Item 7. Management’s Discussion and Analysis
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Organization and Business Segments
Description of the Company and Business Segments
Johnson & Johnson and its subsidiaries (the Company) have approximately 152,700 employees worldwide engaged in the research and development, manufacture and sale of a broad range of products in the healthcare field. The Company conducts business in virtually all countries of the world with the primary focus on products related to human health and well-being.
The Company is organized into three business segments: 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 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 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 MedTech business segments.
In all of its product lines, the Company competes with other companies both locally and globally, throughout the world. Competition exists in all product lines without regard to the number and size of the competing companies involved. Competition in research, involving the development and the improvement of new and existing products and processes, is particularly significant. The development of new and innovative products, as well as protecting the underlying intellectual property of the Company's product portfolio, is important to the Company’s success in all areas of its business. The competitive environment requires substantial investments in continuing research. In addition, the development and maintenance of customer demand for the Company’s consumer products involves significant expenditures for advertising and promotion.
Management’s Objectives
With “Our Credo” as the foundation, the Company’s purpose is to blend heart, science and ingenuity to profoundly change the trajectory of health for humanity. The Company is committed to bringing its full breadth and depth to ensure health for people today and for future generations. United around this common ambition, the Company is poised to fulfill its purpose and successfully meet the demands of the rapidly evolving markets in which it competes.
The Company is broadly based in human healthcare, and is committed to creating value by developing accessible, high quality, innovative products and services. New products introduced within the past five years accounted for approximately 25% of 2022 sales. In 2022, $14.6 billion was invested in research and development reflecting management’s commitment to create life-enhancing innovations and to create value through partnerships that will profoundly change the trajectory of health for humanity.
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 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. Leveraging the extensive resources across the enterprise enables the Company to innovate and execute with excellence. This ensures the Company can remain focused on addressing the unmet needs of society every day and invest for an enduring impact, ultimately delivering value to its patients, consumers and healthcare professionals, employees, communities and shareholders.
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Results of Operations
Analysis of Consolidated Sales
For discussion on results of operations and financial condition pertaining to the fiscal years 2021 and 2020 see the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2022, Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition.
In 2022, worldwide sales increased 1.3% to $94.9 billion as compared to an increase of 13.6% in 2021. These sales changes consisted of the following:
Sales increase/(decrease) due to: 2022 2021
Volume 6.9 % 12.9 %
Price (0.8) (0.7)
Currency (4.8) 1.4
Total 1.3 % 13.6 %
The net impact of acquisitions and divestitures on the worldwide sales growth was a negative impact of 0.1% in 2022 and a negative impact of 0.6% in 2021.
Sales by U.S. companies were $48.6 billion in 2022 and $47.2 billion in 2021. This represents increases of 3.0% in 2022 and 9.3% in 2021. Sales by international companies were $46.4 billion in 2022 and $46.6 billion in 2021. 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. and international sales were 4.4%, 4.0% and 4.9%, respectively. The ten-year compound annual growth rates for worldwide, U.S. and international sales were 3.5%, 5.0% and 2.2%, respectively.
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. In 2021, the Company had three wholesalers distributing products for all three segments that represented approximately 14.0%, 11.0% and 11.0% of the total consolidated revenues.
Note: values may have been rounded
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Analysis of Sales by Business Segments
Consumer Health Segment
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%. U.S. Consumer Health segment sales were $6.6 billion, an increase of 1.3%. 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*:
Total Operations Currency
(Dollars in Millions) 2022 2021 Change Change Change
OTC (1)
$ 6,031 5,627 7.2 % 11.2 % (4.0) %
Skin Health/Beauty 4,352 4,541 (4.2) (0.4) (3.8)
Oral Care 1,505 1,645 (8.5) (4.7) (3.8)
Baby Care 1,461 1,566 (6.7) (2.4) (4.3)
Women’s Health 904 917 (1.5) 7.0 (8.5)
Wound Care/Other 700 739 (5.3) (3.8) (1.5)
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. 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.
