CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings for Amgen Inc. (Amgen) including Amgen's 'BBB'/'F2' Issuer Default Rating (IDR). The Rating Outlook remains Negative. A full list of rating actions follows at the end of this press release.
The ratings apply to approximately $33.4 billion of debt at June 30, 2014.
KEY RATING DRIVERS
--The Negative Outlook reflects presently high debt leverage (gross debt to EBITDA) after the acquisition of Onyx Pharmaceuticals (Onyx) in October 2013. Fitch anticipates leverage to fall to around 3.5 times (x) in 2014 and to below 3.0x by the end of 2017 through a combination of EBITDA growth and modest debt reduction.
--Rapid margin expansion in 2014 is directly resulting from a change in a co-promotion agreement with Pfizer Inc. (Pfizer) pertaining to marketing of Enbrel in the U.S. and Canada. The full benefit to margins of the reduction in profit-sharing paid to Pfizer is somewhat offset by incremental expenses from Onyx. The first phase of a recently-announced restructuring program will not support margin improvement in the near term, in Fitch's estimation.
--Over the next three years, Amgen's aging product offering may see multi-source competition to Neulasta, Aranesp and Sensipar, that collectively represented 30.6% of total revenues for the latest 12-months (LTM) as of June 30, 2014 in the patent-challenged territories. Fitch believes that the company could overcome the pressure on revenues from patent expiration with commercialization of its broad late-stage research pipeline.
--Fitch expects sustained strong free cash flow (FCF) to result from modest revenue growth and improved margins. However, the majority of a growing, large cash balance is expected to be held outside the U.S.
--Amgen's temporarily moderated share repurchases in 2014 and 2015 as it digests the Onyx acquisition should help to build domestic cash through the end of next year, improving financial flexibility. However, the commitment to increasing the dividend coupled with a likely return of active share repurchasing in 2016 will pressure U.S. cash balances.
Presently High Leverage
Amgen's high leverage was further stressed by the acquisition of Onyx Pharmaceuticals (Onyx) in October 2013 for approximately $9.5 billion that led to leverage of 4.3 times (x) at the end of 2013. The current leverage level leaves little cushion within the 'BBB' rating category. Fitch sees relief on ratings pressure as total debt leverage falls to around 3.5x by the end of 2014, expected to result from a combination of EBITDA growth and debt reduction. The Negative Outlook primarily reflects some uncertainty in the pacing of leverage reduction to 3.0x by the end of 2017, a level more commensurate of the current rating. Opportunity to unwind the debt load exists during this time given debt maturities of $1.75 billion in 2016 on top of annual term loan amortization.
Margins Enhanced by Co-Promotion Change
Profit-sharing expense fell by $462 million in the first six months of 2014 as the royalty rate paid to Pfizer dropped in October 2013, in conjunction with the start of a three-year phase out period under an agreement for the co-promotion of Enbrel in the U.S. and Canada. Accordingly, EBITDA margin jumped to 46.3% in the first half of 2014 from 40.5% in 2013 and 42.4% in 2012. Fitch sees persistence of most of the margin benefit while Amgen undertakes restructuring actions intended to shift investment to support anticipated product introductions from research and production. Full dissolution of the co-promotion arrangement in November 2016 will again strengthen margins.
Intellectual Property Challenges
Over the next three years, the base patents expire for Neulasta in the U.S. in October 2015 and in Europe starting in February 2015 while the international patents for Sensipar lapse in October 2015. In addition, the European patent for the second-generation erythropoietin medicine, Aranesp, recently expired in mid-August. Collectively, these maturing pharmaceuticals generated $5.95 billion in the patent-challenged territories for the LTM period at the end of the second quarter of 2014, representing 30.6% of total revenues. Amgen has already lost patent protection in the U.S. for two of its five top-selling biopharmaceuticals - Epogen and Neopogen. Through the long term, Teva's branded medication Granix and potentially Sandoz's recently-filed biosimilar therapy will take share directly from Neupogen and to a lesser extent Neulasta, Amgen's long acting filgrastim treatment. However, Fitch anticipates a compound annual growth rate of revenues of 2.7% in 2013 to 2018 despite the pressure from an aging drug portfolio as Amgen refreshes its product offering over the next few years with promising new therapeutics, notably in oncology and cardiology.
New competition to Amgen's biological therapies in the form of 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 of around 20% to 30% as opposed to the 80% to 90% typically seen with patent lapses of small-molecule drugs.
Liquidity Supports Current Rating
Fitch expects FCF to remain above $4 billion annually, representing FCF margins of 20% to 25% through 2017, despite a growing dividend that has increased to $1.6 billion for the LTM as of June 30, 2014 ($0.61 per share per quarter), from $500 million in 2011 ($0.28 per share per quarter). FCF was $4.66 billion for the LTM as of June 30, 2014.
The company also had cash and short-term investments of $26.2 billion on June 30, 2014 of which only $3.2 billion resides domestically according to Amgen reports. Fitch feels that Amgen will likely build U.S. cash balances as the company limits its share repurchasing in 2014 and 2015; however, a likely return to heavy shareholder-friendly actions could pressure domestic cash balances over the longer term.
Additional liquidity comes from full availability of a recently amended and extended $2.5 billion credit facility that now matures on July 30, 2019 (from December 2016). The facility backstops an untapped $2.5 billion commercial paper program providing additional financial flexibility.
Positive: Future developments, individually or collectively, that may lead to positive rating action include the following:
--An upgrade of the ratings is not likely in the near term given currently high leverage;
--The Negative Outlook may be revised to Stable once Fitch is confident 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.
Negative: Future developments, individually or collectively, that may lead to negative rating action include the following:
--Gross debt leverage not reduced to Fitch's expectation of around 3.5x at the end of 2014 would likely result in a one-notch downgrade.
--Lack of certainty that reduction in debt leverage will pace to below 3.0x by the end of 2017. Progress toward the target could be hindered by financial decisions that include leveraging acquisitions or debt-financed share repurchases. In addition, leverage improvement could be jeopardized by operational stress that decreases profitability, including poor execution of the restructuring plan, greater-than-expected generic and brand name drug competition and/or unsuccessful commercialization of the late-stage research pipeline.
DEBT ISSUE RATINGS
Fitch has affirmed Amgen's rating as follows:
--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. 15, 2013;
--'Rating Pharmaceutical Companies - Sector Credit Factors', dated Aug. 9, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating Pharmaceutical Companies