The acquisition of an entire company or a hot upcoming product fuels the revenue hungry parent company.  Expenses and duplication efforts are pared down at the target company, and new revenue netted.

 All of this is American Business 101.

 Where is the public and political discussion about, and plan for real revenue creation?  Cutting taxes at the mid and upper segment of the population in the hope of boistering GDP growth (because people will be spending more) is a wishful and perhaps a long-term idea.  It may have worked in prior years (Reagan’s trickledown plan) but this country’s GDP is too anemic for that now.  The path to balancing the budget and long-term deficit reduction is real revenue increase.

The ideas being presented in today’s discussions are void of these ideas.  Perhaps new taxes on upper income Americans, and significant tax reductions for firms that invest hundreds of millions into the U.S. economy - resulting in jobs, product development, revenue etc. - are the key.

Tax cuts to the masses, decreasing services, and wage freezes are expense reductions, not solid new revenue ideas.  We may have to live with long-term deficits for the next 5 years but the fuel for an economic recovery is new ideas for revenue.

Note:  This essay is also published on blackandwhiteprogram.com

The FDA is smoking…….with ideas

 The Food and Drug Administration (FDA) recently presented its ideas and somewhat of an ad campaign for continued deterrence of smoking.  The primary elements of their campaign ideas consist of requiring cigarette makers to print bold and extreme graphic health warnings on cigarette packages and billboard advertisements. Their newfound power of regulating tobacco (The Family Smoking Prevention and Tobacco Control Act) has prompt these ideas.

The nine messages

These messages would consist of nine new warnings in text accompanied by color graphics depicting the negative health consequences of smoking.  The warnings are:

WARNING:  Cigarettes are addictive.

WARNING:  Tobacco smoke can harm your children.

WARNING:  Cigarettes cause fatal lung disease.

WARNING:  Cigarettes cause cancer.

WARNING:  Cigarettes cause strokes and heart disease.

WARNING:  Smoking during pregnancy can harm your baby.

WARNING:  Smoking can kill you.

WARNING:  Tobacco smoke causes fatal lung disease in nonsmokers.

WARNING:  Quitting smoking now greatly reduces serious risks to your health.

 The ideas are at the proposal stage as unveiled to the public. The FDA is seeking public comment on the proposed rule from Friday, November 12, 2010 through Tuesday, January 11, 2011. The agency is proposing that the health warnings appear on the upper portion of the front and rear panels of each cigarette package, and comprise at least the top 50 percent of these panels.

In cigarette advertisements, the FDA requires that the warnings appear in each ad, and occupy at least 20 percent of the advertisement including color graphics. Yes, color graphics depicting the harmful affects of tobacco use.

 So is this a good idea?  Obviously the intentions are noble and valid.  Tobacco use is harmful. Hands down, proven over and over again. But where does it end?  This regulation issue happens to be about tobacco use. There approximately 40 million Americans who use tobacco products. Roughly 260 million do not. 

Do we really want to see graphic images of the effects of smoking?  There are other causes on the streets and on billboard advertisements that come to mind.  For instance, anti-abortion groups and their graphic depictions of fetuses.  Need I say more?   The FDA regulates many products.  Should we expect to see potato chip makers required to post graphics of obese people or overweight babies with their ads due to the obvious negative consequence of eating their product?  The fat content of potato chips contribute to heart disease. How about cheese makers? Americans are eating more cheese than ever and cheese has one of the highest saturated fat content percentages of products consumed in America.  Are we therefore going to see graphic images of grossly overweight people, with heart disease, clogged arteries, etc. on billboard advertisements in the future?

 A picture speaks a thousand words as they say, but to all who experience it, not just a subset of who sees it. Having all of the public experience upsetting images is not productive. The FDA’s ideas for graphic representations may go up in smoke as the public realizes the consequences.

Note: This essay is also published on blackandwhiteprogram.com

Pfizer reported third-quarter profit that exceeded analyst estimates and also confirmed its plans significantly decrease its work force to uplift profits. Profits were 54 cents a share.

Revenue rose 39 percent to $16.2 billion.  This included revenue from Wyeth products, a major firm that was acquired by Pfizer for 68 Billion Dollars and one that the firm is looking to upgrade its business significantly.

 Company officials in a statement raised their earnings forecast for the year to between $2.17 and $2.22 a share when some items are excluded. Pfizer said in August it expected earnings of $2.10 a share to $2.20 a share. Without excluding items, the company lowered the forecast to 84 cents to 94 cents a share from a range of 95 cents to $1.10.

Pfizer reported impairment charges of $1.5 billion related to the $68 billion purchase of Wyeth and a $701 million charge for asbestos litigation for its subsidiary Quigley Company Inc.

Pfizer shares fell 3 cents to $17.59. The shares had increased 3.5 percent in the last 12 months.

The drug Lipitor, Pfizer’s flagshop product of late and world’s top-selling drug with $11.4 billion in sales last year, faces U.S. competition from generic versions in latter 2011.

New acquasations in the making are to buy King Pharmaceuticals Inc. for $3.6 billion to acquire a painkiller franchise and the purchase of Biocon Ltd. for $200 million to make insulin products in India.

Slashing jobs for profit

Pfizer has been reducing costs and said it’s on schedule to fire 19,000 employees, close 8 manufacturing plants and shut 6 research centers as it works through it plans for the Wyeth purchase.  It is reportedly bracing for the lost revenue associated with Lipitor as patent protection expires.

Since 2009, Pfizer had fired about 40,000 employees

So, are they a good buy?   As long as Pfizer successfully pursues its hunger for new revenue-drug-firms acquisitions, and continues to ruthlessly slash jobs and costs, they appear to have a winning formula.

 However in August of 2010, Judge Royce Lamberth of the U.S. District Court approved a temporary injunction of federally funded research involving embryonic stem-cells on the grounds that it violates the 1995 Dickey Wicker amendment, which prohibits federal funded research in which a human embryo is "destroyed, discarded or knowingly subject to risk of injury or death”. The injunction halted federally funded embryonic stem-cell research sending the industry into a swift descent of a roller coaster ride, and severely rattling investors.  Companies and scientists who have significant roles in the embryonic stem-cell research industry worked furiously to determine if their research projects were affected by the injunction, which had implications on their funding status and the value of their investors’ stock.

 The upswing of that ride emerged recently as the ban issued by Judge Lamberth was over turned.   While this news appeased the industry, one has to wonder what mid-term elections will bring to the future for the industry. If Democrats lose control of either house of Congress, Republicans bent on overturning ‘Obamacare’ could send the stem-cell coaster ride back on a downhill path, leaving investors white knuckled again and braced for a steep decline.

 If you’re an investor in the embryonic stem cell industry do you just take Meclizine to  ride out the motion sickness?   The answer is, you don't have to. 

With some qualified research of your own, you may be able to determine what companies, and respective stocks, are not subject to the roller coaster of politics within the embryonic stem cell research industry, and whose fortunes and research funding are not affected by the swing of a pen of a president or the prevailing party in Congress.   The key is to look for firms that use new technology designed to harvest stem cells without destroying the fetus therefore avoiding funding and political controversies, and judicial court rulings. These “embryo-safe” stem cells may be the key to advances in research and cell harvesting which lead to life saving measures in the years to come (for adults and children alike), therefore fueling the growth of companies, and potentially their stock price.

 Another potential safeguard to avoid a white knuckle investing experience is to invest with firms who do not rely on government funded research for their product development.  This funding information is readily available in any company’s investment prospectus or through inquiries to their investor relations’ departments.