DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with

companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®

Client-Driven Solutions, Insights, and Access

3 February 2016 Americas/United States

Equity Research Animal Health

Zoetis (ZTS) Rating OUTPERFORM Price (02-Feb-16,US$) 41.72 Target price (US$) 58.00 52-week price range 55.38 - 39.65 Market cap (US$ m) 20,773.24 Enterprise value (US$ m) 23,807.24 *Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

Research Analysts

Erin Wilson

212 538 4080

erin.wilson@credit-suisse.com

INITIATION

Leader of the Pack: Top Pick in Animal Health We Are Initiating Coverage of Zoetis with an Outperform Rating and

$58 TP: As the global leader in therapeutics for livestock and companion animals, ZTS is highly levered to rebounding industry fundamentals, and earnings growth should accelerate over an improving cost and capital structure. Our focus is on underappreciated efficiency initiatives that should drive over 900 bps operating margin expansion by 2017, a considerable feat for a company of its size that ensures double-digit EPS growth in 2017 and beyond.

Constructive on Fundamentals, Cost Structure: While restructuring will curtail NT growth, rebounding demand, as supported by proprietary survey work, should drive consistent revenue growth of 5-7%. New products and services, a business mix increasingly skewed toward faster-growing geographies and species, and efforts to optimize operations as an independent company should fuel revenue growth ahead of the industry and build EPS momentum. Execution on these initiatives is ahead of plan in 2016, offering potential profit upside, a possible near-term catalyst. With strong free cash flow ($1B in 2016E), its capital deployment efforts prioritize value-added M&A, which we view as poorly understood, as well as share buybacks, deleveraging, and an ongoing commitment to dividend hikes.

Valuation Compelling—An Attractive Alternative HC Investment: With its shares down 25% (-10% S&P 500) from a high in June, they currently trade at 16.7x our 2017 EPS, well below its peer group (25.2x). Our $58 TP is based on a P/E multiple of 23.0x, which better reflects its accelerating growth prospects, operational and capital deployment opportunities, and its competitive positioning as a diversified, established leader in animal health for which there are inherent advantages. We view ZTS as an attractive alternative health care investment, sheltered from onerous reimbursement and regulatory challenges, R&D inefficiencies, and other issues overhanging human health care. Risks to our call include weather, FX, epidemiological, or macro headwinds as well as activist involvement.

Share price performance

On 02-Feb-2016 the S&P 500 INDEX closed at 1903.03

Daily Feb03, 2015 - Feb02, 2016, 02/03/15 = US$43.5

Quarterly EPS Q1 Q2 Q3 Q4 2014A 0.38 0.38 0.41 0.40 2015E 0.41 0.43 0.50 0.39 2016E 0.42 0.45 0.50 0.41

Financial and valuation metrics

Year 12/14A 12/15E 12/16E 12/17E EPS (CS adj.) (US$) 1.57 1.74 1.78 2.28 Prev. EPS (US$) P/E (x) 26.6 24.0 23.4 18.3 P/E rel. (%) 163.7 147.6 152.9 135.1 Revenue (US$ m) 4,785.0 4,727.5 4,817.3 5,114.2 EBITDA (US$ m) 1,329.0 1,484.5 1,603.6 1,892.7 OCFPS (US$) 2.65 2.96 3.21 3.81 P/OCF (x) 16.3 14.1 13.0 10.9 EV/EBITDA (current) 17.9 16.0 14.6 11.9 Net debt (US$ m) 3,054 3,034 2,602 1,706 ROIC (%) 20.89 22.22 25.57 41.63

Number of shares (m) 497.92 IC (current, US$ m) 4,153.00 Net debt (Next Qtr., US$ m) - EV/IC (x) - Net debt/tot eq (Next Qtr.,%) - Dividend (current, US$) - Source: Company data, Thomson Reuters, Credit Suisse estimates

3 February 2016

Zoetis (ZTS) 2

Zoetis (ZTS)

Price (02 Feb 2016): US$41.72; Rating: OUTPERFORM; Target Price: US$58

Income Statement 12/14A 12/15E 12/16E 12/17E

Revenue (US$ m) 4,785.0 4,727.5 4,817.3 5,114.2 EBITDA 1,329 1,484 1,604 1,893 Depr. & amort. (143) (170) (132) (132) EBIT (US$) 1,186 1,314 1,472 1,761 Net interest exp (117) (114) (146) (146) Associates - - - - Other adj. 11 7 0 0 PBT (US$) 1,080 1,207 1,326 1,615 Income taxes (290) (332) (437) (484) Profit after tax 790 875 888 1,130 Minorities (4) (3) -0 -0 Preferred dividends - - - - Associates & other 0 0 0 0 Net profit (US$) 786 872 888 1,130 Other NPAT adjustments 0 0 0 0 Reported net income 786 872 888 1,130

Cash Flow 12/14A 12/15E 12/16E 12/17E

EBIT 1,186 1,314 1,472 1,761 Net interest (117) (114) (146) (146) Cash taxes paid - - - - Change in working capital - - - - Other cash & non-cash items 260 284 278 278 Cash flow from operations 1,329 1,484 1,604 1,893 CAPEX (292) (610) (125) (125) Free cashflow to the firm 1,037 874 1,479 1,768 Aquisitions - - - - Divestments - - - - Other investment/(outflows) 0 0 0 0 Cash flow from investments (292) (610) (125) (125) Net share issue(/repurchase) - - - - Dividends paid (146) (167) (184) (202) Issuance (retirement) of debt - - - - Other (898) (687) (862) (670) Cashflow from financing activities (1,044) (854) (1,046) (873) Effect of exchange rates - - - - Changes in Net Cash/Debt (7) 20 432 895 Net debt at start 3,047 3,054 3,034 2,602 Change in net debt 7 (20) (432) (895) Net debt at end 3,054 3,034 2,602 1,706

Balance Sheet (US$) 12/14A 12/15E 12/16E 12/17E

Assets Cash & cash equivalents 598 592 1,024 1,920 Account receivables 980 941 972 942 Inventory 1,289 1,374 1,295 972 Other current assets 0 0 (0) (0) Total current assets 2,867 2,908 3,292 3,834 Total fixed assets - - - - Intangible assets and goodwill 976 976 976 976 Investment securities - - - - Other assets (976) (976) (976) (976) Total assets 5,041 5,184 5,151 5,157 Liabilities Accounts payables 290 304 271 277 Short-term debt 0 0 0 0 Other short term liabilities 0 0 0 0 Total current liabilities 290 304 271 277 Long-term debt 3,652 3,626 3,626 3,626 Other liabilities 0 0 0 0 Total liabilities 3,942 3,930 3,897 3,903 Shareholder equity 1,099 1,254 1,254 1,254 Minority interests - - - - Total liabilities and equity 5,041 5,184 5,151 5,157 Net debt 3,054 3,034 2,602 1,706

Per share 12/14A 12/15E 12/16E 12/17E

No. of shares (wtd avg) 502 501 499 496 CS adj. EPS 1.57 1.74 1.78 2.28 Prev. EPS (US$) Dividend (US$) 0.00 0.00 0.00 0.00 Dividend payout ratio 0.00 0.00 0.00 0.00 Free cash flow per share 2.07 1.75 2.96 3.56

Earnings 12/14A 12/15E 12/16E 12/17E

Sales growth (%) 4.9 (1.2) 1.9 6.2 EBIT growth (%) 7.6 10.8 12.0 19.6 Net profit growth (%) 11.5 11.0 1.8 27.3 EPS growth (%) 11.1 11.2 2.2 28.0 EBITDA margin (%) 27.8 31.4 33.3 37.0 EBIT margin (%) 24.8 27.8 30.5 34.4 Pretax margin (%) 22.6 25.5 27.5 31.6 Net margin (%) 16.4 18.5 18.4 22.1

Valuation 12/14A 12/15E 12/16E 12/17E

EV/Sales (x) 4.98 5.04 4.85 4.40 EV/EBITDA (x) 17.9 16.0 14.6 11.9 EV/EBIT (x) 20.1 18.1 15.9 12.8 P/E (x) 26.6 24.0 23.4 18.3 Price to book (x) 19.1 16.7 16.6 16.5 Asset turnover 0.9 0.9 0.9 1.0

Returns 12/14A 12/15E 12/16E 12/17E

ROE stated-return on (%) 80.9 74.2 70.8 90.1 ROIC (%) 0.2 0.2 0.3 0.4 Interest burden (%) 0.91 0.92 0.90 0.92 Tax rate (%) 26.9 27.5 33.0 30.0 Financial leverage (%) 3.32 2.89 2.89 2.89

Gearing 12/14A 12/15E 12/16E 12/17E

Net debt/equity (%) 277.9 241.9 207.5 136.1 Net Debt to EBITDA (x) 2.3 2.0 1.6 0.9 Interest coverage ratio (X) 10.1 11.5 10.1 12.1

Quarterly EPS Q1 Q2 Q3 Q4

2014A 0.38 0.38 0.41 0.40 2015E 0.41 0.43 0.50 0.39 2016E 0.42 0.45 0.50 0.41

Share price performance

On 02-Feb-2016 the S&P 500 INDEX closed at 1903.03

Daily Feb03, 2015 - Feb02, 2016, 02/03/15 = US$43.5

Source: Company data, Thomson Reuters, Credit Suisse estimates

3 February 2016

Zoetis (ZTS) 3

Figure 1: Established, Global Leader in AH Figure 2: Companion Animal Demand Rebounding

Source: Company reports, Credit Suisse estimates. Source: Company reports, Credit Suisse estimates.

Figure 3: Strengthening Production Animal

Dynamics—USDA Cattle Inventory Projections Figure 4: Significant Profit Margin Opportunity

Source: USDA, Credit Suisse estimates. Source: Company reports, Credit Suisse estimates.

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3 February 2016

Zoetis (ZTS) 4

Executive Summary We are initiating coverage of Zoetis (ZTS) with an Outperform rating and $58 target price.

ZTS is the global leader in the development, manufacturing, and commercialization of

animal health medicines and vaccines, with an estimated $4.7 billion in 2015 revenues. It

was formed by Pfizer in 1952, and in January 2013, Pfizer spun off what was the leading

animal health business in an initial public offering, to create ZTS. Now, as a truly

independent entity, ZTS benefits from greater strategic and operational flexibility with

increased management focus, streamlined decision-making, and more optimal investment,

capital structure, and dividend policies. While it experienced some growing pains in its first

year as a standalone company, following operational and organizational shifts, with a new

CFO and a recharged board in place, new restructuring initiatives (April 2015) and several

acquisitions, ZTS has made meaningful strides that position it well for more profitable

growth in the longer term, clarity on which has also improved.

The global animal health industry is worth an estimated $110+ billion, stemming from the

sale of products and services that promote the health and welfare of production animals

(cattle, poultry, swine, sheep, and fish) and companion animals (dogs, cats, and horses).

Products include therapeutics, diagnostics, medicinal feed additives, nutritional

supplements, medical devices, and pet supplies, while services include veterinary care,

laboratory testing, and other support offerings such as data management and consulting.

Within the animal health space, therapeutics, ZTS's primary area of focus, comprises an

estimated $24 billion market, growing 4-6% annually, a run rate that ZTS should exceed on

an operational basis.

Both the animal and human healthcare markets involve an intense focus on innovation and

R&D, complex manufacturing processes, and rigorous sales and marketing efforts within a

strict and dynamic regulatory framework. However, there are several key differences

between the human health and animal health sectors that enhance the allure of investment

opportunities in the animal health sector. R&D operations are considerably faster and

cheaper, product portfolios are more sustainable, and generic drugs present only a limited

threat. Importantly, broader economic factors play less of a role in driving demand of

animal health products, leaving it uniquely resilient to macroeconomic conditions.

3 February 2016

Zoetis (ZTS) 5

Figure 5: Top Global Animal Health Companies: ZTS Is an Established, Diversified Leader in Animal Health

Source: Credit Suisse, 2014 AH Reported Sale, $ in Billions.

*Of note, there is a pending merger Boehringer and Merial's animal health businesses.

