CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Amgen Inc.'s (Amgen) Ratings at 'BBB'/'F2' and revised the Rating Outlook to Negative from Stable. The recommendation follows Amgen's announcement that it will acquire Onyx Pharmaceuticals Inc. (Onyx) for approximately $10.4 billion in cash or roughly $9.7 billion (net of Onyx cash balances). A full list of ratings follows at the end of this press release.
The ratings apply to approximately $24 billion of debt at June 30, 2013.
KEY RATING DRIVERS
--Fitch expects leverage to increase significantly because of the Onyx acquisition;
--Fitch views the acquisition as 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 TO RISE FROM ONYX ACQUISITION
Fitch expects debt leverage to increase from incremental debt required to consummate the proposed purchase of Onyx. The acquisition is expected to increase the company's debt load by at least $8 billion; pushing total debt leverage to above 3.0x through 2015 - 2016. This level of leverage leaves the company little flexibility within its 'BBB' rating category. However, Fitch expects the company will deleverage during the forecast period primarily through growth in EBITDA, with possibly some modest debt reduction.
ONYX ASSETS SUPPORT LONG-TERM REVENUE GROWTH
Fitch views the Onyx acquisition as strategically sound. Sales from Onyx's three marketed pharmaceuticals - Nexavar, Stivarga, and Kyprolis - should help 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 rate of 3.2% in 2012 to 2017. Revenues generated by the Onyx portfolio, notably Kyprolis, adds nearly 2% to the CAGR during this period. 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.
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 with a first-generation filgrastim treatment introduced by Teva Pharmaceutical Industries as early as 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 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, Amgen stated, and Fitch expects, that share repurchases will stop through 2015. The focus of shareholder returns during this period will turn to dividends, forecasted to increase annually during the intermediate term. Amgen's board already increased the annual rate of dividends 68% to $1.88 per share in 2013 from $1.12 per share in 2011 that will result in payments of $1.4 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 $3.2 billion for the latest 12-month (LTM) period ending June 30, 2013 representing a margin of 18.3%. 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 and short-term investments of $22 billion at June 30, 2013, the majority of which resides outside of the U.S. Fitch feels that Amgen will continue to struggle with diminishing U.S. cash balances due to capital demands for shareholder-friendly actions. At June 30, 2013, the company had full capacity under $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.
A one-notch downgrade would follow if Amgen completes the acquisition of Onyx with financial terms that result in debt leverage meaningfully higher than the terms announced today, while still delivering heavy shareholder returns through large dividend increases.
Fitch favorably views the acquisition of Onyx as a means to offset expected revenue pressures on Amgen's maturing drug portfolio, notably Neupogen and Neulasta, over the long-term. However, Fitch expects that Amgen will reduce debt leverage 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.
Positive rating momentum is not seen in the near-term if the acquisition is executed. A positive rating action of revising 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.
DEBT ISSUE RATINGS
Fitch has affirmed the following ratings of Amgen's and revised the Rating Outlook to Negative from Stable.
--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'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 15, 2013);
--'Rating Pharmaceutical Companies - Sector Credit Factors'
(Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
Rating Pharmaceutical Companies