Fitch Affirms Amgen's IDR at 'BBB'; Ratings Outlook Stable
CHICAGO -- April 19, 2013
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
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
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.
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'.
Additional information is available at www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' dated Aug. 8, 2012
--'Rating Pharmaceutical Companies - Sector Credit Factors', dated Aug. 9,
Applicable Criteria and Related Research
Rating Pharmaceutical Companies
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Michael Zbinovec, +1 312-368-3164
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Bob Kirby, +1 312-368-3147
Mike Weaver, +1 312-368-3156
Brian Bertsch, +1 212-908-0549
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