S-1/A 1 d381653ds1a.htm AMENDMENT NO. 6 TO FORM S-1 Amendment No. 6 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on January 28, 2013

Registration No. 333-183254

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Amendment No. 6 to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Zoetis Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   2834  

46-0696167

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification No.)

 

(I.R.S. Employer

Identification No.)

c/o Pfizer Inc.

5 Giralda Farms

Madison, New Jersey 07940

(973) 660-5000

(Address, Including Zip Code, of Registrant’s Principal Executive Offices)

 

 

Juan Ramón Alaix

Chief Executive Officer

Zoetis Inc.

c/o Pfizer Inc.

5 Giralda Farms

Madison, New Jersey 07940

(973) 660-5000

(Name, Address and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

Stacy J. Kanter, Esq.

Dwight S. Yoo, Esq.

Skadden, Arps, Slate, Meagher & Flom LLP

Four Times Square

New York, New York 10036

(212) 735-3000

(212) 735-2000 (facsimile)

 

Richard D. Truesdell, Jr., Esq.

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, New York 10017

(212) 450-4000

(212) 701-5800 (facsimile)

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one)

 

Large accelerated filer  ¨     Accelerated filer  ¨     Non-accelerated filer  x     Smaller reporting company  ¨

 

 

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE AN AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. The debt-for-equity exchange parties may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated January 28, 2013

Prospectus

 

LOGO

86,100,000 Shares

Zoetis Inc.

Class A common stock

 

 

This is the initial public offering of Class A common stock of Zoetis Inc. All of our shares of common stock are currently held by Pfizer Inc.

In connection with this offering, Pfizer will exchange shares of our Class A common stock for indebtedness of Pfizer held by certain of the underwriters, which we refer to, in such role, as the “debt-for-equity exchange parties.” The debt-for-equity exchange parties will then sell these shares pursuant to this offering. As a result, the debt-for-equity exchange parties, and not Pfizer or Zoetis, will receive the net proceeds from the sale of the shares in this offering. Prior to this offering, there has been no public market for our Class A common stock. Our Class A common stock has been approved for listing on the New York Stock Exchange, or NYSE, under the symbol “ZTS.” The estimated initial public offering price is between $22.00 and $25.00 per share of Class A common stock.

In connection with this offering, we will have two classes of authorized common stock: Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock will be identical, except with respect to voting and conversion rights. The holders of Class A common stock and Class B common stock will each be entitled to one vote per share for all matters submitted to a vote of stockholders other than with respect to the election of directors. With respect to the election of directors, the holders of Class B common stock will be entitled to ten votes per share, and the holders of Class A common stock will be entitled to one vote per share. Each share of Class B common stock held by Pfizer or one of its subsidiaries will be convertible into one share of Class A common stock at any time but will not be convertible if held by any other holder.

Investing in our Class A common stock involves a high degree of risk. See “Risk factors ” beginning on page 16.

 

     Per share      Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions

   $                    $                

Proceeds to the debt-for-equity exchange parties, before expenses(1)

   $                    $                

 

  (1) We and Pfizer have agreed to reimburse the underwriters for certain FINRA-related expenses. See “Underwriting.”

The debt-for-equity exchange parties have granted the underwriters an option for a period of 30 days to purchase from them up to 12,915,000 additional shares of Class A common stock. The debt-for-equity exchange parties, and not Pfizer or Zoetis, will receive the net proceeds from any shares of Class A common stock sold pursuant to this option to purchase additional shares.

Delivery of the shares of Class A common stock will be made on or about                     , 2013 through the book-entry facilities of The Depository Trust Company.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

J.P. Morgan   BofA Merrill Lynch   Morgan Stanley

 

Barclays   Citigroup   Credit Suisse   Deutsche Bank Securities   Goldman, Sachs & Co.   Guggenheim Securities   Jefferies

 

BNP PARIBAS   HSBC   Loop Capital Markets   RBC Capital Markets   The Williams Capital Group, L.P.   UBS Investment Bank
Lebenthal Capital Markets   Piper Jaffray   Ramirez & Co., Inc.

 

                    , 2013


Table of Contents

LOGO


Table of Contents

Table of contents

 

Summary

     1   

Risk factors

     16   

Cautionary statement concerning forward-looking statements

     42   

Use of proceeds

     43   

Dividend policy

     44   

Dilution

     45   

Capitalization

     46   

Selected historical combined financial data

     47   

Unaudited pro forma condensed combined financial statements

     49   

The Separation and Distribution transactions

     58   

Management’s discussion and analysis of financial condition and results of operations

     60   

Industry

     96   

Business

     102   

Management

     124   

Principal and selling stockholder

     152   

Certain relationships and related party transactions

     153   

Description of certain indebtedness

     166   

Description of capital stock

     168   

Shares eligible for future sale

     177   

Material United States federal income and estate tax consequences to non-U.S. holders

     179   

Underwriting (Conflicts of interest)

     182   

Legal matters

     190   

Experts

     190   

Where you can find more information

     190   

Index to financial statements

     F-1   

 

 

Zoetis Inc., Pfizer Inc., the debt-for-equity exchange parties and the underwriters have not authorized anyone to provide any information other than that contained or incorporated by reference in this prospectus or in any free writing prospectus prepared by or on behalf of Zoetis Inc. None of Zoetis Inc., Pfizer Inc., the debt-for-equity exchange parties or the underwriters are making an offer to sell these securities in any jurisdiction where the offer or sale thereof is not permitted. Zoetis Inc., Pfizer Inc., the debt-for-equity exchange parties and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. The information contained in this prospectus is accurate only as of the date of this prospectus.

