Fitch Affirms Amgen's IDR at 'BBB'; Ratings Outlook Stable

Fri Apr 19, 2013 3:24pm EDT

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(The following statement was released by the rating agency) CHICAGO, April 19 (Fitch) Fitch Ratings has affirmed Amgen Inc.'s (Amgen) ratings, including the Issuer Default Rating (IDR) at 'BBB'. The Rating Outlook is Stable. A full list of ratings affirmed is listed below. The ratings apply to approximately $26.6 billion of debt at Dec. 31, 2012. KEY RATING DRIVERS Amgen's gross debt leverage is currently high relative to its 'BBB' IDR. There is limited flexibility in the rating for any increase in debt leverage, whether driven by weak operating performance or debt funding of acquisitions or shareholder returns. However, Fitch notes that given Amgen's consistent and strong free cash flow (FCF) generation and large cash balances, the company has ample liquidity to fund its financial policy without increasing debt levels, limiting the potential for negative rating action in the near term. Leverage improvement from EBITDA jump: Debt leverage will improve from a boost in EBITDA resulting from the phased dissolution of the Enbrel co-promotion agreement with Pfizer starting in November 2013. As such, Fitch estimates that adjusted debt leverage and total debt leverage may each drop below 3.0x in 2014 excluding a decrease in the debt load. At the end of 2012, adjusted debt leverage and gross debt leverage were 3.7x and 3.6x, respectively, and 3.4x and 3.3x (excluding prefunding 2013 debt). Strong FCF despite operational pressures: Fitch anticipates steady, strong FCF despite increasing dividends. Cash flow generation has been resilient to operational stresses which have included key drug patent losses outside the U.S., expanded brand name competition to Enbrel, reimbursement and demand pressures on the once top-selling ESA franchises, and higher interest payments from incremental debt used for its capital plan. The company has maintained FCF generation greater than $4 billion annually since 2005, and in 2012, FCF was $4.1 billion representing a margin of 23.6%. Additional liquidity comes from $2.5 billion of unused revolver capacity and $24.1 billion of cash and marketable securities at the end of 2012. Amgen has debt maturities totaling $2 billion in 2014 consisting of $1 billion in 1.875% unsecured notes and $1 billion in 4.85% unsecured notes. Dividends favored over share repurchasing: Ample liquidity provided by consistent and strong FCF generation and large cash balances allows Amgen to fund its financial strategy without increasing debt levels. Amgen's financial policy targets an average return of 60% of adjusted net income to shareholders. Over the next two years, Fitch sees the company deploying more capital toward dividends than share repurchases. Since 2011, the company purchased $12.9 billion in equity, utilizing all but $300 million of a $10 billion program authorized in October 2011. Presently, Amgen has $2.3 billion of authorization including $2 billion in new capacity in December 2012. Amgen's board increased the quarterly rate of dividends to $0.47 per share for the first two quarters of 2013 from $0.28 per share in 2011 which could result in payments of $1.4 billion this year. Dividends paid in 2012 were $1.1 billion compared to $500 million in 2011. Long-term revenue growth despite patent losses: Solid uptake of Amgen's most promising medicines - Prolia and Xgeva - mitigates much pressure from the expiring patents, notably in 2015. Fitch anticipates that sustained strong growth of these products and continued demand increases for the company's bestseller Enbrel may yield compound annual growth of 1.5% in 2012 to 2017. At the end of 2012, Amgen's maturing drug portfolio represented 48.1% of overall company sales in 2012, excluding patent lapses in territories not covered by the company. Fitch expects to see competing biological drugs in the U.S. to two top-5 selling drugs - Neupogen and Neulasta - over the next three years with a first-generation filgrastim treatment introduced by Teva Pharmaceutical Industries as early as November 2013. However, new competition to Amgen's biological therapies, either generic or brand name, will not benefit from interchangeability upon launch, limiting their inroads into the marketplace. Moreover, the number of potential drugmakers may be modest given the high cost to develop and market generic biological pharmaceuticals. As such, Fitch anticipates revenue declines from patent expirations around 20% to 30% as opposed to the 80% to 90% typically seen with patent lapses of small-molecule drugs. RATING SENSITIVITIES Positive rating momentum depends upon a sustained decrease in debt leverage, with gross debt leverage decreasing to between 2.5x and 3.0x. Positive action would also require solid operational performance supported by underlying revenue growth despite demand challenges from key drug patent expiration and new brand name competition to Enbrel over the intermediate term. Fitch sees Amgen's presently high debt leverage dropping from EBITDA growth, rather than debt reduction, accelerated by significant operating cost improvement in 2014 stemming from the phased dissolution of the Enbrel co-promotion with Pfizer. However, significantly falling demand for the maturing drug portfolio could jeopardize operational strength and impair leverage improvement. There is limited flexibility in the rating for any increase in the presently high debt leverage from either weak operating performance or debt funding of acquisitions or shareholder returns. Fitch affirms the following: --IDR at 'BBB'; --Senior unsecured debt at 'BBB'; --Bank loan at 'BBB'; --Short-term IDR at 'F2'; --Commercial paper at 'F2'. Contact: Primary Analyst Michael Zbinovec Senior Director +1-312-368-3164 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Bob Kirby Director +1-312-368-3147 Committee Chairperson Mike Weaver Managing Director +1-312-368-3156 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: Additional information is available at'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' dated Aug. 8, 2012 --'Rating Pharmaceutical Companies - Sector Credit Factors', dated Aug. 9, 2012 Applicable Criteria and Related Research Rating Pharmaceutical Companies here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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