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/Stable) as well as the S-1 short-term debt rating, the A senior unsecured debt rating and the BBB+ contractually subordinated debt (hybrid) rating on 18 August 2023.

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

After reviewing Merck KGaA’s FY 2022 and H1 2023 results, Scope has concluded that the business and financial risk profiles are in line with Scope’s assumptions despite the expected deteriorating results in FY 2023.

In 2022, Merck generated a 6.4% organic increase in group revenue, experiencing significant tailwinds from foreign exchange effects and a small portfolio effect related to the acquisition of Exelead. Sales grew by more than EUR 2.5bn in comparison to 2021 to reach EUR 22.2bn. Nearly 90% of the organic sales growth was driven by the big three subdivisions: Process Solutions and Life Science Services in Life Science; new medicines in Healthcare; and Semiconductor Solutions in Electronics.

Looking at H1 2023, Merck’s performance was very modest compared to H1 2022. Healthcare was the key growth driver as weaker market environment in Life Science and Electronics weighs on business performance. Life Science faced a significant decline in Covid-19-related sales while Semiconductor and Display Solutions in the Electronic division are slowly recovering.

Diversification into the three main business segments continues to benefit the group’s overall sales, which confirms the conglomerate structure's resilience. Healthcare is expected to slightly make up for the lost sales in the other divisions in 2023. While Life Science and Electronics are experiencing a slowdown, Healthcare enjoys good momentum thanks to increasing sales of Mavenclad, Bavencio and fertility products. The profitability margin will be slightly impacted by lower group sales, higher inflation-induced costs and adverse foreign exchange developments. Recovery of the Life Science and Electronics divisions and continuous cost control will be key to improving margins in the coming years.

The rating continues to be supported by the issuer’s resilient financials despite going through a transition period. Merck has updated its guidance for FY 2023 as it expects diminishing sales and EBITDA. At the same time, it confirmed its EUR 25bn target sales by FY 2025, excluding inorganic growth. Scope has updated its operating forecasts accordingly. Credit metrics are resilient despite a slight deterioration in 2023. Scope expects leverage in terms of Scope-adjusted debt/EBITDA to remain below 1.5x and cash flow to remain strong despite increased capital expenditure guidance for the next years.

The base case assumes that no big acquisition will take place in the current fiscal year given the challenging operating environment.

The methodologies applicable for the reviewed ratings and/or rating Outlooks (General Corporate Rating Methodology, 15 July 2022; Pharmaceuticals Rating Methodology, 10 January 2023; Chemicals Rating Methodology,17 April 2023) 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, Associate Director

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