 

i


Table of Contents

 

Unless the context requires otherwise: (a) references to “Zoetis,” our “company,” “we,” “us” or “our” refer to Zoetis Inc., a Delaware corporation, and its subsidiaries after giving effect to the transactions described under “The Separation and Distribution transactions—The Separation;” and (b) references to “Pfizer” refer to Pfizer Inc., a Delaware corporation, and its subsidiaries other than Zoetis and Zoetis’s subsidiaries. Accordingly, unless the context requires otherwise, statements relating to our history in this prospectus describe the history of Pfizer’s animal health business unit.

Currency amounts in this prospectus are stated in United States dollars, unless otherwise indicated.

 

 

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market share, is based on information from Vetnosis Limited, or Vetnosis, a research and consulting firm specializing in global animal health and veterinary medicine, and management estimates. Vetnosis is a leading provider of research products, commercial information and analysis of the global animal health sector. The information from Vetnosis contained in this prospectus was not prepared by Vetnosis on our behalf. Management estimates are derived from publicly available information, our knowledge of our industry and assumptions based on such information and knowledge, which we believe to be reasonable. Our management estimates have not been verified by any independent source, and we have not independently verified any third-party information. In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk factors.” These and other factors could cause future performance to differ materially from our assumptions and estimates. See “Cautionary statement concerning forward-looking statements.”

 

 

The name and mark, Pfizer, and other trademarks, trade names and service marks of Pfizer appearing in this prospectus are the property of Pfizer. Prior to the completion of this offering, Zoetis and other trademarks, trade names and service marks of Zoetis appearing in this prospectus are the property of Pfizer, and after the completion of this offering, Zoetis and other trademarks, trade names and service marks of Zoetis appearing in this prospectus will be the property of Zoetis. This prospectus also contains additional trade names, trademarks and service marks belonging to Pfizer and to other companies. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

 

ii


Table of Contents

Summary

This summary highlights information included elsewhere in this prospectus and does not contain all of the information you should consider in making an investment decision. You should read this entire prospectus carefully, including the sections entitled “Risk factors,” “Cautionary statement concerning forward-looking statements,” “Selected historical combined financial data,” “Unaudited pro forma condensed combined financial statements” and “Management’s discussion and analysis of financial condition and results of operations” and our combined financial statements and the notes thereto before making an investment decision regarding our Class A common stock.

Our company

Zoetis is a global leader in the discovery, development, manufacture and commercialization of animal health medicines and vaccines, with a focus on both livestock and companion animals. For more than 60 years, as a business unit of Pfizer, we have been committed to enhancing the health of animals and bringing solutions to our customers who raise and care for them. Measured by our revenues of $4.2 billion for the year ended December 31, 2011, we are the largest animal health medicines and vaccines business, with our products sold in more than 120 countries and across eight core species and five major product categories.

With our sales organization of approximately 3,400 employees, we directly market our portfolio of more than 300 product lines to livestock producers and veterinarians located in approximately 70 countries across North America, Europe, Africa, Asia, Australia and Latin America, and are a market leader in nearly all of the major regions in which we operate. Through our efforts to establish an early and direct presence in many emerging markets, such as Brazil, China and India, emerging markets contributed 27% of our revenues for the year ended December 31, 2011, which we believe makes us the largest animal health medicines and vaccines business as measured by revenues across emerging markets as a whole. In markets where we do not have a direct commercial presence, we generally contract with distributors that provide logistics and sales and marketing support for our products.

We believe our investments in the industry’s largest sales organization, which includes an extensive network of technical and veterinary operations specialists, our high-quality manufacturing and reliability of supply, and our long track record of developing products that meet customer needs, lead to enduring and valued relationships with our customers. From 2004 to 2011, we obtained approximately one-fourth of all animal health medicine approvals granted by the U.S. Food and Drug Administration, or FDA, and approximately one-fifth of all animal health vaccine approvals granted by the U.S. Department of Agriculture, or USDA. The majority of our research and development, or R&D, programs focus on brand lifecycle development, which is defined as R&D programs that leverage existing animal health products by adding new species or claims, achieving approvals in new markets or creating new combinations and reformulations.

