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

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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 six months of 2022, worldwide sales were $47.4 billion, a total increase of 4.0%, including an operational increase of 7.8% as compared to 2021 fiscal six months sales of $45.6 billion. Currency fluctuations had a negative impact of 3.8% for the fiscal six months of 2022. In the fiscal six months of 2022, the net impact of acquisitions and divestitures on worldwide operational sales growth was a negative 0.2%.

Sales by U.S. companies were $23.6 billion in the fiscal six months of 2022, which represented an increase of 2.5% as compared to the prior year. In the fiscal six months of 2022, the net impact of acquisitions and divestitures on the U.S. operational sales growth was a negative 0.1%. Sales by international companies were $23.8 billion, an increase of 5.5%, including an operational increase of 13.3%, and a negative currency impact of 7.8% as compared to the fiscal six months sales of 2021. In the fiscal six months of 2022, the net impact of acquisitions and divestitures on the international operational sales growth was a negative 0.3%.

In the fiscal six months of 2022, sales by companies in Europe achieved growth of 9.3%, which included an operational increase of 20.1% and a negative currency impact of 10.8%. Sales by companies in the Western Hemisphere, excluding the U.S., achieved growth of 8.1%, which included an operational increase of 9.9%, and a negative currency impact of 1.8%. Sales by companies in the Asia-Pacific, Africa region experienced a decline of 0.2%, including an operational increase of 5.6% and a negative currency impact of 5.8%.

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Note: values may have been rounded

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For the fiscal second quarter of 2022, worldwide sales were $24.0 billion, a total increase of 3.0%, which included operational growth of 8.0% and a negative currency impact of 5.0% as compared to 2021 fiscal second quarter sales of $23.3 billion. In the fiscal second quarter of 2022, the net impact of acquisitions and divestitures on worldwide operational sales growth was a negative 0.1%.

Sales by U.S. companies were $12.2 billion in the fiscal second quarter of 2022, which represented an increase of 2.3% as compared to the prior year. In the fiscal second quarter of 2022, the net impact of acquisitions and divestitures on the U.S. operational sales growth was a negative 0.1%. Sales by international companies were $11.8 billion, a total increase of 3.8%, which included operational growth of 13.9% and a negative currency impact of 10.1%. In the fiscal second quarter of 2022, the net impact of acquisitions and divestitures on the international operational sales growth was a negative 0.3%.

In the fiscal second quarter of 2022, sales by companies in Europe achieved growth of 7.3%, which included operational growth of 20.7% and a negative currency impact of 13.4%. Sales by companies in the Western Hemisphere, excluding the U.S., achieved growth of 12.4%, including operational growth of 14.9% and a negative currency impact of 2.5%. Sales by companies in the Asia-Pacific, Africa region experienced a decline of 3.6%, including operational growth of 4.7% and a negative currency impact of 8.3%.

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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 six months of 2022 were $7.4 billion, a decrease of 1.4% as compared to the same period a year ago, including operational growth of 1.6% and a negative currency impact of 3.0%. U.S. Consumer Health segment sales decreased by 3.5%. International Consumer Health segment sales increased by 0.3%, including operational growth of 5.7% and a negative currency impact of 5.4%. In the fiscal six months of 2022, the net impact of acquisitions and divestitures on the Consumer Health segment operational sales growth was a negative 0.6%.

Major Consumer Health Franchise Sales* — Fiscal Six Months Ended

(Dollars in Millions)July 3, 2022July 4, 2021Total ChangeOperations ChangeCurrency Change
OTC(1)$2,943$2,6999.0%12.0%(3.0)%
Skin Health/Beauty2,1382,333(8.3)(5.6)(2.7)
Oral Care760843(9.7)(7.1)(2.6)
Baby Care730776(5.9)(3.0)(2.9)
Women’s Health4584521.47.7(6.3)
Wound Care/Other361393(8.0)(7.3)(0.7)
Total Consumer Health Sales$7,391$7,495(1.4)%1.6%(3.0)%

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

(1)In the first fiscal six months of 2021, approximately $0.2 billion of certain international OTC products, primarily in China, were reclassified from the Pharmaceutical segment to the Consumer Health segment based on operational changes

Consumer Health segment sales in the fiscal second quarter of 2022 were $3.8 billion, a decrease of 1.3% as compared to the same period a year ago, including operational growth of 2.3% offset by a negative currency impact of 3.6%. U.S. Consumer Health segment sales decreased by 3.6%. International Consumer Health segment sales increased by 0.6% including operational growth of 7.3% and a negative currency impact of 6.7%. In the fiscal second quarter of 2022, the net impact of acquisitions and divestitures on the Consumer Health segment operational sales growth was a negative 0.6% primarily due to the DR. CI:LABO - Sedona divestiture in Asia Pacific.

