Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for Merck KGaA and its financing subsidiaries Merck Financial Services GmbH and EMD Finance LLC (rated A-/Positive) as well as the S-1 short-term debt rating, A- senior unsecured debt rating and BBB contractually subordinated debt (hybrid) rating on 17 August 2022.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

Merck KGaA reached the upper bound of its 2021 guidance after underlying market dynamics remained favourable: close to 80% of net sales growth came from its BIG 3 (Process Solutions in Life Science, New Medicines in Healthcare, and Semiconductor Solutions in Electronics).

As of H1 2022, Life Science remains the largest division. The segment’s sales organically reached a new record, driven by an acceleration of the core business that compensated for Covid-19-related headwinds. Pharma also contributed, fuelled by Bavencio uptake in first-line bladder cancer. Mavenclad and the recovery of the high-efficacy multiple sclerosis market remain in focus after the pandemic. Electronics performed well considering supply bottlenecks and thanks to expansionary efforts. Semiconductor remains the key growth driver and contributes two-thirds of segment sales.

Scope expects the positive trends to continue in the second half of 2022, which would mark another year of solid performance. In 2022, results will continue to lead to robust cash flow and higher financial flexibility for strategic growth. Merck remains committed to increasing group sales by EUR 25bn by 2025, which would require more than EUR 1bn in organic sales growth every year. Its ‘’BIG 3’’ will be the main drivers.

Scope has therefore updated its operating forecasts on the group for 2022, 2023 and 2024. Credit metrics are expected to remain strong. Leverage in terms of Scope-adjusted debt/EBITDA is expected to improve, which assumes no significantly increased shareholder remuneration or major debt-funded M&A activities in the foreseeable future. Scope will maintain the rating as long as there is no full guidance on the deployment of Merck’s cash cushion, expected to be significantly above the multi-year average, or on its medium-term deleveraging policy. Scope expects Merck to provide more transparency on these topics in its capital markets day in Oct 2022.

The methodologies applicable for the reviewed ratings and/or rating Outlooks (Corporate Rating Methodology, 15 July 2022; Pharmaceuticals Rating Methodology, 10 January 2022; Chemical Rating Methodology, 22 April 2022) are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Azza Chammem, Senior Analyst

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