JOHNSON & JOHNSON RESULTS OF OPERATIONS
Sales to Customers
Analysis of Consolidated Sales For the fiscal nine months of 2020, worldwide sales were$60.1 billion , a total decrease of 2.0%, including an operational decline of 0.8% as compared to 2019 fiscal nine months sales of$61.3 billion . Currency fluctuations had a negative impact of 1.2% for the fiscal nine months of 2020. In the fiscal nine months of 2020, the net impact of acquisitions and divestitures on worldwide operational sales growth was a negative 0.4%. Sales byU.S. companies were$31.3 billion in the fiscal nine months of 2020, which was flat as compared to the prior year. In the fiscal nine months of 2020, the net impact of acquisitions and divestitures on theU.S. operational sales growth was a negative 0.4%. Sales by international companies were$28.8 billion , a decrease of 4.0%, including an operational decline of 1.7%, and a negative currency impact of 2.3% as compared to the fiscal nine months sales of 2019. In the fiscal nine months of 2020, the net impact of acquisitions and divestitures on the international operational sales growth was a negative 0.4%. In the fiscal nine months of 2020, sales by companies inEurope experienced a decline of 0.7%, which included an operational increase of 0.1% and a negative currency impact of 0.8%. Sales by companies in the Western Hemisphere, excluding theU.S. , experienced a decline of 11.6%, which included an operational decline of 0.4%, and a negative currency impact of 11.2%. Sales by companies in theAsia-Pacific ,Africa region experienced a decline of 5.1%, including an operational decline of 4.3% and a negative currency impact of 0.8%.
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Note: values may have been rounded
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For the fiscal third quarter of 2020, worldwide sales were $21.1 billion , a
total increase of 1.7%, and operational increase of 1.7% as compared to 2019
fiscal third quarter sales of $20.7 billion . In the fiscal third quarter of
2020, the net impact of acquisitions and divestitures on worldwide operational
sales growth was a negative 0.3%.
Sales by U.S. companies were $11.1 billion in the fiscal third quarter of 2020,
which represented an increase of 2.7% as compared to the prior year. In the
fiscal third quarter of 2020, the net impact of acquisitions and divestitures on
the U.S. operational sales growth was a negative 0.1%. Sales by international
companies were $10.0 billion , a total increase of 0.6%, and an operational
increase of 0.6%. In the fiscal third quarter of 2020, the net impact of
acquisitions and divestitures on the international operational sales growth was
a negative 0.5%.
In the fiscal third quarter of 2020, sales by companies in Europe achieved
growth of 8.0%, which included operational growth of 4.6% and a positive
currency impact of 3.4%. Sales by companies in the Western Hemisphere, excluding
the U.S. , experienced a decline of 12.9%, which included an operational decline
of 1.2%, and a negative currency impact of 11.7%. Sales by companies in the
Asia-Pacific , Africa region experienced a decline of 2.7%, including an
operational decline of 3.2% and a positive currency impact of 0.5%.
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Note: values may have been rounded
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Analysis of Sales by Business Segments
Consumer Health*Consumer Health segment sales in the fiscal nine months of 2020 were$10.4 billion , an increase of 1.0% as compared to the same period a year ago, including operational growth of 3.4% and a negative currency impact of 2.4%.U.S. Consumer Health segment sales increased by 11.1%.International Consumer Health segment sales decreased by 6.4%, including an operational decline of 2.2% and a negative currency impact of 4.2%. In the fiscal nine months of 2020, the net impact of acquisitions and divestitures on theConsumer Health segment operational sales growth was a negligible.
Major Consumer Health* Franchise Sales - Fiscal Nine Months Ended
September 27, September 29, Total Operations Currency
(Dollars in Millions) 2020 2019 Change Change Change
OTC $ 3,639 $ 3,249 12.0 % 13.5 % (1.5) %
Skin Health/Beauty** 3,273 3,443 (5.0) (3.6) (1.4)
Oral Care 1,204 1,135 6.0 8.9 (2.9)
Baby Care 1,110 1,254 (11.5) (6.6) (4.9)
Women's Health 664 733 (9.4) (2.7) (6.7)
Wound Care/Other 545 516 5.8 7.2 (1.4)
Total Consumer Health* Sales $ 10,435 $ 10,331 1.0 % 3.4 % (2.4) %
* Previously referred to as Consumer ** Previously referred to as BeautyConsumer Health segment sales in the fiscal third quarter of 2020 were$3.5 billion , an increase of 1.3% as compared to the same period a year ago, including operational growth of 3.0% and a negative currency impact of 1.7%.U.S. Consumer Health segment sales increased by 11.6%.International Consumer Health segment sales decreased by 5.6%, including an operational decline of 2.7% and a negative currency impact of 2.9%. In the fiscal third quarter of 2020, the net impact of acquisitions and divestitures on theConsumer Health segment operational sales growth was a negative 0.1%.
Major Consumer Health* Franchise Sales - Fiscal Third Quarter Ended
September 27, September 29, Total Operations Currency
(Dollars in Millions) 2020 2019 Change Change Change
OTC $ 1,142 $ 1,098 4.0 % 4.0 % 0.0 %
Skin Health/Beauty** 1,149 1,151 (0.2) 0.9 (1.1)
Oral Care 412 379 8.5 10.8 (2.3)
Baby Care 393 417 (5.9) (0.7) (5.2)
Women's Health 230 255 (9.6) (4.1) (5.5)
Wound Care/Other 189 168 12.5 13.5 (1.0)
Total Consumer Health* Sales $ 3,514 $ 3,469 1.3 % 3.0 % (1.7) %
* Previously referred to as Consumer
** Previously referred to as Beauty
The OTC franchise achieved operational growth of 4.0% as compared to the prior
year fiscal third quarter. Growth was primarily attributable to sales from
TYLENOL® driven by COVID-19 stocking demand, digestive health products in the
U.S. and ZARBEES® Naturals. International sales were negatively impacted by
COVID-19.