Major Consumer Health Franchise Sales* — Fiscal Second Quarter Ended

(Dollars in Millions)July 3, 2022July 4, 2021Total ChangeOperations ChangeCurrency Change
OTC(1)$1,482$1,4263.8%7.5%(3.7)%
Skin Health/Beauty1,1261,170(3.7)(0.3)(3.4)
Oral Care394426(7.3)(4.0)(3.3)
Baby Care375387(3.1)0.5(3.6)
Women’s Health2302300.27.2(7.0)
Wound Care/Other197216(8.4)(7.4)(1.0)
Total Consumer Health Sales$3,805$3,854(1.3)%2.3%(3.6)%

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

(1)In the fiscal second quarter of 2021, approximately $0.1 billion of certain international OTC products, primarily in China, were reclassified from the Pharmaceutical segment to the Consumer Health segment based on operational changes

The OTC franchise achieved operational growth of 7.5% as compared to the prior year fiscal second quarter. Growth was driven by upper respiratory and analgesic products outside the U.S. and IMODIUM in digestive health. This was partially offset by supply constraints and a softer allergy season in the U.S.

The Skin Health/Beauty franchise experienced an operational decline of 0.3% as compared to the prior year fiscal second quarter. The decline was driven by external supply constraints, competitive pressures, the DR. CI:LABO - Sedona divestiture in Asia Pacific and regional COVID-19 related mobility restrictions. The decline was partially offset by pricing actions coupled with new product introductions in ASPAC.

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The Oral Care franchise experienced an operational decline of 4.0% as compared to the prior year fiscal second quarter. The decline was driven by regional COVID-19 related mobility restrictions, a divestiture primarily in the EMEA region and lapping of prior year COVID-19 related demand increases.

The Baby Care franchise achieved operational growth of 0.5% as compared to the prior year fiscal second quarter. Slight growth was driven by performance outside the U.S. due to price actions in the Latin America region and higher demand in the Asia Pacific region. The growth was mostly offset by supply constraints primarily in the U.S.

The Women’s Health franchise achieved operational growth of 7.2% as compared to the prior year fiscal second quarter which was primarily driven by growth in the Asia Pacific region due to price increases and strong consumer demand and increased distribution in EMEA.

The Wound Care/Other franchise experienced an operational decline of 7.4% as compared to the prior year fiscal second quarter primarily driven by lapping of prior year higher demand and the professional tape divestiture partially offset by supply recovery in Canada.

In November 2021, the Company announced its intention to separate the Company’s Consumer Health business, with the intention to create a new, publicly traded company. The Company is targeting completion of the planned separation in 18 to 24 months after the initial announcement.

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Pharmaceutical

Pharmaceutical segment sales in the fiscal six months of 2022 were $26.2 billion, an increase of 6.5% as compared to the same period a year ago, with an operational increase of 10.8% and a negative currency impact of 4.3%. U.S. Pharmaceutical sales increased 3.6% as compared to the same period a year ago. International Pharmaceutical sales increased by 10.0%, including operational growth of 19.4% and a negative currency impact of 9.4%. In the fiscal six months of 2022, the net impact of acquisitions and divestitures on the Pharmaceutical segment operational sales growth was a negative 0.1%.

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

(Dollars in Millions)July 3, 2022July 4, 2021Total ChangeOperations ChangeCurrency Change
Immunology$8,530$8,1454.7%7.8%(3.1)%
REMICADE1,3101,665(21.4)(20.3)(1.1)
SIMPONI/ SIMPONI ARIA1,1371,146(0.8)3.3(4.1)
STELARA4,8874,42210.513.9(3.4)
TREMFYA1,18789732.336.6(4.3)
Other Immunology915(39.0)(39.0)0.0
Infectious Diseases2,6132,01629.637.6(8.0)
COVID-19 VACCINE1,001264***
EDURANT/rilpivirine473505(6.5)1.9(8.4)
PREZISTA/ PREZCOBIX/ REZOLSTA/ SYMTUZA9651,051(8.1)(6.1)(2.0)
Other Infectious Diseases(2)174196(10.9)(7.2)(3.7)
Neuroscience3,4753,519(1.2)2.7(3.9)
CONCERTA/methylphenidate318332(4.1)1.5(5.6)
INVEGA SUSTENNA/ XEPLION/ INVEGA TRINZA/ TREVICTA2,1021,9895.79.0(3.3)
RISPERDAL CONSTA254312(18.4)(14.1)(4.3)
Other Neuroscience(2)800886(9.6)(5.2)(4.4)
Oncology7,9927,10512.518.4(5.9)
DARZALEX3,8422,79837.343.3(6.0)
ERLEADA85056351.157.2(6.1)
IMBRUVICA2,0082,241(10.4)(5.6)(4.8)
ZYTIGA/ abiraterone acetate1,0441,201(13.1)(4.9)(8.2)
Other Oncology248302(18.0)(13.7)(4.3)
Pulmonary Hypertension1,6951,731(2.1)1.1(3.2)
OPSUMIT881913(3.5)0.2(3.7)
UPTRAVI6536185.77.1(1.4)
Other Pulmonary Hypertension161200(19.8)(13.9)(5.9)
Cardiovascular / Metabolism / Other1,8822,065(8.9)(7.5)(1.4)
XARELTO1,1171,158(3.5)(3.5)—
INVOKANA/ INVOKAMET248310(19.9)(17.6)(2.3)
Other(1,2)517598(13.5)(10.1)(3.4)
Total Pharmaceutical Sales$26,186$24,5816.5%10.8%(4.3)%
  • Percentage greater than 100% or not meaningful

