Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Sales to Customers

Analysis of Consolidated Sales

For the fiscal nine months of 2021, worldwide sales were $69.0 billion, a total increase of 14.7%, including an operational increase of 12.4% as compared to 2020 fiscal nine months sales of $60.1 billion. Currency fluctuations had a positive impact of 2.3% for the fiscal nine months of 2021. In the fiscal nine months of 2021, the net impact of acquisitions and divestitures on worldwide operational sales growth was a negative 0.7%.

Sales by U.S. companies were $35.0 billion in the fiscal nine months of 2021, which represented an increase of 11.7% as compared to the prior year. In the fiscal nine months of 2021, the net impact of acquisitions and divestitures on the U.S. operational sales growth was a negative 0.1%. Sales by international companies were $34.0 billion, an increase of 18.0%, including an operational increase of 13.1%, and a positive currency impact of 4.9% as compared to the fiscal nine months sales of 2020. In the fiscal nine months of 2021, the net impact of acquisitions and divestitures on the international operational sales growth was a negative 1.3%.

In the fiscal nine months of 2021, sales by companies in Europe achieved growth of 21.6%, which included an operational increase of 15.3% and a positive currency impact of 6.3%. Sales by companies in the Western Hemisphere, excluding the U.S., achieved growth of 9.2%, which included an operational increase of 8.1%, and a positive currency impact of 1.1%. Sales by companies in the Asia-Pacific, Africa region achieved growth of 16.8%, including an operational increase of 12.3% and a positive currency impact of 4.5%.

Note: values may have been rounded

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For the fiscal third quarter of 2021, worldwide sales were $23.3 billion, a total increase of 10.7%, which included operational growth of 9.9% and a positive currency impact of 0.8% as compared to 2020 fiscal third quarter sales of $21.1 billion. In the fiscal third quarter of 2021, the net impact of acquisitions and divestitures on worldwide operational sales growth was a negative 0.7%.

Sales by U.S. companies were $12.0 billion in the fiscal third quarter of 2021, which represented an increase of 7.9% as compared to the prior year. In the fiscal third quarter of 2021, the net impact of acquisitions and divestitures on the U.S. operational sales growth was a negative 0.1%. Sales by international companies were $11.4 billion, a total increase of 13.8%, which included operational growth of 12.1% and a positive currency impact of 1.7%. In the fiscal third quarter of 2021, the net impact of acquisitions and divestitures on the international operational sales growth was a negative 1.4%.

In the fiscal third quarter of 2021, sales by companies in Europe achieved growth of 15.9%, which included operational growth of 14.6% and a positive currency impact of 1.3%. Sales by companies in the Western Hemisphere, excluding the U.S., achieved growth of 15.7%, including operational growth of 13.4% and a positive currency impact of 2.3%. Sales by companies in the Asia-Pacific, Africa region achieved growth 10.5%, including operational growth of 8.5% and a positive currency impact of 2.0%.

Note: values may have been rounded

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Analysis of Sales by Business Segments

Consumer Health

Consumer Health segment sales in the fiscal nine months of 2021 were $11.0 billion, an increase of 5.2% as compared to the same period a year ago, including operational growth of 3.1% and a positive currency impact of 2.1%. U.S. Consumer Health segment sales increased by 2.8%. International Consumer Health segment sales increased by 7.3%, including operational growth of 3.5% and a positive currency impact of 3.8%. In the fiscal nine months of 2021, the net impact of acquisitions and divestitures on the Consumer Health segment operational sales growth was a negative 1.0%.

Major Consumer Health Franchise Sales — Fiscal Nine Months Ended

(Dollars in Millions)						October 3, 2021						September 27, 2020						Total Change						Operations Change						Currency Change
OTC						$	3,854					$	3,639					5.9		%				3.0		%				2.9		%
Skin Health/Beauty						3,457						3,273						5.6						3.9						1.7
Oral Care						1,240						1,204						3.0						0.8						2.2
Baby Care						1,167						1,110						5.2						4.3						0.9
Women’s Health						684						664						3.0						2.1						0.9
Wound Care/Other						575						545						5.4						3.6						1.8
Total Consumer Health Sales						$	10,978					$	10,435					5.2		%				3.1		%				2.1		%

Consumer Health segment sales in the fiscal third quarter of 2021 were $3.7 billion, an increase of 5.3% as compared to the same period a year ago, including operational growth of 4.1% and a positive currency impact of 1.2%. U.S. Consumer Health segment sales increased by 4.5%. International Consumer Health segment sales increased by 5.9% including operational growth of 3.7% and a positive currency impact of 2.2%. In the fiscal third quarter of 2021, the net impact of acquisitions and divestitures on the Consumer Health segment operational sales growth was a negative 1.6% primarily due to the DR. CI:LABO - Sedona divestiture in Asia Pacific.

Major Consumer Health Franchise Sales — Fiscal Third Quarter Ended

(Dollars in Millions)						October 3, 2021						September 27, 2020						Total Change						Operations Change						Currency Change
OTC						$	1,372					$	1,142					20.1		%				18.2		%				1.9		%
Skin Health/Beauty						1,124						1,149						(2.2)						(3.0)						0.8
Oral Care						398						412						(3.3)						(4.5)						1.2
Baby Care						391						393						(0.3)						(1.2)						0.9
Women’s Health						232						230						0.8						0.8						0.0
Wound Care/Other						182						189						(3.5)						(4.8)						1.3
Total Consumer Health Sales						$	3,700					$	3,514					5.3		%				4.1		%				1.2		%

The OTC franchise achieved operational growth of 18.2% as compared to the prior year fiscal third quarter. Growth was driven by Analgesics, TYLENOL® and MOTRIN®, digestive health and the hydration benefit offering (ORSL).