The Skin Health /Beauty franchise achieved operational growth of 0.9% as compared
to the prior year fiscal third quarter. Growth was primarily attributable to
OGX® and DR. CI:LABO products partially offset by negative COVID-19 related
impacts in the U.S. , Asia Pacific and Latin America regions and competitive
pressure.
The Oral Care franchise achieved operational growth of 10.8% as compared to the
prior year fiscal third quarter primarily due to sales of LISTERINE® mouthwash
related to COVID-19 stocking demand globally and new product launches in Asia
Pacific .
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The Baby Care franchise experienced an operational decline of 0.7% as compared
to the prior year fiscal third quarter. The decline was primarily due to
COVID-19 related impacts and the Baby Center divestiture in the U.S. partially
offset by strength in AVEENO® baby.
The Women's Health franchise experienced an operational decline of 4.1% as
compared to the prior year fiscal third quarter primarily driven by price
reductions and COVID-19 impacts.
The Wound Care/Other franchise achieved operational growth of 13.5% as compared
to the prior year fiscal third quarter. Growth was due to strong performance of
BAND-AID® Brand Adhesive Bandages in the U.S. and COVID-19 related demand in the
Asia Pacific region.
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Pharmaceutical
Pharmaceutical segment sales in the fiscal nine months of 2020 were$33.3 billion , an increase of 5.2% as compared to the same period a year ago, with an operational increase of 6.1% and a negative currency impact of 0.9%.U.S. Pharmaceutical sales increased 5.2% as compared to the same period a year ago. International Pharmaceutical sales increased by 5.3%, including operational growth of 7.4% and a negative currency impact of 2.1%. In the fiscal nine months of 2020, the net impact of acquisitions and divestitures on the Pharmaceutical segment operational sales growth was a negative 0.2%.
Major Pharmaceutical Therapeutic Area Sales** - Fiscal Nine Months Ended
September 27, September 29, Total Operations Currency
(Dollars in Millions) 2020 2019 Change Change Change
Immunology $ 10,950 $ 10,428 5.0 % 5.7 % (0.7) %
REMICADE® 2,846 3,345 (14.9) (14.0) (0.9)
SIMPONI®/ SIMPONI ARIA® 1,667 1,673 (0.4) 0.9 (1.3)
STELARA® 5,463 4,661 17.2 17.7 (0.5)
TREMFYA® 965 742 30.2 30.3 (0.1)
Other Immunology 9 8 12.4 19.1 (6.7)
Infectious Diseases 2,662 2,547 4.5 6.1 (1.6)
EDURANT®/rilpivirine 716 639 12.1 12.6 (0.5)PREZISTA®/ PREZCOBIX®/ REZOLSTA®/ SYMTUZA® 1,615 1,566 3.1 4.8 (1.7) Other Infectious Diseases 331 342 (3.2) 0.0 (3.2) Neuroscience 4,850 4,762 1.8 2.9
(1.1)
CONCERTA®/methylphenidate 469 544 (13.8) (12.6)
(1.2)
INVEGA SUSTENNA®/ XEPLION®/ INVEGA TRINZA®/ TREVICTA® 2,688 2,459 9.3 9.8 (0.5) RISPERDAL CONSTA® 475 528 (10.1) (9.2) (0.9) Other Neuroscience 1,218 1,231 (1.1) 1.1 (2.2) Oncology 8,933 7,976 12.0 13.1 (1.1) DARZALEX® 2,937 2,168 35.5 37.0 (1.5) ERLEADA®(1) 519 216 * * * IMBRUVICA® 3,011 2,536 18.7 20.2 (1.5) VELCADE® 311 636 (51.2) (50.7) (0.5) ZYTIGA®/ abiraterone acetate 1,848 2,118 (12.7) (12.3) (0.4) Other Oncology 308 303 1.7 3.3 (1.6) Pulmonary Hypertension 2,283 2,000 14.1 14.6 (0.5) OPSUMIT® 1,187 1,001 18.6 19.2 (0.6) UPTRAVI® 792 611 29.6 29.8 (0.2) Other Pulmonary Hypertension(2) 304 388 (21.7) (21.3)
(0.4)
Cardiovascular / Metabolism / Other 3,625 3,936 (7.9) (7.2) (0.7) XARELTO® 1,716 1,704 0.7 0.7 - INVOKANA®/ INVOKAMET® 578 558 3.6 4.3 (0.7) PROCRIT®/EPREX® 423 607 (30.4) (29.9) (0.5) Other 908 1,067 (14.9) (12.9) (2.0) Total Pharmaceutical Sales$ 33,304 $ 31,650 5.2 % 6.1 %
(0.9) %
* Percentage greater than 100% or not meaningful
**Certain prior year amounts have been reclassified to conform to current year
presentation
(1) Previously included in Other Oncology
(2) Inclusive of TRACLEER® which was previously disclosed separately
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Pharmaceutical segment sales in the fiscal third quarter of 2020 were $11.4
billion , an increase of 5.0% as compared to the same period a year ago, with an
operational increase of 4.6% and a positive currency impact of 0.4%. U.S.
Pharmaceutical sales increased 1.5% as compared to the same period a year ago.
International Pharmaceutical sales increased by 9.7%, including operational
growth of 8.8% and a positive currency impact of 0.9%. In the fiscal third
quarter of 2020, the net impact of acquisitions and divestitures on the
Pharmaceutical segment operational sales growth was a negative 0.1%.