ZTS is the largest and most diversified company focused on animal health therapeutics

with market leadership in nearly all the regions in which it operates. It can leverage key

competitive advantages to gain market share, improve profitability and cash flow, and

boost ROIC. These advantages include a diversified portfolio of 300+ product lines

spanning eight core species groups and five major therapeutic categories, the industry's

largest direct sales force presence in 70 countries and less reliance on distributor partners,

and an established and expanding presence in faster-growing geographies. Given these

key advantages, ZTS is well positioned to drive future growth on better industry trends and

through several initiatives. Key growth drivers include:

Robust Industry Fundamentals

For rebounding fundamentals, we view the animal health sector as an attractive space in

health care, evading much of the associated risks that affect its human counterparts.

Strengthening Companion Animal Dynamics

Digging deeper into recent industry trends, animal health industry constituents have

reported impressive growth trends YTD, aided by growing demand for veterinary products

and services, outpacing that of the human health care market. In 3Q15, we were

heartened to see VCA, the largest standalone animal hospital chain, post one of its best

quarters in over eight years, with robust same-store sales across both its hospital (+5.4%)

and reference laboratory (+6.0%) businesses, despite difficult comps. Hospital sales were

helped by positive same-store orders (+1.6%) for the fifth consecutive quarter, following

seven years of declines, with flea-and-tick-related visits up in the double digits, an

all-important driver of patient traffic. Management commentary suggested the momentum

is continuing in a relatively warm 4Q15, an encouraging view on the heels of the robust

experiences over the past five quarters. As the largest animal hospital chain in the U.S.,

the trend bodes well for all our companion animal health names.

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Zoetis Merk Elanco Merial Bayer Boehringer Vibrac Ceva Phibro Vetoquinol

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s)

3 February 2016

Zoetis (ZTS) 6

Figure 6: Quarterly Utilization Trends from IDEXX and VCA

WOOF Same-Store hospital Sales and quarterly metrics reported by IDXX's information technology systems.

Source: Company reports, Credit Suisse.

Pet adoptions and veterinary prescription trends, indicators of overall pet demand, can be

barometers of performance for our companies with significant exposure to the companion

animal market. (ZTS generates 20% of total revenues within the U.S. companion animal

segment). According to Pethealth Inc., a leading provider of management software to

animal welfare organizations in North America, year-over-year growth in pet adoptions

across 1,226 animal shelters rose 5.5% in December with average growth of 6.0% over the

trailing three-month period. Cat adoptions led the gain, improving 5.6% year over year,

while canine adoptions rose 5.4%, representing a meaningful sequential acceleration. Of

note, the average price of a canine veterinary visit is ~30% higher than a feline visit.

According to Pethealth, adoptions from animal shelters represent 30% of all new pet

acquisitions in the U.S. Pet euthanasia, inversely correlated to pet demand, dropped 15%

in December, consistent with recent monthly trends, a positive for overall pet ownership.

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3 February 2016

Zoetis (ZTS) 7

Figure 7: Monthly Pet Adoption Trends

Source: Credit Suisse.

According to IMS HEALTH, monthly total scripts prescribed by veterinarians rose 7.9% in

December, adjusted for calendar day shifts, a sequential acceleration in the trend. On a

trailing three-month basis, prescriptions increased 5.2%, rounding out 2015 with a 6.2%

increase for the year. Of note, 67% of prescriptions are dispensed at veterinary clinics. To

put the metric into perspective, human prescription declined 0.6% in December and

increased 2.3% in 2015.

Figure 8: Monthly Pet Prescription Volume, Continues to Outpace Human Prescriptions*

Source: IMS HEALTH, Credit Suisse; *Includes only medications where there is a human equivalent.

Proprietary Survey Work Points to Broader Optimism in Animal Health

In our proprietary survey of 75 U.S. veterinary practices, we assessed recent clinic volume

and revenue trends in 4Q15. As a caveat, this is only our first quarterly proprietary

veterinary survey, and the data points will likely be more relevant and indicative of industry

trends when enough historical data exist for a more robust sequential and year-over-year

comparison

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2013 2014 2015 Vet Average Human Avg (2013-2015)

Human Rx Historical Average = 2.1%

Animal Rx Historical Average = 11.1%

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Owner Surrenders Pet Adoptions Euthanizations

Euthanizations: -14.6%

Owner Surrenders: -11.5%

Adoptions: 5.5%

3 February 2016

Zoetis (ZTS) 8

Based on our survey, the vast majority (79%) of respondents experienced positive patient

traffic and practice revenue growth in the latest period. On a weighted-average basis,

volume rose 1.9% and practice revenues improved 2.0%, primarily driven by increased

pricing (+1.2%), diagnostics (+1.1%), acute care visits (+0.9%), and existing patient traffic

(+0.8%). Importantly, new patient traffic was the most meaningful driver of patient visits, a

key indicator of pet ownership trends and underlying veterinary demand. Favorable

weather trends also contributed to the better experience, as noted by 15% of survey

respondents.

Figure 9: The Vast Majority of Veterinarians (79%) Experienced Increased

Volume and Revenues in 4Q15

Source: Credit Suisse.

Figure 10: Primary Drivers of Veterinary Volumes in 4Q15

Source: Credit Suisse.

Respondents (80%) were also broadly optimistic that practice volume will improve over the

next 12 months, and 87% of veterinarians expect practice revenues to also expand. While

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Pricing

Diagnostic Testing Volumes

Acute Care Visits

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Wellness Visits

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3 February 2016

Zoetis (ZTS) 9

ad hoc commentary suggests lingering concerns over the challenging economic

environment, the level of optimism was generally consistent with our view of a continuing

veterinary rebound.

Figure 11: Respondents Broadly Optimistic on Practice Volume, Revenue

Trends over the Next 12 months

Source: Credit Suisse.

Favorable Production Animal Dynamics—Feed the World

The production animal market is expected to grow at a 6% CAGR between 2013 and 2018

based on data from Vetnosis, as demand for animal protein rises with global population

growth. Other drivers include a need for greater productivity, with natural resources such

as land and fresh water dwindling with increasing urbanization, and heightened focus of

consumers and regulators on disease-free animal products. Currently, 40% of the global

value of agricultural output stems from the livestock sector, and 33% of arable land is

dedicated to producing feed for livestock production.

Growth in emerging markets should exceed the experience in larger, more developed

economies with the necessary modernization of the production animal infrastructure to

accommodate rising populations. New vaccines, medications, medicinal feed additives,

along with improved production animal health protocols should improve yields. Advances

in diagnostics, bovine genomics, and other diagnostic or preventative practices are areas

of potential focus for ZTS as solutions emerge and evolve to improve livestock productivity

outside of conventional therapeutics.

Figure 12: Production Animal—Projected Growth by 2023

Source: Credit Suisse.

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# of animals Protein Production

Beef Cattle 1.4% 1.5%

Dairy Cattle 1.2% 1.8%

Swine 1.3% 1.7%

Poultry 2.1% 2.5%

Total 1-2% 2-3%

3 February 2016

Zoetis (ZTS) 10

Following years of contraction, the U.S. cattle herd size is poised to expand in the coming

years, according to the USDA, with improved forage conditions and lower input costs

(primarily corn-based feed), easing pressure on livestock producers. U.S. livestock

represents ZTS's largest species segment by geography (24% of revenues).

Figure 13: USDA Long-Term Projections for Cattle Herd Growth

Source: USDA, Credit Suisse.

Antibiotic Regulation: ZTS Has Limited Exposure, with Multiple Offsets

In December 2013, the FDA announced voluntary measures (GFI #213) to remove the

growth promotion label for relevant antibiotic feed additives by the end of 2016. This is

related only to medicinal feed additives used for growth promotion purposes in the U.S.

livestock industry. Of note, ZTS's global medicinal feed additives business, which includes

non-antibiotic feed additives, represents an estimated 7% of total sales; a much smaller

portion of this would be exposed to the voluntary regulation. Importantly, given many of

these products were approved decades ago, updated label changes as well as increased

preventative and therapeutic uses could be more than offsetting across the industry.

In response to consumers and public health experts advocating for more judicious use of

antibiotics in livestock, other industry constituents, including McDonald's (MCD), have

outlined initiatives to reduce antibiotic utilization in livestock. MCD plans to phase out

sourcing chicken treated with antibiotics important in human medicine for its 14,000 U.S.

restaurants. While this could be interpreted as a negative, ZTS has relatively low exposure

to relevant antibiotic categories, and there are multiple potential offsets in greater utilization

of other therapeutics offsetting coinciding lower animal yields.

Importantly, there are several caveats to MCD's provisions. It will allow the use of certain

antibiotics for treatment and prevention of disease, and its provisions will allow the use of

anticocidials (including ionophores, the most commonly used anticoccidial, representing

30% of all antibiotics used in livestock). Of note, ionophores are never used in human

medicine. MCD's provisions actually align well with the aforementioned FDA measures to

reduce the prophylactic use of certain medicinal feed additives that animal health

companies, including ZTS, have endorsed. Importantly, MCD has now potentially created a

framework that distinguishes itself from the harsher regulations of Panera and Chipotle,

recognizing the need for the treatment of sick animals and antibiotic relevance to human

medicine that others in the industry could emulate, further deemphasizing the overall

impact.

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3 February 2016

Zoetis (ZTS) 11

Innovation—Robust Pipeline of Novel Therapeutics

and Product Line Extensions

ZTS has over 400 programs in its R&D pipeline, with the majority targeting novel

technologies. Brand lifecycle management efforts will also enable ZTS to capitalize on

existing product lines by entering new markets, adding species indications, or creating new

formulations. Importantly, it requires substantially less time and resources to

commercialize a new chemical entity in animal health, given limited need for complex,

lengthy human clinical trials. Consequently, the likelihood of success is determined earlier

in the development process, making the effort more predictable, facilitating financial

decision making. A new chemical entity in animal health can be brought to market in

roughly six years under FDA regulations (or shorter under USDA, depending on type of

product), or about half the time it takes to commercialize a human drug. Associated costs

of less than $10 million do not compare with an average price of $1-2 billion to develop a

major human drug.

Figure 14: Highlighting the Inherent Efficiencies of Animal Health Drug Development vs. Human

Source: Credit Suisse, 2014 AH Reported Sale, $ in Billions.

Figure 15: Robust R&D Pipeline

Source: Company reports, Credit Suisse.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13+

Animal pK

IND Filing

Phase I

Field Trials Phase II

Field Trials

Final Formulation

Phase III

Human Clinical Studies

$6-$15 MILION IN DEVELOPMENT PER PROGRAM

Proof of Concept in

Dogs /Cats

API, Formulation

Development

pK in Dogs/Cats

Selection of Lead

Dose Selection

Probe Safety in

Dogs/Cats

Chemistry Optimization

Animal Toxicology

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AL

(N

CE

, N

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Proof of concept in lab animals

SAR Chemistry, Selection of lead

In vitro

Toxicology

NADA

Research (2-3.5yrs)

Development (3.7-5 yrs)

Approval (1-1.5yrs)

Phase I, II, III (6-7 yrs) Approval (0.5-2Yrs)

EU Approval

NDA

Time to Market Number of R&D Projects

Less Than 7 years 31

4-7 years 137

Less than 4 years 275

3 February 2016

Zoetis (ZTS) 12

Highlighting New Potential Blockbusters

■ Apoquel Update—Ramping Supply: Recent launches of Apoquel and monoclonal

antibody IL-31 (under conditional USDA licensure) target the critical unmet need of

canine atopic dermatitis, representing a meaningful $150 million opportunity in 2015

with ample room for expansion as it ramps supply in 2016.

Following supply disruptions throughout 2015, ZTS expanded availability of Apoquel in

Europe in November and expanded supply in the U.S. in December. It is now better

positioned from a supply perspective in 2016, with peak annualized sales in the $300

million territory. As it ramps supply back up in the U.S., it also plans to launch in other

markets in 2016. As of January 14, ZTS has fully ramped supply of Apoquel in the U.S.

and other relevant markets. We view upside could also stem from more aggressive

pricing given its overwhelmingly high demand and pricing of alternative therapeutics.

This is consistent with commentary in our proprietary survey, which suggests

veterinarians are starting to see better supply trends of Apoquel.

■ IL-3—Rounding Out Its Atopic Dermatitis Portfolio: ZTS is also slated to receive full

USDA licensure for its new monoclonal antibody for atopic dermatitis in 2016, currently

under conditional USDA approval. According to our survey work, this type of

veterinarian-administered injectable could be used on 58% of atopic dermatitis cases, a

compelling data point suggesting potentially strong traction for the novel therapy. While

few veterinarians in our survey used the product as yet, given its conditional licensure

limiting its launch to certain, primarily specialty clinics, respondents noted its potentially

longer duration, lower risk of toxicity, superior efficacy, and less side effects as

potentially compelling advantages over standard therapy.

