40% Of Amgen Sales Are Due To Fall Off The Patent Cliff

| About: Amgen Inc. (AMGN)

Summary

Amgen has a broad sales portfolio of 10+ products.

Patents have or are about to expire on 40% of Amgen Sales.

What might the future look like for Amgen.

Introduction

Currently Amgen (NASDAQ:AMGN) has a market capitalization of about $110 billion with a Free Cash Flow of $8.5 billion achieved in 2015. Revenue for the year was about $21.5 billion.

Shareholders have been largely rewarded via the dividend and capital appreciation. The stock yields about 2.67% and dividend growth has been an impressive 29% over 5 years since its inception.

Shareholder returns have been somewhat bolstered by a lumpy buyback policy.

2012 2013 2014 2015 2016F
Revenue 17.25 18.7 20.1 21.7 22
FCF 5.1 5.6 7.5 8.5 8.5
Divs Paid 1.1 1.4 1.85 2.4 3
Buybacks 1.8 0 0.5 3.3

The Free Cash Flow Yield of Amgen currently stands at 7.7%. The following table lists some other stocks I've been following with attractive Free Cash Flow Yields.

Ticker Mkt Cap Cash on BS Debt on BS Net Free Cash Working Cap Buy-Out Cap TTM FCF FCF Yield*
CSCO 138.14 60 -27.5 32.5 -5 110.64 11 9.94%
AAPL 581.09 210 -63 147 -15 449.09 63 14.03%
GILD 119.89 25 -23 2 1 116.89 20 17.11%
AMGN 110.96 31 -31.5 -0.5 0.5 110.96 8.5 7.66%

* FCF Yield in this case is FCF divided by the Buy-Out Cap. AAPL and CSCO have vast free-cash surpluses on their balance sheets. Buy-Out Cap = Mkt Cap - Free Cash + Working Capital Deficit

Whilst Amgen may not offer the best value in terms of FCF Yield, the stock is trading close to 52 week lows. A purchase of Amgen could be justified if the revenue quality of the stock stacks up.

Assessing the Quality of the Amgen Revenue Portfolio

Amgen achieved Sales of $5.3 billion in Q4 2015. The revenue breakdown by product was as follows:

As we can see, about 50% of Amgen's sales were dependent on its top 2 products: Enbrel and Neulasta. The remaining 50% of Amgen's sales were dependent on over 10 products. Most of this is accounted for by 6 products: Aranesp (9%), Sensipar (7%), Prolia (7%), Xgeva (7%), Epogen (6%) and Neupogen (5%).

The above is just a snapshot of the various revenue positions in Q4 2015. Amgen is what I call a "Metrics" stock. It will pass all your screens for historic Dividend Growth, Dividend Yield, Earnings Growth, Free Cash Flow Generation, Balance Sheet Health and Total Return. It will tick many boxes for dividend growth and quality.

But what does the future hold.

Despite the attempts of many online brokerages to categorize health stocks as safe, non-cyclical plays akin to utility or consumer staple investments, I contend many health stocks are effectively technology plays. If you have the best technology then the win is massive but your technology can become obsolete very quickly... particularly when patents are about to expire.

Assessing Patent Cliff Risk at Amgen

I now present a table of Amgen products with the respective 2015 Q4 Revenue Growth Rate, FDA Approval Date and US Patent Expiry Date for each product.

Product Growth FDA Approval Expires
Kyprolis 63% 2013 2025
Xgeva 10% 2010 2025
Vectibix 2% 2006 2020
Nplate 15% 2008 2022
Neulasta -2% 2002 2015
Neupogen -4% 1991 2013
Enbrel 8% 1998 2029
Prolia 21% 2010 2025
Epogen -37% 1989 2015
Aranesp 4% 2001 2024
Sensipar 21% 2004 2016

The patents on 4 products have expired or are about to expire: Neulasta, Neupogen, Epogen and Sensipar. I will call this group of products the "Patent Cliffers." I will compare the Quarterly Sales Performance of the Patent Cliffers to Quarterly Sales Performance of Amgen's other products that generally have a robust patent expiry period ranging from 2020-2025 and beyond.

The above chart shows us that revenues from the Patent Cliffers have remained fairly steady delivering just north of $2 billion in sales every quarter. Overall revenue growth has been provided by Amgen's other products in a reassuring manner: climbing from $2 billion in Q1 2014 to $3 billion in Q4 2015 with an average quarterly growth rate of 5% or an annualized growth rate of 18.5%.

Whilst the Patent Cliffers have provided steady sales, we should note that patent expiry has really only just commenced. I will now show the results of a forecast where sales from the Patent Cliffers now decline at 20% per year and the remaining product sales grow at 10% per year.

The above forecast comes with several caveats:

  1. EU patents expire a lot sooner in most cases, although 80% of Amgen's sales are in the US

  1. The forecast is framed very much with patent expiry risk in mind and does not consider other major risks like bio-similars, competitive products or pricing pressure.

  1. The forecast does not consider Amgen products which have less than $100 million of quarterly sales. These "small-sale" generators may well become major contributors in the coming years.

  1. The forecast does not consider potential sales of products and treatments in the pipeline that may be about to gain FDA approval and launch on to the market in a number of years.

The forecast nonetheless gives us an idea of what Amgen must achieve in the coming years to maintain sales at $20 billion per annum that in turn underpin the Free Cash Flows, Earnings, Dividend and ultimately the current price of the stock.

Conclusion

I think Amgen with its 7.5% Free Cash Flow Yield and diversified product mix is a reasonable enough deal. More conservative investors may wish to wait a bit to see how sales are hit by the Patent Cliff risk.

At the moment, I will leave Amgen to the side. I would like to analyze a few more bio-tech and pharma stocks in order to better survey the "field of play" and gain a clearer picture of what value lies in the sector.

Disclosure: I am/we are long GILD, CSCO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.