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Bankruptcy of WomenFirst Health Care, Inc.
Women First HealthCare, Inc. entered the American business scene in 1996 and its declared mission was to "to help midlife women make informed choices regarding their health care and to provide pharmaceutical products" and, additionally, to provide specific pharmaceutical products to meet the needs of women over forty years. In this sense, the company developed several products, including hormone treatments, meant to improve the life condition of middle- aged women.
Even if, in the beginning, there seemed to be a highly potential market segment that could have been profitably exploited and even if a brief analysis in 2001 showed a significant rise in the stock quotations, the company filed for bankruptcy in 2004, only to end a period of continuous losses and accumulated debts. Had we not had a look at some documents and had we not analyzed the actual happenings, we might have believed this was a surprise, however, seeing the data, it is strange that the company managed to hold on for such a long period of time.
The best place to start our investigation is by analyzing some of the consequences that have led the company to file for bankruptcy and discover what has actually happened there. Next, we will be having a look at the financial information and will be conducting some analysis on the significant financial ratios, such as the current ratio, measure of the company's short- term solvability. In the end, we will be able to draw some conclusions and make an overall evaluation.
The first cause, not necessarily in order of importance, of the company's bankruptcy, was the decreasing prescription demand for most of the company's products. The management says this was "unexpected," however, it is quite hard to believe that a company's management who has only incurred losses since its founding, in 1996 has never actually asked itself what was going on. In cases such as these, especially for specific products, addressing a small category of persons, it is obvious that there is a direct relationship between demand and revenue. Further more, since the demand for the company's products has been dropping, it is clear that revenues can't be that high either.
The company managed to add up huge costs from its return products policy. Product returns and chargebacks meant $6 million in 2003, not to mention an incredible $8.3 million in reserves and provisions for the return products policies. Incredible amounts for a company that only made $1.4 million in revenues in 2003!
If we have not been yet convinced that this company was in a terrible state, let's have a look at some other financials. The net revenues fell by 97% in 2003. Some of the causes for this, besides the decreasing demand, was the decrease in sales and marketing expenses, for example.
It is quite hard to be expected to sell, if you don't invest in prospecting the market, in launching a solid advertising campaign and in creating new products. We may consider, for example, that the population was no longer interested din some of the old products that the company had produced and commercializing. This happens to many companies, but this is the moment where the research and development department enters the stage and where the company must make sure that this department had a serious investment budget. This was not the case for Women First, because, as we may notice from the financial statement (see the income statement), the company spent only $1.7 million on research development, over three times more than in 2002, however, obviously not enough.
If we look at the cost of sales, we will probably first notice an incredible inadvertence between the cost and the revenues that the products actually brought. The cost of sales, as it is mentioned consists mainly of the amount paid for the product supply and the distribution costs. The costs of sales were around $12 million in 2003, a decrease from $17 million in 2002. However, the problem did not reside in the actual absolute cost, but in its proportion of the revenues. While in 2002, the cost of sales represented 35% of the total revenues, in 2003, the cost was actually a staggering 879% of the total revenues the company had.
A need to make a note here and affirm that the actual problem of the company was not the cost, but the fact that it did not manage to commercialize what it bough and distributed and, further more, that an adequate analysis was never made to estimate what the demand would be in 2003. As such, the company did not sell, because the demand was decreasing and it bought an overwhelming amount of stock, stock which unsold is obviously a burden.
Further more, the main activity of the company was selling and commercializing products. However, in 2003, the sales expenses decreased by some 25% from the previous year. Following the restructuring in March 2003, more than 60% of the sales workforce was let go and no new products were released, so that the marketing expenses were also decreased. However, I should note here that it is most probable that the company was already in trouble by the time restructuring was decided and that it really had no chances of saving the situation. The problems need to be sought before the restructuring date.
Another thing that comes to mind when referring to the company's financial situation is that, while the sales and marketing expenses, elements which were actually used for the company's activity, encountered a decrease, the company's administrative and general expenses increased from $5.5 million in 2002 to $7 million in 2003. However, most of these were auditing and accounting expenses, necessary in the situation the company had brought itself into.
Before passing on to some relevant financial ratios (although, in light of what I have already mentioned, I am not sure how much more relevant these can be), I should not a final figure that reflects the entire situation at Women First. In 2003, the net operating loss amounted to $60.6 million, up from only $0.2 million encountered in the 2002 fiscal year.
The first ratio we are interested to calculate and discuss is the Current Ratio. Calculated as the current assets value divided by the current liabilities values, the ratio shows us the short-term solvability that the company may provide. In this case, the company's current ratio is Current Ratio = Current Assets/Current Liabilities = 0.16
This is an incredible low value. In general, in healthy companies, the current ratio is somewhere between 1 and 1.5. However, 0.16 means that the company could pay the yearly current liabilities from its current assets in six years! Compared with the values in 2002, the current liabilities have increased by approximately four times, while the current assets value has decreased by three times. The reason for this is quite simple: the company did not sell. Indeed, if in 2002, the accounts receivable position had around $16 million, in 2003, this value came to only a little over $2 million. Surprisingly enough, in 2002, the Current Ratio value was a reasonable one, around 1.76, so the decrease is phenomenal.
As for the Quick Ratio, this is calculated by subtracting the Inventory value from the Current Assets and dividing the remainder to the Current Liabilities value. In our case, this is 0.13. There is no extra comment to be made here, because it is obvious that since the current ratio had such a small value, the quick ratio couldn't be any better.
If we look at some of the debt indicators, the situation isn't much better here. We can, for example, calculate the debt- to- assets ratio for 2003. As such, if we divide the total debt value to the total assets value, we will have 83.5%. This means that the company's creditors are financing as much as 83.5% of the company's activity. This high level of debt has obviously also caused high interest rates for the company and additional expenses.
The Yahoo Finance website allows us to make some general considerations on the industry's trends as well. To my surprise, these were somewhat ambiguous. For example, even if the average industrial revenue growth was 15%, the average industrial net income was - $6.31 million and the EBITDA was also negative, amounting to - $5.61 million.
However, even if this seems to be the industrial trend, some of the company's competitors, generally the large and powerful ones such as Pfizer or Wyeth, had good financial years in 2003. Wyeth, for example, had a 8.7% revenue growth and a net income of $1.49 billion in 2003.
I would have liked to briefly analyze the company's stock evolution in 2003, however, there is no data provided on Yahoo Finance. However, in August 2004, this had reached derisory values (around 1-2 cents), but this is explainable, since the company was already bankrupt. In 2003, one would expect that the stock followed a descending evolution…[continue]
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