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Pharmaceutical Segment
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%. U.S. sales were $28.6 billion, an increase of 2.3%. 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. Adjustments to previous sales reserve estimates were approximately $0.1 billion and $0.7 billion in fiscal years 2022 and 2021, respectively.
Major Pharmaceutical Therapeutic Area Sales*:
Total Operations Currency
(Dollars in Millions) 2022 2021 Change Change Change
Total Immunology $ 16,935 16,750 1.1 % 4.8 % (3.7) %
REMICADE 2,343 3,190 (26.6) (25.3) (1.3)
SIMPONI/SIMPONI ARIA 2,184 2,276 (4.0) 1.0 (5.0)
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
Total Infectious Diseases 5,449 5,825 (6.5) 0.8 (7.3)
COVID-19 VACCINE 2,179 2,385 (8.6) 2.0 (10.6)
EDURANT/rilpivirine 1,008 994 1.5 11.8 (10.3)
PREZISTA/ PREZCOBIX/REZOLSTA/ SYMTUZA 1,943 2,083 (6.7) (4.4) (2.3)
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 4,140 4,022 3.0 6.9 (3.9)
RISPERDAL CONSTA 485 592 (18.1) (13.0) (5.1)
Other Neuroscience (2)
1,623 1,706 (4.9) 0.4 (5.3)
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)
Other Oncology 571 568 0.6 6.0 (5.4)
Total Pulmonary Hypertension 3,417 3,450 (1.0) 3.0 (4.0)
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)
XARELTO 2,473 2,438 1.4 1.4 —
INVOKANA/ INVOKAMET 448 563 (20.4) (17.2) (3.2)
Other (1,2)
966 1,119 (13.6) (9.3) (4.3)
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
(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
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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.
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 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. 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 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.
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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
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 • •
ERLEADA
(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 •
teclistamab
(BCMA/CD3) Treatment of Patients with Relapsed Refractory Multiple Myeloma • •
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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%. U.S. sales were $13.4 billion, an increase of 5.4% as compared to the prior year. 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) %
Advanced 4,569 4,622 (1.1) 3.8 (4.9)
General 5,121 5,190 (1.3) 3.8 (5.1)
Orthopaedics 8,587 8,588 0.0 3.7 (3.7)
Hips 1,514 1,480 2.3 5.8 (3.5)
Knees 1,359 1,325 2.6 6.1 (3.5)
Trauma 2,871 2,885 (0.5) 3.1 (3.6)
Spine, Sports & Other 2,843 2,898 (1.9) 1.9 (3.8)
Vision 4,849 4,688 3.4 9.5 (6.1)
Contact Lenses/Other 3,543 3,440 3.0 9.6 (6.6)
Surgical 1,306 1,248 4.6 9.4 (4.8)
Interventional Solutions
4,300 3,971 8.3 13.7 (5.4)
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, 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.
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Analysis of Consolidated Earnings Before Provision for Taxes on Income
Consolidated earnings before provision for taxes on income was $21.7 billion and $22.8 billion for the years 2022 and 2021, respectively. As a percent to sales, consolidated earnings before provision for taxes on income was 22.9% and 24.3%, in 2022 and 2021, respectively.
(Dollars in billions. Percentages in chart are as a percent to total sales)
Cost of Products Sold and Selling, Marketing and Administrative Expenses:
(Dollars in billions. Percentages in chart are as a percent to total sales)
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
• 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.
