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Item 7. Management’s Discussion and Analysis

2023-02-16 compared with 2022-02-17 · 221 added, 231 removed, 453 unchanged (50% of the section changed)

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The Company is organized into three business segments:

Consumer Health, Pharmaceutical and Medical Devices.

Consumer Health, Pharmaceutical and MedTech.

The Consumer Health segment includes a broad range of products used in the Baby Care, Oral Care, Skin Health/Beauty, Over-the-Counter pharmaceutical, Women’s Health and Wound Care markets.

These products are marketed to the general public and sold online (eCommerce) and to retail outlets and distributors throughout the world.

The Pharmaceutical segment is focused on six therapeutic areas, including Immunology, Infectious diseases, Neuroscience, Oncology, Pulmonary Hypertension, and Cardiovascular and Metabolic diseases.

The Pharmaceutical segment is focused on the following therapeutic areas, including Immunology, Infectious diseases, Neuroscience, Oncology, Pulmonary Hypertension, and Cardiovascular and Metabolic diseases.

Products in this segment are distributed directly to retailers, wholesalers, distributors, hospitals and healthcare professionals for prescription use.

The Medical Devices segment includes a broad range of products used in the Orthopaedic, Surgery, Interventional Solutions (cardiovascular and neurovascular) and Vision fields.

The MedTech segment includes a broad portfolio of products used in the Orthopaedic, Surgery, Interventional Solutions (cardiovascular and neurovascular) and Vision fields.

These products are distributed to wholesalers, hospitals and retailers, and used principally in the professional fields by physicians, nurses, hospitals, eye care professionals and clinics.

The Executive Committee of Johnson & Johnson is the principal management group responsible for the strategic operations and allocation of the resources of the Company.

This Committee oversees and coordinates the activities of the Consumer Health, Pharmaceutical and Medical Devices business segments.

This Committee oversees and coordinates the activities of the Consumer Health, Pharmaceutical and MedTech business segments.

In all of its product lines, the Company competes with other companies both locally and globally, throughout the world.

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A critical driver of the Company’s success is the diversity of its 152,700 employees worldwide.

Employees are empowered and inspired to lead with the Company’s Our Credo and purpose as guides.

Employees are empowered and inspired to lead with Our Credo and purpose as guides.

This allows every employee to use the Company’s reach and size to advance the Company’s purpose, and to also lead with agility and urgency.

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Sales by international companies were $46.4 billion in 2022 and $46.6 billion in 2021.

This represents an increase of 18.2% in 2021 and a decrease of 1.3% in 2020.

This represents a decrease of 0.6% in 2022 and an increase of 18.2% in 2021.

The five-year compound annual growth rates for worldwide, U.S.

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and international sales were 3.5%, 5.0% and 2.2%, respectively.

In 2021, sales by companies in Europe achieved growth of 24.3% as compared to the prior year, which included operational growth of 20.7% and a positive currency impact of 3.6%.

Sales by companies in the Western Hemisphere (excluding the U.S.) achieved growth of 7.8% as compared to the prior year, which included operational growth of 7.3% and a positive currency impact of 0.5%.

Sales by companies in the Asia-Pacific, Africa region achieved growth of 14.1% as compared to the prior year, including operational growth of 11.4% and a positive currency impact of 2.7%.

The Company estimated that the inclusion of a 53rd week in the fiscal year 2020 results negatively impacted the 2021 comparative sales growth by approximately 1.0%.

(See Note 1 to the Consolidated Financial Statements for Annual Closing Date details).

While the additional week added a few days to sales, it also added a full week's worth of operating costs;

therefore, the net earnings impact was negligible.

In 2022, sales by companies in Europe experienced a decline of 0.6% as compared to the prior year, which included operational growth of 11.0% and a negative currency impact of 11.6%.

Sales by companies in the Western Hemisphere, excluding the U.S., achieved growth of 6.5% as compared to the prior year, which included operational growth of 10.2%, and a negative currency impact of 3.7%.

Sales by companies in the Asia-Pacific, Africa region experienced a decline of 2.8% as compared to the prior year, including operational growth of 6.2% and a negative currency impact of 9.0%.

In 2022, the Company utilized three wholesalers distributing products for all three segments that represented approximately 16.5%, 13.0% and 12.0% of the total consolidated revenues.

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Consumer Health Segment

Consumer Health segment sales in 2021 were $14.6 billion, an increase of 4.1% from 2020, which included 2.8% operational growth and a positive currency impact of 1.3%.

Consumer Health segment sales in 2022 were $15.0 billion, a decrease of 0.5% from 2021, which included 3.6% operational growth and a negative currency impact of 4.1%.

Consumer Health segment sales were $6.6 billion, an increase of 1.3%.

International sales were $8.1 billion, an increase of 5.6%, which included 3.1% operational growth and a positive currency impact of 2.5%.

International sales were $8.4 billion, a decrease of 1.9%, which included 5.3% operational growth and a negative currency impact of 7.2%.

In 2022, acquisitions and divestitures had a net negative impact of 0.3% on the operational sales growth of the worldwide Consumer Health segment.

Major Consumer Health Franchise Sales*:

(Dollars in Millions) 2021 2020 ’21 vs.

OTC $ 5,227 4,824 8.4 %

Total Operations Currency

(Dollars in Millions) 2022 2021 Change Change Change

$ 6,031 5,627 7.2 % 11.2 % (4.0) %

Skin Health/Beauty 4,352 4,541 (4.2) (0.4) (3.8)

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Total Consumer Health Sales $ 14,953 15,035 (0.5) % 3.6 % (4.1) %

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

(1) Fiscal 2021 reflects approximately $0.4 billion of certain international OTC products, primarily in China, which were reclassified from the Pharmaceutical segment to the Consumer Health segment based on operational changes

The OTC franchise sales of $6.0 billion increased 7.2% as compared to the prior year.

