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
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
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
Strong Free Cash Flow Sustained,
Amgen has maintained significant free cash flow (FCF) generation annually since 2005, and FCF was
Amgen had cash (including restricted cash) and short-term investments of
Fitch expects Amgen will reduce debt leverage that increased as a result of the Onyx acquisition by roughly 0.5x per year through 2015. A material deviation from this pace of deleveraging would likely result in a downgrade. Such a scenario could result from leveraging acquisitions, debt-financed share repurchases or operational stress that decreases profitability.
No positive rating momentum is seen for the near term if the acquisition is executed. A positive revision of the Rating Outlook to Stable would depend upon Fitch's belief that the company will sustainably operate with total debt leverage of roughly 2.5x to 3.0x. A decrease to this leverage range will require strong operational performance (including solid FCF generation) coupled with relatively stable debt levels.
Amgen's current ratings are:
--Issuer Default Rating (IDR) 'BBB';
--Senior unsecured debt 'BBB';
--Bank loan 'BBB';
--Short-term IDR 'F2';
--Commercial paper 'F2'.
The ratings apply to approximately
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology' dated
--'Rating Pharmaceutical Companies - Sector Credit Factors', dated
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating Pharmaceutical Companies
Source: Fitch Ratings
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