Rating Action

Merck KGaA

• Merck KGaA
• A-/stable - affirmation
• S-2 short-term rating – affirmation
• Merck Financial Services GmbH, EMD Finance LLC
• A-/stable – affirmation
• A- senior unsecured debt - affirmation
• BBB subordinated debt - affirmation

Rating Rationale

The ratings express our view of Merck’s three divisions’ (Health Care, Life Sciences and Performance Materials) very good cash generation capabilities, although slightly impaired by the profit downturn in liquid crystals, a subdivision of Performance Materials. This however is balanced in our view by the health care division’s progress on getting former pipeline projects marketed with initial success (Mavenclad for multiple sclerosis and Bavencio for oncology). Furthermore, we believe that the announced divestiture of the group’s consumer healthcare activity at the end of 2018 will benefit management’s focus on deleveraging after the acquisition of Signa Aldrich in 2016.

Rating Change Drivers

• Upside: considerable and uninterrupted improvement in credit metrics and proven turnaround in healthcare
• Downside: Inability to maintain at least 30% FFO/ SaD and 2.5x leverage

For the detailed rating report, click here.

Stress testing & cash flow analysis
No stress testing was performed. Scope performed its standard cash flow forecasting for the company.

Methodology
The methodology used for this rating(s) and/or rating outlook(s) Rating Methodology: Corporate Ratings, 15.01. 2018; European Pharmaceuticals, 15. January 2018 is available on www.scoperatings.com.
Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.

The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rated entity participate in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory Disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst Olaf Tölke, Managing Director
Person responsible for approval of the rating: Werner Staeblein, Executive Director
The Merck KGaA issuer rating/outlook was first released by Scope on 19.10.2016. The rating/outlook were last updated on 19.10.2017
The Merck KGaA short-term rating was first released by Scope on 19.10.2016. The ratings was last updated on 19.10.2017
The Merck KGaA senior unsecured debt rating/outlook was first released by Scope on 19.04.2018.
The Merck KGaA subordinated debt rating/outlook was first released by Scope on 19.04.2018.
The Merck Financial Services GmbH issuer rating/outlook was first released by Scope on 19.04.2018.
The Merck Financial Services GmbH senior unsecured debt rating/outlook was first released by Scope on 19.04.2018.
The Merck Financial Services GmbH subordinated debt rating/outlook was first released by Scope on 19.04.2018.
The EMD Finance LLC issuer rating/outlook was first released by Scope on 19.04.2018.
The EMD Finance LLC senior unsecured debt rating/outlook was first released by Scope on 19.04.2018.
The EMD Finance LLC subordinated debt rating/outlook was first released by Scope on 19.04.2018.

Potential conflicts
Please see www.scoperatings.com. for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
© 2018 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstrasse 5 D-10785 Berlin.
Scope Ratings GmbH, Lennéstrasse 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Director: Torsten Hinrichs.