Growth was primarily attributable to Analgesics, TYLENOL ® and MOTRIN ® , digestive health and the hydration benefit offering (ORSL).

The Skin Health/Beauty franchise sales of $4.5 billion increased 2.0% as compared to the prior year.

Growth was primarily due to COVID-19 recovery, strong performance of NEUTROGENA ® and AVEENO ® , and eCommerce acceleration partially offset by the divestiture of DR.

CI:LABO - Sedona business in Asia Pacific and external supply constraints.

The Oral Care franchise sales of $1.6 billion increased 0.2% as compared to the prior year.

Market growth in the U.S.

along with strong performance in the Asia Pacific region due to successful brand building and promotional campaigns and the positive impact of currency offset the negative impact of the floss divestiture and U.S.

external supply constraints.

The Baby Care franchise sales of $1.6 billion increased 3.2% compared to the prior year.

Growth was driven by AVEENO ® Asia Pacific eCommerce strength, innovation and COVID-19 recovery.

The Women’s Health franchise sales of $0.9 billion increased 1.8% as compared to the prior year primarily driven by COVID-19 market recovery, favorable price and strong brand building in Asia Pacific partially offset by disruptions in Europe due to flooding.

The Wound Care/Other franchise sales of $0.7 billion increased 2.6% as compared to the prior year.

Growth was due to strong performance of BAND-AID ® Brand Adhesive Bandages in the U.S.

partially offset by product discontinuations and competitive pressures in Asia Pacific.

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 initial announcement.

Operational growth was primarily attributable to increased Cough/Cold/Flu, adult and pediatric incidences, price actions primarily in the U.S.

and increased consumption in China due to easing of COVID-19 restrictions.

Growth was partially offset by supply constraints.

The Skin Health/Beauty franchise sales of $4.4 billion declined 4.2% as compared to the prior year.

The operational decline was driven by supply constraints in the U.S.

partially offset by price actions and strong new product performance in the Asia Pacific and Latin America region.

The Oral Care franchise sales of $1.5 billion declined 8.5% as compared to the prior year.

The operational decline was due to portfolio simplification in the U.S., competitive pressures in EMEA and China, category decline and pricing pressures in EMEA, as well as suspension of personal care sales in Russia and negative COVID-19 impacts in China.

The Baby Care franchise sales of $1.5 billion declined 6.7% as compared to the prior year.

The operational decline was driven by category deceleration and competitive pressures in the U.S., suspension of personal care sales in Russia and weakness in India.

The Women’s Health franchise sales of $0.9 billion declined 1.5% as compared to the prior year.

Operational growth driven by lapping prior year supply constraints in EMEA, strength in India, and price actions in LATAM was partially offset by suspension of personal care sales in Russia and negative currency impacts.

The Wound Care/Other franchise sales of $0.7 billion declined 5.3% as compared to the prior year.

The operational decline was driven by lapping strong prior year consumption, competitive pressure in the U.S., and decreased consumption in China.

In November 2021, the Company announced its intention to separate the Company’s Consumer Health business (Kenvue as the name for the planned New Consumer Health Company), with the intention to create a new, publicly traded company by the end of the fiscal year 2023.

Pharmaceutical Segment

Pharmaceutical segment sales in 2021 were $52.1 billion, an increase of 14.3% from 2020, which included operational growth of 13.1% and a positive currency impact of 1.2%.

Pharmaceutical segment sales in 2022 were $52.6 billion, an increase of 1.7% from 2021, which included operational growth of 6.7% and a negative currency impact of 5.0%.

sales were $28.6 billion, an increase of 2.3%.

International sales were $24.1 billion, an increase of 21.6%, which included 18.8% operational growth and a positive currency impact of 2.8%.

International sales were $24.0 billion, an increase of 1.0%, which included 11.9% operational growth and a negative currency impact of 10.9%.

In 2022, acquisitions and divestitures had a net negative impact of 0.1% on the operational sales growth of the worldwide Pharmaceutical segment.

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Major Pharmaceutical Therapeutic Area Sales*:

(Dollars in Millions) 2021 2020 ’21 vs.

Total Operations Currency

(Dollars in Millions) 2022 2021 Change Change Change

Total Immunology $ 16,935 16,750 1.1 % 4.8 % (3.7) %

3,190 3,747 (14.9)

REMICADE 2,343 3,190 (26.6) (25.3) (1.3)

SIMPONI/SIMPONI ARIA 2,184 2,276 (4.0) 1.0 (5.0)

2,276 2,243 1.4

9,134 7,707 18.5

2,127 1,347 57.9

STELARA 9,723 9,134 6.5 10.4 (3.9)

TREMFYA 2,668 2,127 25.4 30.1 (4.7)

Other Immunology 17 24 (28.2) (28.2) 0.0

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PREZISTA/ PREZCOBIX/REZOLSTA/ SYMTUZA 1,943 2,083 (6.7) (4.4) (2.3)

2,083 2,184 (4.6)

Other Infectious Diseases (2)

318 363 (12.3) (7.2) (5.1)

Total Neuroscience 6,893 6,988 (1.4) 3.4 (4.8)

CONCERTA/methylphenidate 644 667 (3.5) 4.1 (7.6)

INVEGA SUSTENNA ® /XEPLION ® /INVEGA TRINZA ® /TREVICTA ®

4,022 3,653 10.1

INVEGA SUSTENNA/XEPLION/

INVEGA TRINZA/TREVICTA 4,140 4,022 3.0 6.9 (3.9)

RISPERDAL CONSTA 485 592 (18.1) (13.0) (5.1)

592 642 (7.7)

Other Neuroscience (2)

Total Oncology 14,548 12,367 17.6

1,623 1,706 (4.9) 0.4 (5.3)