We believe our ability to successfully position our diverse portfolio of products with high brand recognition in attractive markets and execute our operating plan has contributed to our financial performance over the last several years. For the nine months ended September 30, 2012, our revenues were $3.2 billion, reflecting growth of 2% compared to the nine months ended October 2, 2011. For the years ended December 31, 2011 and 2010, our revenues were $4.2 billion and $3.6 billion, reflecting growth of 18% and 30% compared to the prior year periods.

As a result of the impact of recent significant acquisitions and related government-mandated divestitures on the revenue numbers in our statement of operations, during the nine months ended September 30, 2012 and October 2, 2011 and the years ended December 31, 2011, 2010 and 2009, the growth trend on our existing portfolio from year to year is not readily apparent. We believe that it is not only important to understand overall revenue growth, but also existing portfolio growth year over year. As such, we utilize “base revenue growth.” Base revenue growth is defined as revenue growth excluding the impact of incremental revenues from recent

 

 

1


Table of Contents

significant acquisitions, government-mandated divestitures and foreign exchange. Our base revenue growth was 5% in the nine months ended September 30, 2012, 7% in 2011 and 7% in 2010 compared to the prior year periods. For a more complete description of base revenue growth, see “Management’s discussion and analysis of financial condition and results of operations—Analysis of the combined statements of operations.”

For the nine months ended September 30, 2012, our Adjusted net income (a non-GAAP financial measure) was $482 million, reflecting growth of 27% compared to the nine months ended October 2, 2011. In 2011 and 2010, our Adjusted net income was $503 million and $275 million, reflecting growth of 83% and 46% compared to the prior year periods. For the nine months ended September 30, 2012, our net income attributable to Zoetis was $446 million, reflecting growth of 89% compared to the nine months ended October 2, 2011. In 2011 and 2010, our net income attributable to Zoetis was $245 million and $110 million, reflecting growth of 123% and 210% compared to the prior year periods. For a reconciliation of Adjusted net income to net income attributable to Zoetis, see “Management’s discussion and analysis of financial condition and results of operations—Adjusted net income.”

Our leadership in animal health medicines and vaccines extends across both livestock and companion animals. The primary livestock species are cattle (both beef and dairy), swine, poultry, sheep and fish, and the primary companion animal species are dogs, cats and horses. Our livestock products primarily prevent or treat conditions in livestock, enabling the cost-effective production of safe, high-quality animal protein, whereas our companion animal products improve the quality of and extend the life of pets and increase convenience and compliance for pet owners. Livestock and companion animal products represented approximately 66% and 34% of our revenues, respectively, for the year ended December 31, 2011.

Our more than 300 product lines include vaccines, parasiticides, anti-infectives, medicinal feed additives and other pharmaceutical products. Our product portfolio is enhanced by complementary businesses, including diagnostics, genetics, devices and services such as dairy data management, e-learning and professional consulting.

Animal health industry

The animal health industry, which focuses on both livestock and companion animals, is a growing industry that impacts billions of people worldwide. Broadly defined, as measured by revenues, the approximately $100 billion animal health industry includes all products and services, other than livestock feed and pet food, that promote livestock productivity and health and companion animal health, such as medicines and vaccines, diagnostics, medical devices, pet supplies, nutritional supplements, veterinary services and other related services.

Within this broad market, medicines and vaccines, our core area of operation, represented a global market of $22 billion, as measured by 2011 revenues, grew at a compound annual growth rate, or CAGR, of 6% between 2006 and 2011 and, excluding the impact of foreign exchange, is projected to grow at a CAGR of 6% per year between 2011 and 2016, according to Vetnosis, a research and consulting firm specializing in global animal health and veterinary medicine.

The livestock medicines and vaccines sector represented $13.1 billion of sales in 2011, or 60% of the total animal health medicines and vaccines market. This sector grew at a CAGR of 7% between 2006 and 2011 and, excluding the impact of foreign exchange, is projected to grow at a CAGR of 6% per year between 2011 and 2016, according to Vetnosis.

Growth in the livestock medicines and vaccines sector is driven by human population growth and increasing standards of living, consequently increasing demand for improved nutrition, particularly animal protein, increasing natural resource constraints driving a need for enhanced productivity, and increased focus on food safety. Livestock health and production are essential to meeting the growing demand for animal protein of a

 

 

2


Table of Contents

global population that is increasing in size and standard of living, particularly in many emerging markets. As part of the global ecosystem, livestock health is critical to assuring a safe, sustainable global food supply and reducing the outbreak of infectious disease in both humans and animals.

The cost to livestock producers of animal health medicines and vaccines is small relative to other livestock production costs, including feed, and these products help protect producers’ investments by treating and preventing diseases in herds and flocks before they become widespread, thus improving economic outcomes for producers. As a result, demand for animal health medicines and vaccines has typically been more stable than demand for other production inputs.

The companion animal medicines and vaccines sector represented $8.9 billion of sales in 2011, or 40% of the total animal health medicines and vaccines market. This sector grew at a CAGR of 6% between 2006 and 2011 and, excluding the impact of foreign exchange, is projected to grow at a CAGR of 5% per year between 2011 and 2016, according to Vetnosis.

