OREANDA-NEWS. Fitch Ratings has assigned a 'BBB' rating to Amgen Inc.'s (Amgen) notes offering. Amgen intends to use the net proceeds of the issuance for general corporate purposes, as well as pay down or prefund existing borrowings. The Rating Outlook is Negative. A full list of Amgen's ratings follows the end of this press release.

KEY RATING DRIVERS

--The Negative Outlook reflects presently high debt leverage (gross debt to EBITDA) of 3.3 times (x) stemming from the acquisition of Onyx Pharmaceuticals (Onyx) in October 2013. Fitch looks for Amgen to reduce leverage to around 3.0x by the end of 2015.

--Amgen has resumed repurchasing shares and intends to buy back roughly \$2 billion of its stock during 2015. Coupled with an increasing dividend, shareholder friendly actions will continue to pressure U.S. cash balances and gross debt leverage.

--Fitch expects margins to continue to expand in 2015, driven by improving sales (including contributions from newer products), lower royalty payments to Pfizer, additional cost savings in general & administrative expenses and priortization in research and development spending.

--Growth of established products, progress with ramping up newer medicines and advancing pipeline projects should help to offset some of the risk of anticipated branded and biosimilar competition to Neulasta, Aranesp and Sensipar. In addition, Fitch expects sales erosion for these biologic drugs to be less dramatic than for traditional small-molecule drugs facing generic competition.

--Fitch expects sustained strong free cash flow (FCF) driven by modest revenue growth and improved margins. However, the majority of a growing, large cash balances is expected to be held outside the U.S.

PRESENTLY HIGH LEVERAGE

Amgen's gross debt leverage is high for the 'BBB' rating and is is partly the result of the acquisition of Onyx in October 2013 that led to leverage of 4.3x at the end of 2013. The current leverage level of 3.3x leaves no cushion within the 'BBB' rating category. In order to reduce ratings pressure, gross debt leverage would need to fall to around 3.0x by the end of 2015. Fitch thinks that this leverage target is achievable through EBITDA growth.

CONTINUED MARGIN IMPROVEMENT EXPECTED

Fitch expects Amgen's margins will continue to improve during the intermediate term. EBITDA margin improved during 2014 by roughly 560 basis points to 46.1%, aided by a reduction in selling, general and administration expense. The reduction is highly durable since it was largely due to the drop in royalty payments by Amgen to Pfizer associated with the start of a three-year phase out period for the co-promotion agreement of Enbrel in the U.S. and Canada. In addition, prioritization of product pipeline projects reduced research and development spending as a percentage of sales.

YOUNGER PORTFOLIO PRODUCTS GROWING

Newer therapies such as XGEVA (bone metastases), Prolia (osteoporosis), Nplate (thrombocytopenia) and Kyrpolis (relapsed and refractory multiple myeloma) are posting strong double-digit growth, as good clinical experience drives increased acceptance in the medical community. While these four products accounted for only 17% of sales in the first quarter of 2015 (1Q'15), their combined year-over-year growth in the quarter was 29%, compared to 9% for the remainder of the portfolio.

PIPELINE PROGRESS

Amgen has also experienced a number of successes in advancing products through its pipeline. The company received FDA approval for Blincyto (acute lymphoblastic leukemia) in December 2014 and Colanor (heart failure) in April 2015. Evolocumab (hyperlipidemia) was submitted to the FDA in August 2014, and talimogene (melanoma) is currently under regulatory review (in the U.S. and Europe), with an FDA advisory panel scheduled for April 29, 2015 to review its potential for treating distantly metastatic melanoma. These drugs all have the potential to improve outcomes in a number of patients that currently face suboptimal treatment options.

INTELLECTUAL PROPERTY CHALLENGES

The base patent for Neulasta in the U.S. expires in October 2015, and in Europe it expired in February 2015. International patents for Sensipar lapse in October 2015. In addition, the European patent for the second-generation erythropoietin medicine, Aranesp expired in August 2014. Collectively, these maturing pharmaceuticals represent roughly 30% of total firm revenues at risk to branded or biosimilar competition.

Amgen has already lost patent protection in the U.S. for Epogen and Neopogen. Through the long term, Teva's branded medication and Sandoz's recently-approved biosimilar therapy will take share directly from Neupogen and to a lesser extent Neulasta, Amgen's long acting filgrastim treatment. However, the competing products will not benefit from interchangeability with the originator biologics, requiring the competitors to spend on marketing and selling, which makes stiff competition on price less likely. In addition, the On-Body injector for Neulasta could help fend off biosimilar competition.

ADEQUATE LIQUIDITY

Amgen has a solid liquidity profile, with the biggest concern being the increasing amount of the cash balance that is held overseas. Fitch forecasts FCF to remain above \$4 billion annually, representing FCF margins of 20% to 25% through 2017, despite a growing dividend that has increased to \$1.9 billion for the latest 12 months (LTM) as of Dec. 31, 2014 (currently \$0.79 per share per quarter), from \$500 million in 2011 (\$0.28 per share per quarter). FCF was \$6 billion for the LTM as of Dec. 31, 2014.

The company also had cash and short-term investments of \$27 billion on Dec. 31, 2014 of which only \$1.3 billion resides domestically according to Amgen reports. Growth in the amount of cash held overseas raises concern that dividends and share repurchases will require debt funding, driving higher gross leverage.

Additional liquidity comes from full availability of a recently amended and extended \$2.5 billion credit facility that matures on July 30, 2019. The facility backstops an untapped \$2.5 billion commercial paper program providing additional financial flexibility.

KEY ASSUMPTIONS

Fitch's key assumptions for Amgen's 'BBB'/Negative Outlook include:

--Mid single-digit organic revenue growth, which is somewhat offset by the negative effect of foreign exchange movements during 2015;
--Established products such as Neulasta and Enbrel as well as newer products including Kyrpolis and BLINCYTO will likely drive growth during 2015;
--Improving margins driven largely by reduced royalty payments to Pfizer and cost controls;
--Annual FCF (cash flow from operations minus capital expenditures minus dividends) of roughly \$4 billion during 2015;
--Leverage to trend lower, dropping to 3.0x by the end of 2015.


RATING SENSITIVITIES

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 Rating Outlook may be revised to Stable if Fitch believes that that the company will operate with gross debt leverage of between 2.5x to 3.0x. Fitch thinks this can be achieved through strong operational performance with relatively stable debt levels.

Negative: Future developments, individually or collectively, that may lead to negative rating action include the following:

--Gross debt leverage above 3.0x at the end of 2015 would likely result in a one-notch downgrade or the maintenance of the Negative Outlook;

--Progress toward the target could be hindered by financial decisions that include debt-financed share repurchases, dividends or acquistions. In addition, leverage improvement could be jeopardized by operational stress that decreases profitability, greater-than-expected biosimilar and brand name drug competition and/or unsuccessful commercialization of the late-stage research pipeline.

DEBT ISSUE RATINGS

Fitch currently rates Amgen as follows:

--Issuer Default Rating (IDR) 'BBB';
--Senior unsecured debt 'BBB';
--Bank loan 'BBB';
--Short-term IDR 'F2';
--Commercial paper 'F2'.

The Rating Outlook is Negative.