1,291 760 70.0

4,369 4,128 5.8

Total Oncology 15,983 14,548 9.9 16.9 (7.0)

DARZALEX 7,977 6,023 32.4 39.5 (7.1)

ERLEADA 1,881 1,291 45.7 53.0 (7.3)

IMBRUVICA 3,784 4,369 (13.4) (7.6) (5.8)

ZYTIGA /abiraterone acetate 1,770 2,297 (22.9) (13.6) (9.3)

2,297 2,470 (7.0)

Other Oncology 571 568 0.6 6.0 (5.4)

568 821 (30.8)

Total Pulmonary Hypertension 3,417 3,450 (1.0) 3.0 (4.0)

1,819 1,639 11.0

1,237 1,093 13.1

OPSUMIT 1,783 1,819 (2.0) 2.6 (4.6)

UPTRAVI 1,322 1,237 6.9 8.6 (1.7)

Other Pulmonary Hypertension 313 395 (20.8) (13.1) (7.7)

Total Cardiovascular / Metabolism / Other 3,887 4,119 (5.6) (4.0) (1.6)

2,438 2,345 4.0

XARELTO 2,473 2,438 1.4 1.4 —

INVOKANA/ INVOKAMET 448 563 (20.4) (17.2) (3.2)

966 1,119 (13.6) (9.3) (4.3)

PROCRIT ® /EPREX ®

479 552 (13.3)

Other 981 1,186 (17.3)

Total Pharmaceutical Sales $ 52,563 51,680 1.7 % 6.7 % (5.0) %

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

** Percentage greater than 100% or not meaningful

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

Immunology products achieved sales of $16.8 billion in 2021, representing an increase of 11.3% as compared to the prior year driven by strong uptake of STELARA ® (ustekinumab) in Crohn's disease and Ulcerative Colitis and strength in TREMFYA ® (guselkumab) in Psoriasis and uptake in Psoriatic Arthritis.

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

(2) Fiscal 2021 reflects approximately $0.4 billion of certain international OTC products, primarily in China, which were reclassified from the Pharmaceutical segment to the Consumer Health segment based on operational changes

Immunology products achieved sales of $16.9 billion in 2022, representing an increase of 1.1% as compared to the prior year.

Operational growth was driven by strong uptake of STELARA (ustekinumab) in Crohn's disease and Ulcerative Colitis and strength of TREMFYA (guselkumab) in Psoriasis and uptake in Psoriatic Arthritis.

This was partially offset by lower sales of REMICADE (infliximab) due to biosimilar competition.

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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 sales of $5.9 billion in 2021, representing an increase of 64.0% as compared to the prior year.

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 sales of $7.0 billion, representing an increase of 7.1% as compared to the prior year.

Paliperidone long-acting injectables growth was driven by sales of INVEGA SUSTENNA ® /XEPLION ® (paliperidone palmitate) and INVEGA TRINZA ® /TREVICTA ® from new patient starts and persistence as well as the launch of INVEGA HAFYERA™.

sales in fiscal 2022 were approximately $6.4 billion and the expiration of this product patent or loss of market exclusivity will result in a reduction in sales.

Infectious disease products sales were $5.4 billion in 2022, representing a decline of 6.5% as compared to the prior year.

Operational growth was driven by the COVID-19 vaccine outside the U.S 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 sales were $6.9 billion, in 2022, representing a decline of 1.4% as compared to the prior year.

The operational sales growth of INVEGA SUSTENNA/XEPLION (paliperidone palmitate) and INVEGA TRINZA/TREVICTA from new patient starts and persistence as well as the launch of INVEGA HAFYERA was offset by negative currency impacts and lower sales of RISPERDAL CONSTA.

Oncology products achieved sales of $16.0 billion in 2022, representing an increase of 9.9% as compared to the prior year.

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 competitive pressures from novel oral agents and COVID-19 related market dynamics including delays in new patient starts.

Pulmonary Hypertension products achieved sales of $3.5 billion, representing an increase of 9.6% as compared to the prior year.

Sales growth of OPSUMIT ® (macitentan) and UPTRAVI ® (selexipag) were due to continued share gains and market growth.

Contributions to operational growth were strong sales of DARZALEX (daratumumab) driven by share gains in all regions, continued strong market growth, and uptake of the subcutaneous formulation as well as the continued global launch uptake of ERLEADA (apalutamide).

This was partially offset by declining sales of IMBRUVICA (ibrutinib) due to competitive pressures and market suppression and ZYTIGA due to loss of exclusivity in the European Union in the second half of 2022.

Pulmonary Hypertension products sales were $3.4 billion, a decline of 1.0% as compared to the prior year.

The operational sales growth of OPSUMIT (macitentan) and UPTRAVI (selexipag) due to continued share gains and market growth was offset by COVID-19 related impacts and continued declines in Other Pulmonary Hypertension.

Cardiovascular/Metabolism/Other products sales were $3.9 billion, a decline of 5.6% as compared to the prior year.

The decline was primarily attributable to lower sales of INVOKANA ® /INVOKAMET ® (canagliflozin) due to share erosion and PROCRIT ® / EPREX ® (epoetin alfa) due to biosimilar competition.

The operational decline was primarily attributable to lower sales of INVOKANA/INVOKAMET (canagliflozin) due to share erosion and PROCRIT/ EPREX (epoetin alfa) due to biosimilar competition.

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 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 certain contract pharmacy arrangements under policy exceptions.

The Company has been and 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 had discount implications which positively impacted sales to customers in 2022.