Growth in the companion animal medicines and vaccines sector is driven by economic development and related increases in disposable income, increasing pet ownership, companion animals living longer, increasing medical treatment of companion animals and advances in animal health medicines and vaccines. Industry sources indicate that companion animals improve the physical and emotional well-being of pet owners. Pet ownership and spending per pet are increasing globally, and industry sources report that pet owners indicate a preference for reducing spending on other aspects of their lifestyle, including entertainment, clothing and household goods, before reducing spending on petcare.

Animal health distinctions from human health

The business of developing and marketing animal health medicines and vaccines shares a number of characteristics with the business of developing and marketing medicines and vaccines for human health. These similarities include complex and regulated product manufacturing, products that must be proven efficacious and safe in clinical trials to be approved by regulators, a reliance on new product development through R&D and products that are marketed based on labeled claims regarding impacts on health. However, there are also significant differences between the animal health medicines and vaccines and human health businesses, including:

 

 

R&D is faster, less expensive and more predictable and sustainable. R&D for animal health generally requires fewer clinical studies, involves fewer subjects and is conducted directly in the target species. As a result, decisions on the potential efficacy and safety of products often can be made more quickly, and the likelihood of success often can be established earlier in development than in human health R&D. While the development of new chemical and biological entities through new product R&D continues to play an important role, the majority of animal health R&D investment is focused on brand lifecycle development. These factors generally yield faster, less expensive and more predictable R&D processes and more sustainable R&D pipelines as compared to human health.

 

 

More diverse product portfolios. In general, animal health medicines and vaccines businesses are less reliant on a small number of top selling key products than human health businesses. Animal health products are developed for multiple species and sold across different regions, which may have environmental, cultural, epidemiological and other differences that contribute to distinct product requirements. As a result, animal health products often have a smaller market size, and the performance of any single product typically has less impact on an animal health medicines and vaccines business as compared to a human health business.

 

 

Partnership relationships with customers. While some industry participants rely on distributors to market and sell their products, particularly in certain emerging markets, the animal health industry typically uses a

 

 

3


Table of Contents
 

combination of sales representatives to inform customers about the attributes of animal health products and technical and veterinary operations specialists to provide advice regarding local, regional and global trends in animal health. As a result of these relationships, sales and consulting visits are typically longer and more meaningful, and sales representatives have better access to customer decision makers, as compared to human health.

 

 

Primarily self-pay. Livestock producers and pet owners generally pay for animal healthcare out-of-pocket. Purchasers make decisions without the influence of insurance companies or government payors that are often involved in product and pricing decisions in human healthcare. Livestock producers are able to see measurable economic outcomes related to the use of animal health medicines and vaccines, as compared to human health in which outcomes can be less certain and more difficult to demonstrate. Companion animal veterinarians continue to be key decision-makers and dispensers of medicines and vaccines for companion animals. The sale of animal health products directly to pet owners is a meaningful contributor to veterinary practice economics. We believe that these dynamics result in less pricing pressure than in human health.

 

 

Strong brand loyalty and less generic competition. Generic competition in the animal health industry is less than in human health. The reasons for this include the smaller average market size of each product opportunity, the importance of direct distribution and education to veterinarians and livestock producers and the primarily self-pay nature of the business. In addition, companion animal health products are often directly prescribed and dispensed by veterinarians. The importance of quality and safety concerns to pet owners, veterinarians and livestock producers also contributes to animal health brand loyalty, which we believe often continues after the loss of patent-based and regulatory exclusivity.

Our segments

Due to meaningful differences in customer needs across different regions, we organize and operate our business in four regions. Within each of these regional segments, we offer a diversified product portfolio for both livestock and companion animal customers in order to capitalize on local and regional trends and customer needs. Our business segments are:

 

 

United States. Revenues of $1,294 million and $1,659 million represented 41% and 39% of total revenues for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. We experienced base revenue growth of 7% in 2011 and 13% in 2010 and 6% for the nine months ended September 30, 2012 in this segment.

 

 

Europe/Africa/Middle East. Revenues of $799 million and $1,144 million represented 25% and 27% of total revenues for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. Key developed markets in this segment include the United Kingdom, Germany and France. Key emerging markets in this segment include Russia, Turkey and South Africa. We experienced base revenue growth of 3% in 2011 and (1)% in 2010 and less than 1% for the nine months ended September 30, 2012 in this segment.

 

 

Canada/Latin America. Revenues of $549 million and $788 million represented 18% and 19% of total revenues for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. The developed market in this segment is Canada. Key emerging markets in this segment include Brazil and Mexico. We experienced base revenue growth of 9% in 2011 and 5% in 2010 and 4% for the nine months ended September 30, 2012 in this segment.

 

 

Asia/Pacific. Revenues of $518 million and $642 million represented 16% and 15% of total revenues for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. Key developed markets in this segment include Australia, Japan, New Zealand and South Korea. Key emerging markets in this segment include India and China. We experienced base revenue growth of 12% in 2011 and 15% in 2010 and 8% for the nine months ended September 30, 2012 in this segment.

