Merck & Co. sees ratings upgrade to Aa3 by Moody’s Ratings

Investing.com -- Moody’s Ratings has upgraded the ratings of pharmaceutical giant Merck & Co (NYSE:MRK)., Inc. and its subsidiaries to Aa3 from A1. The revised ratings apply to Merck & Co ., Inc.’s senior unsecured notes, the backed senior unsecured notes of subsidiary Merck (NSE:PROR) Sharp (OTC:SHCAY) & Dohme LLC, and the backed senior unsecured notes of subsidiary MSD Netherlands Capital B.V. The ratings agency has also affirmed Merck & Co., Inc.’s Prime-1 short-term Commercial Paper rating.

In addition to this, Moody’s upgraded Merck & Co., Inc.’s senior unsecured revolving credit facility to Aa3 from A1, and the senior unsecured shelf ratings of both Merck & Co., Inc. and MSD Netherlands Capital B.V. to (P)Aa3 from (P)A1. The outlook for Merck has also been revised to stable from positive.

Moody’s Vice President, Senior Credit Officer, Michael Weinstein, explained that the upgrade reflects growing confidence in Merck’s ability to withstand longer-term pressures on its Keytruda franchise. The company’s new products such as Winrevair and pipeline opportunities across key therapeutic categories including oncology, cardiometabolic, immunology, and HIV are expected to contribute to this stability.

The ratings agency anticipates that Merck will continue to pursue debt-funded acquisition opportunities to enhance its pipeline over the next few years, while maintaining conservative long-term financial policies. It is expected that Merck will generate a minimum of $10 billion in free cash flow annually over the next 2-3 years, providing significant financial flexibility before Keytruda’s U.S. patent expiration in late 2028.

The stable outlook incorporates expectations for solid operating performance and generally conservative financial policies, including debt reduction following any significant acquisitions.

Merck’s Aa3 rating reflects its strong global scale, high margins and strong credit metrics. Despite reliance on its oncology blockbuster Keytruda, a broader product portfolio supports Merck’s revenue and earnings growth. Unless there are extremely large acquisitions, the company’s debt/EBITDA ratio is expected to remain below 2.5x, with a strong free cash flow available for discretionary uses.

However, Merck’s revenue diversity is behind that of global peers due to concentration in Keytruda. The company also faces near-term challenges from its HPV vaccine Gardasil, though its long-term global growth prospects remain favorable. Considering these factors, Merck is likely to pursue business development deals to enhance its product portfolio and pipeline.

Factors that could lead to a future upgrade include increased revenue diversity, strong pipeline execution and solid operating performance. On the other hand, major pipeline setbacks, unexpectedly severe competitive pressures in key franchises or more aggressive financial policies could lead to a downgrade. Quantitatively, a debt/EBITDA ratio sustained above 2.5x could put pressure on the rating.

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