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    Hot OTCBB: FHCO Poised to Alleviate the Negative Effects of Q3 Dip in Revenues

    The Female Health Company (Nasdaq: FHCO) stock was traded between $4.75-$5.00 over the last month after it dropped from the May high of $6.64. Due to a delay in two large pending orders, the company reported a 75% dip in revenues for Q3 FY2010, ended June 30, 2010, and a 99% decline in operating incomes. As of September 23, FHCO stock closed the day at $4.79 on a trading volume of approximately 28,000 shares.

    The Female Health Company manufactures markets and sells the FC2 female condom, the only currently available product under a woman’s control that is approved by the Food and Drug Administration. FC2 provides dual protection against unintended pregnancy and sexually transmitted infections, including HIV/AIDS. In October 2009, the company completed the transition from its first generation product, FC1, to its second generation product, FC2, and production of FC1 ceased. From its introduction in 2007 through June 30, 2010, approximately 65 million FC2 Female Condoms have been distributed in 107 countries worldwide.

    The company’s female condoms have undergone extensive testing for efficacy, safety and acceptability in the United States and many countries around the world. The majority of studies have shown that having FC available allows women and men to access more prevention options and results in an increase in women’s health protection.  The studies concluded that female condom is as effective as male condoms in preventing pregnancy, HIV and sexually transmitted diseases and because it covers more area, it may provide broader protection and allows a woman to be in control of whether protection is used.

    The Female Health Company revenue and net income for FY 2009 ended September 30, exceeded $27.5 million and $6.5 million, respectively. During the last reporting quarter ended June 30, 2010, the company’s net revenues decreased 75% to approximately $1.8 million, compared with approximately $7.0 million in the third quarter of the previous fiscal year.  The decrease was due to a decline in unit sales resulting from the timing of receipt and shipment of large orders.  According to the management, historically, such orders are not lost, but a delayed usually due to bureaucratic issues, politics and/or changes in personnel. The delay period may last from 3-4 weeks to 6 or more months.

    Going forward, The Female Health Company reported that the orders for the fourth quarter are proceeding normally, according to previous expectations.  It is unlikely that the third-quarter results are indicating on any fundamental change in the company’s business or demand for FC2. On the contrary, the strong demand for FC2 was evident in USAID/JSI’s recent doubling of its previous 12 million unit order to 24 million units, deliverable over the period ending September 30, 2011.

    As a result, the company’s management has revised its guidance for fiscal 2010.  Exclusive of the two large pending orders, unit sales could approximate those from FY2009 and operating earnings (net of restructuring expenses) could increase 10% to 20% over fiscal 2009 results.

    The global condom market (public and private sector) is estimated to be $3 billion annually. The global public sector market for male condoms is estimated to have been greater than 10 billion units annually since 2005. Given the rapid spread of HIV/AIDS in India and China, UNAIDS estimates that the annual public sector demand for condoms, both male and female, could reach 19 billion units within the next 10 years.

    Despite the revenue dip in Q3 FY2010, the company’s fundamentals remain strong and it continues to expect growing demand for its offering. Almost 50% of all HIV/AIDS victims are women and HIV/AIDS is the leading cause of death worldwide among women 15-44 years of age.  As a result, the relevance of the female condom and demand for FC2 is increasing.  USAID/JSI’s recent order expansion from 12 million units to 24 million units is indicative of this increase in demand for FC2.  The eventual fulfillment of pending orders could positively impact the next quarter or Fiscal 2011 revenue and earnings and could trigger a recovery of the company’s stock price to May 2010 levels.

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