During 2022, the Company advanced its pipeline with several regulatory submissions and approvals for new drugs and additional indications for existing drugs as follows:

Product Name (Chemical Name) Indication US Approval EU Approval US Filing EU Filing

Maintenance Treatment of Schizophrenia in Adults •

CABENUVA (rilpivirine and cabotegravir) HIV treatment for use every two months •

COVID-19 Vaccine COVID-19 Emergency Use • •

COVID-19 Vaccine Booster Shot COVID-19 Emergency Use • •

DARZALEX ® (daratumumab)

Subcutaneous (SC) formulation Treatment for Newly Diagnosed Systemic Light Chain Amyloidosis and Gains an Additional Approval in Pre-Treated Multiple Myeloma •

DARZALEX FASPRO ® (daratumumab and hyaluronidase-fihj)

Combination with Carfilzomib and Dexamethasone for Patients with Multiple Myeloma After First or Subsequent Relapse •

INVEGA HAFYERA (paliperidone palmitate) First and Only Twice-Yearly Treatment for Adults with Schizophrenia •

PONVORY (Ponesimod) Treatment of Adults with Relapsing Forms of Multiple Sclerosis with Active Disease Defined by Clinical or Imaging Features •

PONVORY (Ponesimod) Oral Treatment for Adults with Relapsing Multiple Sclerosis •

RYBREVANT (amivantamab-vmjw) Treatment for Patients with Non-Small Cell Lung Cancer with EGFR Exon 20 Insertion Mutations •

SPRAVATO ® (esketamine)

Rapid reduction of depressive symptoms in a psychiatric emergency for patients with major depressive disorder •

STELARA ® (ustekinumab)

Treatment of Pediatric Patients with Juvenille Psoriatic Arthritis •

Teclistamab Treatment of Patients with Relapsed or Refractory Multiple Myeloma •

Intravenous Use in Adult Patients with Pulmonary Arterial Hypertension (PAH)

XARELTO ® (rivaroxaban)

Help Prevent and Treat Blood Clots in Pediatric Patients

XARELTO ® (rivaroxaban)

Expanded Peripheral Artery Disease (PAD) Indication to Include Patients After Lower-Extremity Revascularization (LER)

Medical Devices Segment

The Medical Devices segment sales in 2021 were $27.1 billion, an increase of 17.9% from 2020, which included operational growth of 16.2% and a positive currency impact of 1.7%.

aprocitentan Treatment for difficult to treat hypertension •

CABENUVA (rilpivirine and cabotegravir) HIV treatment for adolescents •

CARVYKTI (ciltacabtagene autoleucel) Treatment for patients with relapsed or refractory Multiple Myeloma • •

(apalutamide) Tablet reduction • •

IMBRUVICA (ibrutinib) Treatment for Pediatric Patients with Chronic Graft-Versus-Host Disease •

Treatment for Frontline Chronic Lymphocytic Leukemia (I + V fixed duration) (GLOW) •

niraparib Treatment of L1 Prostate cancer metastatic castration-resistant in combination with abiraterone acetate and Prednisone •

STELARA (ustekinumab) Treatment of Pediatric Patients with Juvenile Psoriatic Arthritis •

Talquetamab Treatment of Patients with Relapsed Refractory Multiple Myeloma •

(BCMA/CD3) Treatment of Patients with Relapsed Refractory Multiple Myeloma • •

MedTech Segment**

The MedTech segment sales in 2022 were $27.4 billion, an increase of 1.4% from 2021, which included operational growth of 6.2% and a negative currency impact of 4.8%.

sales were $13.4 billion, an increase of 5.4% as compared to the prior year.

International sales were $14.4 billion, an increase of 20.6% as compared to the prior year, which included operational growth of 17.3% and a positive currency impact of 3.3%.

In 2021, the net impact of acquisitions and divestitures on the Medical Devices segment worldwide operational sales growth was a negative 0.6% primarily due to the divestiture of Advanced Sterilization Products (ASP).

The Company has seen a market 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 as compared to the prior year.

Major Medical Devices Franchise Sales:

(Dollars in Millions) 2021 2020 ’21 vs.

International sales were $14.1 billion, a decrease of 2.3% as compared to the prior year, which included operational growth of 6.9% and a negative currency impact of 9.2%.

In 2022, the net impact of acquisitions and divestitures on the MedTech segment worldwide operational sales growth was a positive 0.1%.

Major MedTech Franchise Sales*:

Total Operations Currency

(Dollars in Millions) 2022 2021 Change Change Change

Surgery $ 9,690 9,812 (1.2) % 3.8 % (5.0) %

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4,300 3,971 8.3 13.7 (5.4)

Total Medical Devices Sales $ 27,060 22,959 17.9 %

The Surgery franchise achieved sales of $9.8 billion in 2021 representing an increase of 19.2% from 2020.

The growth in Advanced Surgery was primarily driven by 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 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 achieved sales of $8.6 billion in 2021, representing an increase of 10.6% from 2020.

The 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 growth in knees was primarily driven by procedure recovery and new product introductions.

The growth in Trauma was driven by global market recovery and uptake of new products.

The growth in Spine, Sports & Other was primarily driven by procedure recovery and new product introductions.

Total MedTech Sales $ 27,427 27,060 1.4 % 6.2 % (4.8) %

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

**Previously referred to as Medical Devices

The Surgery franchise sales were $9.7 billion in 2022, representing a decline of 1.2% from 2021.

The operational growth in Advanced Surgery was primarily driven by the following:

Endocutter market recovery and new products partially offset by competitive pressures in the U.S.;

Biosurgery market recovery and the success of new products partially offset by strong U.S.

market demand in the prior year for infection prevention products;

and Energy products driven by market recovery and new product penetration coupled with competitive supply challenges.

The operational growth in General Surgery was primarily driven by market recovery and technology penetration.

The Orthopaedics franchise sales were $8.6 billion in 2022, which was flat to the prior year.

The Orthopaedics franchise included operational sales growth of 3.7% offset by a negative currency impact of 3.7%.