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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:
Research and development expense by segment of business was as follows:
2022 2021
(Dollars in Millions) Amount % of Sales* Amount % of Sales*
Consumer Health $ 493 3.3 % $ 459 3.1 %
Pharmaceutical 11,622 22.1 11,878 23.0
MedTech 2,488 9.1 2,377 8.8
Total research and development expense $ 14,603 15.4 % $ 14,714 15.7 %
Percent increase/(decrease) over the prior year (0.8) % 21.0 %
*As a percent to segment sales
Research and development activities represent a significant part of the Company's business. These expenditures relate to the processes of discovering, testing and developing new products, upfront payments and developmental milestones, improving existing products, as well as ensuring product efficacy and regulatory compliance prior to launch. The Company remains committed to investing in research and development with the aim of delivering high quality and innovative products.
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. The impairment charge was calculated based on revisions to the discounted cash flow valuation model reflecting a delay of first in human procedures of approximately two years from the initial acquisition model assumption of the second half of 2022. The Company will continue to monitor the remaining $1.5 billion Ottava platform intangible asset as development program activities are ongoing.
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), 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
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
Restructuring related 0.1 0.1 0.0
Employee benefit plan related (1.2) (0.6) (0.6)
Other (0.4) (0.4) —
Total Other (Income) Expense, Net $ 1.9 0.5 1.4
( 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.
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Interest (Income) Expense: 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
Income (loss) before tax by segment of business were as follows:
Income Before Tax Segment Sales Percent of Segment Sales
(Dollars in Millions) 2022 2021 2022 2021 2022 2021
Consumer Health (3)
$ 2,930 1,573 14,953 15,035 19.6 % 10.5
Pharmaceutical (3)
15,901 17,969 52,563 51,680 30.3 34.8
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
Less: Expenses not allocated to segments (2)
624 1,072
Less: 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 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:
• 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:
• 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 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
• Currency impacts in Cost of Products Sold
partially offset by:
• 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
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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:
• 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:
• 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 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 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.
Provision for Taxes on Income: 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.
Liquidity and Capital Resources
Liquidity & Cash Flows
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 $0.4 billion decrease were:
(Dollars In Billions)
$ 14.5 Q4 2021 Cash and cash equivalents balance
21.2 cash generated from operating activities
(12.4) net cash used by investing activities
(8.9) net cash used by financing activities
$ (0.3) effect of exchange rate and rounding
$ 14.1 Q4 2022 Cash and cash equivalents balance
In addition, the Company had $9.4 billion in marketable securities at the end of fiscal year 2022 and $17.1 billion at the end of fiscal year 2021. See Note 1 to the Consolidated Financial Statements for additional details on cash, cash equivalents and marketable securities.
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Cash flow from operations of $21.2 billion was the result of:
(Dollars In Billions)
$ 17.9 Net Earnings
7.3 non-cash expenses and other adjustments primarily for depreciation and amortization, stock-based compensation and asset write-downs partially offset by the deferred tax provision, net gain on sale of assets/businesses and credit losses and accounts receivable allowances
(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
(3.8) an increase in accounts receivable and inventories
$ 21.2 Cash Flow from operations
Investing activities use of $12.4 billion of cash was primarily used for:
(Dollars In Billions)
$ (4.0) additions to property, plant and equipment
(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
(0.2) other (primarily licenses and milestones) and rounding
$ (12.4) Net cash used for investing activities
Financing activities use of $8.9 billion of cash was primarily used for:
(Dollars In Billions)
$ (11.7) dividends to shareholders
(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
$ (8.9) Net cash used for financing activities
As of January 1, 2023, the Company's notes payable and long-term debt was in excess of cash, cash equivalents and marketable securities. As of January 1, 2023, the net debt position was $16.1 billion as compared to the prior year of $2.1 billion. 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, 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 (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, 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.
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
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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: To satisfy these obligations, the Company intends to use cash from operations.
(Dollars in Millions) Tax Legislation (TCJA) Debt Obligations Interest on
Debt Obligations Total
2023 $ 1,522 1,551 893 3,966
2024 2,029 1,392 843 4,264
2025 2,536 1,667 789 4,992
2026 — 1,996 744 2,740
2027 — 2,271 736 3,007
After 2026 — 19,562 8,772 28,334
Total $ 6,087 28,439 12,777 47,303
For tax matters, see Note 8 to the Consolidated Financial Statements.
