The latest information on the rating, including rating reports and related methodologies, are available on this LINK.

Rating action

Scope Ratings has today affirmed the A- issuer rating with Stable Outlook, the S-1 short-term rating, the A- senior unsecured debt rating and the BBB subordinated debt rating of German group Merck KGaA. The agency also affirmed the A- issuer rating, the A- senior unsecured debt rating as well as the BBB subordinated debt rating for the wholly owned financing subsidiaries Merck Financial Services GmbH and EMD Finance LLC.

Rating rationale

The rating affirmation continues to reflect Scope’s view of Merck’s credit-supportive business risk profile, which consists of the mostly stable and cash-generative business models of its three critically sized divisions. Scope sees the group’s diversified structure as reflecting the owning family’s philosophy, which includes achieving balanced cyclicality exposure. Merck’s Healthcare division still depends on its mature product portfolio and is continuing to transition towards a broader pharma portfolio by expanding into immuno-oncology therapies. However, recent sales trends of its key drug Bavencio (anti-PD-L1), jointly developed and marketed with Pfizer Inc, have been rather modest. To date, the drug is approved for smaller indications (bladder cancer and Merkel cell carcinoma) while possible approvals for the more sizeable indications of renal cell cancer and lung cancer are expected within the next months. Bavencio is currently developed in four Phase 3 projects. Sales of Merck’s new multiple sclerosis drug Mavenclad have ramped up successfully, following US approval in early 2019. This was a major breakthrough in Scope’s view, as it opened up blockbuster potential for the drug. In a crowded multiple sclerosis product market, the drug is likely to generate more than EUR 250m in revenues in its first year after approval.

Scope’s assessment of Merck’s financial risk profile continues to reflect the agency’s expectation that management is both willing and able to reduce debt continuously in the coming years. This expectation is supported by Merck’s reduction of net financial debt by EUR 3.4bn in 2018, despite operational headwinds. Following the Versum acquisition, management has announced a focus on costs after 2019, including R&D as well as sales and marketing expenditures. Thus, while 2019 credit metrics will be negatively affected by the acquisition debt for Versum (only one quarter of cash flows will be consolidated in 2019), the following years will allow for deleveraging, in Scope’s view, as the potential to realise growth in all divisions will be unlocked by management’s increased focus on cost. Scope therefore expects credit metrics for 2020 to move in line with the requirements for the ratings, namely funds from operations/Scope-adjusted-debt (SaD) of 30% and adjusted EBITDA/SaD of 2.5x.

Rating-change drivers

• Positive: funds from operations/SaD above 35%, SaD/EBITDA significantly below 2.5x on a sustainable basis
   
• Negative: funds from operations/SaD of below 30% and SaD/EBITDA of above 2.5x

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

Methodology
The methodologies used for this rating and rating outlook (Corporate Ratings; European Pharmaceuticals) are available on www.scoperatings.com.
Historical default rates of the entities rated by 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 definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale.
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 and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, 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 Stäblein, Executive Director
The Merck KGaA issuer rating/outlook was first released by Scope on 19 October 2016. The rating/outlook were last updated on 02 November 2018.
The Merck KGaA short-term rating was first released by Scope on 19 October 2016. The rating was last updated on 02 November 2018.
The Merck KGaA senior unsecured debt rating/outlook was first released by Scope on 19 April 2018. The rating was last updated on 02 November 2018.
The Merck KGaA subordinated debt rating/outlook was first released by Scope on 19 April 2018. The rating was last updated on 02 November 2018.
The Merck Financial Services GmbH issuer rating/outlook was first released by Scope on 19 April 2018. The rating was last updated on 02 November 2018.
The Merck Financial Services GmbH senior unsecured debt rating/outlook was first released by Scope on 19 April 2018. The rating was last updated on 02 November 2018.
The Merck Financial Services GmbH subordinated debt rating/outlook was first released by Scope on 19 April 2018. The rating was last updated on 02 November 2018.
The EMD Finance LLC issuer rating/outlook was first released by Scope on 19 April 2018.The rating was last updated on 02 November 2018.
The EMD Finance LLC senior unsecured debt rating/outlook was first released by Scope on 19 April 2018. The rating was last updated on 02 November 2018.
The EMD Finance LLC subordinated debt rating/outlook was first released by Scope on 19 April 2018. The rating was last updated on 02 November 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
© 2019 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 Directors: Torsten Hinrichs and Guillaume Jolivet.