Amgen (NASDAQ:AMGN) may not be as exciting a stock to own as clinical-stage upstarts, but shares in this biotech Goliath have been mounting a rally lately that should make every investor take notice. So far in 2018, Amgen's rewarded investors with an 18% return.

The performance is impressive, but patent-expiration woes could take a toll on the company's financials in the future. Can Amgen continue rewarding investors with market-beating returns?

What it does

Amgen manufactures a lot of top-selling medications that have been on the market for awhile, including Enbrel, an autoimmune disease blockbuster drug, and Neulasta, a treatment used to prevent infection in patients with low white blood cell counts.

Three yellow road signs with the words sell, buy, and hold written on them.

IMAGE SOURCE: GETTY IMAGES.

In 2017, Neulasta and Enbrel contributed $4.5 billion and $5.4 billion, respectively, to Amgen's $21.8 billion in sales, but those aren't the only legacy drugs that are big sellers. The company also markets the following billion dollar blockbusters:

  • Prolia: An osteoporosis drug with sales of $2 billion in 2017.
  • Sensipar: A treatment for secondary hyperparathyroidism in dialysis patients, which had sales of $1.7 billion in 2017.
  • Xgeva: A bone cancer drug with $1.6 billion in sales in 2017.
  • Aranesp and Epogen: Two anemia drugs with sales of $2.1 billion and $1.1 billion, respectively, in 2017.

The company also markets a slate of nine-figure medications that, combined, have helped revenue grow to over $20 billion last year from $3.5 billion in 2000.

Digesting patent risks

The launch of last-generation blockbusters tripled sales between 2000 and 2010. However, medications have limited life cycles due to patent expirations, and the loss of exclusivity on Amgen's older drugs is a concern for investors evaluating the stock today.

For instance, Enbrel was launched way back in 1998 for use in arthritis patients, and Novartis has developed a biosimilar called Erelzi that's an inexact copy of Enbrel, but works similarly to it. It isn't available in the U.S. yet, but it's likely to carve away at sales when it does eventually launch. Biosimilars already are competing against Neupogen, a short-acting version of Neulasta, and a biosimilar to Neulasta from Mylan called Fulphila launched in the U.S. in July at a price that was 33% lower than Neulasta's wholesale acquisition cost.

During Amgen's second-quarter conference call, the company also said its 2018 financial guidance reflects "uncertainties related to potential new competition for Neulasta and Aranesp and a range of potential Sensipar generic competition outcomes."

Sensipar's U.S. composition of matter patent expired earlier this year. However, other patents still protect it, and litigation to prevent generics from launching is ongoing. Aranesp has patent protection until 2024, but it competes in the dialysis market against Amgen's Epogen, and Epogen biosimilars could become available in the coming year. If Epogen biosimilars launch at a lower price that prompts patients to switch to it, Aranesp could lose market share or see its sales fall because of price cuts.

Offsetting risks

The threat of generic competition puts $13.7 billion in 2017 sales at risk at Amgen. The company may be able to overcome those headwinds, however, if lawsuits delay the entry of competitors, price cuts help it maintain market share, and label expansions and new drugs contribute additional revenue. 

For instance, the Food and Drug Administration's (FDA) decision to add data to Repatha's label last year that shows it lowers the risk of cardiovascular events helped Repatha's second-quarter 2018 revenue surge 78% year over year, to $148 million. And that could be the tip of the iceberg because the market for cholesterol-lowering drugs is worth billions of dollars per year.  

Similarly, the FDA's expanded approval of Blincyto's use in more patients with acute lymphoblastic leukemia helped its sales increase 40% year over year, to $60 million last quarter, and impressive overall survival data for Kyprolis' use alongside competing multiple myeloma drugs helped its sales grow 25%, to $263 million, in the past year. Those drugs will go a long way toward offsetting generic-drug risks if sales continue growing at a double-digit rate.

The company's investment in biosimilars is starting to pay off, too. In Q2, Amgen launched Kanjinti, a biosimilar to Herceptin, in the EU. Herceptin's global revenue was over $7 billion (at current exchange rates) last year, including $2 billion in Europe. Kanjinti could generate hundreds of millions of dollars in sales.

The opportunity could be even bigger for Amgen's biosimilar to the $18 billion-plus Humira. Last year, Humira's international sales were $6.1 billion, and Amgen plans to launch its biosimilar to it in Europe later this year.

Amgen's revenue also may benefit from the recent FDA approvals of Aimovig, a migraine treatment, and Parsabiv, a competitor to Sensipar. The migraine market represents a blockbuster opportunity, and the fact that Parsabiv can be dosed at dialysis centers, rather than taken at home, may boost its use and patient adherence relative to Sensipar.

Is it a buy?

Patent risks suggest Amgen's sales aren't going to soar anytime soon, but the company may be able to deliver consistent double-digit earnings-per-share (EPS) growth because of cost-cutting and share buybacks. For example, second-quarter sales were $6.1 billion, up 4% from last year, and earnings per share grew 17% year over year, to $3.83. As a result, Amgen thinks sales will be between $22.5 billion to $23.2 billion and EPS will be between $13.30 to $14. In 2017, revenue was $22.8 billion and EPS was $12.58.

If earnings hold up, then Amgen should have the financial flexibility necessary to continue investing in research and development (R&D), while also returning more money to investors. Recently, it boosted its dividend by 15%, and currently, its dividend yield is a respectable 2.7%. Despite already buying back $3.2 billion in its shares in Q2, Amgen still plans to repurchase another $3 billion to $5 billion shares in the second half of 2018.

The buybacks should help prop up share prices, but shares aren't nearly as cheap as they were a year ago. This year's rally has increased Amgen's trailing-12-month price-to-sales ratio to the highest in three years, and its forward price-to-earnings ratio of 14 isn't nearly as low as its big-cap peers Celgene and Gilead Sciences.

AMGN PE Ratio (Forward) Chart

AMGN PE Ratio (Forward). Data by YCharts.

Because Amgen's patent exclusivity question marks raise questions about its future revenue stream and the company is no longer a bargain-bin buy, I think it's too risky to own in income portfolios and there are better options out there for growth investors to buy. If you own it already, I wouldn't sell. But if you don't own it yet, it makes sense to focus more on other opportunities.

Todd Campbell owns shares of Amgen, Celgene, Gilead Sciences, and Mylan. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Celgene and Gilead Sciences. The Motley Fool recommends Amgen and Mylan. The Motley Fool has a disclosure policy.