Financing and Market Risk
The Company uses financial instruments to manage the impact of foreign exchange rate changes on cash flows. Accordingly, the Company enters into forward foreign exchange contracts to protect the value of certain foreign currency assets and liabilities and to hedge future foreign currency transactions primarily related to product costs. Gains or losses on these contracts are offset by the gains or losses on the underlying transactions. A 10% appreciation of the U.S. Dollar from the January 1, 2023 market rates would increase the unrealized value of the Company’s forward contracts by $0.1 billion. Conversely, a 10% depreciation of the U.S. Dollar from the January 1, 2023 market rates would decrease the unrealized value of the Company’s forward contracts by $0.1 billion. In either scenario, the gain or loss on the forward contract would be offset by the gain or loss on the underlying transaction, and therefore, would have no impact on future anticipated earnings and cash flows.
The Company hedges the exposure to fluctuations in currency exchange rates, and the effect on certain assets and liabilities in foreign currency, by entering into currency swap contracts. A 1% change in the spread between U.S. and foreign interest rates on the Company’s interest rate sensitive financial instruments would either increase or decrease the unrealized value of the Company’s swap contracts by approximately $1.7 billion. In either scenario, at maturity, the gain or loss on the swap contract would be offset by the gain or loss on the underlying transaction, and therefore, would have no impact on future anticipated cash flows.
The Company does not enter into financial instruments for trading or speculative purposes. Further, the Company has a policy of only entering into contracts with parties that have at least an investment grade credit rating. The counterparties to these contracts are major financial institutions and there is no significant concentration of exposure with any one counterparty. Management believes the risk of loss is remote. The Company entered into credit support agreements (CSA) with certain derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. See Note 6 to the Consolidated Financial Statements for additional details on credit support agreements.
The Company invests in both fixed rate and floating rate interest earning securities which carry a degree of interest rate risk. 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 less than $0.1 billion.
The Company has access to substantial sources of funds at numerous banks worldwide. 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. Commitment fees under the agreement are not material.
Total borrowings at the end of 2022 and 2021 were $39.7 billion and $33.8 billion, respectively. 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. Total debt represented 34.1% of total capital (shareholders’ equity and total debt) in 2022 and 31.3% of total capital in 2021. Shareholders’ equity per share at the end of 2022 was $29.39 compared to $28.16 at year-end 2021.
A summary of borrowings can be found in Note 7 to the Consolidated Financial Statements.
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Dividends
The Company increased its dividend in 2022 for the 60th consecutive year. Cash dividends paid were $4.45 per share in 2022 and $4.19 per share in 2021.
On January 3, 2023, the Board of Directors declared a regular cash dividend of $1.13 per share, payable on March 7, 2023 to shareholders of record as of February 21, 2023.
Other Information
Critical Accounting Policies and Estimates
Management’s discussion and analysis of results of operations and financial condition are based on the Company’s consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the U.S. (GAAP). The preparation of these financial statements requires that management make estimates and assumptions that affect the amounts reported for revenues, expenses, assets, liabilities and other related disclosures. Actual results may or may not differ from these estimates. The Company believes that the understanding of certain key accounting policies and estimates are essential in achieving more insight into the Company’s operating results and financial condition. 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.
Revenue Recognition: The Company recognizes revenue from product sales when obligations under the terms of a contract with the customer are satisfied; generally, this occurs with the transfer of control of the goods to customers. The Company's global payment terms are typically between 30 to 90 days. Provisions for certain rebates, sales incentives, trade promotions, coupons, product returns, discounts to customers and governmental clawback provisions are accounted for as variable consideration and recorded as a reduction in sales.
Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well as market conditions, including consideration of competitor pricing. Rebates are estimated based on contractual terms, historical experience, patient outcomes, trend analysis and projected market conditions in the various markets served. The Company evaluates market conditions for products or groups of products primarily through the analysis of wholesaler and other third-party sell-through and market research data, as well as internally generated information.
Sales returns are estimated and recorded based on historical sales and returns information. Products that exhibit unusual sales or return patterns due to dating, competition or other marketing matters are specifically investigated and analyzed as part of the accounting for sales return accruals.
Sales returns allowances represent a reserve for products that may be returned due to expiration, destruction in the field, or in specific areas, product recall. The sales returns reserve is based on historical return trends by product and by market as a percent to gross sales. In accordance with the Company’s accounting policies, the Company generally issues credit to customers for returned goods. The Company’s sales returns reserves are accounted for in accordance with the U.S. GAAP guidance for revenue recognition when right of return exists. Sales returns reserves are recorded at full sales value. Sales returns in the Consumer Health and Pharmaceutical segments are almost exclusively not resalable. 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. The sales returns reserve for the total Company has been approximately 1.0% of annual net trade sales during the fiscal years 2022, 2021 and 2020.
Promotional programs, such as product listing allowances and cooperative advertising arrangements, are recorded in the same period as related sales. Continuing promotional programs include coupons and volume-based sales incentive programs. The redemption cost of consumer coupons is based on historical redemption experience by product and value. Volume-based incentive programs are based on the estimated sales volumes for the incentive period and are recorded as products are sold. 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. 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. Amounts due from collaborative partners for these arrangements are recognized as each activity is performed or delivered, based on the relative selling price. Upfront fees received as part of these arrangements are deferred and recognized over the performance period. See Note 1 to the Consolidated Financial Statements for additional disclosures on collaborations.
Reasonably likely changes to assumptions used to calculate the accruals for rebates, returns and promotions are not anticipated to have a material effect on the financial statements. The Company currently discloses the impact of changes to assumptions in the quarterly or annual filing in which there is a material financial statement impact.
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Below are tables that show the progression of accrued rebates, returns, promotions, reserve for doubtful accounts and reserve for cash discounts by segment of business for the fiscal years ended January 1, 2023 and January 2, 2022.
Consumer Health Segment
(Dollars in Millions) Balance at
Beginning of Period Accruals Payments/Credits Balance at
End of Period
2022
Accrued rebates (1)
$ 287 1,052 (948) 391
Accrued returns 76 83 (88) 71
Accrued promotions 387 2,077 (2,008) 456
Subtotal $ 750 3,212 (3,044) 918
Reserve for doubtful accounts 32 5 (3) 34
Reserve for cash discounts 15 210 (208) 17
Total $ 797 3,427 (3,255) 969
2021
Accrued rebates (1)
$ 289 893 (895) 287
Accrued returns 76 136 (136) 76
Accrued promotions 428 1,958 (1,999) 387
Subtotal $ 793 2,987 (3,030) 750
Reserve for doubtful accounts 39 0 (7) 32
Reserve for cash discounts 12 213 (210) 15
Total $ 844 3,200 (3,247) 797
(1) Includes reserve for customer rebates of $82 million at January 1, 2023 and $80 million at January 2, 2022, recorded as a contra asset.
Pharmaceutical Segment
(Dollars in Millions) Balance at
Beginning of Period Accruals Payments/Credits (2)
Balance at
End of Period
2022
Accrued rebates (1)
$ 10,331 43,026 (41,068) 12,289
Accrued returns 520 444 (315) 649
Accrued promotions 3 5 (7) 1
Subtotal $ 10,854 43,475 (41,390) 12,939
Reserve for doubtful accounts 50 0 (6) 44
Reserve for cash discounts 94 1,281 (1,265) 110
Total $ 10,998 44,756 (42,661) 13,093
2021
Accrued rebates (1)
$ 9,837 37,922 (37,428) 10,331
Accrued returns 460 345 (285) 520
Accrued promotions 6 13 (16) 3
Subtotal $ 10,303 38,280 (37,729) 10,854
Reserve for doubtful accounts 52 18 (20) 50
Reserve for cash discounts 70 1,163 (1,139) 94
Total $ 10,425 39,461 (38,888) 10,998
(1) Includes reserve for customer rebates of $203 million at January 1, 2023 and $218 million at January 2, 2022, recorded as a contra asset.