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

(1) Inclusive of PROCRIT / EPREX which was previously disclosed separately

(2)In the fiscal six months of 2021, approximately $0.2 billion of certain international OTC products, primarily in China, were reclassified from the Pharmaceutical segment to the Consumer Health segment based on operational changes

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Pharmaceutical segment sales in the fiscal second quarter of 2022 were $13.3 billion, an increase of 6.7% as compared to the same period a year ago, including an operational increase of 12.3% and a negative currency impact of 5.6%. U.S. Pharmaceutical sales increased 4.2% as compared to the same period a year ago. International Pharmaceutical sales increased by 9.8%, including operational growth of 22.1% and a negative currency impact of 12.3%. In the fiscal second quarter of 2022, the net impact of acquisitions and divestitures on the Pharmaceutical segment operational sales growth was a negative 0.1%. Adjustments to previous sales reserve estimates were approximately $0.1 billion unfavorable in the fiscal second quarter of 2022 and approximately $0.2 billion favorable in the fiscal second quarter of 2021.

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

(Dollars in Millions)July 3, 2022July 4, 2021Total ChangeOperations ChangeCurrency Change
Immunology$4,411$4,2314.3%8.1%(3.8)%
REMICADE647888(27.2)(25.6)(1.6)
SIMPONI/ SIMPONI ARIA566584(3.0)2.0(5.0)
STELARA2,5992,27414.318.6(4.3)
TREMFYA59747924.429.7(5.3)
Other Immunology37(59.2)(59.2)0.0
Infectious Diseases1,3161,01829.342.0(12.7)
COVID-19 VACCINE544164***
EDURANT/rilpivirine225262(14.3)(5.3)(9.0)
PREZISTA/ PREZCOBIX/ REZOLSTA/ SYMTUZA464505(7.9)(5.3)(2.6)
Other Infectious Diseases(2)8388(5.4)(2.6)(2.8)
Neuroscience1,7341,804(3.9)0.5(4.4)
CONCERTA/ methylphenidate1611610.38.3(8.0)
INVEGA SUSTENNA/ XEPLION/ INVEGA TRINZA/ TREVICTA1,0541,0242.96.9(4.0)
RISPERDAL CONSTA125155(19.3)(14.4)(4.9)
Other Neuroscience(2)393464(15.2)(11.6)(3.6)
Oncology4,0423,53514.321.9(7.6)
DARZALEX1,9861,43338.646.1(7.5)
ERLEADA45030249.556.9(7.4)
IMBRUVICA9701,116(13.1)(7.2)(5.9)
ZYTIGA/ abiraterone acetate505563(10.3)0.9(11.2)
Other Oncology1301207.514.4(6.9)
Pulmonary Hypertension843870(3.1)0.9(4.0)
OPSUMIT438463(5.3)(0.6)(4.7)
UPTRAVI3283134.96.6(1.7)
Other Pulmonary Hypertension7895(18.7)(10.7)(8.0)
Cardiovascular / Metabolism / Other9721,021(4.8)(3.1)(1.7)
XARELTO6095697.17.1—
INVOKANA/ INVOKAMET120160(24.9)(21.8)(3.1)
Other(1,2)243293(17.2)(12.7)(4.5)
Total Pharmaceutical Sales$13,317$12,4806.7%12.3%(5.6)%
  • Percentage greater than 100% or not meaningful

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

(1) Inclusive of PROCRIT / EPREX which was previously disclosed separately

(2)In the fiscal second quarter of 2021, approximately $0.1 billion of certain international OTC products, primarily in China, were reclassified from the Pharmaceutical segment to the Consumer Health segment based on operational changes

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Immunology products achieved operational growth of 8.1% as compared to the same period a year ago driven by continued strong uptake of STELARA (ustekinumab) in Crohn's disease and Ulcerative Colitis, as well as the net benefit of favorable discounts partially offset by unfavorable adjustments to previous sales reserves. Additionally, strong growth of TREMFYA (guselkumab) due to market share gains in Psoriasis and Psoriatic Arthritis was partially offset by unfavorable adjustments to previous sales reserves. 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.

The latest expiring United States patent for STELARA (ustekinumab) will expire in September 2023. STELARA (ustekinumab) U.S. sales in fiscal 2021 were approximately $5.9 billion. The expiration of a product patent or loss of market exclusivity is likely to result in a reduction in sales.

Infectious disease products achieved operational growth of 42.0% 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 0.5% 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 new patient starts and persistence of treatment as well as the launch of INVEGA HAFYERA.