The Skin Health/Beauty franchise experienced an operational decline of 3.0% as compared to the prior year fiscal third quarter. The decline was driven by the DR. CI:LABO - Sedona divestiture in Asia Pacific, U.S. external supply constraints and the aerosol sunscreen voluntary recall partially offset by worldwide COVID-19 recovery and e-commerce growth as well as strong growth outside the U.S. of AVEENO® and NEUTROGENA®.

The Oral Care franchise experienced an operational decline of 4.5% as compared to the prior year fiscal third quarter. The decline was primarily driven by divestitures and U.S. external supply constraints partially offset by market growth in the U.S. along with strong performance in Asia Pacific due to successful brand building and promotional campaigns.

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The Baby Care franchise experienced an operational decline of 1.2% as compared to the prior year fiscal third quarter. The decline was driven by COVID-19 related lockdowns in parts of Asia Pacific coupled with competitive pressures in that region partially offset by worldwide AVEENO® Baby strength.

The Women’s Health franchise achieved operational growth of 0.8% as compared to the prior year fiscal third quarter primarily driven by COVID-19 market recovery and favorable price in Latin America partially offset by disruptions in Europe due to flooding.

The Wound Care/Other franchise experienced an operational decline of 4.8% as compared to the prior year fiscal third quarter primarily driven by competitive pressures outside the U.S. and impacts from prior year stocking partially offset by U.S. category growth.

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Pharmaceutical

Pharmaceutical segment sales in the fiscal nine months of 2021 were $37.8 billion, an increase of 13.5% as compared to the same period a year ago, with an operational increase of 11.3% and a positive currency impact of 2.2%. U.S. Pharmaceutical sales increased 10.3% as compared to the same period a year ago. International Pharmaceutical sales increased by 17.5%, including operational growth of 12.5% and a positive currency impact of 5.0%. In the fiscal nine months of 2021, the net impact of acquisitions and divestitures on the Pharmaceutical segment operational sales growth was a negative 0.5%.

Major Pharmaceutical Therapeutic Area Sales** — Fiscal Nine Months Ended

(Dollars in Millions)						October 3, 2021						September 27, 2020						Total Change						Operations Change						Currency Change
Immunology						$	12,395					$	10,950					13.2		%				11.3		%				1.9		%
REMICADE®						2,426						2,846						(14.8)						(16.1)						1.3
SIMPONI®/ SIMPONI ARIA®						1,717						1,667						3.0						1.4						1.6
STELARA®						6,800						5,463						24.5						22.4						2.1
TREMFYA®						1,434						965						48.5						46.1						2.4
Other Immunology						18						9						91.6						89.5						2.1
Infectious Diseases						3,424						2,662						28.6						26.1						2.5
COVID-19 VACCINE						766						—						*						*						—
EDURANT®/rilpivirine						764						716						6.7						1.4						5.3
PREZISTA®/ PREZCOBIX®/ REZOLSTA®/ SYMTUZA®						1,568						1,615						(2.9)						(4.1)						1.2
Other Infectious Diseases						325						331						(1.8)						(5.0)						3.2
Neuroscience						5,218						4,850						7.6						5.5						2.1
CONCERTA®/methylphenidate						489						469						4.1						0.8						3.3
INVEGA SUSTENNA®/ XEPLION®/ INVEGA TRINZA®/ TREVICTA®						2,994						2,688						11.4						9.4						2.0
RISPERDAL CONSTA®						452						475						(4.9)						(6.6)						1.7
Other Neuroscience						1,284						1,218						5.5						3.6						1.9
Oncology						10,770						8,933						20.6						17.4						3.2
DARZALEX®						4,378						2,937						49.1						46.0						3.1
ERLEADA®						907						519						74.7						72.2						2.5
IMBRUVICA®						3,307						3,011						9.9						6.7						3.2
ZYTIGA®/ abiraterone acetate						1,749						1,848						(5.4)						(9.4)						4.0
Other Oncology(1)						428						619						(30.7)						(32.4)						1.7
Pulmonary Hypertension						2,599						2,283						13.9						12.7						1.2
OPSUMIT®						1,371						1,187						15.5						14.1						1.4
UPTRAVI®						927						792						17.1						16.2						0.9
Other Pulmonary Hypertension						301						304						(1.1)						(1.9)						0.8
Cardiovascular / Metabolism / Other						3,386						3,625						(6.6)						(8.1)						1.5
XARELTO®						1,794						1,716						4.5						4.5						—
INVOKANA®/ INVOKAMET®						443						578						(23.4)						(25.2)						1.8
PROCRIT®/EPREX®						366						423						(13.4)						(15.8)						2.4
Other						783						908						(13.8)						(17.3)						3.5
Total Pharmaceutical Sales						$	37,792					$	33,304					13.5		%				11.3		%				2.2		%

• Percentage greater than 100% or not meaningful

**Certain prior year amounts have been reclassified to conform to current year presentation

(1) Inclusive of VELCADE® which was previously disclosed separately

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Pharmaceutical segment sales in the fiscal third quarter of 2021 were $13.0 billion, an increase of 13.8% as compared to the same period a year ago, including an operational increase of 13.2% and a positive currency impact of 0.6%. U.S. Pharmaceutical sales increased 12.2% as compared to the same period a year ago. International Pharmaceutical sales increased by 15.9%, including operational growth of 14.6% and a positive currency impact of 1.3%. In the fiscal third quarter of 2021, the net impact of acquisitions and divestitures on the Pharmaceutical segment operational sales growth was a negative 0.6%. Adjustments to previous sales reserve estimates were approximately $0.2 billion in both fiscal third quarters of 2021 and 2020.