■ Simparica—Parasiticides Evolving: Merial (Sanofi/BI) and Merck Animal Health

shook up the $3 billion flea/tick market in 2014 with the introduction of new

prescription-only chewable flea/tick medications that replaced conventional topical

treatments. ZTS is slated to enter this new market in 1H16 with the launch of

Simparica, its new chewable companion animal parasiticide currently in development

for the treatment of fleas, ticks, and mange mite infestations in dogs.

While the companion animal flea/tick market is competitive, it represents the largest

market opportunity by therapeutic class, representing a $3 billion+ market, roughly a

third of the total companion animal therapeutics market, with substantial room for

expansion. While Merial and Merck are ahead with new oral parasiticides launched in

2014, there is room for more than two players in chewable parasiticides, in our view,

and ZTS is well positioned with its leading presence and largest direct sales force in the

industry.

Based on our survey, respondent are overwhelmingly positive on the chewable

category, with 76% often prescribing the new formulations. We view this as impressive

uptake less than two years after launch, particularly for an animal health therapeutic.

For instance, nearly one-half of respondents in our survey (49%) frequently prescribe

Merial's NexGard, the market leader in chewable flea/tick medications, generating $120

million in sales its first year. The positive reception bodes well for ZTS as it enters the

market in early 2016.

3 February 2016

Zoetis (ZTS) 13

Figure 16: High Prospects for ZTS's Upcoming Chewable Parasiticide

Simparica—Do You Prescribe the New Chewable Flea/Tick Medications?

Source: Credit Suisse (n=75).

While Simparica's potential competitive advantages have not been disclosed, the

overall flea/tick therapeutics space represents the largest segment in companion

animal health, with room for multiple players as the treatment category expands.

Greater adoption of prescription-only parasiticides can materially increase patient

compliance, veterinary practice revenues, and veterinary office visits as they are less

vulnerable to diversion. In our view, Simparica could offer a competitive advantage to

existing therapies if it better addressed palatability, GI upsdet, education, pricing,

duration, and species/therapeutic scope. While launch timing and pricing are also key

variables, we estimate Simparica could add $100 million in annual revenues, or

$0.05/share on an annualized EPS basis. Of note, some contributions from Simparica

are incorporated in ZTS's 2016 guidance. ZTS has received approval in Europe for

Simparica, and it has been filed in the U.S. with the FDA. We estimate U.S. approval in

1H16 with potential commercialization immediately thereafter.

■ Fleas + Ticks + Heartworm?—The Future of Parasiticides: Of note, Merial also

launched a combined chewable flea/tick and heartworm product in Europe, and it also

awaits U.S. approval for the product. We view this as a significant innovation,

combining two of the largest treatment areas in companion animal health, and while

this could eat at Simparica's opportunity, ZTS also has a comparable combination

chewable in development. We'd estimated this product would be two to three years

from commercialization, assuming the typical five- to seven-year development pathway

for animal therapeutics, although clarity is limited and we have not incorporated

contributions in our model at this early stage. Similar to the chewable flea/tick

dynamics, if approved in the U.S., Merial's combination flea/tick/heartworm product will

help to build the market for ZTS, although other players are likely closely eyeing the

opportunity as well.

Cost Structure Improvements Running Ahead of

Plan, Driving Substantial Operating Margin Leverage

New operational efficiency initiatives announced in April 2015 should drive over 900 bps

operating margin expansion by 2017, despite lower revenues as it rationalizes certain

regional operations (i.e., Venezuela) and unprofitable product lines. It is essentially

eliminating $300 million in costs while preserving much of its core strengths in sales force

presence and diversity by product line, species, and therapeutic class. Importantly, the

initiatives do not signal a shift away from higher-growth, more profitable product lines, and

there should be no meaningful change in its sales force positioning.

Yes, 76%

No, 24%

3 February 2016

Zoetis (ZTS) 14

The vast majority (>95%) of its pro forma 2017 sales are still expected to be derived from

geographies where it has a direct sales presence (vs. 97% previously), despite downsizing

the number of direct countries to 45 (from 70). Its proposed rationalization of ~5,000 SKUs

will only have a nominal impact of its total number of product lines, as it will target

low-growth, low-margin doses and formulations in relevant markets. All in, ZTS is targeting

34% adjusted operating margin in 2017 (from 25% in 2014), an impressive ramp in our

view. These initiatives are also incremental to its Supply Network Strategy announced in

November 2014 that calls for a 200-bps gross margin improvement by 2020.

Execution Progress

ZTS has closed/sold five of its targeted seven manufacturing facility closures quicker than

expected, driving potential profit upside in the near term. Importantly, internal expectations

assumed it would merely shut down these targeted facilities, but it was able to sell some of

the assets, generating an incremental $82 million in cash YTD. While we expect no

material financial impact from the transaction, it offers evidence it is executing on its

restructuring initiatives already embedded in our expectations.

■ On December 19, Huvepharma, a European-based animal health company, purchased

manufacturing sites and certain associated product lines for $40 million in cash. ZTS

will divest two US manufacturing sites in Laurinburg, North Carolina and Longmont,

Colorado as well as transfer the lease of a manufacturing and distribution facility in Van

Buren, Arkansas to Huvepharma. Pursuant to the agreement, ZTS will also divest

certain product lines, primarily U.S. and international livestock products including

medicinal feed additives and water-soluble therapeutics and nutritionals, representing

an undisclosed portion of its previously targeted $280 million in expected SKU

rationalization.

■ On January 5, ZTS sold a manufacturing site in Haridwar, India to Zydus Cadila for $29

million. The deal included certain product lines that were manufactured at the site,

including lower-margin medicinal feed additives, antibiotics, parasiticides, and

nutritionals sold primarily to livestock producers in India. The sale, which will close in

1Q16, coincides with a slower-than-expected consolidation of dairy operations across

India as the country focuses more on poultry.

■ On January 14, ZTS announced its pending divestiture of a manufacturing facility in

Hsinchu, Taiwan. Pursuant to the transaction, 55% ownership of the site was sold to

Yung Shin Pharmaceutical Industrial, a local animal health company, for $13 million in

cash (estimated close is in 2Q16).

Cost Structure Initiatives

- Eliminating 5,000 SKU's (from 13,000 currently)

- Consolidating 10 manufacturing facilities

- Eliminating 2,000-2,500 employees, but will maintain leading field sales force

position

- Change some of its direct/indirect selling approach (ie. Vaccines move to

distributors)

- Streamlining corporate functions, managements

- Aforementioned initatives are incremental to its Supply Network Strategy that

calls for 200 bps gross margin expansion by 2020

Upside should stem from better underlying business mix and product

launches, not fully reflected in its long-term growth profile or guidance

3 February 2016

Zoetis (ZTS) 15

Figure 17: Operating Margin 2014-19E

Source: Company reports, Credit Suisse estimates.

Targeting Higher-Growth Geographies

While ZTS is exiting certain underperforming markets, such as Venezuela, it is also

targeting certain high-growth markets, where, as it relates to its production animal

businesses, rising populations and standards of living are driving demand for animal

protein, while higher disposable incomes are leading to rising companion pet ownership

and improving standards of pet care. Of note, in 3Q15, growth across Brazil (+12%) and

China (+24%) accelerated, despite perceived tougher macroeconomic conditions across

the regions, highlighting the inherent benefits and unique advantages of the animal health

industry, which is less tied to broader economic fluctuations.

For example, in China, the consolidation of livestock, notably swine, operations across the

country has helped drive demand for more sophisticated therapeutics. Of note, in 2015, it

established new manufacturing and R&D facilities in China, underscoring its commitment

to the country and positioning it for incremental growth despite slowing GDP in the country.

25%

28%

31%

34%36%

37%

15%

20%

25%

30%

35%

40%

2014 2015E 2016E 2017E 2018E 2019E

3 February 2016

Zoetis (ZTS) 16

Figure 18: Diversified Drivers Across Geographies, Less Tied to Broader Macroeconomic Trends

Source: Credit Suisse.

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Figure 19: Global Drivers—Food Security Imperative, Global Dynamics Driving Demand for Animal Health Therapeutics

Source: Company data, Credit Suisse.

Undernutrition. The obesity epidemic

in the U.S. highlights the challenge of “food deserts” in many major cities as

well as rural areas. In a food desert, wholesome, nutritious food isn’t

available as readily as cheap, unhealthy food. (1) Making "better" calories more

affordable is essential to shifting the obesity trend.

Production

Disruptions.Avian influenza

swept Mexico’s eggindustry in 2012,

wiping out 1 in 6birds, doubling egg

prices and sparkinga national crisis. (14)

Natural resources. While

slowing, deforestationto meet food needs is

a significant concernfor long-term climate

change impact on foodproduction. (13)

Gov ernment change.

The lack of affordablebread in Egypt has, in

part, contributed todiscontent with

multiple regimes in thecountry. (12)

Changing Practices.

Fewer farmers are switchingto organic production, with

some even reverting to moreinnovative production. (2)

“You have seen a slowdownin the transition of acres,”

said George Siemon, chiefexecutive of Organic Valley,

the largest U.S. organiccooperative.

Power of Protein. The

school lunch programguidelines limiting

protein in meals at U.S.schools were reversed in

December 2013 afterparticipation dropped

because kids weren’tgetting enough protein. (3)

Rising Prices.

Egg prices in the EUskyrocketed in January

2012, when a ban onconventional chicken

cages pushed many eggproducers out of business

– egg prices in the U.K.quadrupled rapidly. (4,5) Food Shortages.

In 2013, Dutchconsumers protested a

baby formula shortagesparked by local

hoarding and il legaltrade to meet exploding

Chinese demand. (6)

Civ il Unrest. Riots

broke out in 30countries to protest

high food prices in2008, and again in

2011. (7)

Rev erse Trade. Instead of simply exporting

food from an area of production to an area ofneed, growing global economies in Asia and Latin

America are buying in to markets to protect theirlong-term food security, from land purchases in

Africa to the purchase of the largest U.S. porkproducer by a Chinese company. (8,9)

Food Security /Global

Stability. High food pricesare an ongoing threat to

civil order, warn analysts atthe New England Complex

Systems Institute, whostudied the link between food

riots and the Arab Spring.As demand climbs, so could

prices and volatility. (10)

Food Crisis Looms.

According to the WorldFood Programme, 1 in 4

people living in rural areasin Zimbabwe are expected

to need food assistance inearly 2014, the highest

since 2009. (11)

3 February 2016

Zoetis (ZTS) 18

1) WSB-TV. “Experts: ‘Food deserts’ linked to childhood obesity” July 17, 2013 2) Dimitri, Carolyn; Oberholtzer, Lydia. “Marketing U.S. Organic Foods: Recent Trends from Farms to Consumers.” United States Department of Agriculture (USDA) Economic Research Service (ERS). Economic Information Bulletin Number 58. September 2009. 3) National Public Radio “Let them eat sandwiches: USDA Eases School Lunch Restrictions” Jan. 3, 2014 4) Doward, Jamie. “Supermarkets fear egg shortage as farms close over welfare rules.” The Observer. 3 March 2012. Accessed September 23, 2013. 5) Far-center. “Un oeuf is not enough: France suffers major egg shortage.” March 2012. Accessed September 23, 2013 6) British Broadcasting Corporation (BBC). “Dutch order probe into baby milk sales to China.” May 2013. Accessed September 23, 2013 7) Lagi, Marco; Bertrand, Karla Z.; Bar-Yam, Yaneer. “The Food Crises and Political Instability in North Africa and the Middle East.” New England Complex Systems Institute. Cambridge, MA. September 2011. 8) The New York Times. “Needing Pork, China Is to Buy a U.S. Supplier.” May 29, 2013 9) Gulf News. “Land-grab phenomenon threatens Africa” Dec. 29, 2013. 10) Kharas, Homi. “The Emerging Middle Class in Developing Countries.” Global Development Outlook. OECD Development Center. Working Paper No. 285. January 2010. 11) All Africa. “Zimbabwe: Nation Faces Hunger As UN Cuts Food Aid” Jan. 15, 2014 12) The Wall Street Journal. “What Egypt Wants: Cheaper Bread.” Sept. 18, 2013 13) Kirby, Alex. “Cutting Down Amazon for Agriculture Could Cut Yields.” Scientific American. May 2013Source: Credit Suisse, 2014 AH Reported Sales (Including Non-AH Sales)

Enhanced Ancillary Service Offerings

ZTS's complementary businesses such as diagnostics, genetics, medical devices, and

services (including dairy data management, e-learning, and professional consulting) focus

on an outcomes-based approach to animal health that will be an increasingly important

growth driver. ZTS can enhance the appeal of its core offerings, leverage its

industry-leading sales force, and build customer loyalty with these capabilities, helping it to

capture incremental market share.

