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Female Health Co (FHCO) Transitioning to New Strategy, But Receiving Legacy Business Valuation

Female Health Co (NASDAQ:FHCO) is a BUY with a 18 months target price of $6

Investors should assign a higher multiple as company moves away from lumpy revenue streams

As FHCO diversifies product pipeline, their valuation multiples should rise from government sector norms (12x-15x) to being valued as a consumer business (20x-25x)

Company is preparing to target U.S. female consumers by launching an active sales and marketing campaign within the next 2-3 quarters


LRAD Corp. and Taser Inc., were primarily chosen as a comparison to the Female Health Company because both companies generate cash-flow by dealing with government agencies directly just like FHCO. The next product(s) purchase should logically be in the female reproductive health space and go in conjunction with the FC2. This is what will really take the valuation and multiples to a new level.

FHCO comps

Legacy Business Model and Its Issue

Female Health Company (FHCO) manufactures and sells the only approved FDA and WHO female condom (FC2) on the market. The company has its female condom patented in over 50 countries and the FC2 design is trademarked. The company manufactures the female condom in Malaysia for 25-26 cents and sells its roughly 55 to 57 cents to its 4 main non-government and government clients: UNFPA, USAID, Semina (Brazil), Sekunjalo (South Africa). The company’s business model has historically been building relationships with Health Ministries, local channels and medical equipment/device distributors.  The company’s product has been distributed in over 144 countries and growing. The significant demand for the FC2 comes from developing nations, in particular the African continent. The amount of condoms sold on a yearly basis fluctuates due to the nature of the order sizes (millions of units), whether the company continues to win government tenders and often the political climate of the client country. The order sizes and consistency of orders are not always the same on a yearly basis; therefore revenue may seem choppy from year to year. Regardless of that fact, the company has been profitable and cash-flow positive since 2006 and is currently debt free.

Why Investors are Discounting FHCO

The Female Health Company is a highly undervalued opportunity which has been precipitously oversold for about a year now. The current trading price is roughly in the range of $2.85 to $3.35, this is well off the $7 plus range this stock was trading a year ago and more than 40%-50% less than the $5.60 the stock was trading at when the company announced it would no longer pay out its quarterly dividend on July 14th, 2014. Most investors are highly sceptical when a small cap company suddenly stops paying dividends after paying them for 4 years straight.

The second reason why most investors have discounted the company is because the company artificially inflated net income and earnings per share by bringing down the Net Operating Losses with the use of the valuation allowance. The NOL was brought down at the end of 2013. This massive discount to fair value of the stock price is a huge buying opportunity for several reasons.

  1. Nothing in the core revenue generating operations has changed; the company is still selling millions of condoms. In fact on April 2nd, 2015, the company announced record FY 2015 second quarter sales of 20.8 million female condoms. The company’s management though owned up to the fact that they are essentially a one trick pony, selling a single product in the market. Overall, if the company would have continued on the same strategic path, this would have worked out great and the FC2 would act as a cash cow for at least a few years.
  1. The Female Health Company has first mover advantage in the female condom market. The company does face some competition from a publicly traded Indian company, Cupid Ltd., which manufactures latex female condoms approved by the WHO. (The FC2 is made of nitrile.) Cupid’s market cap is roughly $20 million USD and its’ product has not been up to par to satisfy stringent tender requirements, tests and regulations demanded by large buyers such as the Brazilian Health Ministry. There are a few other Chinese competitors potentially entering the female condom space, but for now they are a non-threat.

Strategic Shifts That Will Drive the Turnaround

The company’s management has outlined several strategic initiatives to keep an edge over its competition in the market. The company is creating a framework to access and target the average consumer in the U.S. and to acquire an additional product(s) in the female health, wellness or infection prevention space to go with the FC2. Essentially the company said we need to grow and expand our revenue in order to be competitive and profitable in the long run. The management of this company is definitely forward looking and progressive in its vision for the company. Now the investor can see that in order to grow and expand, the company needs money for M&A activity and for sales, marketing, education and advertising.

The first step in initiating a more consumer oriented growth plan for the U.S. has been taken by making the condom available directly through the company’s website. Customers are required to buy at least 2 packs of 3 condoms each at $2 per condom plus shipping only to the U.S. The female condom is reimbursable under the Affordable Care Act if prescribed by an in-network doctor and covered by most major health plans administered by United-Healthcare, Aetna, Humana, Kaiser and Cigna. The FC2 becomes a viable and safe alternative for women who cannot or do not want to go on the hormonal pill, for women in their 30’s and 40’s who have been taking hormones for years and for women who are fertility challenged.

