Please read the case and answer the following questions at the end of the case

CASE: The Female Health Company (FHC):

The female condom is seeking a foothold in the world market for contraceptive products

On one of her few days off in Spring 2006, President of FHC, Mary Ann Leeper, is thinking about the great opportunities for the female condom. The potential market for the product of her company, the female condom, is huge, but still FCH has not been making positive net profits during the last few years. Mary Ann is thinking about how to reach FHC's long-term goal: 3 per cent of the 12 billion unit male condom market. She accepts that the product is still relatively young in the world market for contraceptives, but she thinks it must be possible to produce better positive financial results with such a high quality product.The big ques tion is how ...

Background to the contraceptive market

The market for contraceptives has long been heavily influenced by social and political considerations. From the early days of the pill, the growing numbers of abor tions and the decision to make the pill freely available in the early 1970s to the emergence of the AIDS threat in the 1980s, this sector has always been more than a mere product category.

Of the 44 million people infected with HIV world wide an estimated 29 million (or about 70 per cent) are African. In some countries (such as Botswana) more than 20 per cent of the population are infected by HIV. The number of African AIDS orphans was expected to reach 15 million in 2003. Over 30 million people have already died from AIDS - more than the number of deaths from all African wars - and 11,000 new cases are diagnosed every day. The deadly disease is decimating Africa's labour force and seriously impeding the con tinent's economic recovery and development.

The increase in the pandemic has been linked to such cultural practices as polygamy, female genital mutilation, widow inheritance and sexual practices and behaviour that are culturally imposed in some societies. In Swaziland, for example, the local culture celebrates virility or the ingwanwa - a man who engages in multiple sexual encounters, while the female equivalent, igwandla is shunned. The AIDS disease is also fuelled by a popular myth that sex with a virgin cures AIDS.

Image courtesy of the Female Health Company and Mayer Laboratories. Inc. (www.mayerlabs.com). US dislribulor of Ihe Female condom.

The total market consists of a very broad range of products, with oral contraceptives (the pill) and male condoms the most popular. Other, 'natural' forms of contraception are also practised, such as withdrawal and the safe period. Men and women may also be surgically sterilised.

Contraceptive products are available in pharmacies or general retail outlets, over the counter (OTC), or via prescription. Contraceptive products are also widely distributed in public clinics. In terms of the two leading forms of contraception, the contraceptive pill is avail able only on prescription, while condoms are widely available in chemists, supermarkets and vending machines, etc. Growth in distribution channels has been a feature of the condom market since the second half of the 1980s in response to the AIDS crisis.

Condom usage has risen substantially over the past six years, while use of the pill has remained broadly stable. The pill remains a popular contraceptive (based upon surveys of women - surveys of men and women show use of condom and pill as about equal).

The product

The female condom is made of polyurethane - a thin but strong material that is resistant to tearing. The female condom consists of a soft, loose-fitting sheath and two flexible O-rings. One of the rings is used to insert the device and helps to hold it in place. The female condom is prelubricated and disposable and is intended for use only once. The product offers an additional benefit to the' 10-15 per cent of the population that are allergic to latex and who, as a result, may be irritated by latex male condoms.

In 2005, FHC announced that it had completed development of its second generation female condom, FC2. FC2 is made of a nitrile polymer which allows for a more rapid and economical manufacturing process. FC2 has the same physical design, specifications, safety and efficacy profile as the female condom the company presently sells. FC2 has been approved by the European Union and has received the CE mark; is currently under review by the World Health Organization (WHO). FHC is in discussions with the US Food and Drug Administration (FDA) regarding requirements for US distribution.

Because of the modified manufacturing procedure, it is expected that having FC2 available wil result in a meaningful reduction in manufacturing costs which wil ultiJ:nately reduce the cost to customers based on the purchase of sufficient volume. It is FHC's objective to use this opportunity to accelerate market penetration.

FHC and the female condom

The female condom was invented by a Danish phys ician who obtained a US patent for the product in 1988, and subsequently sold certain rights to the female condom to a US company. The first female condom became available in 1992, since which time more than 50 million have been sold around the world. The female condom is marketed under the name FC female condom in the United States, Femidom in the United Kingdom, and Myfemy in other markets, such as Japan. The Female Health Company manufactures, mar kets and sells the female condom, the only approved product under a woman's control. FHC is based in Chicago, but has production in London. FHC's UK manufacturing subsidiary received a Queen's Award for enterprise in April 2002, in recognition of international trade achievements. FHC owns worldwide rights to the female condom, including patents that have been issued in a number of countries. The problem in many less developed countries (such as many in Africa) is that most men do not want to use condoms and, when it comes to sexual relationships, women do not haye power to negotiate. In many cultures it is accepted that men can do what they like, so the female condom is a way of empowering and protecting women in those countries.