Oncology products achieved operational sales growth of 21.9% as compared to the same period a year ago. Contributors to the growth were strong sales of DARZALEX (daratumumab) driven by share gains in all regions, continued strong market growth, and solid uptake of the subcutaneous formulation and the continued global launch uptake of ERLEADA (apalutamide). IMBRUVICA (ibrutinib) declined due to competitive pressures. The U.S. decline was partially offset by growth in all regions outside the U.S.

Pulmonary Hypertension achieved operational sales growth of 0.9% as compared to the same period a year ago. Sales growth was due to demand and share gains from UPTRAVI (selexipag) partially offset by COVID-19 related market constraints and unfavorable patient mix in OPSUMIT (macitentan) as well as entrants in Other Pulmonary Hypertension.

Cardiovascular / Metabolism / Other products experienced an operational decline of 3.1% as compared to the same period a year ago. The growth of XARELTO (rivaroxaban) was primarily driven by volume growth and share gains from commercial access changes. The decline in sales of INVOKANA/INVOKAMET (canagliflozin) were due to continued share erosion.

Starting in the second quarter of fiscal 2022, the Company updated its policy so that no end customer will be permitted direct delivery of product to a location other than the billing location. The updated policy impacts contract pharmacy transactions involving non-grantee 340B covered entities for most of the Company’s drugs, subject to multiple exceptions. Both grantee and non-grantee covered entities can maintain unlimited contract pharmacy arrangements under policy exceptions. The Company will continue to offer 340B discounts to covered entities on all of its covered outpatient drugs, and it believes its policy will improve its ability to identify inappropriate duplicate discounts and diversion prohibited by the 340B statute. The 340B Drug Pricing Program is a U.S. federal government program requiring drug manufacturers to provide significant discounts on covered outpatient drugs to covered entities. This policy update has discount and volume implications in the current year and going forward.

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MedTech*

The MedTech segment sales in the fiscal six months of 2022 were $13.9 billion, an increase of 2.3% as compared to the same period a year ago, with an operational increase of 5.9% and a negative currency impact of 3.6%. U.S. MedTech sales increased 3.5%. International MedTech sales increased by 1.2%, including an operational increase of 8.0% and a negative currency impact of 6.8%. In the fiscal six months of 2022, the net impact of acquisitions and divestitures on the MedTech segment operational sales growth was a negative 0.1%.

Major MedTech Franchise Sales — Fiscal Six Months Ended

(Dollars in Millions)July 3, 2022July 4, 2021Total ChangeOperations ChangeCurrency Change
Surgery$4,884$4,894(0.2)%3.4%(3.6)%
Advanced2,3022,2860.74.0(3.3)
General2,5822,608(1.0)2.8(3.8)
Orthopaedics4,3454,3400.13.0(2.9)
Hips7777474.16.8(2.7)
Knees6886673.15.9(2.8)
Trauma1,4441,4430.13.0(2.9)
Spine, Sports & Other1,4361,484(3.2)(0.4)(2.8)
Vision2,4982,3287.312.4(5.1)
Contact Lenses/Other1,8041,7254.59.9(5.4)
Surgical69460215.219.4(4.2)
Interventional Solutions2,1411,9957.411.1(3.7)
Total MedTech Sales$13,869$13,5572.3%5.9%(3.6)%

*Previously referred to as Medical Devices

The MedTech segment sales in the fiscal second quarter of 2022 were $6.9 billion, a decrease of 1.1% as compared to the same period a year ago, which included operational growth of 3.4% offset by and a negative currency impact of 4.5%. U.S. MedTech sales increased 1.6%. International MedTech sales decreased by 3.6%, including operational growth of 5.1% offset by a negative currency impact of 8.7%. In the fiscal second quarter of 2022, the net impact of acquisitions and divestitures on the MedTech segment operational sales growth was negligible.

Major MedTech Franchise Sales — Fiscal Second Quarter Ended

(Dollars in Millions)July 3, 2022July 4, 2021Total ChangeOperations ChangeCurrency Change
Surgery$2,450$2,522(2.8)%1.8%(4.6)%
Advanced1,1561,168(1.0)3.6(4.6)
General1,2941,354(4.5)0.3(4.8)
Orthopaedics2,1572,227(3.1)0.5(3.6)
Hips388391(0.7)2.7(3.4)
Knees349350(0.1)3.3(3.4)
Trauma696710(1.9)1.8(3.7)
Spine, Sports & Other724777(6.8)(3.2)(3.6)
Vision1,2411,1834.910.9(6.0)
Contact Lenses/Other8948682.99.2(6.3)
Surgical34731410.515.5(5.0)
Interventional Solutions1,0491,0460.35.3(5.0)
Total MedTech Sales$6,898$6,978(1.1)%3.4%(4.5)%

*Previously referred to as Medical Devices

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The Surgery franchise achieved operational sales growth of 1.8% as compared to the prior year fiscal second quarter. The operational growth in Advanced Surgery was primarily driven by Endocutter and Biosurgery products attributable to market expansion and the success of new products. Growth of Endocutter products was partially offset by regional COVID-19 related mobility restrictions and competitive pressures in the U.S. Growth of Biosurgery products was partially offset by strong market demand in the prior year for infection prevention products and by regional COVID-19 related mobility restrictions. Energy products growth was due to new product penetration coupled with competitive supply challenges and stocking outside the U.S. partially offset by regional COVID-19 related mobility restrictions. The operational growth in General Surgery was primarily driven by strength of the Suture portfolio and technology penetration mostly offset by regional COVID-19 related mobility restrictions.