For example, in diagnostics, more recently, ZTS launched a new consumable rapid test for

feline viral diseases, taking advantage of recent disruptions among supply chain

constituents as diagnostics industry leader IDEXX Laboratories moved to a direct

distribution model. More broadly, ZTS can leverage its dominant presence into the single

veterinary call point as well as its distributor relationships to theoretically cross sell multiple

diagnostic capabilities, among other products and services, a unique competitive

advantage.

Figure 20: Targeted Areas of Product Development

Source: Credit Suisse.

Capital Deployment Kicker: M&A and Partnerships to

Supplement Growth

On building EPS momentum, we expect ZTS's cash reserves to grow. Its capital

deployment strategy should focus on M&A, deleveraging, and share repurchases while

remaining committed to its dividend.

Acquisitions should help ZTS fortify its existing product portfolio and development pipeline

and further build its presence in new geographies and complementary products and

services that enhance its core product offering. The company has stated interest in areas

such as devices, diagnostics, genomics, pet biotech, aquaculture, and food safety. Pipeline

deals, joint ventures, and research collaborations and partnerships may also provide it with

access to new compounds and help it develop relationships with local governments and

academia, among other unconventional sources. Overall, ZTS can enhance the appeal of

its core portfolio and build customer loyalties with these complementary offerings and

Cross Species Companion Animal LivestockComplementary

Solutions

Parasiticides Allergy/Dermatology Reproduction Genetics

Infectious Disease Sedation/Anesthesia Food Safety Diagnostics

Pain/ Inflammation Renal/ Cardiovascular Performance Biodevices

3 February 2016

Zoetis (ZTS) 19

services, helping to boost market share. Importantly, recent management commentary still

emphasized its preference for smaller tuck-in acquisitions for which there is minimal

overlap with its base business from a therapeutic or geographic perspective.

PHARMAQ: Scale-ing Up in Acquaculture—Adds a LT Growth Engine: The

acquisition of PHARMAQ on November 2 establishes ZTS as the leader in

aquaculture, enhancing its long-term growth profile. ZTS acquired PHARMAQ, the

global leader in animal health products for the aquaculture industry, for $765 million

(9.6x revenues). We view PHARMAQ as a logical extension of its livestock business,

with strong, stable revenue streams, from the fastest-growing species segment in

animal health for which medicalization rates are still relatively low. The Norwegian

company posted $80 million in revenues in 2014, with a historical base business

growth rate of 17% annually. It has 200 employees across its subsidiaries in Chile, the

UK, Spain, Turkey, Panama, Vietnam, and Hong Kong. We estimate the deal to be

neutral to EPS in 2016, but accretive thereafter. Importantly, the PHARMAQ deal

further diversifies its business, which we note is increasingly skewed toward

faster-growing segments.

Figure 21: Meat & Fishery Production, Dressed Weight or Eviscerated Basis (MM tons)*

Source: Credit Suisse, OECD and FAO State World Fisheries and Acquaculture 2012; *Total fishery production = capture + acquaculture. Beef and pork on dressed-weight basis; poultry and fish on an eviscerated basis.

PHARMAQ bolsters ZTS’s presence in the aquaculture market, worth $400 million in

2014, growing at a healthy clip (7-8% annually), compared with the broader livestock

(+6%) and companion animal industries (5%), according to Vetnosis. Farmed fish

currently represents 50% of overall fish consumption, compared with just 15% in 1990.

The deal adds key product lines such as AlphaJect (a vaccine), AlphaMax (parasiticide

for sea lice in Salmon), and diagnostic capabilities, among other products and

services. While profitability (24.8% adjusted EBITDA margin) tracks below ZTS, based

on 2014 statements, synergies could stem from leveraging ZTS’s global sales

presence, expediting geographic expansion initiatives, as well as optimizing R&D and

manufacturing, although we note cost cutting was not the impetus for the transaction.

According to specialty industry publication, IntraFish, Pharmaq is targeting rapid

expansion in key Asian markets, including China, Indonesia, Malaysia, and Vietnam.

Aquaculture is the fastest-growing segment, with production expanding from ~1 million

tons in the early 1950s to over 50 million tons today. Assessing the competitive

landscape, there are relatively few competitors participating in the famed fish market,

with PHARMAQ and Merck Animal Health as the largest, followed by smaller players

3 February 2016

Zoetis (ZTS) 20

such as Phibro Animal Health, Eli Lilly (Novartis), and Virbac. However, PHARMAQ

has a unique focus on vaccines.

New Potential Non-Antibiotic Solutions: On January 18, ZTS entered a partnership

with Australian-based Anatara Lifesciences obtaining the option to license its Detach

swine product globally, a naturally derived product extracted from pineapple stems for

use as an anti-infective and growth promotion agent in pigs.

Figure 22: Global Fish Production—The Fastest-Growing Species Segment in

Animal Health (Acquaculture vs. Capture, % Share of Acquaculture Rising)

MM Tons %

Source: OECD and FAO State World Fisheries and Acquaculture 2014, Credit Suisse.

3 February 2016

Zoetis (ZTS) 21

Earnings Outlook & Financial Resources In 2015, we forecast revenues to decline 1.2% to $4.7 billion, reflecting its exit from

Venezuela, ongoing SKU rationalization, and significant FX headwinds (-8.6%). More

specifically, we forecast U.S. operational growth (excl. FX) of 11% and international of 3%,

helped by rising underlying demand, particularly in the U.S., and recent acquisitions

(Abbott and PHARMAQ). More importantly, however, the EBITDA margin should expand

significantly by 363 bps as its first year of major restructuring initiatives (announced in May

2015) and Abbott synergies materialize. All in, 2015 EPS should grow 11% to $1.74,

despite the aforementioned SKU and country rationalization and foreign currency

headwinds.

Figure 23: Revenue Bridge—Operational Revenue Growth Targets (Excluding FX)*

Source: Credit Suisse, Company data.

We view 2016 as less reflective of its longer-term revenue growth and EPS prospects, and

we look to 2017 and 2018 as more relevant guides. Our 2016 EPS estimate of $1.78

(+2.2%) reflects the bulk of its restructuring initiatives as well as a negative impact from a

recent unfavorable tax ruling in Belgium (-$0.13). We forecast only 1.9% topline growth

with contributions from PHARMAQ and new products such as Simparica offset by

incremental FX headwinds and restructuring initiatives, including the elimination of ~5,000

SKUs. EBITDA margin expansion of 189 bps reflects a more profitable product mix through

efficiency initiatives and acquisition synergies.

More importantly, in 2017, we forecast more normalized topline growth of 6% with

increased exposure to faster-growing segments offsetting ongoing restructuring and

EBITDA margin expansion of 372 bps as efficiency initiatives begin to take hold. Net/net,

we estimate 2017 EPS to rise to $2.28 (+28%).

From a financial resources perspective, ZTS has $592 million in cash reserves and $4.5 billion in debt. We estimate ZTS will generate $432 million in cash flow from operations in 2015, which is tempered by meaningful one-time startup charges related to the Pfizer spin that will not recur.

Its trailing-12-month cash conversion cycle currently stands at 62 days, which compares with a rage of only 46-62 days for veterinary distributors in the U.S. that normally bear the working capital risk in the supply chain. High inventory balances are the culprit at 306 days outstanding, and while some of this may be more structural in nature given its exposure to the livestock industry, ongoing SKU rationalization could help to address the issue. More specifically, it could see inventory days in the 210-240 day territory on improvements in manufacturing, supply chain operations, and technological advances. In addition, with a smaller manufacturing footprint through restructuring initiatives, we would expect capital expenditures to decline to the benefit of free cash flow. All told, our free cash flow forecasts ramp significantly to $895 million in 2016, more than enough to finance its global growth aspirations while leaving ample cash for acquisitions, partnerships, deleveraging, share repurchases, and a dividend.

2015 2016 2017

Previous revenue guidance $4,700 - $4,775 $4,650 - $4,800 $4,850 - $5,050

Operational growth 6.0% - 7.5% (1.0%) - 2.0% 3.0% - 7.0%

Foreign exchange ($25) ($100) ($125)

PHARMAQ $100 $125

Pipeline + Other $100 $125

Updated revenue guidance $4,700 - $4,750 $4,750 - $4,875 $4,750 - $4,875

Operational growth 6.5% - 7.5% 3.0% - 5.0% 3.0% - 5.0%

3 February 2016

Zoetis (ZTS) 22

Figure 24: Trailing-12-Month Cash Conversion Cycle

Source: Company data, Credit Suisse estimates.

Valuation

As of February 2, ZTS's shares were trading at 16.7x our 2017 EPS estimate and an

EV/EBITDA multiple of 11.8x our 2017 forecast, a 25% and 23% discount, respective to

recent highs set in June. We do not believe the valuation fully reflects the strong animal

health industry fundamentals, the company's competitive advantages as the industry

leader, the positive news flow from recent deals and earnings reports, or the meaningful

profit opportunity in the coming years. Our $58 target price implies the stock can trade at a

16.0x EV/EBITDA multiple, a 35% premium to the stock's current valuation.

Figure 25: Price/2016 EPS Figure 26: Enterprise Value/2016 EBITDA

Source: Company data, Thomson Reuters Datastream. Source: Company data, Thomson Reuters Datastream.

Comparable Company Rationale

We also compare ZTS's valuation with a list of comparable animal health products and

services companies. On a P/E and EV/EBITDA multiple basis, ZTS's shares currently

trade well below the comparable products group average of 25.2x and 13.8x for 2017. The

list includes three different groupings of companies, either with similar business models or

that are also plays on the same attractive animal health industry growth drivers.

Accounts Accounts Average Avg. accts. Avg. accts. Inventory days Receivable days Payable days Cash conversion

Date Revenues COGS Inventory receivable payable Revenues COGS inventory receivable payable outstanding outstanding outstanding cycle

9/30/2016E $1,237 $386 $1,295 $972 $271 $4,794 $1,596 $1,339 $949 $283 306.2 72.3 64.8 313.7

6/30/2016E $1,191 $395 $1,344 $945 $277 $4,771 $1,611 $1,362 $964 $288 308.5 73.7 65.2 317.0

3/30/2016E $1,130 $378 $1,289 $906 $264 $4,755 $1,608 $1,378 $969 $287 312.8 74.4 65.1 322.1

12/30/2015E $1,236 $438 $1,374 $941 $304 $4,727 $1,601 $1,374 $974 $284 313.4 75.2 64.8 323.8

9/30/2015 $1,214 $400 $1,403 $1,038 $306 $4,811 $1,624 $1,362 $981 $277 306.1 74.5 62.2 318.4

6/30/2015 $1,175 $392 $1,417 $993 $278 $4,807 $1,643 $1,350 $997 $278 299.9 75.7 61.8 313.8

3/30/2015 $1,102 $371 $1,346 $905 $256 $4,790 $1,647 $1,336 $1,034 $299 296.2 78.8 66.3 308.7

12/31/2014 $1,320 $461 $1,289 $980 $290 $4,785 $1,642 $1,333 $1,079 $339 296.3 82.3 75.4 303.2

9/30/2014 $1,210 $419 $1,388 $1,057 $259 $4,719 $1,614 $1,321 $1,105 $394 298.8 85.5 89.1 295.1

6/30/2014 $1,158 $395 $1,336 $1,098 $337 $4,612 $1,568 $1,299 $1,116 $453 302.4 88.4 105.5 285.2

3/31/2014 $1,097 $366 $1,316 $1,100 $363 $4,568 $1,562 $1,265 $1,091 $474 295.5 87.2 110.6 272.0

12/31/2013 $1,254 $434 $1,293 $1,138 $506 $4,561 $1,584 $1,247 $1,032 $439 287.3 82.6 101.2 268.7

9/30/2013 $1,103 $373 $1,290 $1,110 $482 $4,483 $1,567 $1,251 $969 $380 291.4 78.9 88.5 281.8

6/30/2013 $1,114 $390 $1,257 $1,137 $587 $4,399 $1,536 $1,238 $906 $298 294.2 75.1 70.9 298.4

3/31/2013 $1,090 $387 $1,120 $861 $275 $4,379 $1,518 $1,241 $873 $243 298.4 72.8 58.5 312.6

12/31/2012 $1,176 $417 $1,345 $900 $319 $4,336 $1,513 $1,220 $868 $221 294.1 73.0 53.3 313.9

9/30/2012 $1,019 $342 $1,272 $848 $195 $4,287 $1,490 $1,025 $758 $183 251.2 64.5 44.9 270.8

6/30/2012 $1,094 $372 $1,172 $889 $222 $4,317 $1,505 $720 $541 $131 174.5 45.7 31.8 188.4

Trailing twelve months

15.0x

17.0x

19.0x

21.0x

23.0x

25.0x

27.0x

29.0x

Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15

P/FY2 E Average Peer average

2016 P/E: 24.2x

Historical Avg. P/E: 21.6x

Peer Avg. P/E: 25.4x

10.0x

11.0x

12.0x

13.0x

14.0x

15.0x

16.0x

17.0x

18.0x

19.0x

20.0x

Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15

EV/FY2 EBITDA Average

2016 EV/EBITA: 15.0x

Historical Avg. EV/EBITA: 14.5x

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Figure 27: Animal Health Comparable Companies Analysis

Source: Company data, Credit Suisse Estimates, Thomson Reuters Datastream.