Major Pharmaceutical Therapeutic Area Sales** - Fiscal Third Quarter Ended
September 27, September 29, Total Operations Currency
(Dollars in Millions) 2020 2019 Change Change Change
Immunology $ 3,789 $ 3,711 2.1 % 1.9 % 0.2 %
REMICADE® 921 1,136 (18.9) (18.4) (0.5)
SIMPONI®/ SIMPONI ARIA® 592 586 0.9 0.8 0.1
STELARA® 1,947 1,698 14.7 14.0 0.7
TREMFYA® 327 290 13.1 12.2 0.9
Other Immunology 3 2 35.6 44.6 (9.0)
Infectious Diseases 864 839 3.0 2.6 0.4
EDURANT®/rilpivirine 236 218 8.1 4.1 4.0
PREZISTA®/ PREZCOBIX®/ REZOLSTA®/ SYMTUZA® 526 508 3.5 4.3 (0.8)
Other Infectious Diseases 102 113 (9.4) (8.1) (1.3) Neuroscience 1,605 1,595 0.6 0.4 0.2 CONCERTA®/ methylphenidate 149 193 (22.6) (22.5)
(0.1)
INVEGA SUSTENNA®/ XEPLION®/ INVEGA TRINZA®/ TREVICTA® 926 851 8.8 8.0 0.8 RISPERDAL CONSTA® 152 167 (9.3) (9.9) 0.6 Other Neuroscience 377 384 (1.8) (0.6) (1.2) Oncology 3,129 2,761 13.3 12.4 0.9 DARZALEX® 1,099 765 43.8 43.4 0.4 ERLEADA®(1) 206 86 * * * IMBRUVICA® 1,031 921 11.9 11.2 0.7 VELCADE® 105 149 (30.1) (30.8) 0.7 ZYTIGA®/ abiraterone acetate 590 741 (20.4) (22.1) 1.7 Other Oncology 98 100 (1.7) (2.8) 1.1 Pulmonary Hypertension 749 654 14.5 13.9 0.6 OPSUMIT® 392 347 13.0 12.3 0.7 UPTRAVI® 260 210 23.6 23.2 0.4 Other Pulmonary Hypertension(2) 97 96 0.1 (0.3)
0.4
Cardiovascular / Metabolism / Other 1,281 1,316 (2.6) (2.5) (0.1) XARELTO® 630 613 2.9 2.9 - INVOKANA®/ INVOKAMET® 224 179 24.7 24.9 (0.2) PROCRIT®/ EPREX® 132 198 (33.3) (33.6) 0.3 Other 294 325 (9.5) (9.0) (0.5) Total Pharmaceutical Sales$ 11,418 $ 10,877 5.0 % 4.6 %
0.4 %
* Percentage greater than 100% or not meaningful
**Certain prior year amounts have been reclassified to conform to current year
presentation
(1) Previously included in Other Oncology
(2) Inclusive of TRACLEER® which was previously disclosed separately
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Immunology products achieved operational growth of 1.9% as compared to the same period a year ago driven by strong uptake of STELARA® (ustekinumab) in Crohn's disease and Ulcerative Colitis and strength in TREMFYA® (guselkumab) in Psoriasis. This was partially offset by COVID-19 related demand and lower sales of REMICADE® (infliximab) due to increased discounts/rebates and biosimilar competition. The patents for REMICADE® (infliximab) in certain countries inEurope expired inFebruary 2015 . Biosimilar versions of REMICADE® have been introduced in certain markets outsidethe United States , resulting in a reduction in sales of REMICADE® in those markets. Additional biosimilar competition will likely result in a further reduction in REMICADE® sales in markets outsidethe United States . Inthe United States , a biosimilar version of REMICADE® was introduced in 2016, and additional competitors continue to enter the market. Continued infliximab biosimilar competition in the U.S. market will result in a further reduction inU.S. sales of REMICADE®. Infectious disease products achieved operational growth of 2.6% as compared to the same period a year ago primarily due to strong sales of SYMTUZA® in theU.S. and the launch uptake of JULUCA®. This was partially offset by lower sales of PREZISTA® and PREZCOBIX®/REZOLSTA® due to increased competition and loss of exclusivity of PREZISTA® in certain countries outside theU.S. Neuroscience products achieved operational sales growth of 0.4% as compared to the same period a year ago. Paliperidone long-acting injectables growth driven by sales of INVEGA SUSTENNA®/XEPLION® (paliperidone palmitate) and INVEGA TRINZA®/TREVICTA® from new patient starts and persistence. The growth was partially offset by cannibalization of RISPERDAL CONSTA® (risperidone), declines inU.S. CONCERTA® (methylphenidate) due to competitive entrants and the negative impact of COVID-19. Oncology products achieved strong operational sales growth of 12.4% as compared to the same period a year ago. Contributors to the growth were strong sales of DARZALEX® (daratumumab) driven by patient uptake in all lines of therapy, IMBRUVICA® (ibrutinib) due to increased patient uptake globally partially offset by a one-time sales return in the prior year and the continued global launch uptake of ERLEADA® (apalutamide). Additionally, the growth was negatively impacted declining sales of ZYTIGA® (abiraterone acetate) and VELCADE® (bortezomib) due to generic competition. Pulmonary Hypertension achieved operational sales growth of 13.9% as compared to the same period a year ago. Sales growth of OPSUMIT® (macitentan) and UPTRAVI® (selexipag) were due to continued share gains, market growth and payer mix, partially offset by the impact of COVID-19. Cardiovascular / Metabolism / Other products experienced an operational decline of 2.5% as compared to the same period a year ago. Sales growth of INVOKANA®/INVOKAMET® (canagliflozin) were due to market growth and favorable channel mix dynamics in theU.S. and strength in the European region. The growth of XARELTO® (rivaroxaban) included a one-time pricing adjustment in 2020 and demand growth partially offset by higher rebates. Lower sales of PROCRIT®/ EPREX® (epoetin alfa) were due to biosimilar competition. 54
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Medical Devices The Medical Devices segment sales in the fiscal nine months of 2020 were$16.4 billion , a decrease of 15.3% as compared to the same period a year ago, with an operational decline of 14.6% and a negative currency impact of 0.7%.U.S. Medical Devices sales decreased 15.1%. International Medical Devices sales decreased by 15.5%, including an operational decline of 14.1% and a negative currency impact of 1.4%. In the fiscal nine months of 2020, the net impact of acquisitions and divestitures on the Medical Devices segment operational sales growth was a negative 0.9% primarily due to the divestiture of the ASP business.