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.

This growth was partially offset by impacts of volume-based procurement in China and the timing of tenders outside the U.S.

The operational growth in knees was primarily driven by procedure recovery, strength of the ATTUNE portfolio and pull through related to the VELYS Robotic assisted solution.

This growth was partially offset by impacts of volume-based procurement in China and timing of tenders outside the U.S.

The operational growth in Trauma was driven by global market recovery and uptake of new products.

The operational growth in Spine, Sports & Other was primarily driven by procedure recovery and new product introductions.

This growth was partially offset by competitive pressures in Spine and impacts of volume-based procurement in China.

The Vision franchise achieved sales of $4.8 billion in 2022, representing an increase of 3.4% from 2021.

The Contact Lenses/Other operational growth was due to market recovery and market share gains from new products.

Surgical Vision operational growth was primarily due to market recovery and uptake of recently launched products.

The Interventional Solutions franchise achieved sales of $4.0 billion in 2021, an increase of 30.4% from 2020.

Growth in the electrophysiology and stroke businesses were driven by market recovery and success of new products and commercial strategies.

Beginning in the fiscal first quarter of 2022, the Medical Devices segment will be referred to as the MedTech segment.

The Contact Lenses/Other operational growth was due to market recovery, price actions, commercial execution and benefits from new products.

Surgical Vision operational growth was primarily due to market recovery and the success of new products and was partially offset by a higher prior year U.S.

Refractory market.

The Interventional Solutions franchise achieved sales of $4.3 billion in 2022, representing an increase of 8.3% from 2021.

Operational growth was driven by market recovery and success of new products and commercial strategies.

Interventional solutions also includes sales from Abiomed, Inc.

(Abiomed) which were reflected as of December 22, 2022.

Analysis of Consolidated Earnings Before Provision for Taxes on Income

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Percentages in chart are as a percent to total sales)

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

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

• Supply chain efficiencies in the Consumer Health segment

The intangible asset amortization expense included in cost of products sold was $4.7 billion for both fiscal years 2021 and 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

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

• One-time COVID-19 vaccine manufacturing exit related costs

• Currency impacts in the Pharmaceutical segment

• Commodity inflation in the MedTech and Consumer Health segments

partially offset by

• Increased brand marketing expenses in the Consumer Health business

• Supply chain benefits in the Consumer Health segment

The intangible asset amortization expense included in cost of products sold was $4.3 billion and $4.7 billion for the fiscal years 2022 and 2021, respectively.

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

• Reduction of brand marketing expenses in the Pharmaceutical and Consumer Health businesses

Research and Development Expense:

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Pharmaceutical 11,622 22.1 11,878 23.0

Medical Devices 2,377 8.8 2,174 9.5

MedTech 2,488 9.1 2,377 8.8

Total research and development expense $ 14,603 15.4 % $ 14,714 15.7 %

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The Company remains committed to investing in research and development with the aim of delivering high quality and innovative products.

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

• General portfolio progression in the Pharmaceutical business

• COVID-19 vaccine expenses, net of governmental reimbursements

Research and Development decreased as a percent to sales primarily driven by:

• Lower milestone payments in the Pharmaceutical business

In-Process Research and Development (IPR&D):

In the fiscal year 2022, the Company recorded an intangible asset impairment charge of approximately $0.8 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 and HS indication became available which led the Company to the decision to terminate the development of bermekimab for both AD and HS.

The Company acquired all rights to bermekimab from XBiotech, Inc.

in the fiscal year 2020.

In fiscal year 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.

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The Company will continue to monitor the remaining $1.5 billion Ottava platform intangible asset as development program activities are ongoing.

In fiscal year 2020, the Company recorded an IPR&D charge of $0.2 billion primarily related to a partial impairment due to timing and progression of one of the digital surgery platforms acquired with the Auris Health acquisition.

On January 28, 2022, subsequent to the fiscal year 2021, additional information regarding efficacy became available which led the Company to the decision to terminate the development of bermekimab for Atopic Dermatitis (AD).

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 AD and Hidradenitis Suppurativa (HS).

The impairment charge is related to the AD indication and is a nonrecognized subsequent event and will be reflected in the first quarter 2022 financial statements.

The Company acquired all rights to bermekimab from XBiotech, Inc.

in fiscal year 2020.

Other (Income) Expense, Net:

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, income and losses associated with certain employee benefit programs, gains and losses on divestitures, certain transactional currency gains and losses, acquisition-related costs, litigation accruals and settlements, as well as royalty income.

Other (income) expense, net for the fiscal year 2021 was favorable by $2.4 billion as compared to the prior year primarily due to the following:

(JJDC), changes in the fair value of securities, investment (income)/loss related to employee benefit programs, gains and losses on divestitures, certain transactional currency gains and losses, acquisition and divestiture related costs, litigation accruals and settlements, as well as royalty income.

Other (income) expense, net for the fiscal year 2022 was unfavorable by $1.4 billion as compared to the prior year primarily due to the following:

(Dollars in Billions)(Income)/Expense 2022 2021 Change

Litigation expense (1)

Consumer Health separation costs $ 1.0 0.1 0.9

Litigation related (1)

0.9 2.3 (1.4)

Changes in the fair value of securities 0.7 (0.5) 1.2

One-time COVID-19 vaccine manufacturing exit related costs 0.7 0.0 0.7

Acquisition, Integration and Divestiture related (2)

0.1 (0.5) 0.6

(Gains)/losses on securities (0.5) (0.5) 0.0

Restructuring related 0.1 0.1 0.0

Employee benefit plan related (1.2) (0.6) (0.6)

(0.3) (0.3) —

Other (0.4) (0.4) —

Total Other (Income) Expense, Net $ 1.9 0.5 1.4

( 1) 2021 is primarily related to talc and Risperdal.

