Fitch Rates Amgen's Unsecured Debt Issuance 'BBB'
(The following statement was released by the rating agency) CHICAGO, May 19 (Fitch) Fitch Ratings has assigned a 'BBB' rating to Amgen Inc.'s (Amgen) proposed $4.5 billion unsecured notes offering. Fitch expects Amgen to use the net proceeds for general corporate purposes, including funding the repayment of preferred shares under its Master Repurchase Agreement or outstanding term loan borrowings, and pre-funding a portion of its outstanding 1.875% unsecured notes and 4.85% unsecured notes maturing in November 2014. A full list of ratings is listed at the end of this release. KEY RATING DRIVERS --Debt leverage increased significantly because of the Onyx acquisition; --The acquisition of Onyx was strategically sound and it will likely mitigate Amgen's patent expiry risks; --Fitch anticipates Amgen will refrain from share repurchases in the intermediate term to preserve U.S. cash balances; --Fitch forecasts strong free cash flow (FCF), although significant cash balances are expected to be held outside the U.S. Leverage Increased from Onyx Acquisition Debt leverage rose from incremental debt required to consummate the purchase of Onyx Pharmaceuticals Inc. (Onyx) for approximately $9.7 billion (net of Onyx cash balances) in October 2013. Total debt leverage was 4.2x for the latest 12-month (LTM) period ending March 31, 2014. Fitch expects the level to remain above 3.0x through 2015-2016, leaving the company little flexibility within its 'BBB' rating category. However, the company should deleverage during the forecast period primarily through growth in EBITDA, with possibly some modest debt reduction. Long-Term Revenue Growth Supported by Onyx Fitch sees sales from Onyx's three marketed pharmaceuticals - Nexavar, Stivarga, and Kyprolis - helping to mitigate pressure from expiring drug patents, notably in 2015, when two of Amgen's top-5 selling drugs, Neupogen and Neulasta, could face generic competition. Coupled with continued solid uptake of the promising medicines, Xgeva and Prolia, Fitch anticipates compound annual growth of 3.2% in 2012 to 2017. Revenues generated by the Onyx portfolio, notably Kyprolis, add nearly 2% to the CAGR during this period. Biosimilar Risks Significant, But Less Than Traditional Generic Drugs As mentioned above, 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 including a first-generation filgrastim treatment, Granix, introduced by Teva Pharmaceutical Industries in November 2013. However, new competition to Amgen's biological therapies, biosimilars, 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 biosimilar pharmaceuticals. As such, Fitch anticipates revenue declines from patent expirations at around 20% to 30% as opposed to the 80% to 90% typically seen with patent lapses of small-molecule drugs. Share Repurchases Paused, Dividends to Rise Given the higher debt burden following the Onyx acquisition, Fitch expects share repurchases will be on hold through 2015. Amgen currently has no plans to make any significant repurchases during 2014 and 2015. The focus of shareholder returns during this period will turn to dividends, forecasted to increase annually during the intermediate term. Amgen's board increased the annual rate of dividends 30% to $2.44 per share in 2014 from $1.88 per share in 2013, which will result in payments of $1.9 billion this year. Strong Free Cash Flow Sustained, U.S. Cash Balances Limited Amgen has maintained significant free cash flow (FCF) generation annually since 2005, and FCF was $4.2 billion for the LTM period ending March 31, 2014, representing a margin of 21.9%. Fitch anticipates steady and strong annual FCF (at least $4 billion), despite higher dividend and interest payments. As a result, Fitch expects FCF margins of 20% to 25% through 2015. Amgen had cash (including restricted cash) and short-term investments of $23.2 billion at March 31, 2014, the majority of which resides outside of the U.S. Fitch believes that Amgen will continue to struggle with diminishing U.S. cash balances due to capital demands for shareholder-friendly actions. At March 31, 2014, the company had full capacity under a $2.5 billion credit facility maturing December 2016, which provides added liquidity. Fitch believes Amgen will maintain adequate access to the credit markets to refinance coming debt maturities, including $2 billion of debt that matures in 2014.
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