TEXT-Fitch rates Amgen senior notes 'BBB'
Sept 10 - Fitch Ratings has assigned a 'BBB' rating to Amgen Inc.'s (Amgen) proposed issuance of euro notes due 2019 and sterling notes due 2029. Proceeds of the new debt are expected to be used for general corporate purposes, including repayment of outstanding indebtedness. See the full list of Amgen's ratings at the end of this release. Amgen is in the midst of completing activities under a new financial policy, originally announced in April 2011, directed at returning a significant portion of profit to equity holders via the initiation of a new dividend and aggressive share repurchasing. Amgen's management stated a target payout ratio of more than 60%, which does not deviate significantly from prior payouts made solely through share repurchases. However, Fitch anticipates that the payout target will be far exceeded over the intermediate term from expected increases to the dividend and aggressive share repurchasing activity. Funding for the financial strategy over the ratings horizon will primarily be derived from new debt issuances, as domestic cash is utilized to conduct the expected shareholder-friendly actions, according to Fitch. Resulting leverage from the incremental debt in 2011 and 2012 is anticipated to push adjusted debt leverage to around 3.5x at the end of 2012. The next significant debt maturity is $2.5 billion of unsecured convertible notes due in February 2013. Fitch sees some relief to the credit profile longer-term, as leverage improves to 3.0x by 2014 mainly from strengthening profitability. Leverage that falls outside of this expectation over the long term could prompt further negative rating action. While debt leverage is more reflective of a lower rating category, Amgen's credit profile is supported by very strong liquidity. Liquidity at the end of the second quarter of 2012 (2Q'12) is provided by solid free cash flow generation, around $2.5 billion of unused revolver capacity, and $22.5 billion of cash and marketable securities, of which the vast majority is domiciled internationally. Free cash flow for the latest 12-month (LTM) period at the end of 2Q'12 was $4.2 billion, representing a margin of 25.4%. Fitch still anticipates cash flow generation to remain indicative of a higher-rated rated entity despite stresses from a rapidly growing dividend stream and higher interest payments in the intermediate term. Fitch expects free cash flow margin to fall to a run rate hovering around 20% in 2012-2014 (excluding legal settlements), down from a minimum of 35% since 2008. Fitch recognizes Amgen's strong profitability, indicated by EBITDA and EBITDAR margins of 37.4% and 38.2%, respectively, for the LTM period at the end of 2Q'12, despite incremental promotional spending for newer therapies Prolia and Xgeva. Fitch expects meaningful margin expansion from respective EBITDA and EBITDAR margins of 36.7% and 37.5% in 2011 due to operational leverage over the rating horizon. Fitch views improving profitability (EBITDA and EBITDAR) as the main driver of leverage improvement over the long term. The key factor for driving sales growth over the ratings horizon is Amgen's ability to successfully commercialize Prolia and Xgeva in order to counter the potential loss of patent protection for key drug products. Prolia and Xgeva generated sales of $340 million and $568 million, respectively, for the LTM period at the end of 2Q'12. Uptake of the new medicines as well as demand increases for Nplate, Vectibix, and Sensipar fully offset the negative demand pressures on the maturing product portfolio from brand-name and biosimilar competition, and government reimbursement changes, resulting in a 7.0% rise in total revenues for the LTM period at the end of 2Q'12. Fitch sees the continued benefits of Prolia and Xgeva supporting moderate sales increases through 2013. What Could Trigger a Rating Action An upgrade is not expected at this time given the increasingly aggressive shareholder-friendlypolicy at the company, leading to a drain of U.S. cash and resulting in a significant increase in leverage. Fitch is highly concerned that the company is promising heavy returns to shareholders as the company contends with demand pressures placed on the company's maturing drug portfolio from biosimilar drugs in Europe (and inevitably in the U.S.) as well as government and third-party reimbursement changes. Moreover, the company is highly reliant on the market success of the promising new therapies, Prolia and Xgeva. There is little flexibility in the rating for shareholder returns beyond that contemplated in the financial plan. Gross debt leverage exceeding 3x after 2014 would place negative pressure on the rating. Fitch's current ratings on Amgen are as follows: --Issuer Default Rating (IDR) 'BBB'; --Senior unsecured debt 'BBB'; --Bank loan 'BBB'; --Short-term IDR 'F2'; --Commercial paper 'F2'. The Rating Outlook is Stable.
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