Major Pharmaceutical Therapeutic Area Sales** — Fiscal Third Quarter Ended

(Dollars in Millions)						October 3, 2021						September 27, 2020						Total Change						Operations Change						Currency Change
Immunology						$	4,250					$	3,789					12.2		%				11.7		%				0.5		%
REMICADE®						761						921						(17.4)						(18.3)						0.9
SIMPONI®/ SIMPONI ARIA®						571						592						(3.3)						(3.1)						(0.2)
STELARA®						2,378						1,947						22.2						21.7						0.5
TREMFYA®						537						327						64.1						63.5						0.6
Other Immunology						3						3						(26.4)						(27.5)						1.1
Infectious Diseases						1,389						864						60.6						59.8						0.8
COVID-19 VACCINE						502						—						*						*						—
EDURANT®/rilpivirine						259						236						9.6						8.6						1.0
PREZISTA®/ PREZCOBIX®/ REZOLSTA®/ SYMTUZA®						517						526						(1.7)						(2.2)						0.5
Other Infectious Diseases						110						102						7.8						5.4						2.4
Neuroscience						1,689						1,605						5.3						4.6						0.7
CONCERTA®/ methylphenidate						157						149						4.5						3.3						1.2
INVEGA SUSTENNA®/ XEPLION®/ INVEGA TRINZA®/ TREVICTA®						1,004						926						8.5						8.1						0.4
RISPERDAL CONSTA®						140						152						(8.4)						(8.0)						(0.4)
Other Neuroscience						388						377						3.1						1.5						1.6
Oncology						3,665						3,129						17.1						16.5						0.6
DARZALEX®						1,580						1,099						43.7						42.9						0.8
ERLEADA®						344						206						66.7						65.8						0.9
IMBRUVICA®						1,066						1,031						3.5						2.5						1.0
ZYTIGA®/ abiraterone acetate						548						590						(7.2)						(7.5)						0.3
Other Oncology(1)						126						203						(37.6)						(36.9)						(0.7)
Pulmonary Hypertension						868						749						15.9						16.1						(0.2)
OPSUMIT®						458						392						17.0						17.1						(0.1)
UPTRAVI®						309						260						19.0						18.8						0.2
Other Pulmonary Hypertension						101						97						3.4						4.8						(1.4)
Cardiovascular / Metabolism / Other						1,133						1,281						(11.5)						(12.4)						0.9
XARELTO®						636						630						0.8						0.8						—
INVOKANA®/ INVOKAMET®						133						224						(40.3)						(41.3)						1.0
PROCRIT®/ EPREX®						112						132						(14.6)						(15.8)						1.2
Other						251						294						(14.8)						(17.2)						2.4
Total Pharmaceutical Sales						$	12,994					$	11,418					13.8		%				13.2		%				0.6		%

• Percentage greater than 100% or not meaningful

**Certain prior year amounts have been reclassified to conform to current year presentation

(1) Inclusive of VELCADE® which was previously disclosed separately

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Immunology products achieved operational growth of 11.7% as compared to the same period a year ago driven by continued strong uptake of STELARA® (ustekinumab) in Crohn's disease and Ulcerative Colitis, strength of TREMFYA® (guselkumab) in Psoriasis and uptake in Psoriatic Arthritis and market and share gains in SIMPONI ARIA®. This was partially offset by lower sales of REMICADE® (infliximab) due to biosimilar competition.

Biosimilar versions of REMICADE® have been introduced in the United States and certain markets outside the United States and additional competitors continue to enter the market. Continued infliximab biosimilar competition will result in a further reduction in sales of REMICADE®.

Infectious disease products achieved operational growth of 59.8% as compared to the same period a year ago. Growth was primarily driven by the contribution of the COVID-19 vaccine. This was partially offset by lower sales of PREZISTA® and PREZCOBIX®/REZOLSTA® (darunavir/cobicistat) due to increased competition and loss of exclusivity of PREZISTA® in certain countries outside the U.S.

Neuroscience products achieved operational sales growth of 4.6% as compared to the same period a year ago. Growth of Paliperidone long-acting injectables INVEGA SUSTENNA®/XEPLION® (paliperidone palmitate) and INVEGA TRINZA®/TREVICTA® was due to increased new patient starts and persistence of treatment.

Oncology products achieved operational sales growth of 16.5% as compared to the same period a year ago. Contributors to the growth were strong sales of DARZALEX® (daratumumab) driven by continued strong market growth, share gains in all regions and solid uptake of the subcutaneous formulation launched in 2020; the continued global launch uptake of ERLEADA® (apalutamide) and IMBRUVICA® (ibrutinib) growth primarily driven by market and continued share leadership. The growth of IMBRUVICA® (ibrutinib) was partially offset by COVID-19 related market dynamics including delays in new patient starts as well as competitive pressures from novel oral agents.

Pulmonary Hypertension achieved operational sales growth of 16.1% as compared to the same period a year ago. Sales growth of OPSUMIT® (macitentan) and UPTRAVI® (selexipag) were due to continued share gains and market growth.

Cardiovascular / Metabolism / Other products experienced an operational decline of 12.4% as compared to the same period a year ago. The decline was primarily attributable to lower sales of INVOKANA®/INVOKAMET® (canagliflozin) due to competitive pressures and PROCRIT®/ EPREX® (epoetin alfa) due to biosimilar competition.

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Medical Devices

The Medical Devices segment sales in the fiscal nine months of 2021 were $20.2 billion, an increase of 23.4% as compared to the same period a year ago, with an operational increase of 20.5% and a positive currency impact of 2.9%. U.S. Medical Devices sales increased 20.6%. International Medical Devices sales increased by 26.0%, including an operational increase of 20.5% and a positive currency impact of 5.5%. In the fiscal nine months of 2021, the net impact of acquisitions and divestitures on the Medical Devices segment operational sales growth was a negative 0.9% primarily due to the divestiture of the Advanced Sterilization Products (ASP) business.