(2) Includes prior period adjustments
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MedTech Segment
(Dollars in Millions) Balance at
Beginning of Period Accruals Payments/Credits Balance at
End of Period
2022
Accrued rebates ( 1)
$ 1,446 6,131 (6,107) 1,470
Accrued returns 134 531 (531) 134
Accrued promotions 54 102 (113) 43
Subtotal $ 1,634 6,764 (6,751) 1,647
Reserve for doubtful accounts 148 6 (29) 125
Reserve for cash discounts 10 99 (100) 9
Total $ 1,792 6,869 (6,880) 1,781
2021
Accrued rebates (1)
$ 1,174 5,942 (5,670) 1,446
Accrued returns 138 559 (563) 134
Accrued promotions 52 140 (138) 54
Subtotal $ 1,364 6,641 (6,371) 1,634
Reserve for doubtful accounts 202 12 (66) 148
Reserve for cash discounts 9 96 (95) 10
Total $ 1,575 6,749 (6,532) 1,792
(1) Includes reserve for customer rebates of $802 million at January 1, 2023 and $845 million at January 2, 2022, recorded as a contra asset.
Income Taxes: Income taxes are recorded based on amounts refundable or payable for the current year and include the results of any difference between U.S. GAAP accounting and tax reporting, recorded as deferred tax assets or liabilities. The Company estimates deferred tax assets and liabilities based on enacted tax regulations and rates. Future changes in tax laws and rates may affect recorded deferred tax assets and liabilities.
The Company has unrecognized tax benefits for uncertain tax positions. The Company follows U.S. GAAP, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Management believes that changes in these estimates would not have a material effect on the Company's results of operations, cash flows or financial position.
The Company has recorded deferred tax liabilities on all undistributed earnings prior to December 31, 2017 from its international subsidiaries. The Company has not provided deferred taxes on the undistributed earnings subsequent to January 1, 2018 from certain international subsidiaries where the earnings are considered to be indefinitely reinvested. The Company intends to continue to reinvest these earnings in those international operations. If the Company decides at a later date to repatriate these earnings to the U.S., the Company would be required to provide for the net tax effects on these amounts. The Company estimates that the tax effect of this repatriation would be approximately $0.5 billion under currently enacted tax laws and regulations and at current currency exchange rates. This amount does not include the possible benefit of U.S. foreign tax credits, which may substantially offset this cost.
See Note 1 and Note 8 to the Consolidated Financial Statements for further information regarding income taxes.
Legal and Self Insurance Contingencies: The Company records accruals for various contingencies, including legal proceedings and product liability claims as these arise in the normal course of business. The accruals are based on management’s judgment as to the probability of losses and, where applicable, actuarially determined estimates. The Company has self insurance through a wholly-owned captive insurance company. In addition to accruals in the self insurance program, claims that exceed the insurance coverage are accrued when losses are probable and amounts can be reasonably estimated.
The Company follows the provisions of U.S. GAAP when recording litigation related contingencies. A liability is recorded when a loss is probable and can be reasonably estimated.
See Notes 1 and 19 to the Consolidated Financial Statements for further information regarding product liability and legal proceedings.
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Long-Lived and Intangible Assets: The Company assesses changes, both qualitatively and quantitatively, in economic conditions and makes assumptions regarding estimated future cash flows in evaluating the value of the Company’s property, plant and equipment, goodwill and intangible assets. As these assumptions and estimates may change over time, it may or may not be necessary for the Company to record impairment charges.
