Fitch Affirms Ratings on Amgen (AMGN); Expects Continued GM Improvement

Fitch Ratings has affirmed Amgen Inc.'s (Nasdaq: AMGN) Issuer Default Rating (IDR) at 'BBB'. The Rating Outlook is Stable. The ratings apply to $34.5 billion of debt outstanding at March 31, 2016. A full list of Amgen's ratings can be found at the end of this release.

KEY RATING DRIVERS

--Amgen's gross debt leverage is at the high end of the range for its 'BBB' rating.

--Fitch believes Amgen will continue to improve margins through 2018.

--Revenue growth should continue during the intermediate term, supported by established, recently introduced, and late-stage pipeline products.

--Fitch expects Amgen to continue generating solid free cash flow (FCF) throughout the four-year forecast period.

--Roughly 30% of total firm revenues are at risk to patent expiry in the near term, however, biologics account for these sales. Biologics tend to gradually lose market share to branded or biosimilar competition.

--Amgen has adequate liquidity provided by its credit facility and cash balances, although the vast majority of cash resides outside the U.S.

High Gross Leverage: At 3.1x gross debt-to-EBITDA, Amgen's gross debt leverage is at the high end of the range for its 'BBB' rating. During the latest 12 month period (LTM) ended March 31, 2016, the company issued roughly $4.1 billion of debt to fund share repurchases which more than offset the deleveraging from EBITDA growth driven by its recently strong operational performance.

Continued Margin Improvement Expected: Fitch believes Amgen will continue to improve margins through 2018. The company's profitability improved during 2015. This was largely the result of a change in the Enbrel co-promotion agreement with Pfizer Inc. (Pfizer) which led to declining royalty payments to Pfizer through 2016. Fitch expects further margin expansion in 2016 driven by increasing sales, improving sales mix, incrementally lower royalty payments to Pfizer, and additional cost savings. The company projects its restructuring/transformation efforts will attain $400 million in cost savings in 2016 and ultimately increase the speed at which the company brings products to the market.

Reliable Growth: Growth of a number of established products, [XGEVA (bone metastases), Prolia (osteoporosis), Nplate (thrombocytopenia), Vectibix (metastatic colorectal cancer), Enbrel (autoimmune disorders)], progress in ramping up recently approved medicines and advancing pipeline projects should help to offset some of the risk of anticipated branded and biosimilar competition against Neulasta, Neupogen and Epogen.

Newer therapies such as Kyprolis (relapsed and refractory multiple myeloma), Blincyto (acute lymphoblastic leukemia), Corlanor (heart failureand Imlygic (cancer) are gaining traction in the market, as good clinical experience drives increased acceptance in the medical community. Repatha (hyperlipidemia) awaits clinical outcomes data late 2016/early 2017. These five products account for about only 4% of sales, but they have promising long-term growth prospects.

Upcoming Products support Growth: Amgen has also experienced a number of successes in advancing products through its pipeline. The company received FDA approval for, Blincyto in December 2014, Corlanor in April 2015, Repatha in August 2015 and Imlygic in October 2015. Romosozumab (osteoporosis) has generated positive clinical trial data, and Amgen submitted it in July 2016 to the FDA for approval.

The company submitted Parsabiv (secondary hyperparathyroidism) in August 2015 to the FDA for approval. These drugs have the potential to improve outcomes in a number of patients that currently face suboptimal treatment options. In addition, Amgen is making progress in advancing a number of biosimilars through the regulatory approval process.

Consistently Positive FCF: Fitch expects Amgen to continue generating solid free cash flow (FCF; cash flow from operations [CFFO] less capital expenditure and dividends) of at least $5.7 billion annually, representing about a 25% FCF margin, supported by improving sales and margins, modestly offset by an increasing dividend. 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.

Intellectual Property Challenges: Neulasta's U.S. base patent expired in October 2015 and the European base patent 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 firm revenues at risk to branded or biosimilar competition. Amgen has already lost patent protection in the U.S and Europe for Epogen and Neupogen.

Teva's branded medication and Sandoz's recently-approved biosimilar therapy will likely continue to 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 the competitors to spend on marketing and selling. Stiff price competition will be less likely for Amgen. In addition, Amgen's On-Body injector for Neulasta could help fend off biosimilar competition, which is not expected on the market before year-end 2016.

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 commercialization offset by increased competitive pressure for some established products.
--FCF of about $5.7 billion with continued improvement in the operating EBITDA margin.
--Cash deployment prioritized for dividends, share repurchases and targeted acquisitions.
--Total leverage maintained at or below 3x.

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 maintained leverage in the 2.2x to 2.6x range and operational- and financial performance remained strong.

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

--An expectation for gross debt leverage maintained durably above 3x would likely result in a Negative Outlook or a one-notch downgrade;
--Stressed leverage could be 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 commercialization of the late-stage research pipeline have the potential to stress its current rating.

LIQUIDITY

The biggest concern in Amgen's liquidity profile is the growing amount of cash balances held overseas. The company had cash and short-term investments of $34.7 billion on March 31, 2016, of which only $6.8 billion 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 projects FCF (CFFO less capital expenditures and dividends) to remain roughly above $5.7 billion annually, representing FCF margins of around 25% through 2018, included a growing dividend that is currently at $2.55 billion for the LTM as of March 31, 2016. FCF was $6.5 billion for the LTM as of March 31, 2016.

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. Fitch expects Amgen will refinance the vast majority of its debt maturities. The company has roughly $2.1 billion of debt maturing in 2016, $4.3 billion in 2017, $2.1 billion in 2018 and $3.4 billion in 2019.

FULL LIST OF RATING ACTIONS

Fitch affirms Amgen's ratings as follows:
--Long-Term IDR at 'BBB';
--Senior unsecured debt at 'BBB';
--Bank loan at 'BBB';
--Short-Term at IDR 'F2';
--Commercial at paper 'F2'.

The Rating Outlook is Stable.

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