Major Medical Devices Franchise Sales — Fiscal Nine Months Ended

(Dollars in Millions)						October 3, 2021						September 27, 2020						Total Change						Operations Change						Currency Change
Surgery						$	7,299					$	5,803					25.8		%				22.2		%				3.6		%
Advanced						3,430						2,723						26.0						22.2						3.8
General						3,869						3,080						25.6						22.3						3.3
Orthopaedics						6,433						5,572						15.4						13.0						2.4
Hips						1,105						908						21.8						19.0						2.8
Knees						983						825						19.2						16.6						2.6
Trauma						2,157						1,892						14.0						11.9						2.1
Spine, Sports & Other						2,187						1,947						12.3						9.7						2.6
Vision						3,517						2,843						23.7						22.0						1.7
Contact Lenses/Other						2,607						2,198						18.6						17.2						1.4
Surgical						910						645						41.1						38.3						2.8
Interventional Solutions						2,952						2,153						37.1						33.6						3.5
Total Medical Devices Sales						$	20,201					$	16,370					23.4		%				20.5		%				2.9		%

The Medical Devices segment sales in the fiscal third quarter of 2021 were $6.6 billion, an increase of 8.0% as compared to the same period a year ago, which included operational growth of 7.0% and a positive currency impact of 1.0%. U.S. Medical Devices sales increased 0.8%. International Medical Devices sales increased by 15.4%, including operational growth of 13.3% and a positive currency impact of 2.1%. In the fiscal third quarter of 2021, the net impact of acquisitions and divestitures on the Medical Devices segment operational sales growth was a negative 0.6% primarily due to the divestiture of the ASP business.

The Company has seen a general recovery in global procedural volumes in the Medical Devices segment as compared to the prior year which had significant negative impacts from COVID-19. This procedural volume recovery is the primary driver of sales and earnings growth in the current quarter as compared to the prior year.

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Major Medical Devices Franchise Sales — Fiscal Third Quarter Ended

(Dollars in Millions)						October 3, 2021						September 27, 2020						Total Change						Operations Change						Currency Change
Surgery						$	2,405					$	2,152					11.8		%				10.2		%				1.6		%
Advanced						1,144						1,000						14.6						12.6						2.0
General						1,261						1,152						9.4						8.1						1.3
Orthopaedics						2,093						2,083						0.5						(0.3)						0.8
Hips						356						345						3.3						2.3						1.0
Knees						316						308						2.8						2.1						0.7
Trauma						715						685						4.2						3.7						0.5
Spine, Sports & Other						705						745						(5.3)						(6.1)						0.8
Vision						1,189						1,081						10.1						10.0						0.1
Contact Lenses/Other						882						830						6.2						6.4						(0.2)
Surgical						308						251						22.7						22.1						0.6
Interventional Solutions						957						836						14.5						13.2						1.3
Total Medical Devices Sales						$	6,644					$	6,150					8.0		%				7.0		%				1.0		%

The Surgery franchise achieved operational sales growth of 10.2% as compared to the prior year fiscal third quarter. The operational growth in Advanced Surgery was primarily driven Endocutter, Biosurgery and Energy products attributable to market recovery, market expansion and the success of new products offsetting competitive pressures in the U.S. The operational growth in General Surgery was primarily driven by market recovery and the continued strength of the suture portfolio partially offset by the impact of the ASP divestiture in the prior year.

The Orthopaedics franchise experienced an operational decline of 0.3% as compared to the prior year fiscal third quarter. The operational growth in hips reflects the market recovery combined with continued strength of the portfolio including the ACTIS® stem and enabling technologies – KINCISE™ and VELYS™ Hip Navigation. The operational growth in knees was primarily driven by procedure recovery and timing of a tender outside the U.S. The operational growth in Trauma was driven by global market recovery and uptake of new products. The operational decline in Spine, Sports & Other was driven by COVID-19 related impacts on the market partially offset by new products.

The Vision franchise achieved operational sales growth of 10.0% as compared to the prior year fiscal third quarter. The Contact Lenses/Other operational growth was due to market recovery and new products partially offset by prior year higher level of stocking in the U.S. The Surgical operational growth was primarily due to market recovery and uptake of recently launched products.

The Interventional Solutions franchise achieved operational sales growth of 13.2% as compared to the prior year fiscal third quarter driven by the market recovery and success of new products and commercial strategies.

ANALYSIS OF CONSOLIDATED EARNINGS BEFORE PROVISION FOR TAXES ON INCOME

Consolidated earnings before provision for taxes on income for the fiscal nine months of 2021 was $17.9 billion representing 26.0% of sales as compared to $14.9 billion in the fiscal nine months of 2020, representing 24.7% of sales.

Consolidated earnings before provision for taxes on income for the fiscal third quarter of 2021 was $3.8 billion representing 16.5% of sales as compared to $4.4 billion in the fiscal third quarter of 2020, representing 20.9% of sales.

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Cost of Products Sold

(Dollars in billions. Percentages in chart are as a percent to total sales)

Fiscal Nine months Q3 2021 versus Fiscal Nine months Q3 2020

Cost of products sold decreased as a percent to sales driven by:

• Non-recurring prior year COVID-19 production related slow downs and related inventory impacts

• Fixed cost deleveraging in the Medical Devices business in the fiscal 2020

The intangible asset amortization expense included in cost of products sold for the fiscal nine months of 2021 and 2020 was $3.6 billion and $3.4 billion, respectively.

Q3 2021 versus Q3 2020

Cost of products decreased as a percent to sales driven by:

• Non-recurring prior year COVID-19 production related slow-downs and related inventory impacts

• Fixed cost deleveraging in the Medical Devices business in the fiscal 2020

• Favorable mix within the Pharmaceutical business as well as at the enterprise level with a higher percentage of sales coming from the Pharmaceutical business

The intangible asset amortization expense included in cost of products sold for the fiscal third quarters of 2021 and 2020 was $1.1 billion and $1.2 billion, respectively.