2/2/2016 Market Avg. Daily Revenue (CY) Hist. Avg (5yr) EPS (CY) Hist. Avg (5yr) P/Sales EV/EBITDA P/E Dividend

Price Cap (mil) Vol. (000's) 2016 2017 Rev (CY) Y/Y 2016 2017 EPS (CY) Y/Y 2016 2017 2016 2017 2016 2017 Yld.

Products

Zoetis Inc $41.72 $21,391 164,055 $4,817 $5,114 3% $1.78 $2.50 39% 4.4x 4.2x 14.4x 12.2x 23.4x 16.7x 1.0%

IDEXX Laboratories Inc $71.44 $6,495 53,833 $1,711 $1,877 7% $2.16 $2.51 11% 3.8x 3.5x 18.6x 16.8x 33.1x 28.4x

Abaxis Inc $43.13 $988 9,316 $236 $260 9% $1.42 $1.54 29% 4.2x 3.8x 14.9x 13.9x 30.5x 28.1x

Phibro Animal Health Corp $33.54 $1,312 6,270 $818 $874 5% $1.90 $2.00 -93% 1.6x 1.5x 11.6x 10.5x 17.7x 16.7x 1.2%

Genus PLC $20.62 $1,303 0 $424 $449 5% $0.62 $0.69 1% 3.1x 2.9x 22.5x 20.4x 33.2x 29.7x 1.1%

Neogen Corp $52.40 $1,984 9,208 $342 $376 14% $1.14 $1.33 11% 5.8x 5.3x 23.4x 19.9x 45.9x 39.5x

Virbac SA $236.00 $1,464 1 $906 $959 8% $6.32 $8.90 -16% 1.6x 1.5x 9.2x 8.1x 37.4x 26.5x 0.7%

Vetoquinol SA $39.35 $468 0 $352 $366 4% $2.41 $2.53 4% 1.3x 1.3x 8.7x 8.2x 16.3x 15.6x 1.1%

Average 7% -2% 3.2x 3.0x 15.4x 13.8x 29.7x 25.2x

Distributors, Services & Retail

Patterson Companies Inc $42.79 $4,281 44,136 $5,676 $5,994 10% $2.64 $2.95 5% 0.8x 0.7x 9.4x 9.5x 16.2x 14.5x 1.9%

Henry Schein Inc $150.86 $12,756 74,008 $11,224 $11,724 6% $6.59 $7.28 11% 1.1x 1.1x 13.6x 12.7x 22.9x 20.7x

VCA Inc $49.90 $4,141 30,261 $2,338 $2,553 9% $2.66 $2.92 49% 1.8x 1.6x 10.9x 10.0x 18.8x 17.1x

Petmed Express Inc $17.66 $262 3,375 $233 $231 -1% $1.01 $1.05 4% 1.1x 1.1x 5.2x 5.0x 17.5x 16.9x 4.2%

Average 6% 17% 1.2x 1.1x 9.8x 9.3x 18.8x 17.3x

Pet-Biotech/other

Aratana Therapeutics Inc $3.20 $117 4,566 $9 $34 -$1.23 -$1.15 132% 12.8x 3.5x -0.7x -1.3x -2.6x -2.8x

Parnell Pharmaceuticals Holdings Ltd $2.51 $35 84 $25 $40 -$1.46 -$0.71 1.4x 0.9x -2.3x 3.2x -1.7x -3.6x

Kindred Biosciences Inc $3.40 $68 377 $1 $12 -$1.82 -$1.12 54.2x 5.8x 1.2x -1.9x -3.0x

Average 132% 22.8x 3.4x -0.6x 0.9x -2.1x -3.1x

Large-Cap Pharmaceuticals

Merck & Co Inc $50.41 $141,772 626,001 $40,505 $40,361 -5% $3.73 $3.74 34% 3.5x 3.5x 9.5x 9.7x 13.5x 13.5x 3.7%

Sanofi SA $75.27 $98,280 308,081 $37,766 $38,813 2% $5.59 $6.22 12% 2.6x 2.5x 8.7x 8.5x 13.5x 12.1x 4.0%

Bayer AG $100.35 $82,984 310,310 $48,509 $50,601 6% $7.62 $9.28 26% 1.7x 1.6x 9.2x 8.7x 13.2x 10.8x 2.7%

Eli Lilly and Co $76.30 $86,873 403,780 $21,040 $21,948 -5% $3.54 $4.07 4% 4.1x 4.0x 15.0x 13.6x 21.6x 18.7x 2.7%

Perrigo Company PLC $144.01 $21,038 292,535 $6,251 $6,710 16% $9.76 $10.84 101% 3.4x 3.1x 12.9x 11.8x 14.8x 13.3x 0.3%

Average 3% 35% 3.1x 3.0x 11.1x 10.5x 15.3x 13.7x

Total Average 6% 20% 5.7x 2.7x 10.8x 10.6x 19.2x 16.5x

3 February 2016

Zoetis (ZTS) 24

Value-Based Analysis Rationale

Based on our analysis, there is a strong documented correlation between ROIC and

valuation for our cohort of animal health companies, suggesting investors are focused

more on true economic returns. Applying our regression of enterprise value to invested

capital vs. ROIC (using FY+1 estimates) for our companies indicates that 74% of the

variation in EV/IC is determined by ROIC. This compares with a much weaker correlation

between conventional P/E multiples and EPS growth rates well below 10%. Consequently,

the ROIC correlation indicates the market is willing to pay more for companies generating

higher returns on their invested capital, not simply for stronger EPS growth.

Our ROIC forecasts are calculated by dividing net operating profits after taxes by average

invested capital. We require ZTS to earn a return on a larger capital base by adding back

reserves for doubtful accounts and other reserves, accumulated amortization, after-tax

asset related charges, and the present value of capitalized operating leases. We believe

its IPO in January 2013 sets the stage for a significant improvement in its ROIC as an

independent industry leader focused on optimizing its growth profile and cost and capital

structures.

Based on our current earnings and capital spending forecasts, we expect ZTS's ROIC to

more than double from 11.0% in 2014 to 23.7% in 2019, an impressive trajectory, in our

view. Improving profitability is the key driver, with possible upside stemming from fixed

asset and working capital improvements. Overall, our regression analysis of relevant

animal health companies' ROICs and valuations helps to support our $58 target price,

which implies a valuation higher than the line of best fit.

Figure 28: Animal Health EV/IC vs. ROIC (FY+2)

Source: Credit Suisse, Company data.

IDXX

PAHC

WOOF

ZTS

ABAX

STE

SRCL

HSIC

PDCO

R² = 0.7437

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

EV/F

Y+2

IC

FY+2 ROIC

3 February 2016

Zoetis (ZTS) 25

Discounted Cash Flow Analysis Rationale

Our discounted cash flow model assumes ZTS's profit margin ramps materially over the

next ten years. We also assume no meaningful startup costs (associated with the Pfizer

spin), and reduced capital expenditures supports our $58 valuation for the stock. Our

WACC assumption of 6.3% reflects the $4.5 billion in outstanding debt balance.

Better-than-expected profit margin growth, along with improving working capital

management, or a higher dividend payout could offer upside for ZTS.

Figure 29: Discounted Cash Flow Analysis

Source: Company data, Credit Suisse estimates.

Management Team

Source: Company Filings

Juan Ramon Alaix – CEO: Juan Ramón Alaix was appointed chief executive officer of

Zoetis in July 2012. Mr. Alaix served as President of Pfizer Animal Health since 2006,

where he was responsible for the overall strategic direction and financial performance of

the company. Under his leadership, the company generated annual revenue of $4.8 billion

in 2014 with approximately 10,000 employees worldwide. Zoetis serves veterinarians,

livestock producers and people who raise and care for farm and companion animals with

sales of its products in 120 countries.

Paul Herendeen – CFO: Paul Herendeen is executive vice president and chief financial

officer (EVP and CFO) of Zoetis. In his role, Herendeen oversees the company’s Finance

and Information Technology organizations and serves as part of the Zoetis Executive

Team, reporting to CEO Juan Ramón Alaix. Herendeen brings more than 30 years of

broad financial experience and leadership to his role at Zoetis, including 16 years as CFO

of Warner Chilcott and MedPointe.

Alejandro Bernal – EVP & Group President, Strategy, Commercial and Business

Development: Alejandro Bernal is Executive Vice President and Group President for

Strategy, Commercial and Business Development, with responsibility for new and

complementary global businesses within Zoetis.

CASH FLOWS 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Net sales $4,785 $4,727 $4,817 $5,114 $5,405 $5,712 $6,112 $6,540 $6,998 $7,530 $8,094

Year-over-year change 4.9% -1.2% 1.9% 6.2% 5.7% 5.7% 7.0% 7.0% 7.0% 7.6% 7.5%

NOPAT $652 $936 $1,048 $1,253 $1,372 $1,513 $1,689 $1,872 $2,083 $2,332 $2,605

Year-over-year change 12.0% 43.7% 11.9% 19.6% 9.5% 10.3% 11.6% 10.8% 11.3% 12.0% 11.7%

EBITDA $1,173 $1,484 $1,604 $1,893 $2,060 $2,259 $2,506 $2,764 $3,061 $3,412 $3,796

Investment in future growth

Chg in working capital $265 ($565) ($27) $44 $39 $42 $67 $71 $76 $92 $96

Chg in fixed assets ($2) $1,179 $155 $85 ($659) $84 $63 $62 $58 $41 $38

Incremental Investment $263 $613 $128 $128 ($620) $126 $130 $134 $134 $134 $134

Free Cash Flow $389 $323 $920 $1,125 $1,992 $1,387 $1,559 $1,738 $1,949 $2,198 $2,471

Discounted cash flow

PV of FCF $389 $304 $815 $938 $1,563 $1,024 $1,083 $1,137 $1,199 $1,273 $1,347

Cumulative PV of FCF $389 $304 $1,119 $2,057 $3,620 $4,644 $5,727 $6,864 $8,063 $9,336 $10,683

Residual Value $14,231 $16,753 $20,033 $21,935 $24,192 $26,992 $29,918 $33,287 $37,274 $41,637 $41,532

PV of Residual Value $14,231 $15,766 $17,744 $18,284 $18,978 $19,928 $20,788 $21,767 $22,939 $24,115 $22,638

Corporate Value $14,620 $16,070 $18,863 $20,341 $22,598 $24,572 $26,515 $28,631 $31,002 $33,452 $33,322

Excess Cash $164 $164 $164 $164 $164 $164 $164 $164 $164 $164 $164

Total Debt and Preferred Stock $3,740 $4,500 $4,500 $4,500 $4,500 $4,500 $4,500 $4,500 $4,500 $4,500 $4,500

Shareholder value $11,044 $11,735 $14,527 $16,005 $18,262 $20,237 $22,179 $24,295 $26,667 $29,116 $28,986

Shares outstanding 501 501 501 501 501 501 501 501 501 501 501

Value per share $22.03 $23.41 $28.98 $31.93 $36.43 $40.37 $44.24 $48.46 $53.20 $58.08 $57.82

3 February 2016

Zoetis (ZTS) 26

Investment Risks Epidemiologic, Weather, Macroeconomic, Regulatory Risks: While the animal health

industry is uniquely sheltered from many of the risks of the human health care market,

including reimbursement risks, reform risks, and generic threats, which are very limited, it

does have exposure to disease threats, droughts, and other potential geographic and

epidemiologic catastrophes. Unexpected changes in weather patterns or disease

outbreaks such as canine flu, bird flu, mad cow disease, or foot-and-mouth disease can

significantly affect (both positively and/or negatively) the demand for livestock and

companion animal products.