2020 is primarily related to talc and the opioid litigation settlement.

(2) 2021 is p rimarily related to divestiture gains of two pharmaceutical brands outside the U.S.

2020 is primarily driven by a contingent consideration reversal of approximately $1.1 billion related to the timing of certain developmental milestones associated with the Auris Health acquisition.

(3 ) 2021 includes Consumer Health separation costs of $0.1 billion.

Costs in future years are expected to be significantly higher.

( 1) 2022 was primarily related to pelvic mesh and 2021 was primarily related to talc and Risperdal Gynecomastia

(2) 2022 was primarily costs related to the acquisition of Abiomed.

2021 was p rimarily related to divestiture gains of two pharmaceutical brands outside the U.S.

Interest (Income) Expense:

The fiscal year 2021 included net interest expense of $130 million as compared to $90 million net interest expense in the fiscal year 2020.

This was primarily due to lower rates of interest earned on cash balances and a higher average debt balance, partially offset by the benefit from net investment hedging.

Interest (income) expense in the fiscal of 2022 was net interest income of $214 million as compared to interest expense of $130 million in the fiscal year 2021 primarily due to higher rates of interest earned on cash balances.

Cash, cash equivalents and marketable securities totaled $23.5 billion at the end of 2022, and averaged $27.6 billion as compared to the cash, cash equivalents and marketable securities total of $31.6 billion and $28.4 billion average cash balance in 2021.

The total debt balance at the end of 2022 was $39.7 billion with an average debt balance of $36.7 billion as compared to $33.8 billion at the end of 2021 and an average debt balance of $34.5 billion.

The lower average cash, cash equivalents and marketable securities and higher average debt balance were primarily due to the acquisition of Abiomed in late December of 2022.

Income Before Tax by Segment

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Consumer Health (3)

$ 2,930 1,573 14,953 15,035 19.6 % 10.5

Pharmaceutical (3)

Medical Devices 4,373 3,044 27,060 22,959 16.2 13.3

15,901 17,969 52,563 51,680 30.3 34.8

Net expense not allocated to segments (2)

Earnings before provision for taxes on income $ 22,776 16,497 93,775 82,584 24.3 % 20.0

MedTech 4,607 4,373 27,427 27,060 16.8 16.2

Segment earnings before tax (1)

23,438 23,915 94,943 93,775 24.7 25.5

Expenses not allocated to segments (2)

Consumer Health separation costs 1,089 67

Worldwide income before tax $ 21,725 22,776 94,943 93,775 22.9 % 24.3

(1) See Note 17 to the Consolidated Financial Statements for more details.

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

(3) Prior year income before tax of approximately $0.2 billion has been reclassified as 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:

In 2021, the Consumer Health segment income before tax as a percent of sales was 8.8% versus a loss before tax of 7.6% in 2020.

In 2022, the Consumer Health segment income before tax as a percent of sales was 19.6% versus 10.5% in 2021.

The increase in the income before tax as a percent of sales was primarily driven by the following:

• 2021 litigation expense includes $1.6 billion of talc expenses;

2020 includes $3.9 billion of talc expenses

• Supply chain efficiencies

• Lower litigation expense of $0.2 billion in 2022 versus $1.6 billion (primarily talc related) in 2021

• Reduction in brand marketing expenses in 2022 versus 2021

• Supply chain benefits in 2022

partially offset by:

• Increased brand marketing expenses and commodity inflation

• Commodity inflation in 2022

Pharmaceutical Segment:

In 2022, the Pharmaceutical segment income before tax as a percent to sales was 30.3% versus 34.8% in 2021.

The increase in the income before tax as a percent of sales was primarily driven by the following:

• Divestiture gains of $0.6 billion related to two pharmaceutical brands outside the U.S.

The decrease in the income before tax as a percent of sales was primarily driven by the following:

• One-time COVID-19 vaccine manufacturing exit related costs of $1.5 billion in 2022

• Unfavorable changes in the fair value of securities ($0.7 billion loss in 2022 vs.

$0.5 billion gain in 2021)

• An IPR&D charge of $0.8 billion in 2022 related to bermekimab (JnJ-77474462), an investigational drug for the treatment of Atopic Dermatitis (AD) and Hidradenitis Suppurativa (HS)

• Lower divestiture gains of $0.1 billion in 2022 versus $0.6 billion related to two pharmaceutical brands outside the U.S.

in fiscal 2021

• 2021 litigation expense includes $0.6 billion primarily related to Risperdal;

2020 includes $0.8 billion primarily related to the opioid litigation settlement

• Currency impacts in Cost of Products Sold

partially offset by:

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

Medical Devices Segment:

In 2021, the Medical Devices segment income before tax as a percent to sales was 16.2% versus 13.3% in 2020.

• Lower litigation related expense of $0.1 billion in 2022 versus $0.6 billion (primarily related to Risperdal Gynecomastia) in 2021

• Lower Research & Development milestone payments in 2022

• Lower brand marketing expenses in 2022 versus 2021

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 provided the Company with supplemental commercial capacity for vaccine production and potentially transferable rights to such production if capacity is not required.

The Company continues to evaluate and monitor both its internal and external supply arrangements.

In fiscal 2022, the COVID-19 Vaccine related costs (mentioned above) included the remaining commitments and obligations, including external manufacturing network exit and related inventory costs and required clinical trial expenses, associated with the Company's modification of its

COVID-19 vaccine research program and manufacturing capacity to levels that meet all remaining customer contractual requirements.

MedTech Segment:

In 2022, the MedTech segment income before tax as a percent to sales was 16.8% versus 16.2% in 2021.

The increase in the income before tax as a percent to sales 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

• Litigation expense of $0.1 billion in 2021 vs.