 

 

4


Table of Contents

Our competitive strengths

We believe that the following strengths create sustainable competitive advantages that will enable us to continue our growth as a leader in the animal health medicines and vaccines industry:

 

 

Global leader with scale and scope. According to Vetnosis, as measured by revenues in 2011, we are the market leader in all of the major regions in which we operate, with the exception of Western Europe, where we hold the number two position. We believe we have an industry-leading global footprint, with products sold in more than 120 countries. Following this offering, we expect that we will be the largest standalone company exclusively focused on animal health medicines and vaccines.

 

 

Established direct presence in emerging markets. We have an established direct presence in many important emerging markets, and we are a leader in many of the emerging markets in which we operate. We believe this direct presence has enabled us to become the largest animal health medicines and vaccines business as measured by revenues across emerging markets as a whole. Emerging markets contributed approximately 27% of our revenues for the year ended December 31, 2011.

 

 

Diversified product portfolio. We market products across eight core species and five major product categories, and our portfolio contains more than 300 product lines. The depth of our product portfolio enables us to address the varying needs of different customers. Generally, because we have lower product sales concentration than many of our competitors, the performance of any single product has less impact on our business as compared to other, less-diversified animal health medicines and vaccines businesses. In 2011, our top selling product line, the ceftiofur line, contributed less than 8% of our revenues, and our top ten best selling product lines contributed less than 38% of our revenues.

 

 

Leader in direct sales and marketing with strong customer relationships. Our commercial model emphasizes direct selling, and we believe we are less reliant on distributors than our competitors. We believe our sales organization, consisting of approximately 3,400 employees, is the largest in our industry, with direct operations in approximately 70 countries. Our sales organization is supported by our technical and veterinary operations specialists, who advise our customers with in-depth technical and medical expertise and disease education. Our direct relationships and our direct global presence create a high level of local and regional specialization, which allows us to rapidly capitalize on market-specific situations and provides a global platform for R&D and business expansion. We believe we achieve both stronger customer relationships and better economic returns on our products by emphasizing these direct relationships.

 

 

Leader in product development—new product R&D and brand lifecycle development. We believe that we are a leader in animal health R&D. We have a track record of developing products that meet the needs of our customers. From 2004 to 2011, we obtained approximately one-fourth of all animal health medicine approvals granted by the FDA and approximately one-fifth of all animal health vaccine approvals granted by the USDA. While new chemical and biological entities play an important role in our growth, the majority of our R&D investment is in brand lifecycle development, which is defined as R&D programs that leverage existing animal health products by adding new species or claims, achieving approvals in new markets or creating new combinations and reformulations.

 

 

High-quality products delivered reliably by our world-class manufacturing operations. We believe that our customers value high-quality manufacturing and reliability of supply. We utilize a diversified network of 29 proprietary manufacturing sites located in 11 countries and numerous third-party contract manufacturing organizations, which we refer to as CMOs, to maximize operational efficiencies and to introduce products quickly and efficiently. Our manufacturing sites experienced approximately 170 regulatory inspections globally between 2007 and 2011, with no findings that required material remediation or other penalties. We believe this reflects the strong quality controls and quality assurance programs in place at our manufacturing sites.

 

 

Dedicated employees and experienced management team. We believe that we have more professionally educated animal health experts on our team than any of our competitors. Our research team has an average

 

 

5


Table of Contents
 

tenure of more than ten years, and our sales organization employees have, on average, been with us for more than five years. Several members of our executive team lead and have led important and influential animal health industry organizations.

 

 

Track record of strong top-line revenue growth and significant cash flow generation. We have generated revenue growth at a CAGR of 24% over the three years ended December 31, 2011. Our revenue growth, driven by a diverse product portfolio and acquisitions, has generated significant cash flow. We have generated base revenue growth of 7% and 7% for the years ended December 31, 2011 and December 31, 2010, respectively.

Our growth strategies

We are committed to enhancing the health of animals and bringing solutions to our customers who raise and care for them. We intend to continue to grow our business by pursuing the following core strategies:

 

 

Leverage our direct local presence and strong customer relationships. We believe our direct selling commercial model and the brand loyalty enjoyed by our existing products provide us with operational efficiencies and access to an array of new growth opportunities, including a platform to encourage the adoption by our customers of more sophisticated animal health products. We believe our close contact with customers provides us with an in-depth understanding of their businesses, which allows us to develop products that address unmet customer needs.

 

 

Further penetrate emerging markets. We believe we are well-positioned in many emerging markets, based on our diverse product portfolio and our regional and local focus, and that we have further opportunities to expand in emerging markets by reaching new customers, by introducing more of our products and by supporting the adoption by our customers of more sophisticated medicines and vaccines. Furthermore, we believe that consolidation of livestock producers in certain emerging markets will drive adoption of our products. We intend to continue to efficiently develop and market new products that respond to the needs of these customers and provide them with strong customer service and technical support.

