Fitch Affirms Amgen's IDR at 'BBB'; Outlook Stable
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 is provided at the end of this release.
The ratings apply to approximately $26.5 billion of debt at Sept. 30, 2012.
The ratings reflect the following key credit considerations:
Amgen Making Strides With Financial Policy:
Amgen has been actively fulfilling its financial policy instituted in April 2011 that, through 2015, would return an average payout of 60% of net income to shareholders in the form of dividends and share repurchases. Over the past 12 months, management significantly accelerated equity buybacks against a $10 billion program and meaningfully increased a new dividend. By the end of the third quarter of 2012, the company purchased $8.4 billion in shares out of a $10 billion program authorized in October 2011, of which $3.4 billion was bought during 2012.
Amgen's Board of Directors has held dividends at an annual rate of $0.36 per share throughout 2012 (after rising 29% from 2011), resulting in payments of $1.1 billion for the latest 12 months (LTM) ending June 30, 2012. However, Fitch anticipates more capital deployment toward dividends than share repurchases in the next two years.
Leverage Remains Jigh For Rating Category:
Incremental debt needed to complete the capital plan pushed lease adjusted leverage and gross debt leverage to 3.6 times (x) and 3.5x, respectively, for the LTM at the end of the second quarter of 2012. Lease adjusted leverage and gross debt leverage from 1.7x and 1.6x (excluding prefunding 2011 debt), respectively, in 2010, a period prior to the initiation of the new financial policy.
Amgen issued $2 billion in new debt in September to pre-fund coming maturities of $2.5 billion in convertible notes in February 2013. Fitch expects adjusted debt leverage and total debt leverage to drop below 3.1x and 3.0x, respectively, in 2014. The reduction in leverage will result from EBITDA growth as opposed to a decrease in debt load, in Fitch's estimation. Leverage that falls outside of this expectation could prompt negative rating action.
Strong Free Cash Flow Despite New Dividend:
Amgen's credit profile benefits from sustained strong liquidity stemming from solid free cash flow (FCF) generation. FCF for the LTM ending June 30, 2012 was $4.2 billion, representing a margin of 25.4%. Fitch anticipates sustained strong FCF despite stresses from an increasing dividend stream and higher interest payments, which Fitch expects to lower FCF margin to a run rate at least 18% in 2012-2014 (excluding a Federal investigation settlement in 2012) from a minimum 35% since 2008. Additional liquidity comes from around $2.5 billion of unused revolver capacity and $25.4 billion of cash and marketable securities at the end of the third quarter.
Enbrel Patent Extension Eases Steep Patent Cliff:
Amgen's maturing drug portfolio faces the potential generic drug competition, domestically or internationally, to five top-selling biopharmaceuticals over the next three years. Medicines contending with patent expirations during this time or currently expired represented 51% of overall sales for the LTM period ending Sept. 30, 2012. In late 2011, Amgen successfully extended the U.S. patent for Enbrel to November 2028 from October 2012, mitigating the risk for its second best-selling drug that generates around 24% of total revenues.
Long-term sales growth is highly correlated to the successful commercialization of Amgen's most promising therapeutics - Prolia and Xgeva. Prolia and Xgeva generated sales of $399 million and $667 million, respectively, for the LTM period at the end of the third quarter of 2012. Fitch sees solid growth of these products contributing to overall revenues increasing at a compound annual growth rate of 2.7% in 2012 to 2016.
EBITDA Gains To Drive Debt Leverage Improvement:
Fitch views improving profitability (EBITDA and EBITDAR) as the main driver of debt leverage improvement over the long term. Fitch recognizes Amgen's strong profitability, indicated by EBITDA and EBITDAR margins of 42.2% and 43% for the LTM period at the end of the second quarter of 2012, respectively, despite incremental promotional spending for new therapies as well as continued investment into the R&D program. Fitch expects meaningful margin expansion from the current levels in the long term primarily due to a declining profit sharing stream to Pfizer tied to Enbrel revenues in the U.S. and Canada starting in November 2013. Amgen paid approximately $1.3 billion to Pfizer in 2011 under the collaboration agreement.
What Could Trigger A Rating Action:
An upgrade is not expected at this time given the increasingly aggressive shareholder-friendly policy at the company, leading to a drain of U.S. cash and resulting in a significant increase in debt leverage.
Fitch is highly concerned that the company is delivering heavy returns to shareholders while contending 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 current rating for shareholder returns beyond those under the latest financial plan. Gross debt leverage exceeding 3x after 2014 would place negative pressure on the rating. A debt leverage decrease is likely to be driven by EBITDA growth, rather than debt reduction, with operating cost improvement in 2014 and 2015 primarily stemming from the phased dissolution of the agreement with Pfizer regarding Enbrel.
Fitch has affirmed Amgen's ratings as follows:
--Issuer Default Rating (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'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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:
Corporate Rating Methodology
Rating Pharmaceutical Companies
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