The Orthopaedics franchise achieved operational sales growth of 0.5% as compared to the prior year fiscal second quarter. The operational growth in hips reflects the continued strength of the portfolio including the ACTIS stem and enabling technologies – KINCISE and VELYS Hip Navigation and momentum in the U.S. Ambulatory Surgery Center channel partially offset by the negative impact of regional COVID-19 related mobility restrictions. The operational growth in knees was primarily driven by market recovery and uptake of new products partially offset by regional COVID-19 related mobility restrictions and the timing of tenders outside the U.S. The operational growth in Trauma was driven by the uptake of new products partially offset by the negative impact of regional COVID-19 related mobility restrictions. The operational decline in Spine, Sports & Other was primarily driven by continued procedural softness in Spine and regional COVID-19 related mobility restrictions partially offset by new products in Sports, Spine & VELYS Digital Solutions.

The Vision franchise achieved operational sales growth of 10.9% as compared to the prior year fiscal second quarter. The Contact Lenses/Other operational growth was primarily driven by market growth, commercial execution and new products. The growth was partially offset by the negative impact from prior year stocking. The Surgical operational growth was primarily driven by Cataract market recovery, uptake of recently launched products, timing of stocking in ASPAC partially offset by high prior year comparison in Refractive.

The Interventional Solutions franchise achieved operational sales growth of 5.3% as compared to the prior year fiscal second quarter was driven by market growth in the U.S., EMEA and LATAM coupled with success of new products and commercial strategies. Growth was partially offset by the negative impact of regional COVID-19 related mobility restrictions.

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ANALYSIS OF CONSOLIDATED EARNINGS BEFORE PROVISION FOR TAXES ON INCOME

Consolidated earnings before provision for taxes on income for the fiscal six months of 2022 was $11.7 billion representing 24.7% of sales as compared to $14.1 billion in the fiscal six months of 2021, representing 30.9% of sales.

Consolidated earnings before provision for taxes on income for the fiscal second quarter of 2022 was $5.8 billion representing 24.3% of sales as compared to $6.7 billion in the fiscal second quarter of 2021, representing 28.6% of sales.

Cost of Products Sold

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

Fiscal Six months Q2 2022 versus Fiscal Six months Q2 2021

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

  • Inflation and unfavorable mix in the MedTech segment

  • Commodity inflation in the Consumer Health segment

  • COVID-19 vaccine supply network related costs in the Pharmaceutical segment

partially offset by

  • Favorable segment mix with a higher percentage of sales coming from the Pharmaceutical segment

  • Supply chain benefits in the Consumer Health segment

The intangible asset amortization expense included in cost of products sold for the fiscal six months of 2022 and 2021 was $2.2 billion and $2.4 billion, respectively.

Q2 2022 versus Q2 2021

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

  • Inflation and unfavorable mix in the MedTech segment

  • Commodity inflation in the Consumer Health segment

  • COVID-19 vaccine supply network related costs in the Pharmaceutical segment

partially offset by

  • Supply chain benefits in the Consumer Health segment

  • Favorable segment mix with a higher percentage of sales coming from the Pharmaceutical segment

The intangible asset amortization expense included in cost of products sold for the fiscal second quarters of 2022 and 2021 was $1.1 billion and $1.2 billion, respectively.

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Selling, Marketing and Administrative Expenses

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

Fiscal Six months Q2 2022 versus Fiscal Six months Q2 2021

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

  • Increased spending to support product launches in the MedTech business

  • Higher brand marketing expenses in the Consumer Health business

Q2 2022 versus Q2 2021

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

  • Leveraging in Pharmaceutical brand marketing expense spending

  • Favorable segment mix with a higher percentage of sales coming from the Pharmaceutical segment

partially offset by

  • Increased spending to support product launches in the MedTech business

Research and Development Expense

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

Fiscal Six months Q2 2022 versus Fiscal Six months Q2 2021

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

  • General portfolio progression in the Pharmaceutical business

  • Increased investment across all franchises in the MedTech business

Q2 2022 versus Q2 2021

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

  • General portfolio progression in the Pharmaceutical business

  • Increased investment across all franchises in the MedTech business

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In-Process Research and Development (IPR&D)

In the fiscal six months of 2022, the Company recorded an intangible asset impairment charge of approximately $0.6 billion related to an in-process research and development asset, bermekimab (JnJ-77474462), an investigational drug for the treatment of Atopic Dermatitis (AD) and Hidradenitis Suppurativa (HS). Additional information regarding efficacy of the AD indication became available which led the Company to the decision to terminate the development of bermekimab for AD. The Company acquired all rights to bermekimab from XBiotech, Inc. in the fiscal year 2020.