Major Medical Devices Franchise Sales* - Fiscal Nine Months Ended
September 27, September 29, Total Operations Currency
(Dollars in Millions) 2020 2019 Change Change Change
Surgery $ 5,803 $ 7,059 (17.8) % (16.6) % (1.2) %
Advanced 2,723 3,019 (9.8) (8.7) (1.1)
General(1) 3,080 4,040 (23.8) (22.5) (1.3)
Orthopaedics 5,572 6,566 (15.1) (14.7) (0.4)
Hips 908 1,061 (14.5) (13.9) (0.6)
Knees 825 1,085 (24.0) (23.7) (0.3)
Trauma 1,892 2,034 (7.0) (6.5) (0.5)
Spine, Sports &
Other(2) 1,947 2,384 (18.3) (18.0) (0.3)
Vision 2,843 3,483 (18.4) (17.8) (0.6)
Contact Lenses/Other 2,198 2,559 (14.1) (13.6) (0.5)
Surgical 645 923 (30.2) (29.6) (0.6)
Interventional Solutions 2,153 2,223 (3.1) (2.7) (0.4)
Total Medical Devices
Sales $ 16,370 $ 19,331 (15.3) % (14.6) % (0.7) %
*Certain prior year amounts have been reclassified to conform to current year
presentation
(1) Includes Specialty Surgery which was previously disclosed separately
(2) Previously referred to as Spine & Other
The Medical Devices segment sales in the fiscal third quarter of 2020 were $6.2
billion , a decrease of 3.6% as compared to the same period a year ago, with an
operational decline of 3.9% and a positive currency impact of 0.3%. U.S. Medical
Devices sales increased 1.2%. International Medical Devices sales decreased by
8.1%, including an operational decline of 8.5% partially offset by a positive
currency impact of 0.4%. In the fiscal third quarter of 2020, the net impact of
acquisitions and divestitures on the Medical Devices segment operational sales
growth was a negative 0.6%. While results in the fiscal third quarter were net
negatively impacted by COVID-19, primarily related to reduced procedures, the
Company did see improvement throughout the quarter as countries and states began
to gradually re-open. For example, sales in the U.S. returned to gradual growth
in the fiscal third quarter. However, the ultimate COVID-19 impact on Medical
Devices fiscal year sales remains highly fluid and will continue to evolve with
geographical re-openings and virus waves.
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Major Medical Devices Franchise Sales* - Fiscal Third Quarter Ended
September 27, September 29, Total Operations Currency
(Dollars in Millions) 2020 2019 Change Change Change
Surgery $ 2,152 $ 2,311 (6.9) % (6.9) % 0.0 %
Advanced 1,000 1,010 (1.1) (1.2) 0.1
General(1) 1,152 1,301 (11.4) (11.3) (0.1)
Orthopaedics 2,083 2,138 (2.6) (3.1) 0.5
Hips 345 336 2.4 1.9 0.5
Knees 308 344 (10.9) (11.6) 0.7
Trauma 685 677 1.3 0.7 0.6
Spine, Sports &
Other(2) 745 778 (4.3) (5.0) 0.7
Vision 1,081 1,193 (9.4) (9.5) 0.1
Contact Lenses/Other 830 893 (7.1) (7.2) 0.1
Surgical 251 299 (16.3) (16.4) 0.1
Interventional Solutions 836 741 12.9 12.4 0.5
Total Medical Devices
Sales $ 6,150 $ 6,383 (3.6) % (3.9) % 0.3 %
*Certain prior year amounts have been reclassified to conform to current year
presentation
(1) Includes Specialty Surgery which was previously disclosed separately
(2) Previously referred to as Spine & Other
The Surgery franchise experienced an operational sales decline of 6.9% as
compared to the prior year fiscal third quarter. The operational decline in
Advanced Surgery was primarily driven by the negative impact of COVID-19 and
competitive pressures in the U.S. This was partially offset by global growth in
Biosurgery led by share gains from SURGIFLO® which was positively impacted due
to the recovery of an isolated supply disruption in the prior year. The
operational decline in General Surgery was primarily driven by the negative
impact of COVID-19.
The Orthopaedics franchise experienced an operational sales decline of 3.1% as
compared to the prior year fiscal third quarter. The operational growth in hips
was driven by market procedure recovery as well as our leadership in the
Anterior approach, strong market demand for the ACTIS® stem and enabling
technologies - KINCISE™ and VELYS™ Hip Navigation. The operational decline in
knees was driven by the negative impact of COVID-19. The operational growth in
Trauma was driven by procedures rebounding and strength from new products. The
operational decline in Spine, Sports & Other was driven by the negative impact
of COVID-19 partially offset by the uptake of the SYMPHONY™
Occipito-Cervico-Thoracic (OCT) System in Spine.
The Vision franchise experienced an operational sales decline of 9.5% as
compared to the prior year fiscal third quarter. The Contact Lenses/Other
operational decline was due to the negative impact of COVID-19 which was
partially offset by growth in the
The Interventional Solutions franchise achieved operational growth of 12.4% as
compared to the prior year fiscal third quarter driven by atrial fibrillation
procedure growth coupled with strength from new products.
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ANALYSIS OF CONSOLIDATED EARNINGS BEFORE PROVISION FOR TAXES ON INCOME
Consolidated earnings before provision for taxes on income for the fiscal nine
months of 2020 was
Consolidated earnings before provision for taxes on income for the fiscal third quarter of 2020 was$4.4 billion representing 20.9% of sales as compared to$1.6 billion in the fiscal third quarter of 2019, representing 7.9% of sales.