 

 

Pursue new product development and value-added brand lifecycle development to extend our product portfolio. We intend to continue to develop and grow our product portfolio by developing new chemical and biological entities through new product R&D as well as by expanding our product lines by adding new species or claims, achieving approvals in new countries and creating new combinations and reformulations. Our R&D efforts enable us to deliver innovative products to address unmet needs and evolve our product lines so they remain relevant for our customers. We leverage our strong direct presence in many regions, which we believe allows us to cost-effectively develop and introduce new products, including brand lifecycle development products.

 

 

Remain the partner of choice for access to new products and technologies. We intend to continue to expand our extensive network of research partnerships around the globe in order to gain access to new technologies, pharmaceutical targets and vaccine antigens. Through participation in over 100 research alliances with leading universities and research institutes, we support cutting-edge research and secure the right to develop and commercialize new products and technologies. We also intend to continue to grow our business through smaller scale acquisitions, asset purchases, in-licensing transactions, supply and distribution agreements and other strategic partnerships. Subject to certain restrictions pursuant to the R&D collaboration and license agreement, following this offering, we expect to have access to Pfizer’s proprietary compound library and database to develop new products. We also intend to explore opportunities to enter into collaboration agreements and external alliances with other parties, including parties that may have chosen not to collaborate with us while we were a business unit of Pfizer. As a result, we will continue to offer and develop products that add value for veterinary professionals, livestock producers and pet owners.

 

 

Continue to provide high-quality products and improve manufacturing production margins. We believe that we are a leader in manufacturing quality and in supply reliability. Our manufacturing and supply chain

 

 

6


Table of Contents
 

provide us with a global platform for continued expansion, including in emerging markets, and we believe that we will continue to increase our production efficiencies and expand production margins as our business grows. Our operational efficiency initiatives have delivered consistent gross margin improvements for our legacy products, and as we have integrated acquisitions we have also applied these operational efficiency initiatives to improve production margins.

 

 

Expand into complementary businesses to become a more complete, trusted partner in providing solutions. We intend to continue to expand our presence in complementary businesses, including diagnostics, genetics, devices and services. We also intend to expand our complementary services, including dairy data management, e-learning and professional consulting, to help our customers improve their practice management capabilities and production efficiencies. We believe that these expanded offerings, supported by our technical expertise, will drive an outcomes-based approach to animal healthcare that has the potential to generate incremental revenues, as well as increase customer loyalty and sales of our products.

The Separation

Prior to the completion of this offering, we will be a wholly-owned subsidiary of Pfizer, and all of our outstanding shares of common stock will be owned by Pfizer.

Prior to the completion of the senior notes offering described below, through a series of steps, Pfizer transferred to us its subsidiaries holding substantially all of the assets and liabilities of its animal health business. In exchange, we issued or agreed to transfer to Pfizer: (i) all of the issued and outstanding shares of our Class A common stock; (ii) all of the issued and outstanding shares of our Class B common stock; (iii) the Pfizer-owned notes (as described below); and (iv) an amount of cash equal to substantially all of the net proceeds we will receive in the senior notes offering, which amount will be paid immediately prior to the completion of this offering. In addition, immediately prior to the completion of this offering, we and Pfizer intend to enter into, or have entered into, certain agreements that will provide a framework for our ongoing relationship with Pfizer. For a description of these agreements, see “Certain relationships and related party transactions—Relationship with Pfizer.” We refer to the separation transactions, as described in “The Separation and Distribution transactions—The Separation,” as the “Separation.”

The underwriting and the debt-for-equity exchange

Instead of selling shares of our Class A common stock directly to the underwriters for cash, Pfizer will first exchange the shares of our Class A common stock to be sold in this offering with certain of the underwriters, which we refer to, in such role, as the “debt-for-equity exchange parties,” for outstanding indebtedness of Pfizer held by the debt-for-equity exchange parties. The debt-for-equity exchange parties will then sell the shares to the underwriters for cash. This debt-for-equity exchange will occur on the settlement date of this offering immediately prior to the settlement of the debt-for-equity exchange parties’ sale of the shares to the underwriters. If the underwriters exercise their option to purchase additional shares of Class A common stock from the debt-for-equity exchange parties, Pfizer will convert shares of Class B common stock into shares of Class A common stock and exchange such shares of Class A common stock with the debt-for-equity exchange parties. The debt-for-equity exchange parties will then sell such shares of Class A common stock to the underwriters for cash. This debt-for-equity exchange will occur on the settlement date of such option exercise immediately prior to the settlement of the debt-for-equity exchange parties’ sale of such shares to the underwriters. We refer to these exchanges collectively as the “debt-for-equity exchange.”