Interest (Income) Expense

Interest (Income) Expense in the first fiscal six months of 2022 was a net interest income of $38 million as compared to interest expense of $76 million in the same period a year ago primarily due to higher rates of interest earned on cash balances and the benefit from net investment hedging. Interest (Income) Expense in the fiscal second quarter of 2022 was a net interest income of $26 million as compared to interest expense of $28 million in the same period a year ago primarily due to higher rates of interest earned on cash balances. The balance of cash, cash equivalents and current marketable securities was $32.6 billion at the end of the fiscal second quarter of 2022 as compared to $25.3 billion at the end of the fiscal second quarter of 2021. The Company’s debt position was $32.6 billion as of July 3, 2022 as compared to $33.5 billion the same period a year ago.

Other (Income) Expense, Net*

Fiscal Six months Q2 2022 versus Fiscal Six months Q2 2021

Other (income) expense, net for the fiscal six months of 2022 was unfavorable by $1.6 billion as compared to the prior year primarily due to the following:

Fiscal Six Months
(Dollars in Billions)(Income)/Expense20222021Change
Changes in the fair value of securities$0.5(0.2)0.7
Consumer Health separation costs0.40.00.4
Litigation related0.40.00.4
Employee benefit plan related(0.6)(0.3)(0.3)
Acquisition, integration and divestiture related(1)0.0(0.5)0.5
Other(0.5)(0.4)(0.1)
Total Other (Income) Expense, Net$0.2(1.4)1.6

(1) Primarily related to divestiture gains of two pharmaceutical brands outside the U.S. in the fiscal six months of 2021.

Q2 2022 versus Q2 2021

Other (income) expense, net for the fiscal second quarter of 2022 was unfavorable by $0.8 billion as compared to the prior year primarily due to the following:

Fiscal Second Quarter
(Dollars in Billions)(Income)/Expense20222021Change
Litigation related$0.40.00.4
Consumer Health separation costs0.30.00.3
Changes in the fair value of securities0.1(0.2)0.3
Employee benefit plan related(0.3)(0.1)(0.2)
Other(0.2)(0.2)—
Total Other (Income) Expense, Net$0.3(0.5)0.8

*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), changes in the fair value of securities, gains and losses on divestitures, gains and losses on sale of assets, 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 six months were as follows:

Income Before TaxSegment SalesPercent of Segment Sales
(Dollars in Millions)July 3, 2022July 4, 2021July 3, 2022July 4, 2021July 3, 2022July 4, 2021
Consumer Health$1,470$1,708$7,391$7,49519.9%22.8%
Pharmaceutical8,3449,46326,18624,58131.938.5
MedTech2,6183,37513,86913,55718.924.9
Segment earnings before tax12,43214,54647,44645,63326.231.9
Less: Expenses not allocated to segments(1)360455
Less: Consumer Health separation costs370—
Worldwide income before tax$11,702$14,091$47,446$45,63324.7%30.9%

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

Consumer Health Segment

The Consumer Health segment income before tax as a percent of sales in the fiscal six months of 2022 was 19.9% versus 22.8% for the same period a year ago. The decline in the income before tax as a percent of sales in the fiscal six months of 2022 as compared to the prior year was primarily driven by the following:

  • Commodity inflation

partially offset by

  • Supply chain benefits

Pharmaceutical Segment

The Pharmaceutical segment income before tax as a percent of sales in the fiscal six months of 2022 was 31.9% versus 38.5% for the same period a year ago. The decline in the income before tax as a percent of sales for the fiscal six months of 2022 as compared to the prior year was primarily driven by the following:

  • An IPR&D charge of $0.6 billion in 2022 related to bermekimab (JnJ-77474462), an investigational drug for the treatment of AD and Hidradenitis Suppurativa (HS)

  • Divestiture gains of $0.6 billion in 2021, primarily related to divestiture gains of two pharmaceutical brands outside the U.S.