Selling, Marketing and Administrative Expenses

(Dollars in billions. Percentages in chart are as a percent to total sales)

Fiscal Nine months Q3 2021 versus Fiscal Nine months Q3 2020

Selling, Marketing and Administrative Expenses decreased as a percent to sales driven by:

• Leveraging in the Medical Devices business resulting from the recovery of sales from the prior years impact of COVID-19

partially offset by:

• Segment mix with a higher percentage of sales coming from the Medical Devices business in the current year

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Q3 2021 versus Q3 2020

Selling, Marketing and Administrative Expenses slightly decreased as a percent to sales driven by:

• Leveraging in the Medical Devices business resulting from the recovery of sales from the prior years impact of COVID-19

• Segment mix with a higher percentage of sales coming from the Pharmaceutical business

Research and Development Expense

(Dollars in billions. Percentages in chart are as a percent to total sales)

Fiscal Nine months Q3 2021 versus Fiscal Nine months Q3 2020

Research and Development increased as a percent to sales driven by:

• COVID-19 vaccine expenses, net of governmental reimbursements

• Portfolio progression in the Pharmaceutical business

partially offset by:

• Recovery of Medical Devices sales from the prior year’s negative COVID-19 impact

Q3 2021 versus Q3 2020

Research and Development increased as a percent to sales driven by:

• Portfolio progression in the Pharmaceutical business

In-Process Research and Development (IPR&D)

In the fiscal third quarter and fiscal nine months of 2021, the Company recorded a partial IPR&D charge of $0.9 billion primarily related to expected development delays in the general surgery digital robotics platform (Ottava) acquired with the Auris Health acquisition in 2019. The impairment charge was calculated based on revisions to the discounted cash flow valuation model reflecting a delay of first in human procedures of approximately two years from the initial acquisition model assumption of the second half of 2022. The Company will continue to monitor the remaining $1.5 billion Ottava platform intangible asset as development program activities continue.

Interest (Income) Expense

Interest (Income) Expense in the fiscal nine months of 2021 was a net interest expense of $83 million as compared to net interest expense of $16 million in the same period a year ago primarily due to reduced interest income. Interest (Income) Expense in the fiscal third quarter of 2021 was a net interest expense of $7 million as compared to $32 million in the same period a year ago primarily due to the benefit from net investment hedging. The balance of cash, cash equivalents and current marketable securities was $31.0 billion at the end of the fiscal third quarter of 2021 as compared to $30.8 billion at the end of the fiscal third quarter of 2020. The Company’s debt position was $33.9 billion as of October 3, 2021 as compared to $37.8 billion the same period a year ago.

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Other (Income) Expense, Net*

Fiscal Nine months Q3 2021 versus Fiscal Nine months Q3 2020

Other (income) expense, net for the fiscal nine months of 2021 was flat as compared to the prior year primarily due to the following:

Fiscal Nine Months
(Dollars in Billions)(Income)/Expense						2021						2020						Change
Acquisition, Integration and Divestiture Related(1)						$	(0.5)					(1.1)						0.6
Gains on securities						(0.3)						(0.2)						(0.1)
Litigation related(2)						2.1						2.2						(0.1)
Restructuring related						0.1						0.1						0.0
Employee benefit plan related						(0.5)						(0.3)						(0.2)
Other						(0.4)						(0.2)						(0.2)
Total Other (Income) Expense, Net						$	0.5					0.5						—

Q3 2021 versus Q3 2020

Other (income) expense, net for the fiscal third quarter of 2021 was unfavorable by $0.7 billion as compared to the prior year primarily due to the following:

Fiscal Third Quarter
(Dollars in Billions)(Income)/Expense						2021						2020						Change
Gains on securities						$	(0.1)					0.0						(0.1)
Litigation related(2)						2.1						1.5						0.6
Employee benefit plan related						(0.2)						(0.1)						(0.1)
Other						0.1						(0.2)						0.3
Total Other (Income) Expense, Net						$	1.9					$	1.2					$	0.7

(1) Primarily related to divestiture gains of two pharmaceutical brands outside the U.S. in the fiscal nine months of 2021. Primarily related to a contingent consideration reversal related to the timing of certain developmental milestones associated with the Auris Health acquisition in the fiscal nine months of 2020.

(2) Primarily related to talc and Risperdal in the fiscal third quarter and fiscal nine months of 2021. Primarily related to talc and the opioid litigation settlement in the fiscal third quarter and fiscal nine months of 2020.

*Other (income) expense, net is the account where the Company records gains and losses related to the sale and write-down of certain investments in equity securities held by Johnson & Johnson Innovation - JJDC, Inc. (JJDC), unrealized gains and losses on investments, gains and losses on divestitures, certain transactional currency gains and losses, acquisition-related costs, litigation accruals and settlements, investment (income)/loss related to employee benefit plans, as well as royalty income.

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EARNINGS BEFORE PROVISION FOR TAXES BY SEGMENT

Income before tax by segment of business for the fiscal nine months ended were as follows:

						Income Before Tax												Segment Sales												Percent of Segment Sales
(Dollars in Millions)						October 3, 2021						September 27, 2020						October 3, 2021						September 27, 2020						October 3, 2021						September 27, 2020
Consumer Health						$	956					$	993					$	10,978					$	10,435					8.7		%				9.5		%
Pharmaceutical						13,838						11,787						37,792						33,304						36.6						35.4
Medical Devices						3,798						2,681						20,201						16,370						18.8						16.4
Segment earnings before tax						18,592						15,461						68,971						60,109						27.0						25.7
Less: Expenses not allocated to segments(1)						652						611
Worldwide income before tax						$	17,940					$	14,850					$	68,971					$	60,109					26.0		%				24.7		%

(1) Amounts not allocated to segments include interest (income) expense and general corporate (income) expense

