How a small stock is taking on a big health crisis
In the fight against a world health crisis, one small firm slowly developed a solution, says this U.S. advisory, and then grew rapidly.
This is the story of a small company in Illinois that is making headway in one of the biggest crises in world health.
It is making a product that can make a difference in the prevention of HIV/AIDS: a female condom.
Indirectly, the story comes from Fortune magazine, which has ranked this firm eighth among the 100 fastest-growing publicly traded small companies in America.
Directly, it comes to us from Mr. Max Bowser, a fervent advocate of microcap stocks who first picked this company two years ago.
In the pages of The Bowser Report, he tells the tale of The Female Health Co. (NASDQ-FHCO). In many ways, it is a classic case of how small stocks grow up to be bigger ones.
In short, it is not the story of a good idea that blossomed magically overnight, but one of trial and error and of persevering against a host of technical, financial and political obstacles.
Mr. Bowser starts with the successful results and then works backward to the birth of the company.
A new product
In 2008, Female Health sold 34.7 million female condoms in 93 countries, a 34 per cent increase over the year before. Its revenues grew 33 per cent to $25.6 million. Net income grew no less than 215 per cent, to $4.8 million.
This rapid growth comes from the success of the company’s new product, called FC2, which, at 60¢ each, costs much less than its predecessors. The cost may even go lower, says Mr. Bowser, “enabling health organizations to distribute many millions more than at present.”
(In fact, just over a week ago, the company signed a contract to supply 12 million for the use of United States Agency for International Development, or USAID.)
Not surprisingly, Female Health has attracted the attention of socially responsible mutual funds, like Appleseed. Its portfolio manager, Mr. Adam Strauss had this to say. “From a value standpoint, we think that FHCO’s stock price was relatively low when we bought it — that is, relative to its revenue growth, increased margins and low capital requirements.”
Yet it took the company 20 years to turn a profit.
Off the drawing board
The company’s CEO, 75-year-old Mr. O.B. Parrish “is nothing if not persistent,” says Mr. Bowser.
He left his position as the head of G.D. Searle’s pharmaceutical business in 1985 when that firm was sold to Monsanto by its president, Mr. Donald Rumsfeld (yes, the same Donald Rumsfeld you saw on TV nightly during the invasion of Iraq).
Along with several other pharmacy industry veterans, he looked around and found a tiny firm in Wisconsin that had bought the right to make a new female condom designed by a Danish physician.
It hadn’t even gotten off the drawing board yet, but Mr. Parrish perceived the potential. He and his partners bought the company and got started with a product that is now known as FC1.
“But the very notion of a female condom had a rough road ahead,” writes Mr. Bowser. “To sell one would mean building a global market for it.”
That meant facing certain political problems. More practically, it meant making an effective contraceptive at a reasonable price.
The yuck factor
The first-generation condom had some problems. Without going into the details, it had what one company insider called a high “yuck factor.”
And the price was exorbitantly high — $1.20 each, far above the male counterpart that sells for pennies.
“And there were more daunting problems,” adds Mr. Bowser. Without educational programs, many women around the world are reluctant to adopt the device. In many cases, the husband may “assume she’s being promiscuous,” he adds.
But Mr. Parrish and his company kept chipping away at the obstacles. They began with those they could control at home — quality and price. They found a cheaper material — soft, synthetic latex — and developed a new manufacturing process that could turn out millions every year.
In 2006, the World Health Organization approved the newer device, the FC2, allowing U.N. agencies to buy it for distribution overseas. The company turned its first profit.
In March of this year, it also got approval at home, from the FDA. The U.S. government approved $48 billion for AIDS prevention and local governments discovered the value of the female condom. New York City distributed two million of them last year.
With FDA approval, the product has no real competition yet. The Bill Gates Foundation is working on one, but has not yet gone to clinical trials.
An intriguing story
Mr. Bowser first wrote about the stock in his advisory in October 2007, when it traded at $2.32. By the time he added it to his personal portfolio, it was at $2.68.
By December 2008, the stock had risen above $3.00 and has risen from there. “It has been supported by not only good financials, but an intriguing story, which has resulted in considerable publicity.”
Like all small stocks, it is still quite thinly traded and can go up and down quickly. It has been as high as $7 and is now at $5.43.
The company may face competition from the Gates Foundation or from those who think condoms are not the solution to the HIV/AIDS problem.
But the story for investors is this. A company that’s an overnight success is just as liable to be an overnight failure. A company that strove patiently to create the right product at the right price is more likely to have the right stuff.
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