  • Net mark-to-market loss related to the change in the fair value of securities ($0.5 billion loss in 2022 vs. $0.1 billion gain in 2021)

  • COVID-19 Vaccine supply network related costs of $0.2 billion in 2022

  • Increased Research & Development investment for general portfolio progression

partially offset by

  • Favorable product mix

  • Lower intangible asset amortization expense ($1.5 billion in 2022 vs. $1.7 billion in 2021)

MedTech Segment

The MedTech segment income before tax as a percent of sales in the fiscal six months of 2022 was 18.9% versus 24.9% for the same period a year ago. The decline in the income before tax as a percent of sales for the fiscal six months of 2022 was primarily driven by the following:

  • Litigation related expense of $0.3 billion in 2022 vs. income of $0.1 billion in 2021

  • Inflation and unfavorable product mix

  • Increased investment in Research & Development

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Income before tax by segment of business for the fiscal second quarters were as follows:

Income Before TaxSegment SalesPercent of Segment Sales
(Dollars in Millions)July 3, 2022July 4, 2021July 3, 2022July 4, 2021July 3, 2022July 4, 2021
Consumer Health$784$866$3,805$3,85420.6%22.5%
Pharmaceutical4,4204,29413,31712,48033.234.4
MedTech1,1411,7466,8986,97816.525.0
Segment earnings before tax6,3456,90624,02023,31226.429.6
Less: Expenses not allocated to segments (1)237244
Less: Consumer Health separation costs268—
Worldwide income before tax$5,840$6,662$24,020$23,31224.3%28.6%

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

Consumer Health Segment

The Consumer Health segment income before tax as a percent of sales in the fiscal second quarter of 2022 was 20.6% versus 22.5% for the same period a year ago. The decrease in the income before tax as a percent of sales in the fiscal second quarter of 2022 as compared to the prior year was primarily driven by the following:

  • Commodity inflation

partially offset by

  • Supply chain benefits

Pharmaceutical Segment

The Pharmaceutical segment income before tax as a percent of sales in the fiscal second quarter of 2022 was 33.2% versus 34.4% for the same period a year ago. The decrease in the income before tax as a percent of sales for the fiscal second quarter of 2021 as compared to the prior year was primarily driven by the following:

  • Net mark-to-market loss related to the change in the fair value of securities ($0.1 billion loss in 2022 vs. $0.2 billion gain in 2021)

  • COVID-19 Vaccine supply network related costs of $0.2 billion in 2022

  • Increased Research & Development investment for general portfolio progression

partially offset by

  • Lower intangible asset amortization expense ($0.7 billion in 2022 vs. $0.8 billion in 2021)

  • Brand marketing expense leveraging

  • Favorable product mix

MedTech Segment

The MedTech segment income before tax as a percent of sales in the fiscal second quarter of 2022 was 16.5% versus 25.0% for the same period a year ago. The decrease in the income before tax as a percent of sales for the fiscal second quarter was primarily driven by the following:

  • Litigation related expense of $0.3 billion in 2022 vs. income of $0.1 billion in 2021

  • Inflation and unfavorable product mix

  • Increased investment in Research & Development

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 pre-tax cost savings that will be substantially delivered by the end of 2022. The Company expects to record pre-tax

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restructuring charges of approximately $2.1 to $2.3 billion by the completion of the program in December 2022. In the first fiscal six months of 2022, the Company recorded a net pre-tax charge of $200 million, which is included on the following lines of the Consolidated Statement of Earnings, $155 million in restructuring, $33 million in cost of products sold and $12 million in other (income) expense, net. In the first fiscal six months of 2021, the Company recorded a pre-tax charge of $212 million, which is included on the following lines of the Consolidated Statement of Earnings, $109 million in restructuring, $47 million in cost of products sold and $56 million in other (income) expense, net. In the fiscal second quarter of 2022, the Company recorded a net pre-tax charge of $128 million, which is included on the following lines of the Consolidated Statement of Earnings, $85 million in restructuring, $17 million in cost of products sold and $26 million in other (income) expense, net. In the fiscal second quarter of 2021, the Company recorded a pre-tax charge of $108 million, which is included on the following lines of the Consolidated Statement of Earnings, $56 million in restructuring, $20 million in cost of products sold and $32 million in other (income) expense, net. Restructuring charges of approximately $2.0 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

The worldwide effective income tax rate for the fiscal six months of 2022 was 14.9% in 2022 and 11.5% in 2021. Subsequent to July 3, 2022, as part of the planned separation of the Company’s Consumer Health business the Company has recognized approximately $0.3 billion in incremental tax costs due to the reorganization of certain international subsidiaries which will be recorded in the fiscal third quarter. During fiscal year 2022, the Company is expected to incur significant additional international tax costs related to the legal separation of the Consumer Health business.

For discussion related to the fiscal six months of 2022 provision for taxes refer to Note 5 to the Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

jnj-20220703_g11.jpg jnj-20220703_g12.jpg jnj-20220703_g13.jpg

Cash Flows

Cash and cash equivalents were $11.0 billion at the end of the fiscal second quarter of 2022 as compared with $14.5 billion at the end of fiscal year 2021. The primary sources and uses of cash that contributed to the $3.5 billion decrease were:

(Dollars In Billions)
$14.5Q4 2021 Cash and cash equivalents balance
9.6cash generated from operating activities
(6.3)net cash used by investing activities
(6.6)net cash used by financing activities
(0.2)effect of exchange rate and rounding
$11.0Q2 2022 Cash and cash equivalents balance

In addition, the Company had $21.6 billion in marketable securities at the end of the fiscal second quarter of 2022 and $17.1 billion at the end of fiscal year 2021.