The Consumer Health segment income before tax as a percent of sales in the fiscal nine months of 2021 was 8.7% versus 9.5% for the same period a year ago. The decline in the income before tax as a percent of sales in the fiscal nine months of 2021 as compared to the prior year was primarily driven by the following:

• Higher litigation expense, primarily talc ($1.5 billion in 2021 vs. $1.2 billion in 2020)

• Increased brand marketing expense

partially offset by:

• Supply chain efficiencies

The Pharmaceutical segment income before tax as a percent of sales in the fiscal nine months of 2021 was 36.6% versus 35.4% for the same period a year ago. The increase in the income before tax as a percent of sales for the fiscal nine months of 2021 as compared to the prior year was primarily driven by the following:

• Divestiture gains of $0.6 billion related to two pharmaceutical brands outside the U.S. in the fiscal nine months of 2021

• Lower litigation expense ($0.7 billion in 2021 primarily related to Risperdal vs. $1.0 billion in 2020 primarily related to opioid litigation settlement)

partially offset by:

• Research & Development investment in the COVID-19 vaccine net of governmental reimbursements and general portfolio progression

The Medical Devices segment income before tax as a percent of sales in the fiscal nine months of 2021 was 18.8% versus 16.4% for the same period a year ago. The increase in the income before tax as a percent of sales for the fiscal nine months of 2021 was primarily driven by the following:

• Recovery of prior year COVID-19 production related slow downs and related inventory impacts

• Overall expense leveraging resulting from the Medical Devices sales recovery

partially offset by:

• A contingent consideration reversal of approximately $1.1 billion in the fiscal nine months of 2020 related to the timing of certain developmental milestones associated with the Auris Health acquisition

• A higher IPR&D charge of $0.8 billion ($0.9 billion in 2021 related to the general surgery offering in digital robotics (Ottava) acquired with the Auris Health acquisition in 2019)

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Income (loss) before tax by segment of business for the fiscal third quarters were as follows:

						Income Before Tax												Segment Sales												Percent of Segment Sales
(Dollars in Millions)						October 3, 2021						September 27, 2020						October 3, 2021						September 27, 2020						October 3, 2021						September 27, 2020
Consumer Health						$	(636)					$	191					$	3,700					$	3,514					(17.2)		%				5.4		%
Pharmaceutical						4,259						3,439						12,994						11,418						32.8						30.1
Medical Devices						423						1,010						6,644						6,150						6.4						16.4
Segment earnings before tax						4,046						4,640						23,338						21,082						17.3						22.0
Less: Expenses not allocated to segments (1)						197						239
Worldwide income before tax						$	3,849					$	4,401					$	23,338					$	21,082					16.5		%				20.9		%

(1) Amounts not allocated to segments include interest (income) expense and general corporate (income) expense.

Consumer Health Segment

The Consumer Health segment income/(loss) before tax as a percent of sales in the fiscal third quarter of 2021 was a negative 17.2% versus 5.4% for the same period a year ago. The decrease in the income before tax as a percent of sales in the fiscal third quarter of 2021 as compared to the prior year was primarily driven by the following:

• Higher litigation expense, primarily associated with talc ($1.4 billion in 2021 vs. $0.5 billion in 2020)

• Increased brand marketing expense

partially offset by:

• Supply chain efficiencies

Pharmaceutical Segment

The Pharmaceutical segment income before tax as a percent of sales in the fiscal third quarter of 2021 was 32.8% versus 30.1% for the same period a year ago. The increase in the income before tax as a percent of sales for the fiscal third quarter of 2021 as compared to the prior year was primarily driven by the following:

• Lower litigation expense ($0.8 billion in 2021 primarily related to Risperdal vs. $1.0 billion in 2020 primarily related to opioid litigation settlement)

• Higher gains on securities ($0.1 billion in 2021 vs. $0.0 billion in 2020)

partially offset by:

• Research & Development investment for general portfolio progression

Medical Devices Segment

The Medical Devices segment income before tax as a percent of sales in the fiscal third quarter of 2021 was 6.4% versus 16.4% for the same period a year ago. The decrease in the income before tax as a percent of sales for the fiscal third quarter was primarily driven by the following:

• A higher IPR&D charge of $0.8 billion ($0.9 billion in 2021 related to the general surgery offering in digital robotics (Ottava) acquired with the Auris Health acquisition in 2019)

• A contingent consideration reversal of approximately $0.2 billion in the fiscal third quarter of 2020 related to the timing of certain developmental milestones associated with the Auris Health acquisition

partially offset by:

• Recovery of prior year COVID-19 production related slow downs and related inventory impacts

• Overall expense leveraging resulting from the Medical Devices sales recovery

Restructuring

In the fiscal second quarter of 2018, the Company announced plans to implement actions across its Global Supply Chain that are intended to enable the Company to focus resources and increase investments in critical capabilities, technologies and solutions necessary to manufacture and supply its product portfolio of the future, enhance agility and drive growth. The Company expects these supply chain actions will include expanding its use of strategic collaborations, and bolstering its initiatives to reduce complexity, improving cost-competitiveness, enhancing capabilities and optimizing its network. Discussions regarding specific future actions are ongoing and are subject to all relevant consultation requirements before they are finalized. In total, the Company expects these actions to generate approximately $0.6 to $0.8 billion in annual

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pre-tax cost savings that will be substantially delivered by 2022. The Company expects to record pre-tax restructuring charges of approximately $1.9 to $2.3 billion. In the fiscal third quarter of 2021, the Company recorded a pre-tax charge of $121 million, which is included on the following lines of the Consolidated Statement of Earnings, $60 million in restructuring, $18 million in cost of products sold and $43 million in other (income) expense, net. In the fiscal third quarter of 2020, the Company recorded a pre-tax charge of $130 million, which is included on the following lines of the Consolidated Statement of Earnings, $68 million in restructuring, $32 million in cost of products sold and $30 million in other (income) expense, net. In the fiscal nine months of 2021, the Company recorded a pre-tax charge of $333 million, which is included on the following lines of the Consolidated Statement of Earnings, $169 million in restructuring, $65 million in cost of products sold and $99 million in other (income) expense, net. In the fiscal nine months of 2020, the Company recorded a pre-tax charge of $363 million, which is included on the following lines of the Consolidated Statement of Earnings, $187 million in restructuring, $69 million in cost of products sold and $107 million in other (income) expense, net. Restructuring charges of approximately $1.6 billion have been recorded since the restructuring was announced.