Cost of Products Sold
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(Dollars in billions. Percentages in chart are as a percent to total sales)
Fiscal Nine months Q3 2020 versus Fiscal Nine months Q3 2019 Cost of products sold increased as a percent to sales driven by: •Medical Device idle capacity costs associated with COVID-19 related production slow downs and fixed cost deleveraging. •Establishment of obsolescence reserves associated with the impact of COVID-19 in the Medical Devices business The intangible asset amortization expense included in cost of products sold for the fiscal nine months of 2020 and 2019 was$3.4 billion and$3.3 billion , respectively. Q3 2020 versus Q3 2019 Cost of products sold remained flat as a percent to sales driven by: •Medical Device idle capacity costs associated with COVID-19 related production slow downs and fixed cost deleveraging. partially offset by: •Favorable mix within the Pharmaceutical and Consumer businesses. The intangible asset amortization expense included in cost of products sold for the fiscal third quarters of 2020 and 2019 was$1.2 billion and$1.1 billion , respectively.
Selling, Marketing and Administrative Expenses
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(Dollars in billions. Percentages in chart are as a percent to total sales)
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Fiscal Nine months Q3 2020 versus Fiscal Nine months Q3 2019 Selling, Marketing and Administrative Expenses decreased as a percent to sales driven by: •Leveraging in the Pharmaceutical business •Planned prioritization and reduced brand marketing expense in theConsumer Health business •Favorable product mix with a higher percentage of sales coming from the Pharmaceutical business partially offset by: •Deleveraging in the Medical Devices business resulting from the COVID-19 impact on sales Q3 2020 versus Q3 2019 Selling, Marketing and Administrative Expenses decreased as a percent to sales driven by: •Expense leveraging in the Pharmaceutical business •Favorable segment mix with a higher percentage of sales coming from the Pharmaceutical business partially offset by: •Deleveraging in the Medical Devices business resulting from the COVID-19 impact on sales •Increased brand marketing expense in theConsumer Health business
Research and Development Expense
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(Dollars in billions. Percentages in chart are as a percent to total sales)
Fiscal Nine months Q3 2020 versus Fiscal Nine months Q3 2019 Research and Development increased slightly as a percent to sales driven by: •Higher upfront/milestone payments in the fiscal nine months of 2019, primarily related to the argenx collaboration partially offset by: •The negative COVID-19 impact on Medical Devices sales •Increased investment in the Medical Devices business related to robotics and digital programs Q3 2020 versus Q3 2019 Research and Development increased as a percent to sales driven by: •Portfolio progression including the COVID-19 vaccine in the Pharmaceutical business •The negative COVID-19 impact on Medical Devices sales •Increased investment in the Medical Devices business related to robotics and digital programs •Segment mix with a higher percentage of sales coming from the Pharmaceutical business partially offset by: •Lower upfront/milestone payments in the fiscal third quarter of 2020
Research and Development costs for the remainder of the fiscal year will include incremental investment spending associated with vaccines and the recently completed Momenta Pharmaceuticals acquisition to advance the pipeline.
In the fiscal third quarter and fiscal nine months of 2020, the Company recorded a partial IPR&D charge of$0.1 billion related to timing and progression of the digital surgery platforms acquired with theAuris Health acquisition. In the fiscal first quarter of 2019, the Company recorded an IPR&D charge of$0.9 billion for the remaining intangible asset value related to the development program of AL-8176, an investigational drug for the treatment of Respiratory Syncytial Virus (RSV) and human metapneumovirus (hMPV) acquired with the 2014 acquisition ofAlios Biopharma Inc. The impairment charge was based on 58 -------------------------------------------------------------------------------- Table of Content additional information, including clinical data, which became available and led to the Company's decision to abandon the development of AL-8176.
Interest (Income) Expense
Interest (Income) Expense in the fiscal nine months of 2020 was a net interest expense of$16 million as compared to income of$43 million in same period a year ago. This was primarily due to reduced interest income resulting from lower rates of interest earned on cash balances and a higher average debt balance. Interest (Income) Expense in the fiscal third quarter of 2020 was a net interest expense of$32 million as compared to income of$41 million in the same period a year ago. This was primarily due to reduced interest income resulting from lower rates of interest earned on cash balances and a higher average debt balance. The balance of cash, cash equivalents and current marketable securities was$30.8 billion at the end of the fiscal third quarter of 2020 as compared to$17.9 billion at the end of the fiscal third quarter of 2019. The Company's debt position was$37.8 billion as ofSeptember 27, 2020 as compared to$29.2 billion the same period a year ago. Other (Income) Expense, Net
Fiscal Nine months Q3 2020 versus Fiscal Nine months Q3 2019
Other (income) expense, net for the fiscal nine months of 2020 was favorable by
Fiscal Nine Months
(Dollars in Billions)(Income)/Expense 2020 2019 Change
Litigation expense(1) $ 2.2 4.8 (2.6)
Acquisition and Integration related(2) (1.1) 0.2 (1.3)
Unrealized (gains)/losses on securities (0.2) (0.2) 0.0
Equity step-up gain related to DR. CI:LABO 0.0 (0.3) 0.3
Divestiture Gains(3) (0.1) (2.1) 2.0
Restructuring related 0.1 0.1 0.0
Other (0.4) 0.0 (0.4)
Total Other (Income) Expense, Net $ 0.5 2.5 (2.0)
(1)2019 included higher litigation expense primarily related to the agreement in
principle to settle opioid litigation
(2) 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) 2019 included the divestiture of ASP
Q3 2020 versus Q3 2019
Other (income) expense, net for the fiscal third quarter of 2020 was favorable
by $3.0 billion as compared to the prior year primarily due to the following:
Fiscal Third Quarter
(Dollars in Billions)(Income)/Expense 2020 2019 Change
Litigation expense(1) $ 1.5 4.0 (2.5)
Acquisition and Integration related (0.1) 0.1 (0.2)
Unrealized (gains)/losses on securities 0.0 0.1 (0.1)
Other (0.2) 0.0 (0.2)
Total Other (Income) Expense, Net $ 1.2 4.2 (3.0)
(1)2019 included higher litigation expense primarily related to the agreement in principle to settle opioid litigation
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EARNINGS BEFORE PROVISION FOR TAXES BY SEGMENT
Income before tax by segment of business for the fiscal nine months were as
follows:
Income Before Tax Segment Sales Percent of Segment Sales
September 27, September 29, September 27, September 29, September 27,
(Dollars in Millions) 2020 2019 2020 2019 2020 September 29, 2019
Consumer Health $ 993 $ 1,800 $ 10,435 $ 10,331 9.5 % 17.4 %
