Zoetis Inc. NEUTRAL ZACKS CONSENSUS ESTIMATES (ZTS-NYSE) SUMMARY. Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec)

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1 March 06, 2015 Zoetis Inc. Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 06/03/2014 Current Price (03/05/15) $46.46 Target Price $ Week High $ Week Low $28.40 One-Year Return (%) Beta 0.82 Average Daily Volume (sh) 4,033,460 Shares Outstanding (mil) 501 Market Capitalization ($mil) $23,276 Short Interest Ratio (days) 0.93 Institutional Ownership (%) 92 Insider Ownership (%) 0 Annual Cash Dividend $0.33 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%) N/A N/A N/A using TTM EPS 29.6 using 2015 Estimate 28.0 using 2016 Estimate 24.6 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page (ZTS-NYSE) SUMMARY Zoetis fourth-quarter 2014 earnings of $0.40 per share were above the Zacks Consensus Estimate of $0.36. Fourth-quarter 2014 earnings were above the year-ago figure by $0.04 on the back of higher revenues, which climbed 5% to $1.32 billion. Zoetis updated its earnings outlook for Adjusted earnings per share are projected in the range of $1.50 to $1.54. The company expects revenues to be between $4.8 billion and $4.9 billion. We are impressed with the company s performance in the fourth quarter driven primarily by total livestock revenue growth and improvement in companion animal products. Based on the above factor, we retain our Neutral recommendation on the stock. Risk Level * Below Average Type of Stock Large-Growth Industry Med-Drugs Zacks Industry Rank * 98 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,090 A 1,114 A 1,103 A 1,254 A 4,561 A ,097 A 1,158 A 1,210 A 1,320 A 4,785 A ,107 E 1,160 E 1,217 E 1,380 E 4,864 E ,145 E Note: Quarterly nos. may not add up to annual nos due to rounding off Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.36 A $0.36 A $0.34 A $0.36 A $1.42 A 2014 $0.38 A $0.38 A $0.41 A $0.40 A $1.57 A 2015 $0.37 E $0.40 E $0.43 E $0.46 E $1.66 E 2016 $1.89 E Note: Quarterly nos may not add up to annual nos due to rounding off Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Florham Park, NJ-based Zoetis Inc. came into existence following Pfizer s decision to spin off its animal health business. The entity started trading on NYSE from Feb 1, 2013, under the name, Zoetis. Zoetis, which focuses on the discovery, development, manufacture and commercialization of animal health medicines and vaccines, has a presence in more than 120 countries. Zoetis boasts of a robust and diversified product portfolio. It is divided into five categories antiinfectives, vaccines, parasiticides, medicated feed additives and other pharmaceuticals for veterinarians and livestock producers. Zoetis markets its offerings primarily across 8 species: cattle, swine, poultry, sheep and fish (livestock) and dogs, cats and horses (companion animals). Geographically, the company operates in four segments the U.S, Europe/Africa/Middle East (EuAfME), Canada/Latin America (CLAR), and Asia/Pacific (APAC). The EuAfME region includes the UK, Germany, France, Italy, Spain, Northern Europe and Central Europe in addition to Russia, Turkey and South Africa among others. The CLAR region comprises Canada, Brazil, Mexico, Central America and other South America. Australia, Japan, New Zealand, South Korea, India, China/Hong Kong, Northeast Asia, Southeast Asia and South Asia fall under the APAC region. Zoetis reported revenues of $4.8 billion in REASONS TO BUY Focus on Emerging Markets: Zoetis intends to increase its presence in emerging markets, which provide substantial opportunity for growth given the rise in middle class income and an aging population. The company is focusing on expanding our manufacturing presence, sales organization and product offerings in these markets. We believe that Zoetis is extremely diversified with a presence in anti-infectives, vaccines, parasiticides, medicated feed additives markets among others. The diversification should enable the company to penetrate into these markets and capture market share. Expansion through Acquisition: Zoetis has acquired Abbott Laboratories animal health assets for $255 million. This business is focused on the veterinary surgical market. It will strengthen Zoetis pain portfolio and sedation product portfolio and complement its diagnostic business. We expect to see more such acquisitions/deals at Zoetis in the near future as the company continues to focus on its strategy of acquiring complementary businesses and products. Attractive Return to Shareholders: In Dec 2014, the board of directors at Zoetis approved a 15% increase in the quarterly dividend to $0.083 per share. The dividend for the second quarter of 2015 will be paid on Jun 2, 2015, to shareholders of record on Apr 9, We are encouraged by the company s policy to reward shareholders through regular dividends. In Nov 2014, the company announced that its board of directors has authorized a $500 million share repurchase program as part of its capital allocation plans. REASONS TO SELL Pipeline Setbacks: We note that clinical development involves a high degree of risk. Gaining approval for pipeline candidates has become more difficult given the tough regulatory environment. Development and regulatory setbacks for late-stage pipeline candidates would be a major disappointment for the company. Zoetis suffered a setback in the third quarter of 2013 when it decided to withdraw its new drug applications to the FDA for arsenical feed medicines, 3-Nitro and Carb-O-Sep. Similar setbacks are likely to pull down the stock. Equity Research ZTS Page 2