See Note 12 to the Consolidated Financial Statements for additional details related to the restructuring.

Provision for Taxes on Income

For discussion related to the fiscal nine months of 2021 provision for taxes refer to Note 5 to the Consolidated Financial Statements.

In the fiscal second quarter of 2021, the Company reorganized the ownership structure of certain wholly-owned international subsidiaries. As part of this reorganization, the Company increased the tax basis of certain assets to fair value in accordance with applicable local regulations. Accordingly, the Company recorded a local deferred tax benefit of approximately $2.3 billion, which was partially offset by a related increase in the U.S. GILTI deferred tax liability of approximately $1.7 billion. The net impact of this restructuring was approximately $0.6 billion net benefit or a 3.4% decrease to the 2021 year-to-date effective tax rate. This restructuring is not expected to have material impact to the Company’s future effective tax rate.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Cash and cash equivalents were $17.6 billion at the end of the fiscal third quarter of 2021 as compared with $14.0 billion at the end of fiscal year 2020. The primary sources and uses of cash that contributed to the $3.6 billion increase were:

(Dollars In Billions)
$	14.0		Q4 2020 Cash and cash equivalents balance
17.7			cash generated from operating activities
(3.3)			net cash used by investing activities
(10.6)			net cash used by financing activities
(0.2)			effect of exchange rate and rounding
$	17.6		Q3 2021 Cash and cash equivalents balance

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In addition, the Company had $13.4 billion in marketable securities at the end of the fiscal third quarter of 2021 and $11.2 billion at the end of fiscal year 2020.

Cash flow from operations of $17.7 billion was the result of:

(Dollars In Billions)
$	16.1		Net Earnings
4.2			non-cash expenses and other adjustments primarily for depreciation and amortization, stock-based compensation, asset write-downs partially offset by the deferred tax provision, net gain on sale of assets/businesses and credit losses and accounts receivable allowances
(1.9)			a decrease in other current and non-current liabilities
(3.0)			an increase in accounts receivable and inventories
0.2			an increase accounts payable and accrued liabilities
2.1			a decrease in other current and non-current assets
$	17.7		Cash Flow from operations

Investing activities use of $3.3 billion of cash was primarily used for:

(Dollars In Billions)
$	(2.2)		additions to property, plant and equipment
0.7			proceeds from the disposal of assets/businesses, net
(2.0)			net purchases of investments
0.7			credit support agreements activity, net
(0.5)			Other (primarily licenses and milestones) and rounding
$	(3.3)		Net cash used for investing activities

Financing activities use of $10.6 billion of cash was primarily used for:

(Dollars In Billions)
$	(8.2)		dividends to shareholders
(2.5)			repurchase of common stock
(1.0)			net repayment of short and long term debt
0.8			proceeds from stock options exercised/employee withholding tax on stock awards, net
0.2			credit support agreements activity, net
0.1			other and rounding
$	(10.6)		Net cash used for financing activities

The Company has access to substantial sources of funds at numerous banks worldwide. In September 2021, the Company secured a new 364-day Credit Facility. Total credit available to the Company approximates $10 billion, which expires on September 8, 2022. Interest charged on borrowings under the credit line agreement is based on either Term Secured Overnight Financing Rate (SOFR) Reference Rate or other applicable market rates as allowed under the terms of the agreement, plus applicable margins. Commitment fees under the agreement are not material.

In the fiscal third quarter of 2021, the Company's notes payable and long-term debt was in excess of cash, cash equivalents and marketable securities. As of October 3, 2021, the net debt position was $2.9 billion as compared to the prior year of $7.0 billion. Considering recent market conditions and the on-going COVID-19 crisis, the Company has re-evaluated its operating cash flows and liquidity profile and does not foresee any significant incremental risk. The Company anticipates that operating cash flows, the ability to raise funds from external sources, borrowing capacity from existing committed credit facilities and access to the commercial paper markets will continue to provide sufficient resources to fund operating needs, including the Company's

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approximate $1.2 billion in contractual supply commitments associated with its development of the COVID-19 vaccine, the agreement to settle opioid litigation for $5 billion and the establishment of the $2 billion trust for talc related liabilities (See Note 11 to the Consolidated Financial Statements for additional details). In addition, the Company monitors the global capital markets on an ongoing basis and from time to time may raise capital when market conditions are favorable. Additionally, as a result of the Tax Cuts and Jobs Act (TCJA), the Company has access to its cash outside the U.S. at a significantly reduced cost. During the fiscal third quarter of 2021, in accordance with the terms of the agreement associated with the acquisition of Actelion, the Company's undrawn credit facility with Idorsia was terminated.

During the fiscal nine months of 2021, the Company paid approximately $1.7 billion to the U.S. Treasury which included $0.8 billion related to the current installment due on foreign undistributed earnings as part of the TCJA (see Note 1 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2021) and $0.9 billion primarily related to the normal estimated payment for the fiscal first, second and third quarters of 2021.

Dividends

On July 19, 2021, the Board of Directors declared a regular cash dividend of $1.06 per share, payable on September 7, 2021 to shareholders of record as of August 24, 2021.

On October 21, 2021, the Board of Directors declared a regular cash dividend of $1.06 per share, payable on December 7, 2021 to shareholders of record as of November 23, 2021. The Company expects to continue the practice of paying regular quarterly cash dividends.

