Pharma Face-Off: Johnson & Johnson vs Merck O2C Performance

How does Johnson & Johnson beat Merck in cash efficiency despite longer payment and collection times? Let's find out.

When it comes to the business of pharma, speed, and efficiency in the financial engine room can make all the difference. With billions at stake in research funding and product sales, how swiftly global pharma giants Johnson & Johnson and Merck receive payments and disburse funds is a key performance indicator.

In this pacy payments powwow, we pit J&J against Merck in a high-stakes comparison of their account receivables, from days sales outstanding to cash conversion cycles.

Join us for an injectable dose of their financial metrics, as we see who's leaving the other in their pharmaceutical dust when converting sales into cash.

It's crunch time in the pharma finance wars, so prepare for a piston-pumping pace as we get their accounting pulses racing!

Johnson & Johnson's CCC beats Merck's by 51%

Across the five years from 2019 to 2023, Johnson & Johnson consistently maintained a lower Cash Conversion Cycle(CCC) compared to Merck.

In 2019, J&J’s CCC stood at 84 days, significantly lower than Merck’s CCC of 197 days, indicating J&J’s superior efficiency in managing its working capital.

Throughout the years, J&J continued to demonstrate better efficiency, with its CCC ranging from 54 to 88 days, while Merck’s CCC ranged from 120 to 197 days.

The widest gap between the two companies CCCs was observed in 2019, with J&J’s CCC being 113 days lower than Merck’s. Although the gap narrowed in subsequent years, J&J consistently maintained a lead.

Notably, both companies managed to decrease their CCC over the years, indicating efforts to improve working capital management, but J&J consistently outperformed Merck in this aspect.

Now, let’s delve into the specific metrics—Days Sales Outstanding (DSO), Days Payable Outstanding (DPO), and Days Inventory Outstanding (DIO)—to understand better what drove these CCC scores.

Merck's DSO is 4 days lower

Comparing the Days Sales Outstanding (DSO) for Johnson & Johnson (J&J) and Merck over the last five years, we observe interesting trends.

Johnson & Johnson (J&J) has shown a modest fluctuation in DSO figures, ranging from 62 days in 2020 to 67 days in 2022, with an average of 64 days. 

Notably, in 2020, during the height of the COVID-19 pandemic, J&J’s DSO hit its lowest point at 62 days. This dip can be attributed in part to J&J’s pivotal role in developing a COVID-19 vaccine, underscoring the impact of significant external factors on financial metrics.

On the other hand, Merck showed a DSO range from 57 in 2023 to 65 days in 2019, averaging 60 days, showcasing a steady improvement in its collection efficiency over time.

Despite the apparent difference in averages—J&J being slightly higher by 4 days—both companies display comparable DSO figures, indicating similar global customer bases in Consumer Health, Pharmaceutical, and Medical Devices. Their shared commitment to innovation, extensive R&D, and sophisticated marketing strategies cater to diverse healthcare segments, maintaining their leadership in the Pharma industry.

Johnson & Johnson's DPO is 33 days higher

Johnson & Johnson’s average Days Payables Outstanding (DPO) was 134 days, ranging from 116 days in 2019 to 160 days in 2023. In contrast, Merck’s DPO averaged 105 days, between 93 in 2019 and 120 days in 2023.

This shows that Johnson & Johnson pays suppliers about a month (29 days on average) later than Merck. 

While both companies demonstrate stable payment practices, J&J’s higher DPO suggests better cash flow management and negotiations with suppliers, whereas Merck’s lower DPO indicates faster supplier payments.

Why is Merck’s DPO lower than Johnson & Johnson’s?

Procurement Operations with JAGGAER: Merck’s integration of JAGGAER’s procurement solution has optimized operations, managing 8,000 suppliers at one location. This has streamlined processes, reduced manual tasks, and improved data accuracy, culminating in significant cost savings and lower DPO.

Strategic Supplier Diversity Initiatives: Merck’s robust engagement with diverse suppliers and substantial financial support for minority – and women-owned businesses leads to a lower DPO. It offers its suppliers favorable terms and streamlined processes to enable faster payments to support its diverse supplier base.

Johnson & Johnson's DIO is 10 days lower

Comparing the Days Inventory Outstanding (DIO) for Johnson & Johnson (J&J) and Merck over the last five years reveals interesting trends and insights.

J&J’s DIO averaged 138 days, ranging from 117 in 2019 to 154 days in 2021 while Merck’s DIO averaged 148 days, fluctuating between 124 in 2022 and 173 days in 2019

Despite variations in individual years, J&J consistently maintained a lower DIO compared to Merck, with an average difference of 10 days.

This indicates that J&J managed its inventory more efficiently, holding inventory for a shorter duration compared to Merck.

Why is Johnson & Johnson’s DIO lower than Merck’s?

Inventory Optimization Through AI: J&J has leveraged AI-powered platforms to predict surgical product needs with over 90% accuracy across its operations, significantly minimizing excess inventory by up to 60%. This approach has effectively reduced instrument tray costs and sterilization expenses, leading to a decrease in DIO.

Streamlined Order Fulfillment Operations: J&J has streamlined its order fulfillment operations through the adoption of advanced technologies, including intelligence-based call routing and auto-answer systems. These enhancements have expedited order processing and delivery, further reducing the time inventory spends in warehouses and lowering DIO.

J&J Out-Cashed Merck in the Pharma Race

While both Johnson & Johnson and Merck demonstrated continuous improvements in their cash performance metrics over the past few years, J&J has consistently shown a leaner financial formula by maintaining a significantly lower average Cash Conversion Cycle. 

With an average Cash Conversion Cycle that was 51% lower than Merck’s, J&J has proved more efficient at converting sales into cash and crossing the cash finish line sooner. Although Merck collected receivables an average of just 4 days faster than J&J’s steady pace, J&J was able to extend its payment of suppliers by a whole 33 days on average, effectively stretching its working capital for longer periods. Additionally, J&J managed its inventory more efficiently by keeping products spinning on the shelves 10 days faster than Merck on average. 

As these two pharma titans rev their research and development engines for the high-stakes races that lie ahead in search of future blockbuster drugs, it remains unclear which powerhouse may pull ahead. However, with efficient cash flow and working capital management proven central to fueling the massive budgets required for innovation and commercialization in this industry, Johnson & Johnson has demonstrated the leanest financial formula to stay ahead of competitors so far. 

Both companies will need to keep their financial engines finely tuned to maintain pole position in the cash performance race and keep the cash flowing to the finish line.

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