Regulatory Risk, Antibiotics: Harsher regulations related to the raising, treatment,

processing, or consumption of livestock could cause producers to change treatment

paradigms for their herds or flocks. Potential regulations on animal medication dispensing

or surrounding any particular product line, such as medicinal feed additives, could have

negative financial repercussions. However, the inherent need to treat sick animals and

growing global demand for protein would likely mitigate the impact. In our view, antibiotics

will continue to have a role in the treatment of inevitable global disease threats and

improving the overall efficiency of livestock production while preserving animal welfare.

Cost Structure Initiatives/Manufacturing: As with many relatively new standalone

companies, there is an inherent element of execution risk, particularly as it relates to ZTS's

significant restructuring undertaking, which, if successful, should drive meaningful margin

improvement over the next several years, a key component to our positive thesis on the

stock.

Industry Consolidation Could Alter Competitive Landscape and Supply Chain

Dynamics: For example, major transactions include Eli Lilly's acquisition of Novartis's

animal health business, creating the third largest player in animal health therapeutics. In

addition, in January, Boehringer Ingleheim purchased Sanofi's Merial Animal Health

business, bolstering its exposure in companion animal and creating a more diversified

platform. However, even in light of these transactions, ZTS maintains its market leadership

positioning, and given anti-trust setbacks associated with Pfizer Animal Health's Fort

Dodge and King Animal Health mergers, we view further consolidation among the top

three competitors ZTS, Merck Animal Health, and Eli Lilly's Elanco Animal Health

businesses as unlikely.

Foreign Currency Fluctuations: While there are inherent natural hedges in a constantly

evolving global animal health market, ZTS is exposed to currency fluctuations with 60% of

its sales derived overseas. From a profit standpoint, we estimate a $100 million negative

FX impact translates into a $25 million hit to operating profit.

Activist Involvement: Pershing Square currently has an 8.4% stake in ZTS, representing

the company's largest shareholder. Pershing Square also has two board seat positions.

However, management has noted the relationship as amicable.

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Figure 30: Quarterly EPS

Source: Company data, Credit Suisse estimates.

Historical results Projections

2014 2015

31-Mar 30-Jun 30-Sep 31-Dec Total 31-Mar 30-Jun 30-Sep 31-Dec Total 31-Mar 30-Jun 30-Sep 31-Dec Total

Net sales $1,097 $1,158 $1,210 $1,320 $4,785 $1,102 $1,175 $1,214 $1,236 $4,727 $1,130 $1,191 $1,237 $1,260 $4,817

Cost of sales $366 $395 $419 $461 $1,642 $371 $392 $400 $438 $1,601 $377.69 $394.53 $385.63 $427.68 $1,586

Gross profit $731 $763 $791 $859 $3,143 $731 $783 $814 $798 $3,127 $752 $796 $851 $832 $3,232

Selling, general & administrative $305 $341 $344 $428 $1,417 $286 $309 $326 $358 $1,280 $286.84 $303 $319.51 $353 $1,262

Research & development expenses $87 $91 $93 $122 $393 $80 $83 $91 $108 $362 $83 $85 $89.02 $109 $366

Other deductions $0 $0 $0 $4 $4 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

EBITDA $339 $331 $354 $305 $1,329 $365 $391 $397 $331 $1,484 $382 $408 $443 $370 $1,604

Amortization $5 $4 $3 $3 $15 $4 $4 $4 $4 $16 $4 $4 $4 $4 $16

Depreciation $31 $33 $32 $32 $128 $48 $48 $29 $29 $154 $29 $29 $29 $29 $116

Operating income $303 $294 $319 $270 $1,186 $313 $339 $364 $298 $1,314 $349 $375 $410 $337 $1,472

Interest income $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Interest expense $29 $29 $29 $30 $117 $28 $29 $29 $29 $114 $37 $37 $37 $37 $146

Loss/(Gain) on currency exchange/other ($1) ($3) ($1) ($6) ($11) $0 ($1) ($3) ($3) ($7) $0 $0 $0 $0 $0

Pretax income $275 $268 $291 $246 $1,080 $285 $311 $339 $273 $1,207 $313 $339 $373 $301 $1,326

Income taxes $86 $76 $82 $46 $290 $78 $94 $85 $75.07 $332 $103 $112 $123 $99 $437

Net income $189 $192 $209 $200 $790 $207 $217 $254 $198 $875 $209 $227 $250 $202 $888

Net income attr. non-controlling interest $0 $3 $1 $0 $4 $0 $1 $1 $1 $3 $0 $0 $0 $0 $0

Net income available for common $189 $189 $208 $200 $786 $207 $216 $253 $197 $872 $209 $227 $250 $202 $888

E.P.S. $0.38 $0.38 $0.41 $0.40 $1.57 $0.41 $0.43 $0.50 $0.39 $1.74 $0.42 $0.45 $0.50 $0.41 $1.78

Basic shares outstanding 500 501 501 502 501 501 500 499 498 500 498 497 496 495 497

Average diluted shares outstanding 501 502 502 503 502 501 500 502 501 501 500 499 499 498 499

Tax rate 31.3% 28.4% 28.2% 18.7% 26.9% 27.4% 30.2% 25.1% 27.5% 27.5% 33.0% 33.0% 33.0% 33.0% 33.0%

Margin analysis

Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Cost of sales 33.3% 34.1% 34.7% 35.0% 34.3% 33.6% 33.3% 33.0% 35.5% 33.9% 33.4% 33.1% 31.2% 34.0% 32.9%

Gross profit 66.7% 65.9% 65.3% 65.0% 65.7% 66.4% 66.7% 67.0% 64.5% 66.1% 66.6% 66.9% 68.8% 66.0% 67.1%

Selling, general & administrative 27.8% 29.4% 28.4% 32.4% 29.6% 26.0% 26.3% 26.8% 29.0% 27.1% 25.4% 25.4% 25.8% 28.0% 26.2%

Research & development expenses 7.9% 7.9% 7.7% 9.2% 8.2% 7.3% 7.1% 7.5% 8.7% 7.7% 7.4% 7.2% 7.2% 8.6% 7.6%

EBITDA 30.9% 28.6% 29.3% 23.1% 27.8% 33.1% 33.3% 32.7% 26.8% 31.4% 33.8% 34.3% 35.8% 29.4% 33.3%

Amortization 0.5% 0.3% 0.2% 0.2% 0.3% 0.4% 0.3% 0.3% 0.3% 0.3% 0.4% 0.3% 0.3% 0.3% 0.3%

Depreciation 2.8% 2.8% 2.6% 2.4% 2.7% 4.4% 4.1% 2.4% 2.3% 3.3% 2.6% 2.4% 2.3% 2.3% 2.4%

Operating income 27.6% 25.4% 26.4% 20.5% 24.8% 28.4% 28.9% 30.0% 24.1% 27.8% 30.9% 31.5% 33.1% 26.8% 30.5%

Pretax income 25.1% 23.1% 24.0% 18.6% 22.6% 25.9% 26.5% 27.9% 22.1% 25.5% 27.7% 28.4% 30.2% 23.9% 27.5%

Net income available for common 17.2% 16.3% 17.2% 15.2% 16.4% 18.8% 18.4% 20.8% 15.9% 18.5% 18.5% 19.1% 20.2% 16.0% 18.4%

Growth analysis

Net sales 0.6% 3.9% 9.7% 5.3% 4.9% 0.5% 1.5% 0.3% (6.3%) (1.2%) 2.5% 1.4% 1.9% 1.9% 1.9%

Cost of sales (5.6%) 1.4% 12.3% 6.4% 3.7% 1.3% (0.9%) (4.6%) (5.0%) (2.5%) 1.9% 0.7% (3.7%) (2.4%) (1.0%)

Gross profit 4.1% 5.3% 8.4% 4.6% 5.6% 0.0% 2.7% 2.9% (7.0%) (0.5%) 2.8% 1.7% 4.6% 4.2% 3.4%

Selling, general & administrative 2.9% 8.4% 2.1% 12.1% 6.6% (6.2%) (9.2%) (5.2%) (16.2%) (9.7%) 0.2% (2.1%) (1.9%) (1.6%) (1.4%)

Research & development expenses (3.3%) 0.0% 2.2% 2.5% 0.5% (8.0%) (8.8%) (2.2%) (11.4%) (7.9%) 3.9% 2.8% (2.2%) 0.7% 1.2%

EBITDA 7.3% 3.8% 17.2% (4.7%) 5.7% 7.7% 18.1% 12.1% 8.7% 11.7% 4.7% 4.4% 11.6% 11.7% 8.0%

Amortization 25.0% 33.3% (40.0%) (40.0%) (11.8%) (20.0%) 0.0% 33.3% 33.3% 6.7% 0.0% 0.0% 0.0% 0.0% 0.0%

Depreciation (13.9%) (5.7%) 0.0% (8.6%) (7.2%) 54.8% 45.5% (9.4%) (9.4%) 20.3% (39.6%) (39.6%) 0.0% 0.0% (24.7%)

Operating income 9.8% 4.6% 20.4% (3.6%) 7.6% 3.3% 15.3% 14.1% 10.5% 10.8% 11.5% 10.7% 12.6% 13.0% 12.0%

Pretax income 9.1% 6.3% 19.8% (1.6%) 8.3% 3.6% 16.0% 16.3% 11.0% 11.8% 9.7% 8.9% 10.3% 10.2% 9.8%

Net income available for common 5.6% 6.2% 21.6% 13.0% 11.5% 9.5% 14.3% 21.4% (1.5%) 11.0% 1.2% 5.1% (0.9%) 2.4% 1.8%

E.P.S. 5.6% 5.9% 21.1% 12.4% 11.2% 9.4% 14.6% 21.6% (1.1%) 11.2% 1.4% 5.2% (0.3%) 3.0% 2.2%

2016

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Figure 31: Quarterly Revenues

Source: Company data, Credit Suisse estimates.

31-Mar 30-Jun 30-Sep 31-Dec Total 31-Mar 30-Jun 30-Sep 31-Dec Total 31-Mar 30-Jun 30-Sep 31-Dec Total

GEOGRAPHIC SEGMENTS

US

Livestock $263 $224 $308 $368 $1,163 $299 $256 $348 $381 $1,284 $305 $264 $358 $392 $1,319

Companion $216 $235 $224 $221 $896 $222 $283 $284 $243 $1,032 $249 $300 $302 $259 $1,110

Total US $479 $459 $532 $589 $2,059 $521 $539 $632 $624 $2,316 $554 $564 $661 $651 $2,429

INTERNATIONAL

Livestock $443 $479 $482 $536 $1,940 $416 $434 $402 $434 $1,686 $399 $416 $387 $421 $1,623

Companion $164 $204 $184 $184 $736 $155 $188 $167 $166 $676 $163 $198 $175 $174 $710

Total International $607 $683 $666 $720 $2,676 $571 $622 $569 $600 $2,362 $562 $613 $562 $595 $2,332

TOTAL

Livestock $706 $703 $790 $904 $3,103 $715 $690 $750 $815 $2,970 $704 $679 $745 $813 $2,942

Companion $380 $439 $408 $405 $1,632 $377 $471 $451 $408 $1,707 $411 $498 $478 $432 $1,819

Contract Manufacturing $11 $16 $12 $11 $50 $10 $14 $13 $13 $50 $14 $14 $14 $14 $56

Total $1,097 $1,158 $1,210 $1,320 $4,785 $1,102 $1,175 $1,214 $1,236 $4,728 $1,130 $1,191 $1,237 $1,260 $4,817