Employee Benefit Plans: The Company sponsors various retirement and pension plans, including defined benefit, defined contribution and termination indemnity plans, which cover most employees worldwide. These plans are based on assumptions for the discount rate, expected return on plan assets, mortality rates, expected salary increases, healthcare cost trend rates and attrition rates. See Note 10 to the Consolidated Financial Statements for further details on these rates.
Stock Based Compensation: The Company recognizes compensation expense associated with the issuance of equity instruments to employees for their services. Based on the type of equity instrument, the fair value is estimated on the date of grant using either the Black-Scholes option valuation model or a combination of both the Black-Scholes option valuation model and Monte Carlo valuation model, and is expensed in the financial statements over the service period. The input assumptions used in determining fair value are the expected life, expected volatility, risk-free rate and expected dividend yield. 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. The fair values for the earnings per share goal of each performance share unit was estimated on the date of grant using the fair market value of the shares at the time of the award, discounted for dividends, which are not paid on the performance share units during the vesting period. The fair value for the relative total shareholder return goal of each performance share unit was estimated on the date of grant using the Monte Carlo valuation model. See Note 16 to the Consolidated Financial Statements for additional information.
New Accounting Pronouncements
Refer to Note 1 to the Consolidated Financial Statements for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of January 1, 2023.
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Economic and Market Factors
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. In response to these concerns, the Company has a long-standing policy of pricing products responsibly. For the period 2012 - 2022, in the U.S., the weighted average compound annual growth rate of the Company’s net price increases for healthcare products (prescription and over-the-counter drugs, hospital and professional products) was below the U.S. Consumer Price Index (CPI).
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 continue to have an effect on worldwide economies and, consequently, on the way companies operate. 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. A 1% change in the value of the U.S. Dollar as compared to all foreign currencies in which the Company had sales, income or expense in 2022 would have increased or decreased the translation of foreign sales by approximately $0.5 billion and net income by approximately $0.1 billion.
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 healthcare changes that may continue to result in pricing pressures that include healthcare cost containment and government legislation relating to sales, promotions, pricing 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.
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 U.S. 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.
Legal Proceedings
Johnson & Johnson and certain of its subsidiaries are involved in various lawsuits and claims regarding product liability, intellectual property, commercial, employment, indemnification and other matters; governmental investigations; and other legal proceedings that arise from time to time in the ordinary course of business.
The Company records accruals for loss contingencies associated with these legal matters when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. 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
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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. Amounts accrued for legal contingencies often result from a complex series of judgments about future events and uncertainties that rely heavily on estimates and assumptions including timing of related payments. The ability to make such estimates and judgments can be affected by various factors including, among other things, whether damages sought in the proceedings are unsubstantiated or indeterminate; scientific and legal discovery has not commenced or is not complete; proceedings are in early stages; matters present legal uncertainties; there are significant facts in dispute; procedural or jurisdictional issues; the uncertainty and unpredictability of the number of potential claims; ability to achieve comprehensive multi-party settlements; complexity of related cross-claims and counterclaims; and/or there are numerous parties involved. To the extent adverse awards, judgments or verdicts have been rendered against the Company, the Company does not record an accrual until a loss is determined to be probable and can be reasonably estimated.
In the Company's opinion, based on its examination of these matters, its experience to date and discussions with counsel, the ultimate outcome of legal proceedings, net of liabilities accrued in the Company's balance sheet, is not expected to have a material adverse effect on the Company's financial position. However, the resolution of, or increase in accruals for, one or more of these matters in any reporting period may have a material adverse effect on the Company's results of operations and cash flows for that period.
See Note 19 to the Consolidated Financial Statements included in Item 8 of this report for further information regarding legal proceedings.
Common Stock
The Company’s Common Stock is listed on the New York Stock Exchange under the symbol JNJ. As of February 10, 2023, there were 124,211 record holders of Common Stock of the Company.