$0.3 billion in 2020

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

partially offset by:

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

• A higher IPR&D charge of $0.7 billion ($0.9 billion in 2021 related to the general surgery offering in digital robotics (Ottava) acquired with the Auris Health acquisition in 2019)

• Higher litigation related expense of $0.6 billion in 2022, primarily related to pelvic mesh costs versus $0.1 billion in 2021

• Acquisition related costs of $0.3 billion in 2022 related to the Abiomed acquisition versus $0.1 billion in 2021

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 restructuring charges of approximately $2.1 to $2.3 billion.

The Company estimates that approximately 70% of the cumulative pre-tax costs will result in cash outlays.

The Global Supply Chain actions included expanding its use of strategic collaborations, and bolstering its initiatives to reduce complexity, improving cost-competitiveness, enhancing capabilities and optimizing its supply chain network.

The Company has achieved approximately $0.8 billion in annual pre-tax cost savings as outlined in the restructuring actions.

In 2022, the Company recorded a pre-tax charge of $0.5 billion, which is included on the following lines of the Consolidated Statement of Earnings, $0.3 billion in restructuring, $0.1 billion in other (income) expense and $0.1 billion in cost of products sold.

Total project costs of approximately $2.2 billion have been recorded since the restructuring was announced.

The program is set to be completed at the end of 2022.

The program was completed in the fiscal fourth quarter of 2022.

See Note 20 to the Consolidated Financial Statements for additional details related to the restructuring programs.

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The worldwide effective income tax rate was 17.4% in 2022 and 8.3% in 2021.

In the fiscal 2022, the Company incurred approximately $0.5 billion net incremental international tax cost related to the legal separation of the Consumer Health business, and may continue to incur additional cost in fiscal 2023.

On December 15, 2022, the European Union (EU) Member States formally adopted the EU’s Pillar Two Directive, which generally provides for a minimum effective tax rate of 15%, as established by the Organization for Economic Co-operation and Development (OECD) Pillar Two Framework that was supported by over 130 countries worldwide.

The EU effective dates are January 1, 2024, and January 1, 2025, for different aspects of the directive.

A significant number of other countries are expected to also implement similar legislation, including South Korea which approved legislation on December 23, 2022 with a full effective date of January 1, 2024.

The Company is continuing to evaluate the potential impact on future periods of the Pillar Two Framework, pending legislative adoption by additional individual countries, including those within the European Union.

For discussion related to the fiscal 2022 provision for taxes refer to Note 8 to the Consolidated Financial Statements.

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Cash and cash equivalents were $14.1 billion at the end of 2022 as compared to $14.5 billion at the end of 2021.

The primary sources and uses of cash that contributed to the $0.5 billion increase were:

The primary sources and uses of cash that contributed to the $0.4 billion decrease were:

(Dollars In Billions)

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(2.0) a decrease in current and non-current liabilities

0.7 a decrease in other current and non-current assets

1.1 an increase in accounts payable and accrued liabilities

(5.6) an increase in accounts receivable, inventories and other current and non-current assets

(3.8) an increase in accounts receivable and inventories

$ 21.2 Cash Flow from operations

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$ (4.0) additions to property, plant and equipment

(5.4) net purchases of investments

(17.7) acquisitions

0.5 proceeds from the disposal of assets/businesses, net

9.2 net sales of investments

(0.2) Credit support agreements activity, net

(0.1) acquisitions

(0.2) other (primarily licenses and milestones) and rounding

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$ (11.7) dividends to shareholders

(3.5) repurchase of common stock for employee share programs

(1.0) net repayment from short and long term debt

(6.0) repurchase of common stock

7.5 net proceeds from short and long term debt

1.3 proceeds from stock options exercised/employee withholding tax on stock awards, net

0.3 Credit support agreements activity, net

0.2 other and rounding

$ (8.9) Net cash used for financing activities

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As of January 1, 2023, the net debt position was $16.1 billion as compared to the prior year of $2.1 billion.

There was a decrease in the net debt position due to repayment of debt and an increase in cash, cash equivalents, and marketable securities generating from operations.

The increase was primarily due to the acquisition of Abiomed, Inc.

in December 2022.

The debt balance at the end of 2022 was $39.7 billion as compared to $33.8 billion in 2021.

Considering recent market conditions and the on-going COVID-19 crisis, the Company has 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 $1.1 billion in contractual supply commitments associated with its development of the COVID-19 vaccine, the opioid litigation settlement for $5.0 billion and the establishment of the $2.0 billion trust for talc related liabilities (See Note 19 to the Consolidated Financial Statements for additional details).

Considering recent market conditions, 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 remaining balance to be paid on the agreement to settle opioid litigation for approximately $2.7 billion and the establishment of the $2.0 billion trust for talc related liabilities (See Note 19 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.

Effective beginning in fiscal 2022, the U.S.

Tax Cuts and Job Act of 2017 currently requires the Company to deduct U.S.

Tax Cuts and Job Act of 2017 (TCJA) requires the Company to deduct U.S.

and international research and development expenditures for tax purposes over 5 to 15 years, instead of in the current fiscal year.

As a result, the Company is expecting an increase in annual cash tax payments to the U.S Treasury of an incremental $1.0 to 1.5 billion beginning in fiscal 2022.

The Company will concurrently record a deferred tax benefit for the future amortization of the research and development (R&D) for tax purposes and therefore, the Company is not expecting a significant impact to its effective tax rate related to this change.

As a result, in fiscal 2022, the Company experienced an increase in annual cash tax payments of approximately $1.2 billion above what otherwise would have been remitted to the U.S Treasury.

The Company concurrently records a deferred tax benefit for the future amortization of the research and development (R&D) for tax purposes.

The requirement to expense R&D as incurred is unchanged for U.S.

GAAP purposes and the impact to pre-tax R&D expense is not affected by this provision.

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.

