HSBC Turns Bullish on Merck KGaA on Valuation Grounds

Key Moments

HSBC Upgrade and Sector Positioning

Investing.com — HSBC upgraded Merck KGaA to Buy from Hold, positioning the German conglomerate as one of its favored names in the life sciences tools space. The bank grouped Merck with Lonza, Danaher, and Agilent as preferred picks in the sector.

The analyst team led by Shubhangi Gupta emphasized that Merck delivered one of the fastest growth rates in tools during the first half of 2026, even as the company’s equity performance did not keep pace with the broader rally across life sciences tools and services stocks.

Following the rating change, Merck’s shares advanced 1.7% by 05:06 ET (09:06 GMT).

Growth Dynamics and Segment Offsets

HSBC’s analysts acknowledged that life sciences growth over the coming four quarters is expected to run below the pace seen in the first half of 2026. However, they argued that this should not undermine confidence in Merck’s longer-term growth profile, provided that peers show accelerating trends and that the company’s comparison base is well understood.

They further noted that faster momentum in Merck’s electronics business is expected to counterbalance some of the anticipated moderation in the tools segment.

M&A Assessment and Bio-Techne Deal

The analysts highlighted Merck’s historically careful approach to mergers and acquisitions. In reviewing the company’s Bio-Techne transaction, they stated they were left “unconvinced regarding the return accretion potential,” even after considering future optionality from the combined platform.

At the same time, HSBC acknowledged that enhancing capabilities in cell therapy represents “a real need” for Merck. They indicated that they see merit in the acquisition’s growth contribution and its strategic underpinnings over a time frame exceeding 10 years.

Valuation as a Key Driver

Beyond operating fundamentals and strategic initiatives, HSBC pointed to Merck’s relative valuation as a core element in the decision to upgrade. The analysts cited this as a third major factor supporting the shift to a Buy recommendation.

Sector Backdrop: Rally and Ongoing Debates

The call on Merck comes as HSBC evaluates whether the recent strength in Life Sciences Tools and Services equities represents a lasting upturn or a short-lived bounce. According to the analysts, the sector has moved higher over the past three months, underpinned by improved demand indicators in pharma and biotech, steady execution at contract drug manufacturers (CDMOs) and pharma services providers, more stable equipment trends, and better order growth and book-to-bill ratios.

They identified several issues that remain central to investor discussions heading into the second half. These include whether current weakness in bioprocessing is a matter of timing rather than evidence of a more prolonged recovery path, how quickly instrument demand can rebound against tough consumables comparisons, the durability of Lonza’s capacity expansion, and whether instrument growth is signaling enduring demand or merely a short-term replacement catch-up.

Medium-Term Tailwinds and Diagnostics Outlook

HSBC’s team pointed to multiple medium-term drivers underpinning their constructive view on the broader space. Among these are patent cliffs creating openings for innovation and biosimilar launches, rising demand for sequencing and single-use technologies tied to biologics, and geopolitical developments that are benefiting Western suppliers.

They also highlighted diagnostics as a segment where current market expectations “look conservative,” suggesting the potential for positive surprises relative to consensus assumptions.

Biotech Funding and Implications for Tools Demand

The analysts observed that biotech venture capital investment rebounded sharply in the first half of 2026 after an extended slowdown. They expect this recovery to feed through to tools and CXO demand with a typical lag of four to eight months, offering another prospective support for the sector.

Summary of HSBC’s Merck Thesis