3 High Levels of Debt: We remain concerned about Zoetis high debt levels, which can impact its long-term growth prospects. As of Feb 27, 2015, Zoetis had long-term debt of more than $3.6 billion, representing a debt-to-capitalization ratio of above 72%. Spread of PEDv Virus Affects Swine Business: The spread of the porcine epidemic diarrhea virus (PEDv) has been affecting the company s swine business in the U.S. for the past few quarters. The virus has spread to other parts of the world. Though the company was granted a conditional license by the U.S. Agriculture Department in September this year to sell a vaccine to combat PEDv, the virus will remain an overhang on the shares until the vaccine proves its effectiveness. Moreover, the outbreak of other diseases carried by animals, such as avian influenza, foot-and-mouth disease or bovine spongiform encephalopathy could impact the sales of the company s livestock products adversely, thereby hurting the top line. RECENT NEWS Zoetis Beats on Earnings, Provides In Line 2015 Outlook Zoetis fourth-quarter 2014 adjusted earnings of $0.40 per share were ahead of the Zacks Consensus Estimate of $0.36. Fourth-quarter 2014 earnings were above the year-ago figure by 4 cents. The yearover-year increase was primarily due to higher revenues. Including one-time items, Zoetis reported earnings of $0.25 per share, up 19%. Revenues at Zoetis climbed 5% to $1.32 billion in the fourth quarter of Foreign currency movements impacted revenues negatively. Revenues were slightly above the Zacks Consensus Estimate of $1.26 billion. The company s full-year adjusted earnings were up 11% from the year-ago period to $1.57 per share, above the Zacks Consensus Estimate of $1.53. Revenues came in at $4.8 billion, increasing 5% and exceeding the Zacks Consensus Estimate of $4.7 billion. Quarterly Details Zoetis boasts a robust and diversified product portfolio. The product portfolio is divided into five categories anti-infectives, vaccines, parasiticides, medicated feed additives and other pharmaceuticals for veterinarians and livestock producers. Zoetis markets its offerings primarily across the following species: cattle, swine, poultry, others (livestock) and dogs, cats and horses (companion animals). In the fourth quarter of 2014, sales of livestock products accounted for 68.5% of total revenues. Approximately 30.7% of revenues in the quarter came from the sale of companion animal products. The balance came from contract manufacturing. Geographically, the company operates in four segments the U.S, Europe/Africa/Middle East (EuAfME), Canada/Latin America (CLAR), and Asia/Pacific (APAC). Sales improved in the U.S. by 14% driven by strong sales of livestock products and improvement in companion animal products sales. Sales in the EuAfME market fell 6%. Sales in the CLAR and APAC markets however increased by 7% and 1% respectively. The growth rates are inclusive of foreign exchange impact Outlook Updated The company updated its 2015 guidance to incorporate the expected impact of foreign currency, acquisition of certain assets from Abbott Laboratories and other changes in its operating assumptions. Equity Research ZTS Page 3

4 For 2015, excluding one-time items, earnings are expected to be in the range of $1.61 to $1.68 per share. The company expects revenues to be between $4.8 billion and $4.9 billion. VALUATION Zoetis fourth-quarter 2014 earnings of $0.40 per share were above the Zacks Consensus Estimate of $0.36. Fourth-quarter 2014 earnings were above the year-ago figure by $0.04 on the back of higher revenues, which climbed 5% to $1.32 billion. Zoetis updated its earnings outlook for Adjusted earnings per share are projected in the range of $1.50 to $1.54. The company expects revenues to be between $4.8 billion and $4.9 billion. We are impressed with the company s performance in the fourth quarter driven primarily by total livestock revenue growth and improvement in companion animal products. We believe that the stock is fairly valued at current levels. Hence, we remain Neutral on the stock. Based on 2015 earnings estimates, the stock is trading at 28x compared to the S& P 500 average of 16.7x. Our target price of $49.00 is based on 29.5x our 2015 earnings per share estimate of $1.66. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Zoetis Inc. (ZTS) Industry Average S&P Eisai Co. (ESALY) Shire (SHPG) Grifols (GRFS) Endo International (ENDP) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Zoetis Inc. (ZTS) Industry Average S&P Equity Research ZTS Page 4

5 Earnings Surprise and Estimate Revision History Equity Research ZTS Page 5

6 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of ZTS. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1126 companies covered: Outperform %, Neutral %, Underperform 5.6%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Analyst Lopamudra Bhattacharya Editor Last Updated By QCA Reason for Update Pushpanjali Banerjee Lopamudra Bhattacharya Arpita Dutt 4Q14 Equity Research ZTS Page 6