Novice Investing - Invisible Asset of Pharma

Date: Monday 01st 2008f December 2008 04:56:55 PM

Invisible Asset of Pharma - 07/14/2006

By: Novice Investing Staff

Pharmaceutical companies are well known of having many intangible assets which include Research & Development pipeline and drug patent. Physically, you cannot touch or feel intangible assets as you would with building and machinery. Both tangible and intangible assets mentioned above are listed on the balance sheet. However, there is one other invisible asset that is not included in a company's financial statement. That one asset is distribution channel.

What is distribution channel and why should you consider it as an asset? By definition, asset is something we own that can give us more asset. In other words, if distribution channel enable companies to profit from it, then it should be counted as an asset. The answer here is a resounding yes. Distribution is an invisible asset for big pharma. Let us explain.

When you have a big drug breakthrough coming in, you need to reach your patients quickly. You can use the retail channel for off the counter drug, but for prescription drug, you need to distribute it among millions of doctors around the country. How do you do that? Advertising won't work well here since patients cannot buy the drug by themselves at the pharmacy. Companies need to aim to doctors who can prescribe it for their patients. One of the oldest method is to use your army of salesman. You see, salesman has personal relations with doctors. Like it or hate it, doctors may not want to prescribe medicine from whom he barely knows. Thus, once a doctor prescribe a particular drug from one salesman, a bond is formed. This bond is harder to break. This is what we call competitive advantage; and it is an invisible asset.

The good thing about this invisible asset is that it has already been expensed. The drug being sold by your salesman is your commission expense. Meanwhile, the doctor is more comfortable with your salesman and is more likely to prescribe newer drugs through him rather than from anyone else. Sure, one salesman may leave the company someday. But tens of thousands of salesman at the same time? Highly doubtful. Thus, pharmaceutical companies have this valuable distribution channel of salesman, ready to be utilized.

Want to see some greens? Easy. Pharmaceutical companies can rent their salesman to distribute a breakthrough drug from smaller companies. It is beneficial for both parties. For a modest fee, the smaller drug companies can get access to tens of thousands of salespeople without having to build these networks. Meanwhile, pharmaceutical companies can earn money utilizing their networks of salesman.

While we had not seen too many of these deals going on, we believe that in the future, pharmaceutical companies can garner licensing fee for the use of their network of salesman. It goes straight to their bottom line since no other fixed cost is involved.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding any securities.

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