Pharmaceutical 11,787 5,786 33,304 31,650 35.4 18.3
Medical Devices 2,681 6,078 16,370 19,331 16.4 31.4
Segment earnings before tax 15,461 13,664 60,109 61,312 25.7 22.3
Less: Expenses not allocated to segments (1) 611 554 Worldwide income before tax$ 14,850 $ 13,110 $ 60,109 $ 61,312 24.7 % 21.4 % Income before tax by segment of business for the fiscal third quarters were as follows: Income Before Tax Segment Sales Percent of Segment Sales September 27, September 29, September 27, September 29, September 27, September 29, (Dollars in Millions) 2020 2019 2020 2019 2020 2019 Consumer Health$ 191 $ 653 $ 3,514 $ 3,469 5.4 % 18.8 % Pharmaceutical 3,439 (222) 11,418 10,877 30.1 (2.0) Medical Devices 1,010 1,392 6,150 6,383 16.4 21.8 Segment earnings before tax 4,640 1,823 21,082 20,729 22.0
8.8
Less: Expenses not allocated to segments (1) 239 176 Worldwide income before tax$ 4,401 $ 1,647 $ 21,082 $ 20,729 20.9 %
7.9 %
(1) Amounts not allocated to segments include interest (income) expense and general corporate (income) expense.
Consumer Health Segment
The Consumer Health segment income before tax as a percent of sales in the fiscal nine months of 2020 was 9.5% versus 17.4% for the same period a year ago. The decrease in the income before tax as a percent of sales in the fiscal nine months of 2020 as compared to the prior year was primarily driven by the following: •Higher litigation expense of$1.2 billion in 2020 vs.$0.2 billion in 2019 (primarily associated with talc related costs, including certain settlements) •The fiscal nine months of 2019 included a gain of$0.3 billion related to the Company's previously held equity investment in DR. CI:LABO partially offset by: •Planned prioritization and reduced brand marketing expense in the fiscal nine months of 2020The Consumer Health segment income before tax as a percent of sales in the fiscal third quarter of 2020 was 5.4% versus 18.8% for the same period a year ago. The decrease in the income before tax as a percent of sales in the fiscal third quarter of 2020 as compared to the prior year was primarily driven by the following: •Higher litigation expense of$0.5 billion in 2020 vs.$0.0 billion in 2019 (primarily associated with talc related costs, including certain settlements) •Increased brand marketing expense partially offset by: •Favorable product mix Pharmaceutical Segment The Pharmaceutical segment income before tax as a percent of sales in the fiscal nine months of 2020 was 35.4% versus 18.3% for the same period a year ago. The increase in the income before tax as a percent of sales for the fiscal nine months of 2020 as compared to the prior year was primarily driven by the following: 60 -------------------------------------------------------------------------------- Table of Content •Lower litigation expense of$1.0 billion in 2020 vs.$4.3 billion in 2019 (primarily related to the agreement in principle to settle opioid litigation,$4.0 billion in 2019 and$1.0 billion in 2020) •An in-process research and development charge of$0.9 billion in the fiscal nine months of 2019 related toAlios •Lower research and development expense in 2020. The fiscal nine months of 2019 included a$0.3 billion upfront payment to argenx •Lower acquisition and integration related costs in 2020 •Leveraging in selling, marketing and administrative expense The Pharmaceutical segment income before tax as a percent of sales in the fiscal third quarter of 2020 was 30.1% versus (2.0)% for the same period a year ago. The increase in the income before tax as a percent of sales for the fiscal third quarter of 2020 as compared to the prior year was primarily driven by the following: •Lower litigation expense of$1.0 billion in 2020 vs.$4.0 billion in 2019 (primarily related to the agreement in principle to settle opioid litigation) •Leveraging in selling, marketing and administrative expense •Favorable product mix
Medical Devices Segment
The Medical Devices segment income before tax as a percent of sales in the fiscal nine months of 2020 was 16.4% versus 31.4% for the same period a year ago. The decrease in the income before tax as a percent of sales for the fiscal nine months was primarily driven by the following: •A gain of$2.0 billion related to the ASP divestiture recorded in the fiscal nine months of 2019 •COVID-19 period costs and fixed costs deleveraging and idle capacity charges in Cost of Products Sold in the fiscal nine months of 2020 •The negative impact of COVID-19 on sales in the fiscal nine months of 2020 •An in-process research and development charge of$0.1 billion in 2020 related to theAuris Health acquisition partially offset by: •A contingent consideration reversal of approximately$1.1 billion in the fiscal nine months of 2020 related to the timing of certain developmental milestones associated with theAuris Health acquisition •Litigation expense was insignificant in 2020 vs.$0.3 billion in 2019 The Medical Devices segment income before tax as a percent of sales in the fiscal third quarter of 2020 was 16.4% versus 21.8% for the same period a year ago. The decrease in the income before tax as a percent of sales for the fiscal third quarter was primarily driven by the following: •COVID-19 period costs and fixed costs deleveraging and idle capacity charges in Cost of Products Sold in the fiscal third quarter of 2020 •The negative impact of COVID-19 on sales in the fiscal third quarter of 2020 •An in-process research and development charge of$0.1 billion in 2020 related to theAuris Health acquisition partially offset by: •A contingent consideration reversal of approximately$0.2 billion in the fiscal third quarter of 2020 related to the timing of certain developmental milestones associated with theAuris Health acquisition
Restructuring
In the 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 2022. The Company expects to record pre-tax restructuring charges of approximately$1.9 to$2.3 billion . In the fiscal nine months of 2020, the Company recorded a pre-tax charge of$363 million , which is included on the following lines of the Consolidated Statement of Earnings,$187 million in restructuring,$69 million in cost of products sold and$107 million in other (income) expense. In the fiscal third quarter of 2020, the Company recorded a pre-tax charge of$130 million , which is included on the following lines of the Consolidated Statement of Earnings,$68 million in restructuring,$32 million in cost of products sold and$30 million in other (income) expense. In the fiscal nine months of 2019, the Company recorded a pre-tax charge of$360 million , which is included on the following lines of the Consolidated Statement of Earnings,$162 million in restructuring,$81 million in cost of products sold and$117 million in other (income) expense. In the 61 -------------------------------------------------------------------------------- Table of Content fiscal third quarter of 2019, the Company recorded a pre-tax charge of$128 million , which is included on the following lines of the Consolidated Statement of Earnings,$69 million in restructuring,$20 million in cost of products sold and$39 million in other (income) expense. Restructuring charges of approximately$1.2 billion have been recorded since the restructuring was announced.
See Note 12 to the Consolidated Financial Statements for additional details related to the restructuring.
Provision for Taxes on Income
For discussion related to the fiscal nine months of 2020 provision for taxes refer to Note 5 to the Consolidated Financial Statements.
During the second quarter of 2020, the Internal Revenue Service proposed regulations that may, if issued in their current form, limit the tax deductibility of the payments under the agreement in principle to settle opioid litigation that was initially accrued for in fiscal 2019 for$4.0 billion and an additional$1.0 billion in the fiscal third quarter of 2020 at an effective rate of 21.4% (for more information see Note 21 in the Company's Annual Report on Form 10-K for the fiscal year endedDecember 29, 2019 ). The financial impact of these regulations may be material to the Company's financial results in the period in which they are finalized which could be later in fiscal 2020. LIQUIDITY AND CAPITAL RESOURCES
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Cash Flows
Cash and cash equivalents were
(Dollars In Billions)
$ 17.3 Q4 2019 Cash and cash equivalents balance
15.2 cash generated from operating activities
(12.9) net cash used by investing activities
(0.5) net cash used by financing activities
(0.1) effect of exchange rate and rounding
$ 19.0 Q3 2020 Cash and cash equivalents balance
In addition, the Company had $11.8 billion in marketable securities at the end
of the fiscal third quarter of 2020 and $2.0 billion at the end of fiscal year
2019.
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Cash flow from operations of$15.2 billion was the result of: (Dollars In Billions) $ 13.0 Net Earnings non-cash expenses and other adjustments primarily for depreciation and amortization, stock-based compensation, asset
write-downs and credit losses
and accounts receivable allowances partially offset by the deferred tax
6.1 provision and net gain on sale of assets/businesses
(0.1) decrease in accounts payable and accrued liabilities
an increase in accounts receivable, inventories and other current and
(2.6) non-current liabilities and other current and non-current assets
contingent consideration reversal (related to the timing of certain
developmental milestones associated with the
(1.2) rounding
$ 15.2 Cash Flow from operations
Investing activities use of
primarily related to the acquisitions of bermekimab and related assets
from XBiotech Inc. as well as the acquisition of all outstanding shares
$ (0.9) in Verb Surgical Inc.
(2.0) additions to property, plant and equipment
(9.6) net purchases of investments
(0.4) other (primarily licenses and milestones)
$ (12.9) Net cash used for investing activities
Financing activities use of
(7.8) dividends to shareholders
(2.9) repurchase of common stock
9.9 net proceeds from short and long term debt
proceeds from stock options exercised/employee withholding tax on stock
0.9 awards, net
(0.6) other
$ (0.5) Net cash used for financing activities
The Company has access to substantial sources of funds at numerous banks
worldwide. In September 2020 , the Company secured a new 364-day Credit Facility.
Total credit available to the Company approximates $10 billion , which expires on
September 9, 2021 . Interest charged on borrowings under the credit line
agreement is based on either bids provided by banks, the prime rate, London
Interbank Offered Rates (LIBOR), or other applicable market rates as allowed
under the terms of the agreement, plus applicable margins. Commitment fees under
the agreement are not material.
In the fiscal third quarter of 2020, the Company's notes payable and long-term
debt was in excess of cash, cash equivalents and marketable securities. As of
September 27, 2020 , the net debt position was $7.0 billion as compared to the
prior year of $11.3 billion . Considering recent market conditions and the
on-going COVID-19 crisis, the Company has re-evaluated its operating cash flows
and liquidity profile and does not foresee any significant incremental risk. The
Company anticipates that operating cash flows, the ability to raise funds from
external sources, borrowing capacity from existing committed credit facilities
and access to the commercial paper markets will continue to provide sufficient
resources to fund operating needs, including the agreement in principle to
settle opioid litigation of which the majority may be paid over the next two to
three years. 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. In the fiscal third quarter of 2020, the Company issued approximately
$5.0 billion of commercial paper, with approximately $3.0 billion outstanding at
quarter end which had a weighted average interest rate of 0.15% and a weighted
average maturity of 1.2 months. In the fiscal third quarter of 2020, the Company
issued senior unsecured notes for a total of $7.5 billion at favorable rates.