We expect that the indebtedness of Pfizer held by the debt-for-equity exchange parties will have an aggregate principal amount of at least $2,475,375,000 based on a maximum assumed initial public offering price of $25.00 per share, which is the high point of the price range set forth on the cover of this prospectus. The amount of indebtedness of Pfizer held by the debt-for-equity exchange parties is expected to be sufficient to acquire all of

 

 

7


Table of Contents

the shares of our Class A common stock to be sold in this offering, inclusive of the shares that may be sold pursuant to the underwriters’ option to purchase additional shares. Upon completion of the debt-for-equity exchange, the Pfizer indebtedness exchanged in such debt-for-equity exchange will be retired. We do not guarantee or have any other obligations in respect of the Pfizer indebtedness. See “Underwriting—The debt-for-equity exchange.”

Immediately following the completion of this offering, Pfizer will own 100% of our outstanding Class B common stock and no shares of our Class A common stock, giving Pfizer 82.8% of the economic interest and the combined voting power in shares of our outstanding common stock other than with respect to the election of directors and 98.0% of the combined voting power of our outstanding common stock with respect to the election of directors (or 80.2% and 97.6%, respectively, if the underwriters exercise their option to purchase additional shares in full). We refer to the Class A common stock and Class B common stock collectively as our “common stock.”

Senior notes offering

On January 28, 2013, we issued $3,650,000,000 aggregate principal amount of our senior notes in a private placement. The senior notes are comprised of $400,000,000 aggregate principal amount of our 1.150% Senior Notes due 2016, $750,000,000 aggregate principal amount of our 1.875% Senior Notes due 2018, $1,350,000,000 aggregate principal amount of our 3.250% Senior Notes due 2023 and $1,150,000,000 aggregate principal amount of our 4.700% Senior Notes due 2043. We refer to this private placement as the “senior notes offering.”

We sold $2.65 billion aggregate principal amount of our senior notes through the initial purchasers in the senior notes offering and Pfizer transferred $1.0 billion aggregate principal amount of our senior notes, which we issued to Pfizer prior to the completion of the senior notes offering, to certain of the initial purchasers, who sold such senior notes through the initial purchasers in the senior notes offering. We will pay an amount of cash equal to substantially all of the net proceeds that we received in the senior notes offering to Pfizer prior to the completion of this offering. We refer to the $1.0 billion aggregate principal amount of our senior notes that we issued to Pfizer as the “Pfizer-owned notes.” See “Description of certain indebtedness—Senior notes offering.”

Credit facility

In December 2012, we entered into a revolving credit agreement with a syndicate of banks providing for a five-year $1.0 billion senior unsecured revolving credit facility, which we refer to as the “credit facility.” The credit facility will not be available for borrowings until the date on which certain conditions, including the completion of this offering and the receipt of certain investment grade ratings, are satisfied. We expect that these conditions will be met concurrently with the completion of this offering. Subject to certain conditions, we will have the right to increase the credit facility to up to $1.5 billion. See “Description of certain indebtedness—Credit facility.”

Commercial paper program

We expect to enter into a commercial paper program with a capacity of up to $1.0 billion prior to or concurrently with the completion of this offering. While we do not anticipate that any commercial paper will be issued under the commercial paper program at the time of this offering, we may incur indebtedness under this program in the future.

 

 

8


Table of Contents

The Distribution

Pfizer has informed us that, following this offering, it may make a tax-free distribution to its stockholders of all or a portion of its remaining equity interest in us, which may include one or more distributions effected as a dividend to all Pfizer stockholders, one or more distributions in exchange for Pfizer shares or other securities, or any combination thereof. We refer to any such potential distribution as the “Distribution.”

Pfizer has received a private letter ruling from the Internal Revenue Service, or the IRS, substantially to the effect that, among other things, the Distribution will qualify as a transaction that is tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code, or the Code. Pfizer has no obligation to pursue or consummate any further dispositions of its ownership interest in us, including through the Distribution, by any specified date or at all. If pursued, the Distribution would be subject to various conditions, including receipt of any necessary regulatory or other approvals, the existence of satisfactory market conditions and the continuing application of Pfizer’s private letter ruling from the IRS and the receipt of opinions of counsel to the effect that such Distribution would be tax-free to Pfizer and its stockholders. The conditions to the Distribution may not be satisfied, Pfizer may decide not to consummate the Distribution even if the conditions are satisfied or Pfizer may decide to waive one or more of these conditions and consummate the Distribution even if all of the conditions are not satisfied.

