Joseph J. Wolk
Executive Vice President and Chief Financial Officer at Johnson & Johnson
Thank you, Jessica, and thanks, everyone, for joining us today. As previously shared, we reported particularly strong results across all segments for the second quarter and the first half of 2023. During the second quarter, adjusted operational sales growth by Pharmaceuticals, excluding COVID-19 revenue, accelerated 6.2% over the first quarter of 2023. Similarly, on a sequential basis, MedTech operational sales increased to 4.5% over an already strong first quarter. During the first half of the year, we executed against our long-term business strategy and achieved key clinical and regulatory milestones. These advancements provide a strong foundation for long-term growth and are a testament to the hard work and dedication of our talented colleagues around the world.
We also made considerable progress toward the separation of Kenvue. On May 8, as partial consideration for the transfer of the Consumer Health business, Kenvue paid $13.2 billion to Johnson & Johnson from the net proceeds of the initial public offering and debt financing transactions in connection with the separation. Today, we were pleased to announce an update on our next step toward the separation of Kenvue. Subject to market conditions, our intention is to split off Kenvue shares through an exchange offer as our next step in the separation. As part of the proposed exchange offer, Johnson & Johnson shareholders will have the choice to exchange all, some or none of their shares of Johnson & Johnson common stock for shares of Kenvue common stock subject to the terms of an offer.
We believe a split-off is the most advantageous form of separation for Johnson & Johnson, Kenvue and our shareholders. Specifically, an exchange offer provides Johnson & Johnson the potential opportunity to acquire a large number of outstanding shares of Johnson & Johnson common stock at one time in a tax-free manner for US federal income tax purposes without reducing overall cash or future financial flexibility. Further, following the completion of the exchange offer, Kenvue would most likely have a shareholder base that would have made the election to own its shares.
The exact timing of our decision to launch an exchange offer will, as stated earlier, depend on market conditions, but the launch of the tender could occur as early as the coming days. Offer terms for the exchange, inclusive of applicable discounts as well as the duration of the exchange tender period, would be set upon launch. We understand that you may have questions on this process. At this point, there are no additional details about the contemplated split off to share, but we are committed to providing timely updates as appropriate.
Let's now turn to cash and capital allocation. We ended the second quarter with approximately $29 billion of cash and marketable securities and approximately $46 billion of debt for a net debt position of $17 billion, inclusive of approximately $7 billion of Kenvue net debt. Free cash flow through the second quarter was approximately $5.4 billion compared to $8.1 billion in the prior year. The second quarter reflects elevated tax payments of approximately $2 billion related to TCJA and past audit-related matters. Our capital allocation priorities remain unchanged with continued investment in our business being the highest priority to drive new and better solutions for patients, followed by dividends increasing on an annual basis, adding strategic opportunities for inorganic growth and share repurchases when attractive.
Our R&D investment in the first half of 2023 was $7.4 billion or approximately 15% of sales. This includes external investments, such as our recently announced partnership with Cellular Biomedicine Group on two next-generation CAR-Ts for the treatment of B-cell malignancies, further broadening our cell therapy portfolio. In April, we announced our 61st consecutive year of dividend increases. And in combination with the completion of our $5 billion share repurchase program authorized by the Board in September of 2022 and completed earlier this year, we returned $8.5 billion to shareholders in the first half of 2023.
Let's discuss our outlook for the balance of 2023. Before I get into the specifics of guidance, in light of the potential Kenvue split-off transaction, I will remind you that our updated full year guidance today continues to include results from the Consumer Health business, given Johnson & Johnson remains the majority shareholder of Kenvue. I suspect you already know this, but it would not be accurate to subtract any guidance provided separately by Kenvue from total Johnson & Johnson guidance and assume that the resulting total reflects guidance for the new Johnson & Johnson. When Johnson & Johnson is no longer the majority shareholder of Kenvue, we will provide timely updated new Johnson & Johnson guidance that will reflect among other things, the removal of Consumer Health's current contribution to Johnson & Johnson's performance as well as any updates to Johnson & Johnson's outstanding share count.
So with that context, moving on to our full year guidance. Based on the strong results delivered in the quarter, like we did in April, we are again raising full year operational sales and EPS guidance despite some strategic items not accretive to EPS as detailed on the schedule. Specifically, the lost income related to the approximate 10% noncontrolling interest in Kenvue and the acquired in-process research and development costs related to our investment in Cellular Biomedicine Group. We now expect operational sales growth for the full year 2023 to be in the range of 7% to 8% or up $1.4 billion in the range of $99.3 billion to $100.3 billion on a constant currency basis and adjusted operational sales growth in the range of 6% to 7%.
As you know, we don't speculate on future currency movements. Last quarter, we noted that we utilized the euro spot rate relative to the US dollar at 1.10. The euro spot rate as of mid-last week remains at 1.10. However, the US dollar has strengthened versus other select currencies such as the won and the yen. As such, we now estimate a negative impact of foreign currency translation of approximately 500 basis points, resulting in estimated reported sales growth between 6.5% to 7.5% compared to 2022 with a midpoint of $99.3 billion.
Regarding other lines on the P&L, we now anticipate a slight improvement to our adjusted pretax operating margin driven by expense management. We have reduced our other income estimate to be in the range of $1.6 billion to $1.8 billion primarily related to the company's 10.4% noncontrolling interest in Kenvue. Regarding interest income and expense, we now anticipate a reduction of net interest expense to the range of $150 million to $250 million due to interest income on the net proceeds linked to the Kenvue separation. And finally, based on current tax law, we are maintaining our effective tax rate estimate in the range of 15.5% to 16.5%. These changes result in us increasing our adjusted operational earnings per share guidance by $0.10 per share to a range of $10.60 to $10.70 or $10.65 at the midpoint on a constant currency basis, constant currency growth of 5% at the midpoint.
While not predicting the impact of currency movements, assuming recent exchange rates I previously referenced, our reported adjusted earnings per share for the year assumes no additional foreign exchange impact. As such, our reported adjusted earnings per share for the year increases by $0.10 per share to a range of $10.70 to $10.80 or $10.75 at the midpoint, reflecting growth of 6% at the midpoint. While we do not provide guidance by segment or on a quarterly basis, let me offer some qualitative considerations to support your modeling.
In MedTech, we continue to anticipate stable procedure volumes and health care staffing levels in the back half of the year with normal seasonality. We expect continued competitive performance attributable to commercial execution, recently launched products and improvement in supply. Headwinds from volume-based procurement in China as well as potential impacts from international sanctions in Russia are expected to be higher in the second half than the first half of the year. In Pharmaceuticals, we continue to expect to deliver our 12th consecutive year of above-market growth in 2023 driven by key assets and continued uptick of our newly launched products. We expect continued strong growth in the back half of the year slightly higher than the first half.
When modeling Consumer Health growth rates in 2023, it's important to take into consideration prior year comparisons with lapping price increases in the back half of the year. Given the strong momentum in our Pharmaceutical business and the upcoming clinical milestones mentioned earlier, we remain very confident in our ability to meet our 2025 Pharmaceutical sales target of $57 billion. Looking ahead, we have many important catalysts for the remainder of the year that can drive meaningful near- and long-term value. Beyond the separation in the near term, we are continuing to drive performance in MedTech with better commercial execution and recently launched innovative products being a significant factor in driving the continued higher growth trajectory across the MedTech business. Many of the solutions mentioned are early in their commercialization, which means there is still significant opportunity ahead.
For example, in electrophysiology, we are excited to begin the commercialization of the QDOT microcatheter in the US during the second half of this year. In Orthopaedics, the VELYS Robotic-Assisted Solution recently received regulatory approvals in Europe, and we plan to launch it in key European countries by the end of this year. And in Vision, we are seeing the benefits of our recently launched innovations such as ACUVUE OASYS MAX 1-Day multifocal, which is driving Johnson & Johnson's market share growth in the large and growing presbyopia market. We look forward to continued growth from this and other recent Vision launches.
Related to our Pharmaceutical business, we are excited about upcoming advancements in our pipeline with a number of important regulatory and clinical milestones for our key future assets, including on the regulatory front, there is expected approval of talquetamab in relapsed or refractory multiple myeloma. Clinically, we expect a Phase 3 data for TREMFYA for Crohn's disease and ulcerative colitis, the results of the MARIPOSA study of RYBREVANT plus lazertinib in frontline non-small cell lung cancer with the opportunity to potentially present that data at an upcoming major medical meeting, Phase I data for TAR-210 in non-muscle invasive bladder cancer and Phase 2 data for nipocalimab in rheumatoid arthritis.
A couple of other items to highlight. In case you missed them, we recently published our Health for Humanity Report, our US Pharmaceutical Pricing Transparency Report and our US Patent Table, all of which can be found on our website. Also, a reminder that we will be hosting an enterprise business review featuring both Pharmaceutical and MedTech at the New York Stock Exchange on December 5. I'll conclude my prepared remarks by reiterating that we have had a strong first half of the year, both financially and operationally, and we expect to continue to build upon that momentum in the second half of this year.
With that, I will now turn the call over to Erik Haas.