MIX

US

Livestock 24% 19% 25% 28% 24% 27% 22% 29% 31% 27% 27% 22% 29% 31% 27%

Companion 20% 20% 19% 17% 19% 20% 24% 23% 20% 22% 22% 25% 24% 21% 23%

US 44% 40% 44% 45% 43% 47% 46% 52% 50% 49% 49% 47% 53% 52% 50%

INTERNATIONAL

Livestock 40% 41% 40% 41% 41% 38% 37% 33% 35% 36% 35% 35% 31% 33% 34%

Companion 15% 18% 15% 14% 15% 14% 16% 14% 13% 14% 14% 17% 14% 14% 15%

Total International 55% 59% 55% 55% 56% 52% 53% 47% 49% 50% 50% 51% 45% 47% 48%

TOTAL

Livestock 64% 61% 65% 68% 65% 65% 59% 62% 66% 63% 62% 57% 60% 65% 61%

Companion 35% 38% 34% 31% 34% 34% 40% 37% 33% 36% 36% 42% 39% 34% 38%

Contract Manufacturing 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1%

Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

REPORTED GROWTH

US

Livestock 7.3% 9.8% 12.0% 18.7% 12.5% 13.7% 14.3% 13.0% 3.5% 10.4% 2.0% 3.0% 3.0% 3.0% 2.8%

Companion 3.3% 0.9% 1.8% 7.3% 3.2% 2.8% 20.4% 26.8% 9.8% 15.2% 12.0% 6.0% 6.5% 6.5% 7.5%

Total US 5.5% 5.0% 7.5% 14.1% 8.3% 8.8% 17.4% 18.8% 5.9% 12.5% 6.3% 4.6% 4.6% 4.4% 4.9%

INTERNATIONAL

Livestock (3.3%) 3.5% 12.9% (0.6%) 2.8% (6.1%) (9.4%) (16.6%) (19.0%) (13.1%) (4.0%) (4.2%) (3.8%) (3.1%) (3.8%)

Companion (1.8%) 1.0% 10.8% 0.5% 2.5% (5.5%) (7.8%) (9.2%) (10.0%) (8.2%) 5.0% 5.0% 5.0% 5.0% 5.0%

Total International (2.9%) 2.7% 12.3% (0.3%) 2.7% (5.9%) (8.9%) (14.6%) (16.7%) (11.7%) (1.5%) (1.4%) (1.2%) (0.8%) (1.3%)

TOTAL

Livestock 0.4% 5.4% 12.5% 6.5% 6.2% 1.3% (1.8%) (5.1%) (9.8%) (4.3%) (1.5%) (1.6%) (0.6%) (0.2%) (0.9%)

Companion 1.1% 0.9% 5.4% 4.1% 2.8% (0.8%) 7.3% 10.5% 0.8% 4.6% 9.1% 5.6% 5.9% 5.9% 6.5%

Contract Manufacturing 0.0% 33.3% (14.3%) (31.3%) (5.7%) (9.1%) (12.5%) 8.3% 18.2% 0.0% 40.0% 0.0% 7.7% 7.7% 12.0%

Total 0.6% 3.9% 9.7% 5.3% 4.9% 0.5% 1.5% 0.3% (6.3%) (1.2%) 2.5% 1.3% 1.9% 1.9% 1.9%

Foreign exchange

INTERNATIONAL

Livestock - - - - - (9.0%) (15.0%) (17.0%) (18.0%) (15.0%) (4.0%) (4.0%) (4.0%) (4.0%) (4.0%)

Companion - - - - - (10.0%) (16.0%) (16.0%) (13.0%) (13.9%) (4.0%) (4.0%) (4.0%) (4.0%) (4.0%)

Total International - - - - - (10.0%) (15.3%) (16.7%) (16.7%) (14.8%) (4.0%) (4.0%) (4.0%) (4.0%) (4.0%)

TOTAL

Livestock (4.0%) (4.0%) 0% (4.0%) (3.0%) (6.0%) (10.0%) (10.0%) (10.7%) (9.3%) (2.3%) (2.5%) (2.1%) (2.1%) (2.3%)

Companion (2.0%) (1.0%) 0% (2.0%) (1.0%) (5.0%) (8.0%) (7.0%) (5.9%) (6.5%) (1.6%) (1.6%) (1.5%) (1.6%) (1.6%)

Contract Manufacturing (3.0%) 6% (3.0%) (8.0%) (1.0%) 3.0% (16.0%) (5.0%) (5.0%) (6.8%) 0.0% 0.0% 0.0% 0.0% 0.0%

Total FX (3.0%) (2.0%) 0% (4.0%) (2.0%) (6.0%) (10.0%) (9.0%) (9.2%) (8.6%) (2.0%) (2.1%) (1.9%) (1.9%) (2.0%)

BASE GROWTH (EXCL. FX)

US

Livestock 7.0% 10.0% 12.0% 19.0% 12.5% 14.0% 14.3% 13.0% 3.5% 10.4% 2.0% 3.0% 3.0% 3.0% 2.8%

Companion 3.0% 1.0% 2.0% 7.0% 3.2% 3.0% 20.4% 26.8% 9.8% 15.2% 12.0% 6.0% 6.5% 6.5% 7.5%

US 6.0% 5.0% 7.0% 14.0% 8.3% 9.0% 17.4% 18.8% 5.9% 10.7% 6.3% 4.6% 4.6% 4.4% 4.9%

INTERNATIONAL

Livestock - - - - - 2.9% 5.6% 0.4% (1.0%) 1.9% 0.0% (0.24%) 0.2% 0.9% 0.2%

Companion - - - - - 4.5% 8.2% 6.8% 3.0% 5.7% 9.0% 9.0% 9.0% 9.0% 9.0%

Total International - - - - - 4.1% 6.4% 2.1% 0.0% 3.1% 2.5% 2.6% 2.8% 3.2% 2.7%

TOTAL

Livestock 4.4% 9.4% 12.5% 10.5% 9.2% 7.3% 8.2% 4.9% 0.8% 5.0% (1.5%) (1.6%) (0.6%) (0.2%) 6.0%

Companion 3.1% 1.9% 5.4% 6.1% 3.8% 4.2% 15.3% 17.5% 6.7% 11.2% 9.1% 5.6% 5.9% 5.9% 8.0%

Contract Manufacturing 3.0% 27% (11.3%) (23.3%) (4.7%) (12.1%) 3.5% 13.3% 23.2% 6.8% 40.0% 0.0% 7.7% 7.7% 12.0%

Total base growth 3.6% 5.9% 9.7% 9.3% 6.9% 6.5% 11.5% 9.3% 2.8% 7.4% 4.6% 3.4% 3.8% 3.8% 3.9%

20162014 2015

Historical results Projections

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Figure 32: Annual EPS

Source: Company data, Credit Suisse estimates.

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Net sales $2,760 $3,582 $4,233 $4,336 $4,561 $4,785 $4,727 $4,817 $5,114 $5,405 $5,712

Cost of sales $983 $1,292 $1,553 $1,513 $1,584 $1,642 $1,601 $1,586 $1,639 $1,688.65 $1,736.14

Gross profit $1,777 $2,290 $2,681 $2,823 $2,977 $3,143 $3,127 $3,232 $3,475 $3,716 $3,976

Selling, general & administrative $1,026 $1,305 $1,381 $1,369 $1,329 $1,417 $1,280 $1,262 $1,212 $1,280 $1,331

Research & development expenses $365 $411 $407 $399 $391 $393 $362 $366 $371 $376 $386

Other deductions $8 $105 ($28) $0 $0 $4 $0 $0 $0 $0 $0

EBITDA $378 $469 $921 $1,055 $1,257 $1,329 $1,484 $1,604 $1,893 $2,060 $2,259

Amortization $17 $17 $20 $15 $17 $15 $16 $16 $16 $16 $16

Depreciation $42 $86 $95 $119 $138 $128 $154 $116 $116 $116 $116

Operating income $319 $366 $806 $921 $1,102 $1,186 $1,314 $1,472 $1,761 $1,928 $2,127

Interest income $3 $130 $0 $0 $0 $0 $0 $0 $0 $0 $0

Interest expense $26 $37 $36 $31 $113 $117 $114 $146 $146 $146 $146

Loss/(gain) on currency exchange $0 $0 $0 ($21) ($8) ($11) ($7) $0 $0 $0 $0

Pretax income $296 $459 $770 $911 $997 $1,080 $1,207 $1,326 $1,615 $1,782 $1,981

Income taxes $108 $183 $264 $372 $292 $290 $332 $437 $484 $535 $594

Net income $188 $276 $506 $539 $705 $790 $875 $888 $1,130 $1,248 $1,387

Net income attr. to non-controlling interest ($1) $1 $3 $0 ($0) $4 $3 $0 $0 $0 $0

Net income available for common $189 $275 $503 $539 $705 $786 $872 $888 $1,130 $1,248 $1,387

E.P.S. $0.38 $0.55 $1.01 $1.08 $1.41 $1.57 $1.74 $1.78 $2.28 $2.53 $2.82

Basic shares outstanding 500 500 500 500 500 501 500 497 494 491 489

Average diluted shares outstanding 500 500 500 500 500 502 501 499 496 494 492

Tax rate 36.5% 39.9% 34.3% 40.8% 29.3% 26.9% 27.5% 33.0% 30.0% 30.0% 30.0%

Margin analysis

Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Cost of sales 35.6% 36.1% 36.7% 34.9% 34.7% 34.3% 33.9% 32.9% 32.0% 31.2% 30.4%

Gross profit 64.4% 63.9% 63.3% 65.1% 65.3% 65.7% 66.1% 67.1% 68.0% 68.8% 69.6%

Selling, general & administrative 37.2% 36.4% 32.6% 31.6% 29.1% 29.6% 27.1% 26.2% 23.7% 23.7% 23.3%

Research & development expenses 13.2% 11.5% 9.6% 9.2% 8.6% 8.2% 7.7% 7.6% 7.3% 7.0% 6.8%

EBITDA 13.7% 13.1% 21.8% 24.3% 27.6% 27.8% 31.4% 33.3% 37.0% 38.1% 39.5%

Amortization 0.6% 0.5% 0.5% 0.3% 0.4% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%

Depreciation 1.5% 2.4% 2.2% 2.7% 3.0% 2.7% 3.3% 2.4% 2.3% 2.1% 2.0%

Operating income 11.6% 10.2% 19.0% 21.2% 24.2% 24.8% 27.8% 30.5% 34.0% 35.7% 37.2%

Pretax income 10.7% 12.8% 18.2% 21.0% 21.9% 22.6% 25.5% 27.5% 31.6% 33.0% 34.7%

Net income available for common 6.8% 7.7% 11.9% 12.4% 15.5% 16.4% 18.5% 18.4% 22.1% 23.1% 24.3%

Growth analysis

Net sales 29.8% 18.2% 2.4% 5.2% 4.9% (1.2%) 1.9% 6.2% 5.7% 5.7%

Cost of sales 31.4% 20.1% (2.5%) 4.6% 3.7% (2.5%) (1.0%) 3.4% 3.0% 2.8%

Gross profit 28.9% 17.1% 5.3% 5.5% 5.6% (0.5%) 3.4% 7.5% 6.9% 7.0%

Selling, general & administrative 27.2% 5.8% (0.9%) (2.9%) 6.6% (9.7%) (1.4%) (4.0%) 5.6% 4.0%

Research & development expenses 12.6% (1.0%) (2.0%) (2.0%) 0.5% (7.9%) 1.2% 1.3% 1.3% 2.6%

EBITDA 24.1% 96.4% 14.5% 19.1% 5.7% 11.7% 8.0% 18.0% 8.9% 9.7%

Amortization 0.0% 17.6% (25.0%) 13.3% (11.8%) 6.7% 0.0% 0.0% 0.0% 0.0%

Depreciation 104.8% 10.5% 25.3% 16.0% (7.2%) 20.3% (24.7%) 0.0% 0.0% 0.0%

Operating income 14.7% 120.2% 14.3% 19.7% 7.6% 10.8% 12.0% 19.6% 9.5% 10.3%

Pretax income 55.1% 67.8% 18.3% 9.4% 8.3% 11.8% 9.8% 21.8% 10.4% 11.2%

Net income available for common 45.5% 82.9% 7.2% 30.8% 11.5% 11.0% 1.8% 27.3% 10.4% 11.2%

E.P.S. 45.5% 82.9% 7.2% 30.7% 11.1% 11.2% 2.2% 28.0% 10.9% 11.7%

Historical results Projections

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Figure 33: Cash Conversion Cycle

Source: Company data, Credit Suisse estimates.

