Friday, October 19, 2012

400 Patents and a Big Bankruptcy

"I'll be broke by then" Stan Ovshinsky

Stan Ovshinsky passed away this week. With over 400 patents to his name, he transformed and enabled the markets for solar panels, flat panel TVs, CDs, computer batteries, electric cars and so much more.

His incredible inventions provide us with another window into the great challenges of converting early stage research into profit.

I've provided much detail below, but the short version: he built a company that for 50 years lost money and was liquidated in July after failing to meet its obligations to over $250 million in convertible debt.

My take on all this is that translational research is a public good and financing it through equity markets will continue to prove problematic. But read on and decide for yourself if it could BE different.

"In 1944, Ovshinsky opened his own machine shop and soon had his first invention, a high-speed automated lathe.

In 1952, he moved to Detroit to become director of research for the Hupp Corp., an automotive and defense supplier. During the day, he worked on automatic tracking systems for tanks; at night, he studied the physiology of the human brain.

Three years later, Ovshinsky presented a paper he wrote to Ernest Gardner, the chairman of the department of anatomy at Wayne State University, on how the way the brain processes and stores memory could be mimicked to make better automated machinery. Though Ovshinsky had no college schooling, Gardner asked him to join his research team; he did so and stayed until 1964.

In 1960, Ovshinsky founded Energy Conversion Laboratory in Detroit with $50,000 in savings to develop more efficient ways of creating energy and to make better batteries and electronic switches.

That soon morphed into a wide variety of research projects, including solar photovoltaics, hydrogen storage, batteries for electric vehicles, better small batteries for consumer products and computer memory storage. ECD ended up with some 400 patents, with nearly every battery maker in the world now licensing one or another.

After Bob Stempel left General Motors Corp. as chairman in 1993, Walter McCarthy, the former CEO at Detroit Edison Co. and a longtime ECD board member, helped recruit him to ECD. He would eventually assume the position of CEO and chairman.

Ovshinsky had a history of big-name members of his board, including James Birkenstock, a vice president at IBM generally credited with making IBM a computer company; Jack Conway, a Cabinet member of both the Johnson and Kennedy administrations; Ralph Leach, former chairman of the executive committee at J.P. Morgan and Co. and one of the architects of post-World War II economic policy in the U.S.; Nobel laureate Isadore Rabi, former head of the U.S. Atomic Energy Commission; and Edwin Reischauer, former U.S. ambassador to Japan.

ECD critics said that while the board members had impressive résumés, they were enamored of Ovshinsky and too often served as a rubber stamp for his varied endeavors.

By the mid-2000s, a more independent board was in place, one determined to end years of red ink. The company had only a few profitable years in nearly half a century, its first coming in 1992 and then only because a lawsuit by disgruntled shareholders forced the company to sell a profitable business unit, Ovonics Imaging Systems, to Detroit Pistons owner Bill Davidson.

On Sept. 1 2007, Mark Morelli, took over as CEO with a mandate to focus ECD on marketplace realities and figure out something the company could make and sell at a profit.

Morelli concentrated on the solar roofing materials made by the United Solar Ovonic LLC subsidiary. The plan was to sell huge volumes of flexible roofing material to large construction projects in Europe that were subsidized by governments eager to support green projects, particularly in France and Italy.

For a few months, it seemed as if ECD’s much vaunted potential had become reality. Orders soared, the company began turning a profit and the stock, which traded at $25.91 when Morelli took office, soared to a high of $83.33 on June 23, 2008. The company built new plants in Greenville and Battle Creek to keep up with demand.

And then the recession hit, government subsidies ended, orders plummeted and red ink began flowing. Morelli was terminated last May; in November, ECD suspended manufacturing and cut its workforce by 900. It was trading last week at less than 25 cents a share."

Paraphrased from Crain's Detroit Business, 1/2/2012, Vol. 28 Issue 1, p0016-0016, 1p:

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