On September 14, 2022, the Company announced that its Board of Directors approved a share repurchase program, authorizing the Company to purchase up to $5.0 billion of the Company's Common Stock.

Share repurchases may be made at management’s discretion from time to time on the open market or through privately negotiated transactions.

The repurchase program has no time limit and may be suspended for periods or discontinued at any time.

Any shares acquired will be available

for general corporate purposes.

The Company intends to finance the share repurchase program through available cash.

Through January 1, 2023, approximately $2.5 billion has been repurchased under the program.

The following table summarizes the Company’s material contractual obligations and their aggregate maturities as of January 1, 2023:

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For tax matters, see Note 8 to the Consolidated Financial Statements.

The table does not include activity related to business combinations or the Company’s approximate $1.1 billion in contractual supply commitments associated with its development of a COVID-19 vaccine.

Financing and Market Risk

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The fair market value of fixed rate securities may be adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than predicted if interest rates fall.

A 1% (100 basis points) change in spread on the Company’s interest rate sensitive investments would either increase or decrease the unrealized value of cash equivalents and current marketable securities by approximately $0.1 billion.

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.

In September 2022, the Company secured a new 364-day Credit Facility of $10 billion, which expires on September 7, 2023.

In November 2022, the Company secured an additional 364-day revolving Credit Facility of $10 billion, which has an expiration of November 21, 2023.

Interest charged on borrowings under the credit line agreement is based on either Secured Overnight Financing Rate (SOFR) Reference Rate or other applicable market rate as allowed plus applicable margins.

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Total borrowings at the end of 2022 and 2021 were $39.7 billion and $33.8 billion, respectively.

The decrease in borrowings was due to the repayment of debt.

The increase in borrowings was due to the acquisition of Abiomed, Inc.

In 2022, net debt (cash and current marketable securities, net of debt) was $16.1 billion compared to net debt of $2.1 billion in 2021.

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These key accounting policies include revenue recognition, income taxes, legal and self-insurance contingencies, valuation of long-lived assets, assumptions used to determine the amounts recorded for pensions and other employee benefit plans and accounting for stock based awards.

The extent to which COVID-19 impacts the Company’s business and financial results will depend on numerous evolving factors including, but not limited to, the magnitude and duration of COVID-19, the extent to which it will impact worldwide macroeconomic conditions including interest rates, employment rates and health insurance coverage, the speed of the anticipated recovery, and governmental and business reactions to the pandemic.

The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of January 2, 2022 and through the date of this report.

The accounting matters assessed included, but were not limited to, the Company’s allowance for doubtful accounts and credit losses, inventory and related reserves, accrued rebates and associated reserves, and the carrying value of the goodwill and other long-lived assets.

While there was not a material impact to the Company’s consolidated financial statements as of and for the year ended January 2, 2022, the Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to the Company’s consolidated financial statements in future reporting periods.

Revenue Recognition:

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Sales returns in the Consumer Health and Pharmaceutical segments are almost exclusively not resalable.

Sales returns for certain franchises in the Medical Devices segment are typically resalable but are not material.

Sales returns for certain franchises in the MedTech segment are typically resalable but are not material.

The Company infrequently exchanges products from inventory for returned products.

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These arrangements are evaluated to determine the appropriate amounts to be deferred or recorded as a reduction of revenue.

The Company also earns profit-share payments through collaborative arrangements of certain products, which are included in

sales to customers.

For all years presented, profit-share payments were less than 3.0% of the total revenues and are included in sales to customers.

The Company also earns profit-share payments through collaborative arrangements of certain products, which are included in sales to customers.

Profit-share payments were less than 2.0% of the total revenues in fiscal year 2022 and less than 3.0% of the total revenues in fiscal years 2021 and 2020 and are included in sales to customers.

In addition, the Company enters into collaboration arrangements that contain multiple revenue generating activities.

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(2) Includes prior period adjustments

Medical Devices Segment

MedTech Segment

(Dollars in Millions) Balance at

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The input assumptions used in determining fair value are the expected life, expected volatility, risk-free rate and expected dividend yield.

Prior to fiscal 2020, for performance share units, the fair market value was calculated for each of the three component goals at the date of grant:

operational sales, adjusted operational earnings per share and relative total shareholder return.

Beginning in fiscal 2020, for performance share units, the fair market value is calculated for the two component goals at the date of grant:

For performance share units, the fair market value is calculated for the two component goals at the date of grant:

adjusted operational earnings per share and relative total shareholder return.

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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 help 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.

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.

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 $1.1 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 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 is aware that its products are used in an environment where, for more than a decade, policymakers, consumers and businesses have expressed concerns about the rising cost of healthcare.

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The Company has accounted for operations in Argentina and Venezuela 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 to 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.

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 2022, including accounts receivable or inventory reserves, was not material.

As of both the fiscal years ending January 1, 2023 and January 2, 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 fiscal years ending January 1, 2023 and January 2, 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 continues to supply its other products as patients rely on many of the products for healthcare purposes.

The Company is exposed to fluctuations in currency exchange rates.

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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 healthcare changes that may continue to result in pricing pressures that include healthcare cost containment and government legislation relating to sales, promotions and reimbursement of healthcare 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.

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As of January 1, 2023, the Company has determined that the liabilities associated with certain litigation matters are probable and can be reasonably estimated.

The Company has accrued for these matters and will continue to monitor each related legal issue and adjust accruals as might be warranted based on new information and further developments in accordance with ASC 450-20-25.

The Company has accrued for these matters and will continue to monitor each related legal issue and adjust accruals as might be warranted based

on new information and further developments in accordance with ASC 450-20-25.

For these and other litigation and regulatory matters discussed below for which a loss is probable or reasonably possible, the Company is unable to estimate the possible loss or range of loss beyond the amounts accrued.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis