Note Important Disclosures on pages 7 and 8 Note Analyst Certification on page 7

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1 COMPANY UPDATE / ESTIMATE CHANGE / PRICE TARGET CHANGE Key Metrics ZTS - NYSE (as of 02/15/18) $78.50 Price Target $ Week Range $ $80.12 Shares Outstanding (mm) Market Cap. ($mm) $38,252 1-Mo. Average Daily Volume (000's) 825,919 Institutional Ownership 95% LT Debt / Total Capital 57.7% ROE (TTM) 50.4% Book Value / Share $3.64 Price / Book Value 21.6x Indicated Dividend / Yield $ % TTM Operating Margin 34.2% Non-GAAP EPS FYE 12/31 Prior Curr. Prior Curr. 2017A 2018E 2018E 2019E 2019E 1Q $0.53 $0.68 $0.74 $0.80 2Q $0.53 $0.73 $0.75 $0.82 3Q $0.65 $0.81 $0.78 $0.86 4Q $0.69 $0.75 $0.81 $0.88 Year $2.40 $2.97 $3.08 $3.29 $3.36 P/E 32.7x 25.5x 23.4x Figures may not add up due to rounding Revenue ($b) Prior Curr. Prior Curr. 2017A 2018E 2018E 2019E 2019E 1Q $1.23 $1.32 $1.35 $1.43 2Q $1.27 $1.38 $1.40 $1.49 3Q $1.35 $1.42 $1.44 $1.53 4Q $1.46 $1.45 $1.52 $1.60 Year $5.31 $5.57 $5.71 $5.90 $6.04 Company Description Based in Parsippany, New Jersey, Zoetis develops, manufactures, and markets pharmaceuticals and biologicals for both livestock and companion animals. The company also offers diagnostic products, genomic services, and other services to their customers, which primarily include livestock farmers, veterinarians, and pet owners. Most of the company's products aid in the healthcare of cats, dogs, equine, swine, beef and dairy cattle, sheep, poultry, and fish. Zoetis Inc. ZTS NYSE Buy 2 Animal Health Analyst: Kurt Kemper, CFA / kkemper@hilliard.com Institutional Sales Desk: George Moorin / GMoorin@hilliard.com J.J.B. Hilliard, W.L. Lyons, LLC February 16, 2018 Broad-based Strength in 4Q17; Raising Price Target and Reiterating Buy Rating 4Q17 Results: Zoetis reported revenues of $1.46 billion, growth of 14.3% from the same period a year ago. This beat our estimate of $1.38 billion and the Street consensus of $1.40 billion. Non-GAAP EPS of $0.69 also exceeded our estimate of $0.64 and the Street consensus of $0.66. Positive Highlights: Literally every species segment exceeded our estimates, although most were relatively small beats with one important exception: cattle. The largest livestock segment for the company was also the source of the largest upside surprise, surpassing our estimate by 9%. Negative Highlights: The GAAP gross margin registered a slight miss at 68.7% versus our estimate of 68.9%. Other expenses were higher than we anticipated. Outlook and Estimates: Tailwinds in the cattle business are setting up the company for what we forecast will be the strongest annual revenue growth for the livestock segment in the company s history as a publicly traded company. Although the companion animal (CA) segment cannot be expected to maintain recent growth rates achieved by arguably the greatest product launch in the history of CA drugs, we still view the segment s growth prospects as strong. And importantly, the long-term story remains positive, in our opinion. We increased our FY18 revenue estimate to $5.71 billion from $5.57 billion and increased our FY18 non-gaap EPS estimate to $3.08 from $2.97. We also increased our FY19 revenue estimate to $6.04 billion from $5.90 billion and increased our FY19 non- GAAP EPS estimate to $3.36 from $3.29. Valuation: Zoetis closed yesterday at 32.7X trailing operating EPS and 25.5X our next twelve months operating EPS estimate. This forward multiple is slightly below its three year average of ~26X. We are maintaining our Buy rating and raising our price target to $91 from $88. See page 4 for price target derivation. Note Important Disclosures on pages 7 and 8 Note Analyst Certification on page 7

2 ADDITIONAL COMMENTARY Revenues in millions 4Q17 Y/Y Revenue Growth Quick Comment Cattle % Favorable conditions in US plus strength elsewhere Swine % Strength elswhere offset by VFD in US Poultry % MFAs performing well with the RWA push by producers Fish % Strong growth from new products in Norway Other % Livestock Total % Broad based strength Companion Animal % Dermatology and Simparica strength Contract Mfg. 8 20% Total Revenue 1, % Source: Company Reports Performance Review Revenue growth of 9% received a modest boost from currency exchange rates. The majority of the growth was driven by new products in the companion animal (CA) segment. Zoetis became the first Animal Health company to surpass $5 billion in annual sales on their fifth anniversary as a standalone, publicly traded company. International growth was strong at 13% operationally, with a 3% boost from currency. Australian revenue growth tempered somewhat in the quarter with a 6% operational increase. Brazilian operational growth of 13% was delivered by both livestock and CA, as investments in the salesforce increased growth in key cattle regions in the country and new products in swine also contributed. Canadian growth was solid at 9% operationally. Chinese revenues were up 13% on a constant currency basis, led by CA growth due to increased medicalization of pets. Japanese growth was strong at 27% constant currency, aided by easy comps for the rapidly growing Apoquel and premium injectables in livestock. Growth in key western European markets (Germany and France) was in the double digits. U.S. revenue growth of 13% was led by new CA products, and the livestock business returned to strong growth at 11% after struggling most of the year. Weather conditions induced buying of premium products to counter the increased risk of disease incidence in cattle. The beef cattle business also benefitted from more animals moving into the feedlot. Swine declined domestically again, but poultry registered a strong gain. Looking ahead, the company now has easier comps in cattle and swine after taking a roughly $40 million hit from the Veterinary Feed Directive (VFD). Swine strength in other key markets such as China and Brazil helped overcome domestic weakness. Zoetis received EU approval for a new porcine reproductive and respiratory syndrome (PRRS) vaccine during the quarter. New products such as this are helping the company capture market share after some losses a year ago. Poultry growth came in spite of the VFD and was bolstered by the Asia Pacific region. Zoetis has multiple medicated feed additives (MFAs) that are not critical to humans and therefore give producers an option with more retailers and consumers demanding poultry raised without antibiotics (RWA). The movement also bolsters vaccine usage and other alternatives to antibiotics that Zoetis may provide. The fish segment continues to recover nicely from a weak 2Q17 caused by pricing discussions in Chilean salmon markets. Strong uptake of a new vaccine for pancreatic disease in Norwegian markets was a significant driver of growth. Management remains confident in the aquaculture market prospects long-term, particularly as they look to expand beyond their current concentration in salmon. Hilliard Lyons Equity Research 2 Animal Health

3 The CA segment continues to be dominated by the rapid uptake of the dermatology portfolio (Apoquel and Cytopoint). The two products stayed above the $100 million mark ($125 million to be exact) for a third consecutive quarter. Management pulled forward long-term guidance for the dermatology portfolio to be over $500 million in 2018, essentially raising the peak sales estimate without getting specific, in our view. Simparica sales increased 102% year-over-year, albeit off a small base. The company made several moves in the quarter with an expanded diagnostic lineup for felines and a new vaccine for protection against two strains of canine influenza. Broader progress was made in diagnostics with the launch of Carysta HVC (high volume chemistry), a platform for high volume veterinary clinics. The gross margin barely missed our estimate this quarter, coming in at 67.7% versus our estimate of 67.9%. The company s gross margin has had a lot of volatility recently as they have been improving their manufacturing footprint and focusing on improving inventory turnover. Core operating expenses of $471 million were higher than our estimate ($459 million) due to SG&A expenses. However, we note SG&A as a percent of sales was actually lower than we estimated. R&D expenses were in line with our estimate. The GAAP core operating margin was 36.4% versus our estimate of 35.6%. The non-gaap core operating margin was 36.8% versus our estimate of 36.0%. Non-core operating expenses were in line with our estimate of $73 million. Due to a one-time charge of $212 million related to tax reform, the GAAP tax rate was 81%. The non-gaap tax rate was lower than our estimate of 29.0% and contributed about $0.02 of the beat. Non-GAAP EPS of $0.69 was ahead of our estimate of $0.64 and the Street consensus of $0.66. Balance Sheet and Cash Flow Review Zoetis has generated $1.35 billion in cash from operations in 2017, an 89% increase year-over-year. The company invested $224 million in property and equipment and $82 million in acquisitions (primarily Nexvet) in Zoetis repurchased $500 million in shares in all four quarters and paid just over $50 million in dividends per quarter. The recent dividend increase implies a 20% increase in 2018 dividends per share paid. We forecast dividends to increase about 20% per year through Leverage ratios were stable on a sequential basis. Long-term debt now stands at 58% of total capital. Total debt / Equity is 3.8X. Despite fairly high leverage ratios, we remain comfortable with Zoetis balance sheet due to the stability of the business and strong liquidity; the current ratio is 3.9X. EBITDA/ net interest was 10.9X in 4Q17 and FCF / net interest was 10.5X. We consider the dividend and our projected dividend increases to be well covered Guidance 2018 Guidance HL Estimates Revenue 5,675 5,800 5,713 Gross Margin ~68% 68.1% SG&A 1,370 1,420 1,400 R&D Other Expenses ~ Tax Rate 21% 22% 21.1% EPS $3.08 GAAP EPS* $2.91 *All other items are on a non-gaap basis; all figures in millions except per share data Source: Company Reports, Hilliard Lyons Research Hilliard Lyons Equity Research 3 Animal Health

4 ESTIMATES UPDATE From a top line perspective, there were really only two key changes, as other changes were modest and all positive tweaks. We significantly raised our cattle revenue estimates, primarily due to improvements in the U.S. market. We also increased our fish revenue estimates as we admittedly underappreciated the fact that this is still a sequential growth story and 2017 will provide fairly easy comps, in our view. With the eye-popping numbers generated by the CA dermatology portfolio, we feel compelled to share our estimates there we are increasing our forecast to $530 million from $500 million previously. We believe international momentum coupled with increased utilization rates in the U.S. will help the company achieve that 24% growth. We increased our gross margin estimate, as management sounded confident in a new base established in the past two quarters upon which the company can build. We increased SG&A expense estimates noticeably due to commentary about increasing the salesforce in diagnostics as well as an expectation of continued marketing for the CA portfolio. We tweaked R&D expenses higher as management discussed a wide range of initiatives such as monoclonal antibodies (stemming from the NexVet acquisition), vector vaccines, genetics, diagnostics, devices, automation, and new areas like data analytics and sensors. It is interesting to us that this was mentioned shortly after Cargill made a minority investment in a cattle facial recognition company. After making modest tweaks to estimates for non-core operating expenses, our FY18 non-gaap EPS estimate is now $3.08 versus $2.97 previously. Our FY18 revenue estimate is $5.71 billion versus $5.57 billion previously. For FY19, we increased revenue expectations to $6.04 billion from $5.90 billion and non-gaap EPS to $3.36 from $3.29, with no substantial changes in growth assumptions (simply a higher base built in 2018). We also unveiled FY20 estimates, which are included in our estimates table on page 6. VALUATION & SUITABILITY Zoetis closed yesterday at 32.7X trailing operating EPS and 25.5X our next twelve months operating EPS estimate. To determine our price target, we took the average forward P/E seen since the efficiency initiative was announced (~26.7X) and incorporate a DCF model to recognize impressive cash flow generation. Applying the 26.7X multiple to our 2019 non-gaap EPS estimate, we derive a $90 price target. Increasing our WACC to 9.6%, up from 9.3% due to higher interest rates, we utilize a two-stage growth model for free cash flow to equity and derive a $94 price target. We use the two-stage growth model due to confidence in the intermediate outlook for the company. However, we think it would be too aggressive to use our 7% growth rate (used for four years beyond our FY20 estimates) into perpetuity. Thus, our second stage growth rate assumption is a much more conservative 3%. Due to our continued uncertainty regarding the cash flow implications of tax reform, we are weighting the P/E methodology more heavily at 75%. Using this weighting, we derive a $91 price target, up from $88 previously. Suitability Zoetis is well diversified in terms of products, customer base, and geographies. The company s industry has an attractive secular growth profile and the CA segment is recession-resistant, in our opinion. However, the company s livestock customer base is subjected to commodity cycles. Further, Zoetis has a limited history as a publicly traded company and is fairly levered. Finally, we view the company s status as a growth stock as another risk to consider. Given these factors, our suitability rating is a 2. Hilliard Lyons Equity Research 4 Animal Health

5 RISKS & CONSIDERATIONS Dependence on livestock industry Zoetis derives a significant amount of revenue from customers in or associated with the agricultural industry, which is subject to many factors beyond their control, such as weather or disease outbreaks. Changes in consumer attitudes The companion animal business is dependent on consumers continuing to view their pets as a member of the family and treating them accordingly. A change in this attitude could halt the humanization of pets and harm Zoetis outlook. Additionally, lower consumption of animal protein could hurt Zoetis customers and thereby reduce demand for Zoetis products. Competition The animal health business is highly competitive and attracts significant capital and new competitors. Innovative new products or solutions from competitors could displace Zoetis products. Integration of acquisitions Zoetis has been fairly acquisitive throughout its history, and we anticipate that to continue. Failure to successfully integrate acquisitions could lead to financial results below expectations. Failure of R&D and/or new products Zoetis also internally develops new products and product lines. Failure to successfully develop and sell new products could harm profitability. Legal Product lawsuits are common in the health care sector. An unfavorable court decision could hamper the ability to market a product, whether a current patent under Zoetis is successfully challenged or Zoetis is determined to have infringed upon the patent of a competitor. Regulatory Most Zoetis products must go through various regulatory agencies for approval. Further, the companion animal market could undergo a significant shift if any new regulations are introduced regarding veterinary prescription practices. On the other side of the business, the livestock industry is also subject to significant regulatory requirements and oversight. These situations create uncertainty for both Zoetis and its customers. Emerging markets exposure Zoetis derives a significant portion of its revenues (~22% in 2016) from emerging markets. These markets tend to be riskier due to political, economic, and/or currency instability. Trade While Zoetis is well-diversified in geographical terms, significant disruptions in trade or trade policy could lead to weaker-than-anticipated results. Hilliard Lyons Equity Research 5 Animal Health

6 ZOETIS INC. ZTS: BUY In millions A 1Q18 E 2Q18 E 3Q18 E 4Q18 E 2018 E 2019 E 2020 E Fiscal Period End* 12/31/ /31/ /31/2017 3/31/2018 6/30/2018 9/30/ /31/ /31/ /31/ /31/2020 Income Statement Livestock 2,958 2,881 3, ,257 3,447 3,629 Companion Animal 1,756 1,956 2, ,409 2,549 2,711 Other Total Revenue 4,765 4,888 5,307 1,352 1,402 1,440 1,519 5,713 6,044 6,389 Gross Profit 3,027 3,222 3, ,036 3,888 4,144 4,412 Gross Margin % 63.5% 65.9% 66.6% 68.0% 68.3% 67.7% 68.2% 68.1% 68.6% 69.1% SG&A 1,532 1,364 1, ,400 1,478 1,559 R&D Core Operating Income 1,131 1,482 1, ,086 2,247 2,417 Core Operating Margin % 23.7% 30.3% 34.2% 36.9% 36.6% 37.1% 35.6% 36.5% 37.2% 37.8% Non core Expenses** GAAP Pretax Income 545 1,228 1, ,814 1,978 2,146 GAAP Pretax Margin % 11.4% 25.1% 28.7% 31.9% 31.7% 32.4% 31.1% 31.8% 32.7% 33.6% Effective Tax Rate 37.8% 33.3% 43.5% 21.0% 22.0% 22.0% 21.0% 21.5% 21.4% 21.3% GAAP Net Income*** ,423 1,554 1,688 Non GAAP Adjustments Non GAAP Net Income , ,502 1,628 1,760 Diluted Shares O/S GAAP Diluted EPS $ 0.68 $ 1.65 $ 1.75 $ 0.70 $ 0.71 $ 0.74 $ 0.77 $ 2.91 $ 3.21 $ 3.51 Non GAAP Diluted EPS $ 1.77 $ 1.96 $ 2.40 $ 0.74 $ 0.75 $ 0.78 $ 0.81 $ 3.08 $ 3.36 $ 3.66 Dividends Paid per share $ $ $ $ $ $ $ $ $ $ Balance Sheet Cash and Equivalents 1, ,564 1,612 1,762 1,896 2,167 2,167 2,994 3,871 Other Current Assets 2,676 2,663 2,653 2,778 2,826 2,901 2,896 2,896 2,991 3,089 Total Current Assets 3,830 3,390 4,217 4,389 4,588 4,798 5,063 5,063 5,985 6,960 Net PP&E 1,307 1,381 1,435 1,472 1,511 1,550 1,591 1,591 1,681 1,761 Other Assets 2,776 2,878 2,934 2,962 2,939 2,917 2,895 2,895 2,859 2,825 Total Assets 7,913 7,649 8,586 8,824 9,038 9,264 9,548 9,548 10,525 11,546 Current Liabilities 1,781 1,117 1,094 1,098 1,123 1,142 1,209 1,209 1,775 1,343 Non Current Liabilities 5,041 5,033 5,706 5,700 5,694 5,688 5,682 5,682 5,158 5,634 Total Liabilities 6,822 6,150 6,800 6,798 6,817 6,830 6,891 6,891 6,933 6,977 Total Shareholders' Equity 1,091 1,499 1,786 2,025 2,221 2,434 2,657 2,657 3,592 4,569 Cash Flow Statement Cash Flow from Operations , ,680 1,910 2,049 Cash Flow from Investing (1,115) (214) (270) (77) (80) (81) (85) (323) (272) (272) Cash Flow from Financing 755 (903) (251) (189) (189) (189) (188) (755) (811) (900) Free Cash Flow to Equity 1, , ,358 1,638 1,777 *Zoetis fiscal periods end on Sundays, with the exception of year end, which is always December 31st **Includes amortization, restructuring and M&A costs, net interest expense, and other expenses ***Includes allocation to non controlling interests, which are not shown in this table Source: Company Reports and Hilliard Lyons estimates Additional information is available upon request Hilliard Lyons Equity Research 6 Animal Health

7 Analyst Certification I, Kurt A. Kemper, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject company(ies) and its (their) securities. I also certify that I have not been, am not, and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendation(s) in this report. Important Disclosures Hilliard Lyons analysts receive bonus compensation based on Hilliard Lyons profitability. They do not receive direct payments from investment banking activity. Definitions of Ratings: Buy - We believe the stock has significant total return potential in the coming 12 months. Long-term Buy - We believe the stock is an above average holding in its sector, and expect solid returns to be realized over a longer time frame than our Buy rated issues, typically 2-3 years. Neutral - We believe the stock is an average holding in its sector, is currently fully valued, and may be used as a source of funds if better opportunities arise. Underperform - We believe the stock is vulnerable to a price set back in the next 12 months. Definitions of Suitabilities: 1. A large cap, core holding with a solid history. 2. A historically secure company which could be cyclical, has a shorter history than a "1" or is subject to event driven setbacks. 3. An above average risk/reward ratio could be due to small size, lack of product diversity, sporadic earnings or high leverage. 4. Speculative, due to small size, inconsistent profitability, erratic revenue, volatility, low trading volume or a narrow customer or product base. Hilliard Lyons Equity Research 7 Animal Health

8 Hilliard Lyons Investment Banking Recommended Issues Provided in Past 12 Mo. # of % of Rating Stocks Covered Stocks Covered Banking No Banking Buy 31 28% 10% 90% Hold/Neutral 74 66% 9% 91% Sell 7 6% 0% 100% As of 7 February 2018 Other Disclosures Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of J.J.B. Hilliard, W.L. Lyons, LLC or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed here. J.J.B. Hilliard, W.L. Lyons, LLC is a multi-disciplined financial services firm that regularly seeks investment banking assignments and compensation from issuers for services including, but not limited to, acting as an underwriter in an offering or financial advisor in a merger or acquisition, or serving as placement agent in private transactions. The information herein has been obtained from sources we believe to be reliable but is not guaranteed and does not purport to be a complete statement of all material factors. This is for informational purposes and is not a solicitation of orders to purchase or sell securities. Reproduction is forbidden unless authorized. All rights reserved. Hilliard Lyons Equity Research 8 Animal Health