OTHER INFORMATION

New Accounting Pronouncements

Refer to Note 1 to the Consolidated Financial Statements for new accounting pronouncements.

Economic and Market Factors

COVID-19 considerations and business continuity

The Company has considered various internal and external factors in assessing the potential impact of COVID-19 on its business and financial results based upon information available at this time, as follows:

• Operating Model: The Company has a diversified business model across the healthcare industry with flexibility designed into its manufacturing, research and development clinical operations and commercial capabilities.

• Supply Chain: The Company continues to leverage its global manufacturing footprint and dual-source capabilities while closely monitoring and maintaining critical inventory at major distribution centers away from high-risk areas to ensure adequate and effective distribution.

• Business Continuity: The robust, active business continuity plans across the Company's network have been instrumental in preparing the Company for events like COVID-19 and the ability to meet the majority of patient and consumer needs remains uninterrupted.

• Workforce: The Company has put procedures in place to protect its essential workforce in manufacturing, distribution, commercial and research operations while ensuring appropriate remote working protocols have been established for other employees.

• Liquidity: The Company's high-quality credit rating allows the Company superior access to the financial capital markets for the foreseeable future.

• Domestic and Foreign Legislation: The Company will continue to assess and evaluate the on-going global legislative efforts to combat the COVID-19 impact on economies and the sectors in which it participates. Currently, the recent legislative acts put in place are not expected to have a material impact on the Company’s operations.

In fiscal 2020 and 2021, the Company entered into a series of contract manufacturing arrangements for vaccine production with third party contract manufacturing organizations. These arrangements provide the Company with future supplemental commercial capacity for vaccine production and potentially transferable rights to such production if capacity is not required. Amounts paid for services to be delivered and contractually obligated to be paid to these contract manufacturing organizations of approximately $1.2 billion are reflected in the prepaid expenses and other, other assets, accrued liabilities and other liabilities accounts in the Company's consolidated balance sheet upon execution of each agreement. Additionally, the Company has entered into certain vaccine development cost sharing arrangements with government related organizations.

The Company continues to evaluate and monitor both its internal and external supply arrangements, including its contract with Emergent BioSolutions and related production activities at its Bayview, Maryland facility. The Company has established a

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global vaccine supply network, where, in addition to its internal manufacturing site in Leiden, the Netherlands, ten other manufacturing sites will be involved in the production of vaccine across different countries and continents. The Company does not believe that a disruption at a vaccine manufacturing site, or the resulting delay would have a material financial impact on the Company’s consolidated financial statements or results.

The Company operates in certain countries where the economic conditions continue to present significant challenges. The Company continues to monitor these situations and take appropriate actions. Inflation rates and currency exchange rates continue to have an effect on worldwide economies and, consequently, on the way the Company operates. The Company has accounted for operations in Venezuela and Argentina as highly inflationary, as the prior three-year cumulative inflation rate surpassed 100%. This did not have a material impact on the Company's results in the period. In the face of increasing costs, the Company strives to maintain its profit margins through cost reduction programs, productivity improvements and periodic price increases.

In June 2016, the United Kingdom (U.K.) held a referendum in which voters approved an exit from the European Union (E.U.), commonly referred to as “Brexit”. The U.K. officially exited the E.U. on January 31, 2020, however, there was a transition period to allow time to agree the terms of a new trade deal. On December 30, 2020, the U.K., E.U. and the European Atomic Energy Community (Euratom) signed the EU–UK Trade and Cooperation Agreement (TCA). Over the last few years, Brexit has created global political and economic uncertainty and has led to volatility in exchange rates and interest rates, additional cost containment by third-party payors and changes in regulations. While the UK and EU have now agreed on a future trade and cooperation agreement, it is still unclear what the ultimate financial, trade, regulatory and legal implications the withdrawal of the U.K. from the E.U. will have. However, the Company currently does not believe that these and other related effects will have a material impact on the Company’s consolidated financial position or operating results. As of October 3, 2021, and for the fiscal nine months, the business of the Company’s U.K. subsidiaries represented less than 6% of the Company’s consolidated assets and less than 3% of the fiscal nine months revenues.

Governments around the world consider various proposals to make changes to tax laws and regulations, which may include increasing or decreasing existing statutory tax rates. A change in statutory tax rate in any country would result in the revaluation of the Company’s deferred tax assets and liabilities related to that particular jurisdiction in the period in which the new tax law is enacted. This change would result in an expense or benefit recorded to the Company’s Consolidated Statement of Earnings. The Company closely monitors these proposals as they arise in the countries where it operates. Changes to the statutory tax rate may occur at any time, and any related expense or benefit recorded may be material to the fiscal quarter and year in which the law change is enacted.

The Company faces various worldwide health care changes that may continue to result in pricing pressures that include health care cost containment and government legislation relating to sales, promotions and reimbursement of health care products.

Changes in the behavior and spending patterns of purchasers of health care products and services, including delaying medical procedures, rationing prescription medications, reducing the frequency of physician visits and foregoing health care insurance coverage, may continue to impact the Company’s businesses.

The Company also operates in an environment increasingly hostile to intellectual property rights. Firms have filed Abbreviated New Drug Applications or Biosimilar Biological Product Applications with the FDA or otherwise challenged the coverage and/or validity of the Company's patents, seeking to market generic or biosimilar forms of many of the Company’s key pharmaceutical products prior to expiration of the applicable patents covering those products. In the event the Company is not successful in defending the patent claims challenged in the resulting lawsuits, generic or biosimilar versions of the products at issue will be introduced to the market, resulting in the potential for substantial market share and revenue losses for those products, and which may result in a non-cash impairment charge in any associated intangible asset. There is also a risk that one or more competitors could launch a generic or biosimilar version of the product at issue following regulatory approval even though one or more valid patents are in place.