The net proceeds from this offering were used to fund the
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Momenta Pharmaceuticals, Inc. acquisition on October 1, 2020 and for general
corporate purposes. 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.
In the fiscal second quarter of 2020, the Company paid approximately $1.3
billion to the U.S. Treasury related to the normal estimated tax payment for the
fiscal first and second quarters of 2020 and the current installment due on
foreign undistributed earnings as part of the TCJA (see Note 8 to the
Consolidated Financial Statements as contained in the Company's Annual Report on
Form 10-K for the fiscal year ended December 29, 2019 ).
Dividends
OnJuly 20, 2020 , the Board of Directors declared a regular cash dividend of$1.01 per share, payable onSeptember 8, 2020 to shareholders of record as ofAugust 25, 2020 . OnOctober 22, 2020 , the Board of Directors declared a regular cash dividend of$1.01 per share, payable onDecember 8, 2020 to shareholders of record as ofNovember 24, 2020 . The Company expects to continue the practice of paying regular quarterly cash dividends.
OTHER INFORMATION
New Accounting Pronouncements
Refer to Note 1 to the Consolidated Financial Statements for new accounting pronouncements.
Economic and Market Factors
COVID-19 considerations and business continuity The Company has considered various internal and external factors in assessing the potential impact of COVID-19 on its business and financial results based upon information available at this time, as follows: •Operating Model: The Company has a diversified business model across the healthcare industry with flexibility designed into its manufacturing, research and development clinical operations and commercial capabilities. •Supply Chain: The Company continues to leverage its global manufacturing footprint and dual-source capabilities while closely monitoring and maintaining critical inventory at major distribution centers away from high-risk areas to ensure adequate and effective distribution. •Business Continuity: The robust, active business continuity plans across the Company's network have been instrumental in preparing the Company for events like COVID-19 and the ability to meet the majority of patient and consumer needs remains uninterrupted. •Workforce: The Company has put procedures in place to protect its essential workforce in manufacturing, distribution, commercial and research operations while ensuring appropriate remote working protocols have been established for other employees •Liquidity: The Company's high-quality credit rating allows the Company superior access to the financial capital markets for the foreseeable future. In the fiscal third quarter of 2020, the Company issued approximately$5.0 billion of commercial paper, with approximately$3.0 billion outstanding at quarter end, for additional liquidity at favorable interest rates. Additionally, in the fiscal third quarter of 2020, the Company issued senior unsecured notes for a total of$7.5 billion at favorable rates. The net proceeds from this offering were used to fund the Momenta Pharmaceuticals, Inc. acquisition onOctober 1, 2020 and for general corporate purposes. •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 the fiscal second and third quarters of 2020, the Company entered into a series of contract manufacturing arrangements for vaccine production with third party contract manufacturing organizations. These arrangements provide the Company with future supplemental commercial capacity for vaccine production and potentially transferable rights to such production if capacity is not required. Amounts paid and contractually obligated to be paid to these contract manufacturing organizations of approximately$0.8 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. 64 -------------------------------------------------------------------------------- Table of Content The Company operates in certain countries where the economic conditions continue to present significant challenges. The Company continues to monitor these situations and take appropriate actions. Inflation rates and currency exchange rates continue to have an effect on worldwide economies and, consequently, on the way the Company operates. The Company has accounted for operations inVenezuela andArgentina as highly inflationary, as the prior three-year cumulative inflation rate surpassed 100%. This did not have a material impact on the Company's results in the period. In the face of increasing costs, the Company strives to maintain its profit margins through cost reduction programs, productivity improvements and periodic price increases. InJune 2016 , theUnited Kingdom (U.K. ) held a referendum in which voters approved an exit from theEuropean Union (E.U.), commonly referred to as "Brexit" and onJanuary 31, 2020 , theU.K. formally exited the E.U. Given the lack of comparable precedent, it is unclear what the ultimate financial, trade, regulatory and legal implications the withdrawal of theU.K. from the E.U. will have. Brexit creates global political and economic uncertainty, which may cause, among other consequences, volatility in exchange rates and interest rates, additional cost containment by third-party payors and changes in regulations. However, the Company currently does not believe that these and other related effects will have a material impact on the Company's consolidated financial position or operating results. As ofSeptember 27, 2020 and for the fiscal nine months, the business of the Company'sU.K. subsidiaries represented less than 3% of both the Company's consolidated assets and fiscal nine months revenues, respectively. Governments around the world consider various proposals to make changes to tax laws and regulations, which may include increasing or decreasing existing statutory tax rates. A change in statutory tax rate in any country would result in the revaluation of the Company's deferred tax assets and liabilities related to that particular jurisdiction in the period in which the new tax law is enacted. This change would result in an expense or benefit recorded to the Company's Consolidated Statement of Earnings. The Company closely monitors these proposals as they arise in the countries where it operates. Changes to the statutory tax rate may occur at any time, and any related expense or benefit recorded may be material to the fiscal quarter and year in which the law change is enacted. The Company faces various worldwide health care changes that may continue to result in pricing pressures that include health care cost containment and government legislation relating to sales, promotions and reimbursement of health care products.
Changes in the behavior and spending patterns of purchasers of health care products and services, including delaying medical procedures, rationing prescription medications, reducing the frequency of physician visits and foregoing health care insurance coverage, may continue to impact the Company's businesses.
The Company also operates in an environment increasingly hostile to intellectual property rights. Firms have filed Abbreviated New Drug Applications or Biosimilar Biological Product Applications with the FDA, initiated Inter Partes Review proceedings inthe United States Patent and Trademark Office, 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 these actions, generic or biosimilar versions of the products at issue may 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. For further information, see the discussion on "Litigation Against Filers of Abbreviated New Drug Applications" in Note 11 to the Consolidated Financial Statements. 65
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