The way the company plans to accomplish this is by initiating a social and digital campaign which is expected to be launched within the next to 2-3 quarters. The company has said that it plans create greater product awareness and support by targeting 7000 obstetrician/gynaecologist (OB/GYN) practices who write most of the prescriptions in the United States. These practices will be given samples of the FC2 to then give to the women.  This would be a logical approach to a continuous new long term cash-flow for the company.

The Significance of Sales Marketing & Advertising

The latest company presentation and conference call heavily focused on sales, marketing and distribution. This is an obvious sign that the company is trying to get the word out about its condoms. Some of the money that was set aside for paying the dividend has been directed towards the sales and marketing budget and M&A activity. According to management, most of the money that was set aside for educating women in current consumer countries will be transferred for the upcoming sales and marketing campaign. The current customers’ countries strategy will be changed to a more traditional sales and marketing approach. In effect we may see some new expenses pop up, but the company as a whole is very cost conscious and has set up an advisory board on how to efficiently target the U.S. female consumer. The company has recently hired 3 sales and marketing experts and have signed on new distributors. The company has also mentioned that they plan to invest more into brand management and into actual packaging of the company. The FC2 can be purchased online on Amazon, at selected condom stores, online at Walgreens, but not at Walmart or CVS.

A crucial strength that the Female Company possesses is its invaluable relationships, channels, distributors and reach all over the world. These relationships are the bloodline of this company. The next jump that this company will be making is crucial to its success. The company has been actively seeking a product(s), technology or an acquisition to add to their domain, effectively adding another cash-flow stream to boost growth. As of the last annual meeting on March 19th, 2015 the company has clearly stated that they have evaluated over 75 products/companies, they are negotiating with top targets and there will be an acquisition in calendar 2015. The company is looking for a complementary product(s) to its condom – mainly in the female reproductive, infection prevention and intimate health space. The addition and launching of a new product(s) can be leveraged via the company’s incredible network of distributors, channels and relationships throughout the world. This is the golden key to success, growth and higher cash-flows for the future of this company. Financing would more than likely be required for these acquisitions through either long term debt and/or issuing additional shares.

New Management, New Direction, New Company

For the past 16 months, the company has gone through a targeted hiring of key personnel. A few of the old-timers have resigned from the board of directors. It’s also worth mentioning that the company is heavily owned by management and several institutions.

To start off, the current CEO, Karen King, was hired January 2014, has worked 30 years in the healthcare industry, is a marketing, sales and development specialist and was President of DSM’s biopharmaceutical business.

Susan Ostrowski was hired in June 2014 as an Executive Vice President of New Business Development and will be responsible for the company’s sales, marketing and sales support functions and will lead the commercialization efforts for the FC2 in the U.S. This executive as of late has worked as a Senior Director at DSM, who’s primary role was to lead and develop the US sales and marketing team for DSM Pharma in North America.

Martin Tayler was hired on September 15th, 2014, as an Executive Vice President of Global Operations. Martin Tayler had an extensive career in medical device operations leadership with SSL International PLC, the former manufacturer of the Durex condom; his responsibilities included oversight of the design, construction and ultimate operation of one of the world’s largest condom manufacturing facilities in China.

Sharon Meckes was hired March 23rd, 2015 to the Board of Directors – she previously worked for in the women’s healthcare field for as the head of IUD (intrauterine device) Consumer Marketing at Bayer Healthcare Pharmaceuticals.

The new executive team looks very professional with experience in the female health space. The company is currently looking for several board members. The top 5 institutional holders own 19.1% as of 4/19/2015 and all directors, executive officers or retired former employees (consultants) own 23.5% as of January 14th, 2015. Management has a significant interest for the company to bring value to its shareholders in the long run being owners of the company.

Editor note: The following are Cupid Limited’s comments to this article

  • The Cupid Female Condoms is not only approved by WHO, but also Pre-Qualified by UNFPA/ WHO for public distribution worldwide. We have sold Cupid FC in 18 countries during 2014/15.
  • The statement “its’ product has not been up to par to satisfy stringent tender requirements, tests and regulations demanded by large buyers “, in fact Cupid Limited received  double the quantity order as compared to FHC from the South African Department of Health from their tender in 2014. Even the Brazilian Ministry of health had ranked Cupid as L1 during their tender process.
  • We are in discussion with the MOH Brazil as to why they ended up not awarding any portion of the contract to Cupid Limited.
  • Further Cupid Male Condoms are also WHO/UNFPA Pre Qualified. In fact Cupid has three years long term agreement to supply Female and Male condoms. Recently we have introduced a third line of business i.e. manufacturing and marketing of Water based Lubricant.
  • Cupid Limited is also present on all the three social media platforms : Facebook, Twitter and Printarest. Further, Latex based Condoms sold by Cupid are safe, convenient to use, uses tested and proven raw material and are economical and affordable as compared to the competitor. Finally, Cupid is a debt free company and paid its first dividend in Feb 2015.

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