The female condom can prevent unintended preg nancy and sexually transmitted diseases (STDs), includ ing HIV/AIDS. It is the only HIV/AIDS product specifically developed and approved by regulatory agencies in the United States, the European Union, Japan and the People's Republic of China, among others, since the epidemic began about 20 years ago, for the prevention of the trans.mission of HIV/AIDS through sexual contact.

The product is currently sold or available in various venues including commercial (private sector) outlets, public sector clinics and research programmes in over 75 countries. It is commercially marketed in 21 coun tries, including the United States, the United Kingdom, Canada, France and Japan. However, the female con dom is mainly sold to the global public sector. In the United States it is marketed to city and state public health clinics as well as not-for-profit organizations. Following several years of testing the efficacy and acceptability of the female condom, in 1996 FHC entered into a three-year agreement with the Joint United Nations Programme on AIDS (UNAIDS), which has subsequently been extended. Under the agreement UNAIDS facilitates the availability and dis tribution of the female condom in the developing world and the FHC wil sell the product to developing coun tries at a reduced price based on the total number of units purchased. The current price per unit is approx imately 0.40, or 0.52. Pursuant to this agreement, the product is currently available in over 80 countries with major UN health programmes in about ten countries including Zimbabwe, Tanzania, Brazil, Uganda, South Africa, Namibia, Ghana and Haiti.

Studies have shown that female condoms are reused up to five times. WHO has noted procedure that should be used regarding the washing and preparation of the female condom if it is going to be reused, on its website. WHO, UNAIDS and FHC all make the statement that the female condom should only be reused when a new one is not available.

Global market potential and FHC sales

It is estimated the global annual market for male con doms is 12 billion units (see also Case 9.2). The major segments are in the global public sector, the United States, Japan, India and the People's Republic of China. However, the majority of all acts of sexual intercourse, excluding those intended to result in pregnancy, are completed without protection. As a result it is estimated that the potential market for barrier contraceptives is much larger than the identified male condom market.

Currently it is estima:ted that more than 8 billion male condoms are distributed worldwide by the public sector each year. The rest, 4 billion male condoms, is estimated to go through the traditional retailing systems. The female condom is seen as an important addition to prevention strategies by the public sector because studies show that its availability decreases the amount of unprotected sex by as much as one-third over offer ing only a male condom.

FHC expects to derive the vast majority, if not all, of its future revenue from the female condom, its sole current product. While management believe the global potential for the female condom is significant, the product is in the early stages of commercialization. To date, sales of the female condom have not been sufficient to cover the company's operating costs.

FHC's total net revenue in 2005 was approximately $11,161 million, but with operating losses of $1.3 million.

The competitive situation

FHC's female condom participates in the same market as male condoms but is not seen as directly competing with male condoms. Rather, the FHC believes that providing female condoms is additional in terms of prevention and choice. Latex male condoms cost less and have brand names that are more widely recognized than the female condom. In addition, male condoms are generally manufactured and marketed by compan ies with significantly greater financial resources than FHC.

A new direct competitor has arrived at the scene: Medtech Products (MP) Ltd is a condom company with a manufacturing facility in Chennai, India, which has developed the VIA - Feminine Condom, MP's version of a latex female condom. The manufacturing process has a CE mark for distribution in Europe and is available in German stores. Additionally, Indian Drug Controller approval was received in January 2003. The product has not received FDA approval nor has it been listed as an essential product by WHO.

The Indian case

In July 2006 FHC announced the first purchase of the FC Female Condom by the Indian government for use in its HIVIAIDS prevention programes. The number of HIV/AIDS victims in India is the largest of any nation and is growing rapidly. While still being less than 1 per cent of its 1 billion plus population, the government is aggressively developing prevention programmes to pre clude what has occurred in Sub-Saharan Africa where HIV/AIDS victims exceed 20 per cent of the population in some countries. As a consequence of the growing Indian market, in July 2006 FHC made an agreement with Hindustan Latex Limited (HLL) to manufacture FHC's second generation female condom (FC-2) in India. HLL is an Indian government company (www.hindLatex.com) with an annual male condom manufacturing capacity of 1 billion units. In addition to sales to the Indian government, HLL is launching the female condom to consumers using the trade-name Confidom (www.confidom.com) on a city-by-city basis. It is now available in Bangalore and Chennai, with a series of additional city launches planned and wil soon be available online.

Questions

1. How would you explain FHC's internationalization process up to now?

1. What are the main cultural barriers for expanding global sales of the female condom?
2. Which screening criteria would you use if FHC had plans to expand into new developing markets?
3. How can FHC increase its profitabiLity?