Latest period

Accounts Accounts Average Avg. accts. Avg. accts. Inventory days Receivable days Payable days Cash conversion Cash conversion

Date Revenues COGS Inventory receivable payable Revenues COGS inventory receivable payable outstanding outstanding outstanding cycle cycle

9/30/2016E $1,237 $386 $1,295 $972 $271 $4,794 $1,596 $1,339 $949 $283 306.2 72.3 64.8 313.7 314.0

6/30/2016E $1,191 $395 $1,344 $945 $277 $4,771 $1,611 $1,362 $964 $288 308.5 73.7 65.2 317.0 319.1

3/30/2016E $1,130 $378 $1,289 $906 $264 $4,755 $1,608 $1,378 $969 $287 312.8 74.4 65.1 322.1 320.8

12/30/2015E $1,236 $438 $1,374 $941 $304 $4,727 $1,601 $1,374 $974 $284 313.4 75.2 64.8 323.8 292.4

9/30/2015 $1,214 $400 $1,403 $1,038 $306 $4,811 $1,624 $1,362 $981 $277 306.1 74.5 62.2 318.4 328.1

6/30/2015 $1,175 $392 $1,417 $993 $278 $4,807 $1,643 $1,350 $997 $278 299.9 75.7 61.8 313.8 342.5

3/30/2015 $1,102 $371 $1,346 $905 $256 $4,790 $1,647 $1,336 $1,034 $299 296.2 78.8 66.3 308.7 343.3

12/31/2014 $1,320 $461 $1,289 $980 $290 $4,785 $1,642 $1,333 $1,079 $339 296.3 82.3 75.4 303.2 265.3

9/30/2014 $1,210 $419 $1,388 $1,057 $259 $4,719 $1,614 $1,321 $1,105 $394 298.8 85.5 89.1 295.1 325.4

6/30/2014 $1,158 $395 $1,336 $1,098 $337 $4,612 $1,568 $1,299 $1,116 $453 302.4 88.4 105.5 285.2 317.2

3/31/2014 $1,097 $366 $1,316 $1,100 $363 $4,568 $1,562 $1,265 $1,091 $474 295.5 87.2 110.6 272.0 329.3

12/31/2013 $1,254 $434 $1,293 $1,138 $506 $4,561 $1,584 $1,247 $1,032 $439 287.3 82.6 101.2 268.7 248.5

9/30/2013 $1,103 $373 $1,290 $1,110 $482 $4,483 $1,567 $1,251 $969 $380 291.4 78.9 88.5 281.8 289.3

6/30/2013 $1,114 $390 $1,257 $1,137 $587 $4,399 $1,536 $1,238 $906 $298 294.2 75.1 70.9 298.4 250.1

3/31/2013 $1,090 $387 $1,120 $861 $275 $4,379 $1,518 $1,241 $873 $243 298.4 72.8 58.5 312.6 271.2

12/31/2012 $1,176 $417 $1,345 $900 $319 $4,336 $1,513 $1,220 $868 $221 294.1 73.0 53.3 313.9 294.5

9/30/2012 $1,019 $342 $1,272 $848 $195 $4,287 $1,490 $1,025 $758 $183 251.2 64.5 44.9 270.8 363.0

6/30/2012 $1,094 $372 $1,172 $889 $222 $4,317 $1,505 $720 $541 $131 174.5 45.7 31.8 188.4 307.3

3/31/2012 $1,047 $382 $1,230 $848 $200 319.8

12/31/2011 $1,127 $393 $1,063 $871 $214 267.7

Trailing twelve months

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Figure 34: Summary VBA Analysis

Source: Company data, Credit Suisse estimates.

2011 2012 2013 2014 2015 2016 2017 2018 2019

NOPAT calculation

Revenues $4,233.0 $4,336.0 $4,561.0 $4,785.0 $4,727.5 $4,817.3 $5,114.2 $5,404.9 $5,712.3

Less: Operating Expenses $3,601.0 $3,506.0 $3,741.0 $3,816.0 $3,413.0 $3,345.7 $3,353.5 $3,476.6 $3,585.2

Adjusted EBIT $632.0 $830.0 $820.0 $969.0 $1,314.5 $1,471.6 $1,760.7 $1,928.3 $2,127.2

Plus: Goodwill Amortization $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Plus: Increase in LIFO/Other Reserves $3.0 $20.0 ($17.0) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Plus: Int. Exp. of Capit. Oper. Leases $0.0 $2.9 $2.9 $4.5 $4.5 $4.5 $4.5 $4.5 $4.5

Plus: R&D Expense $0.0 $0.0 $0.0 $0.0 $1.0 $2.0 $3.0 $4.0 $5.0

Less: R&D Amortization $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Less: Cash Taxes $141.2 $309.4 $224.0 $321.6 $382.5 $428.1 $511.9 $560.5 $618.2

NOPAT $493.8 $543.4 $581.9 $651.9 $937.5 $1,050.1 $1,256.3 $1,376.3 $1,518.5

NOPAT growth 16.7% 10.1% 7.1% 12.0% 43.8% 12.0% 19.6% 9.5% 10.3%

NOPAT margin 11.7% 12.5% 12.8% 13.6% 19.8% 21.8% 24.6% 25.5% 26.6%

Average invested capital calculation

Invested Capital - FY Start $4,828.0 $5,294.4 $5,904.3 $5,803.7 $6,095.3 $6,705.3 $6,830.3 $6,955.3 $6,335.3

Plus: Incremental Invested Capital $466.4 $609.9 ($100.5) $291.5 $610.0 $125.0 $125.0 ($620.0) $126.0

Invested Capital - FY End $5,294.4 $5,904.3 $5,803.7 $6,095.3 $6,705.3 $6,830.3 $6,955.3 $6,335.3 $6,461.3

Average Invested Capital $5,061.2 $5,599.3 $5,854.0 $5,949.5 $6,400.3 $6,767.8 $6,892.8 $6,645.3 $6,398.3

Average Invested Capital Growth 109.7% 10.6% 4.5% 1.6% 7.6% 5.7% 1.8% (3.6%) (3.7%)

ROIC calculation

NOPAT $493.8 $543.4 $581.9 $651.9 $937.5 $1,050.1 $1,256.3 $1,376.3 $1,518.5

Divided by: Average Invested Capital $5,061.2 $5,599.3 $5,854.0 $5,949.5 $6,400.3 $6,767.8 $6,892.8 $6,645.3 $6,398.3

ROIC 9.8% 9.7% 9.9% 11.0% 14.6% 15.5% 18.2% 20.7% 23.7%

WACC calculation

Debt to total adjusted market capital 4.6% 18.5% 14.8% 14.8% 20.0% 20.0% 20.0% 20.0% 20.0%

Cost of equity 8.0% 6.5% 7.1% 7.1% 7.2% 7.2% 7.2% 7.2% 7.2%

Cost of debt 3.6% 3.7% 3.6% 3.6% 3.1% 3.1% 3.1% 3.1% 3.1%

WACC 7.8% 6.0% 6.6% 6.6% 6.3% 6.3% 6.3% 6.3% 6.3%

Economic profit calculation

ROIC 9.8% 9.7% 9.9% 11.0% 14.6% 15.5% 18.2% 20.7% 23.7%

Less: WACC 7.8% 6.0% 6.6% 6.6% 6.3% 6.3% 6.3% 6.3% 6.3%

ROIC - WACC 2.0% 3.7% 3.4% 4.4% 8.3% 9.2% 11.9% 14.4% 17.4%

Times: Average Invested Capital $5,061.2 $5,599.3 $5,854.0 $5,949.5 $6,400.3 $6,767.8 $6,892.8 $6,645.3 $6,398.3

Economic profit $100.6 $208.8 $196.7 $260.4 $531.9 $621.2 $819.5 $955.1 $1,113.0

Historical results Projections

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Figure 35: Summary Valuation Statistics (Calendar Year)

Source: Company data, Credit Suisse estimates.

Historical results Projections

2011 2012 2013 2014 2015E 2016E 2017E

Price $35.00 $35.00 $31.22 $43.20 $43.05 $43.05 $43.05

Revenue $4,233 $4,336 $4,561 $4,785 $4,727 $4,817 $5,114

Price/revenue 4.1x 4.0x 3.4x 4.5x 4.5x 4.4x 4.2x

EBITDA $921 $1,055 $1,257 $1,329 $1,484 $1,604 $1,893

EBITDA per share $1.84 $2.11 $2.51 $2.65 $2.97 $3.23 $3.83

Price/EBITDA 19.0x 16.6x 12.4x 16.3x 14.5x 13.3x 11.2x

Net income $503 $539 $705 $786 $872 $888 $1,130

Diluted earnings per share $1.01 $1.08 $1.41 $1.57 $1.74 $1.78 $2.50

Price/EPS 34.8x 32.5x 22.2x 27.6x 24.7x 24.2x 17.2x

Net Income $503 $539 $705 $786 $872 $888 $1,130

Depreciation & Amortization $115 $134 $155 $143 $170 $132 $132

Incremental invested capital $466 $610 ($101) $292 $610 $125 $125

Free cash flow $152 $63 $961 $637 $432 $895 $1,137

Free cash flow yield 0.9% 0.4% 6.2% 2.9% 2.0% 4.2% 5.3%

Cash $79 $317 $610 $598 $592 $1,024 $1,920

Debt $575 $582 $3,657 $3,652 $3,626 $3,626 $3,626

Shares outstanding 500.0 500.0 500.1 501.1 499.6 496.5 493.8

Market capitalization $17,500 $17,500 $15,614 $21,646 $21,508 $21,376 $21,259

Enterprise value $17,996 $17,765 $18,661 $24,700 $24,542 $23,977 $22,965

EV/EBITDA 19.5x 16.8x 14.8x 18.6x 16.5x 15.0x 12.1x

3 February 2016

Zoetis (ZTS) 33

Companies Mentioned (Price as of 02-Feb-2016) ABAXIS (ABAX.OQ, $43.13) Aratana Therapeutics (PETX.OQ, $3.2) Bayer (BAYGn.DE, €100.35) Eli Lilly & Co. (LLY.N, $76.3) Henry Schein Inc. (HSIC.OQ, $150.86) IDEXX Laboratories (IDXX.OQ, $71.44) Kindred Bio (KIN.OQ, $3.4) Merck & Co., Inc. (MRK.N, $50.41) Neogen (NEOG.OQ, $52.4) Parnell Pharma (PARN.OQ, $2.5) Perrigo Company plc (PRGO.N, $144.01) PetMed Express (PETS.OQ, $17.66) Phibro Animal Health (PAHC.OQ, $33.54) Sanofi (SASY.PA, €75.27) The Patterson Companies (PDCO.OQ, $42.79) VCA (WOOF.OQ, $49.9) Vetoquinol (VETO.PA, €36.22) Virbac FR (VIRB.PA, €165.75) Zoetis (ZTS.N, $41.72, OUTPERFORM, TP $58.0)

Disclosure Appendix

Important Global Disclosures I, Erin Wilson, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Zoetis (ZTS.N)

ZTS.N Closing Price Target Price

Date (US$) (US$) Rating

20-Mar-13 33.51 36.00 N *

22-May-13 33.55 NR

23-May-13 32.84 R

* Asterisk signifies initiation or assumption of coverage.

N EU T RA L

N O T RA T ED

REST RICT ED

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2 nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may b e assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

3 February 2016

Zoetis (ZTS) 34

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 56% (36% banking clients) Neutral/Hold* 31% (29% banking clients) Underperform/Sell* 12% (42% banking clients) Restricted 1% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

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Target Price and Rating Valuation Methodology and Risks: (12 months) for Zoetis (ZTS.N)

Method: Our ZTS $58/share TP and Outperform rating is based on 2017E P/E and EV/EBITDA multiples of 23.2x and 16.0x, respectively, which is more aligned with its peer group of animal health products companies and reflects optimism regarding its profit margin profile, as it separates from Pfizer. Given its underlying revenue growth profile, profit margin opportunity, and its long term ROIC potential, we view our Outperform rating as justified.

Risk: Downside risks to our $58/share TP and Outperform rating include slower revenue or earnings growth from weather-related, epidemiological, FX, or macroeconomic headwinds, execution risk to cost and capital structure initiatives, as well as activist involvement.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names The subject company (ZTS.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (ZTS.N) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (ZTS.N) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (ZTS.N) within the next 3 months. As of the date of this report, Credit Suisse makes a market in the following subject companies (ZTS.N).

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3 February 2016

Zoetis (ZTS) 35

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