OREANDA-NEWS. Fitch Ratings has assigned Amgen Inc.'s (Amgen) Swiss franc-denominated notes offering a 'BBB' rating.

The company intends to use the net proceeds from this issue to repay outstanding indebtedness, including borrowings under a term loan credit agreement, to repurchase shares of common stock and for general corporate purposes.

The notes are rated at the same level as Amgen's Long-term Issuer Default Rating, as they represent senior unsecured obligations of the company

The company had USD31.6bn of debt outstanding at end-2015, which are also rated at 'BBB'.

A full list of Amgen's ratings is available at the end of this commentary.

Amgen's profitability improved during 2015. This is largely the result of a change in the Enbrel co-promotion agreement with Pfizer Inc. (Pfizer) resulting in declining royalty payments to Pfizer through 2016. Fitch expects further margin expansion in 2016, driven by increasing sales, improving mix, lower royalty payments to Pfizer, additional cost savings.

Growth of a number 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, Neupogen and Epogen.

Amgen has made significant progress with its drug development pipeline during the past two years with a number of key approvals and positive clinical data for other projects in late-stage development.

Fitch expects Amgen to continue generating solid free cash flow (FCF: cash from operations less capital expenditure and dividends) of at least USD6bn annually, representing about a 30% FCF margin, supported by improving sales and margins, modestly offset by an increasing dividend.

At 3.0x Amgen's gross debt-to-EBITDA is at the high end of the range for its 'BBB' rating. In 2015, the company issued USD3.5bn of debt to fund share repurchases, which offset the deleveraging from EBITDA growth driven by recently strong operational performance.

KEY RATING DRIVERS
Continued Margin Improvement Expected
Fitch expects Amgen's margins will continue to improve during the intermediate term. EBITDA margin will benefit from an improving sales mix, and a reduction in selling, general and administration expense. The declining 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 will also support margin improvement in 2016. In addition, prioritisation of product pipeline projects has 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), Vectibix (metastatic colorectal cancer) and Kyprolis (relapsed and refractory multiple myeloma) are posting strong double-digit growth, as good clinical experience drives increased acceptance in the medical community. These four products accounted for only 18% of sales during 2015 compared with 16% in 2014. Aggregrate growth for these five products was 23% during 2015, while total sales grew 8% during the same period. In addition, 2016 sales will benefit from recent market introductions of Repatha and Imlygic.

Significant 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, Corlanor (heart failure) in April 2015, Repatha (hyperlipidemia) in August 2015 and Imlygic (cancer) in October 2015. Brodalumumab (rheumatoid arthritis) and romosozumab (osteoporosis) have generated positive clinical trial data. These drugs all have the potential to improve outcomes in a number of patients that currently face sub-optimal treatment options.

Intellectual Property Challenges
The base patent for Neulasta in the U.S. expired in October 2015, and in Europe it expired in February 2015. International patents for Sensipar lapsed 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 revenues that are at risk to branded or biosimilar competition.

Amgen has already lost patent protection in the U.S. for Epogen and Neupogen. 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 filagrastim treatment. However, the competing products will not benefit from interchangeability with the originator biologics, requiring competitors to spend on marketing and selling. This means that stiff price competition will be less likely for Amgen's products. In addition, Amgen's On-Body injector for Neulasta could help mitigate biosimilar competition.

KEY ASSUMPTIONS
Fitch's key assumptions for 2016 within the rating case for Amgen include:
--Low to mid-single digit organic top-line growth driven by the uptake of new product commercialisation offset by increased competitive pressure for some established products .
--FCF of about USD6bn with a roughly 50 bps improvement in the operating EBITDA margin.
--Cash deployment prioritised for dividends, share repurchases and targeted acquisitions.
--Gross leverage is maintained at or below 3.0x.

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;
--An upgrade could occur if the company maintains leverage in the 2.2x to 2.6x range and operational performance remains strong.

Negative: Future developments, individually or collectively, that may lead to negative rating action include the following:
--Gross leverage sustained above 3.0x, which would likely result in a Negative Outlook or a one-notch downgrade;
--Stressed leverage driven by financial decisions that include debt-financed share repurchases, dividends or acquisitions. In addition, operational stress that decreases profitability, greater-than-expected biosimilar and brand name drug competition and/or unsuccessful commercialisation of the late-stage research pipeline can put ratings under pressure.

ADEQUATE LIQUIDITY
The biggest risk to Amgen's liquidity profile is the increasing amount of cash balances held overseas. The company had cash and short-term investments of USD30bn on 30 September, 2015, of which only USD1.1bn resides domestically. Unless the company chooses to repatriate cash, Fitch believes that Amgen will continue to issue debt to fund domestic capital deployment, including payments to shareholders.

Fitch forecasts FCF to remain above USD6bn annually, representing a FCF margin of around 30% through 2018, included a growing dividend that is currently at USD2.26bn for the latest 12 months (LTM) to September 2015. FCF was USD6.6bn for the LTM to September 2015.

Additional liquidity comes from full availability of a recently amended and extended USD2.5bn credit facility that matures on 30 July2019. The facility backstops an untapped USD2.5bn commercial paper programme providing additional financial flexibility. Fitch expects Amgen will refinance the vast majority of its debt maturities. The company has roughly USD2.3bn of debt maturing in 2016, USD4.3bn in 2017, USD2bn in 2018 and USD3.4bn in 2019.

FULL LIST OF RATING ACTIONS

Fitch rates Amgen as follows:

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