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

Rating action

Scope Ratings GmbH (Scope) has upgraded the issuer ratings of Merck KGaA and its financing subsidiaries Merck Financial Services GmbH and EMD Finance LLC to A/Stable from A-/Positive. The rating on senior unsecured debt has been upgraded to A from A- and the rating on contractually subordinated (hybrid) debt has been upgraded to BBB+ from BBB. The short-term debt rating for Merck KGaA has been affirmed at S-1.

Rating rationale

The upgrade is driven by Merck's strong growth, which has also led to improved credit metrics with Scope-adjusted debt/EBITDA leverage expected to be sustained at around 1.5x. Growth of the group’s three divisions will also continue to improve, driven by further investment in capacity expansion and the reinforcement of the supply chain to meet demand. The group’s portfolio of products is anticipated to show resilience to macroeconomic challenges.

Within the business risk profile (assessed at A), Merck’s competitive position is driven by the stable and cash-generative business models of its three divisions. Merck remains on track to reach its target by 2025 of EUR 25bn in sales excluding bolt-on acquisitions. The execution of its strategy to achieve a strongly diversified group and service a diverse range of customers continues to be credit-positive.

Life Science remains the group’s largest division in terms of sales and profitability and will continue to be an industry leader despite fading demand for Covid-19 related products. Further investment is helping to expand offerings in its product portfolio, leaving the underlying business, particularly Process Solutions and Life Science Services (LSS), well positioned to capitalise on market trends.

In Healthcare, commercialised products will contribute to growth and to the leadership in targeted treatment areas such as multiple sclerosis. The recently launched drugs Mavenclad, Bavenico and Tepmetco continue to ramp up while Xevinapant and Evobrutib are in phase 3 and will soon be launched.

In Electronics, Merck is a leading player in semiconductor solutions, supported by the integration of Versum Materials and by broader lasting demand.

Life Science, Healthcare and Electronics support group profitability by generating EBITDA margins of above 30%. Inflation-related costs and possible pressure on the Electronics margin are expected to be manageable and easily absorbed.  

Management reiterated during its capital market day¹ that its strategy will focus on its ‘big three’ businesses: Process Solutions and LSS in Life Science, New Medicines in Healthcare, and Semiconductor Solutions in Electronics. These areas are targeted to generate around 80% of sales growth and more than 50% of sales in 2025.

Scope has upgraded its assessment of the financial risk profile to A from A- based on the the group’s material deleveraging and financial flexibility bolstered by solid cash generation. Credit metrics improved significantly in 2021 and are expected to continue to improve in 2022 to below 1.5x in terms of Scope-adjusted debt/EBITDA. Management announced its intention to seek inorganic growth, targeting EUR 15bn to EUR 20bn of strategically aligned acquisitions from 2023 onwards. Merck would ideally fund such deals with cash, followed by issuing debt, using hybrid bonds and finally by divesting existing assets that no longer align with strategy. While a large acquisition may increase leverage, the group is committed to fast deleveraging as shown after previous acquisitions. As a result of the increasing EBITDA, cash flow cover is expected to remain strong despite increasing capital expenditure guidance for the next years.

Merck’s liquidity is adequate. Short-term debt of EUR 2.4bn should be covered by a cash buffer of EUR 1.6bn (both as at end-June 2022) and free operating cash flow similar to its 2021 level. Merck also has committed undrawn credit lines of EUR 2bn.

Among the supplementary rating drivers, financial policy is the most important for Merck. Management is committed to a strong investment-grade rating and deleveraging after a significant acquisition.

The rating assessment includes high regulatory and reputational risks inherent to the pharmaceutical industry (credit-negative ESG factor). At the same time, Merck has a long record of providing products that contribute to human health and well-being (credit-positive ESG factor). 

One or more key drivers of the credit rating action are considered ESG factors.

Outlook and rating-change drivers

The Outlook is Stable and incorporates Scope’s view of growth driven by the main assets within the three divisions. Furthermore, the Stable Outlook reflects Scope’s expectation that Merck will maintain its conservative financial policy and leverage will remain at the current level, at a Scope-adjusted debt/EBITDA of around 1.5x on average, as a result of continuing investment to support growth.

A negative rating action could occur if Scope-adjusted debt/EBITDA were sustained at close to 2x, for example, due to a major acquisition that cannot be absorbed despite robust cash flow.

A positive rating action could be warranted if Scope-adjusted debt/EBITDA were sustained at around 1x, which is deemed unlikely given the acquisition target of EUR 15bn to EUR 20bn from
 2023.

Long-term and short-term debt ratings

The rating on senior unsecured debt has been upgraded to A from A-, the same level as the issuer rating.

The rating on contractually subordinated debt that qualifies as hybrid debt (deferability of coupon payments, structural subordination, perpetual duration) has been upgraded to BBB+ from BBB, two notches below the issuer rating.

The affirmed short-term debt rating of S-1 reflects Merck’s sound credit quality, supported by adequate internal liquidity and reflecting strong access to external funding through capital markets as signalled by the frequent issuance of bonds, commercial paper and hybrid debt.

Rating driver references
1. 6 October 2022 Merck KGaA Capital Market Day  

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

Methodology
The methodologies used for these Credit Ratings and/or Outlooks, (General Corporate Rating Methodology, 15 July 2022; Chemical Ratings Methodology, 22 April 2022; Pharmaceuticals Rating Methodology, 10 January 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Azza Chammem, Senior Analyst
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Merck KGaA issuer Credit Rating/Outlook was first released by Scope Ratings on 19 October 2016. The Credit Rating/Outlook was last updated on 11 October 2021.
The Merck KGaA short-term Credit Rating was first released by Scope Ratings on 19 October 2016. The Credit Rating was last updated on 11 October 2021.
The Merck KGaA senior unsecured debt Credit Rating was first released by Scope Ratings on 19 April 2018. The Credit Rating was last updated on 11 October 2021.
The Merck KGaA subordinated debt Credit Rating was first released by Scope Ratings on 19 April 2018.The Credit Rating was last updated on 11 October 2021.
The Merck Financial Services GmbH issuer Credit Rating/Outlook was first released by Scope Ratings on 19 April 2018. The Credit Rating/Outlook was last updated on 11 October 2021.
The Merck Financial Services GmbH senior unsecured debt Credit Rating was first released by Scope Ratings on 19 April 2018. The Credit Rating was last updated on 11 October 2021.
The Merck Financial Services GmbH subordinated debt Credit Rating was first released by Scope Ratings on 19 April 2018.The Credit Rating was last updated on 11 October 2021.
The EMD Finance LLC issuer Credit Rating/Outlook was first released by Scope Ratings on 19 April 2018.The Credit Ratings/Outlooks were last updated on 11 October 2021.
The EMD Finance LLC senior unsecured debt Credit Rating was first released by Scope Ratings on 19 April 2018.The Credit Rating was last updated on 11 October 2021.
The EMD Finance LLC subordinated debt Credit Rating was first released by Scope Ratings on 19 April 2018. The Credit Rating was last updated on 11 October 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
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