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Cash flow from operations of $9.6 billion was the result of:

(Dollars In Billions)
$10.0Net Earnings
2.3non-cash expenses and other adjustments primarily for depreciation and amortization, stock-based compensation, asset write-downs and credit losses and accounts receivable allowances partially offset by the deferred tax provision and net gain on sale of assets/businesses
(2.6)an increase in accounts receivable and inventories
(1.2)a decrease in accounts payable and accrued liabilities
3.5a decrease in other current and non-current assets
(2.4)a decrease in other current and non-current liabilities and rounding
$9.6Cash Flow from operations

Investing activities use of $6.3 billion of cash was primarily used for:

(Dollars In Billions)
$(1.5)additions to property, plant and equipment
0.3proceeds from the disposal of assets/businesses, net
(0.5)acquisitions, net of cash acquired and other
(4.4)net purchases of investments
(0.2)Other
$(6.3)Net cash used for investing activities

Financing activities use of $6.6 billion of cash was primarily used for:

(Dollars In Billions)
$(5.8)dividends to shareholders
(2.6)repurchase of common stock
0.8proceeds from stock options exercised/employee withholding tax on stock awards, net
0.8credit support agreements activity, net
0.2other and rounding
$(6.6)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.

As of July 3, 2022, the Company's cash, cash equivalents and marketable securities was approximately $32.6 billion and approximately $32.6 billion of notes payable and long-term debt for a net neutral cash position as compared to the prior year net debt position of $8.2 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 approximate $0.9 billion in contractual supply commitments associated with its development of the COVID-19 vaccine, the remaining balance to be paid on the agreement to settle opioid litigation for approximately $4.2 billion and the establishment of the $2.0 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.

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In the fiscal second quarter of 2022, 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 charge (see Note 1 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2022), and $0.9 billion primarily related to the normal estimated payments for the first six months of fiscal 2022.

Subsequent to the fiscal second quarter ended July 3, 2022, the Company sold all of its shares in argenx SE for proceeds of $0.6 billion.

Dividends

On April 19, 2022, the Board of Directors declared a regular cash dividend of $1.13 per share, payable on June 7, 2022 to shareholders of record as of May 24, 2022.

On July 18, 2022, the Board of Directors declared a regular cash dividend of $1.13 per share, payable on September 6, 2022 to shareholders of record as of August 23, 2022. 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 2021 and 2020, 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. In the fiscal second quarter of 2022, amounts paid for services to be delivered and contractually obligated to be paid to these contract manufacturing organizations of approximately $0.9 billion are reflected in the prepaid expenses and other and the accrued liabilities accounts in the Company's consolidated balance sheet. Additionally, the Company has entered into certain vaccine development cost sharing arrangements with government related organizations.

Based on the global progress on vaccine development and distribution as well as the amount of existing global supply, the Company is modifying its COVID-19 vaccine research programs and manufacturing capacity to levels that meet all customer contractual commitments which will result in incremental costs for the year. The Company continues to evaluate the global demand for the COVID-19 vaccine and its related supply.

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The Company continues to evaluate and monitor both its internal and external supply arrangements. The Company has established a global vaccine supply network, where, in addition to its internal manufacturing site in Leiden, the Netherlands, ten other manufacturing sites have been involved in the production of the vaccine across different countries and continents. The Company does not believe that a disruption relating to vaccine manufacturing, or the resulting delay would have a material financial impact on the Company’s consolidated financial statements or results.

Russia-Ukraine War

Although the long-term implications of Russia’s invasion of Ukraine are difficult to predict at this time, the financial impact of the conflict in the fiscal second quarter and six months of 2022, including accounts receivable or inventory reserves, was not material. As of both the 2021 fiscal year ending January 2, 2022, and the fiscal second quarter ending July 3, 2022, the business of the Company’s Ukraine subsidiaries represented less than 1% of the Company’s consolidated assets and revenues. As of both the 2021 fiscal year ending January 2, 2022, and the fiscal second quarter ending July 3, 2022, the business of the Company’s Russian subsidiaries represented less than 1% of the Company’s consolidated assets and represented 1% of revenues.

In early March, the Company took steps to suspend all advertising, enrollment in clinical trials, and any additional investment in Russia. Additionally, at the end of March, the Company made the decision to suspend supply of personal care products in Russia. The Company continued to supply its other products throughout the second quarter as patients rely on many of the products for healthcare purposes.

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%. Beginning in the fiscal second quarter of 2022, the Company accounted for operations in Turkey 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.

Governments around the world consider various proposals to make changes to tax laws, which may include increasing or decreasing existing statutory tax rates. In connection with various government initiatives, companies are required to disclose more information to tax authorities on operations around the world, which may lead to greater audit scrutiny of profits earned in other countries. 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 healthcare products and services, including delaying medical procedures, rationing prescription medications, reducing the frequency of physician visits and foregoing healthcare insurance coverage, as a result of the current global economic downturn, 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.

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