Risk factors

There are a number of risks that you should understand before making an investment decision regarding this offering. These risks are discussed more fully in the section entitled “Risk factors” following this prospectus summary. These risks include, but are not limited to:

 

 

emerging restrictions and bans on the use of antibacterials in food-producing animals;

 

 

perceived adverse effects on human health linked to the consumption of food derived from animals that utilize our products;

 

 

increased regulation or decreased governmental support relating to the raising, processing or consumption of food-producing animals;

 

 

an outbreak of infectious disease carried by animals;

 

 

adverse weather conditions and the availability of natural resources;

 

 

adverse global economic conditions;

 

 

failure of our R&D, acquisition and licensing efforts to generate new products;

 

 

failure to achieve the expected benefits of the Separation or the Distribution, which include improved strategic and operational efficiency, the adoption of a capital structure and investment and dividend policies that are best suited to our standalone company, the use of our equity to facilitate future acquisitions and improved alignment of employee incentives with our performance and growth objectives;

 

 

operation as a standalone public company without many of the resources previously available to us as a business unit of Pfizer;

 

 

control of a majority of the voting power of our common stock by Pfizer and, as a result, Pfizer’s ability to determine the outcome of our future corporate actions, including the election of our directors; and

 

 

actual or potential conflicts of interest as a result of the fact that several of our directors will simultaneously serve as employees of Pfizer.

 

 

9


Table of Contents

Conflicts of interest

The offering is being conducted in accordance with the applicable provisions of Rule 5121 of the Conduct Rules of the Financial Industry Regulatory Authority, Inc., or FINRA, because certain of the underwriters will have a “conflict of interest” pursuant to Rule 5121(f)(5)(C)(ii) by virtue of their role as debt-for-equity exchange parties, since all of the net proceeds of this offering will be received by the debt-for-equity exchange parties. Rule 5121 requires that a “qualified independent underwriter” as defined in Rule 5121 must participate in the preparation of the prospectus and perform its usual standard of diligence with respect to the registration statement and this prospectus. Accordingly, Goldman, Sachs & Co. is assuming the responsibilities of acting as the qualified independent underwriter in the offering. See “Underwriting—Conflicts of interest.”

Corporate information

We were incorporated in Delaware in July 2012. The address of our principal executive offices is currently c/o Pfizer, 5 Giralda Farms, Madison, New Jersey 07940 and we expect that our principal executive offices will be relocated following the completion of this offering. Our website is currently www.pfizerah.com. Prior to the consummation of this offering, our website will be relocated to www.zoetis.com. Information on, or accessible through, our website is not part of this prospectus.

 

 

10


Table of Contents

The offering

 

Class A common stock offered in this
offering

        
86,100,000 shares (99,015,000 shares if the underwriters exercise their option to purchase additional shares in full)

 

Common stock to be held by Pfizer
immediately after this offering

        
No shares of Class A common stock (no shares if the underwriters exercise their option to purchase additional shares in full)

 

  413,900,000 shares of Class B common stock (400,985,000 shares if the underwriters exercise their option to purchase additional shares in full)

 

Common stock to be outstanding
immediately after this offering

        
86,100,000 shares of Class A common stock (99,015,000 shares if the underwriters exercise their option to purchase additional shares in full)

 

  413,900,000 shares of Class B common stock (400,985,000 shares if the underwriters exercise their option to purchase additional shares in full)

 

Underwriters’ option

The underwriters have an option to purchase up to 12,915,000 additional shares of Class A common stock from the debt-for-equity exchange parties as described in “Underwriting.”

 

Use of proceeds

We will not receive any proceeds from the sale of our Class A common stock in this offering. All of the net proceeds from this offering will be received by the debt-for-equity exchange parties. On the settlement date of this offering immediately prior to the settlement of the debt-for-equity exchange parties’ sale of the shares to the underwriters, the debt-for-equity exchange parties will acquire the Class A common stock being sold in this offering from Pfizer in exchange for outstanding Pfizer indebtedness held by the debt-for-equity exchange parties. See “Use of proceeds.”

 

Voting rights

In connection with this offering, we will have two classes of authorized common stock: Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock will be identical, except with respect to voting and conversion rights. The holders of Class A common stock and Class B common stock will each be entitled to one vote per share for all matters submitted to a vote of stockholders other than with respect to the election of directors. With respect to the election of directors, the holders of Class B common stock will be entitled to ten votes per share, and the holders of Class A common stock will be entitled to one vote per share. Each share of Class B common stock held by Pfizer or one of its subsidiaries will be convertible into one share of Class A common stock at any time but will not be convertible if held by any other holder.

 

 

11


Table of Contents

Selling stockholder

In connection with this offering, Pfizer, as a selling stockholder for purposes of the U.S. securities laws, will exchange all of the shares of our Class A common stock being sold in this offering for indebtedness of Pfizer held by the debt-for-equity exchange parties. The debt-for-equity exchange parties will then sell these shares pursuant to this offering.

 

Conflicts of interest

Certain of the underwriters may be deemed to have a “conflict of interest” under Rule 5121 of the Conduct Rules of FINRA. See “Underwriting—Conflicts of interest.”

 

Stock exchange symbol

Our Class A common stock has been approved for listing on the NYSE under the symbol “ZTS.”

Unless the context requires otherwise, references to the number and percentage of shares of common stock to be outstanding immediately after this offering are based on 86,100,000 shares of Class A common stock and 413,900,000 shares of Class B common stock outstanding as of January 28, 2013 and:

 

 

assume the underwriters’ option to purchase additional shares will not be exercised; and

 

 

exclude 25,000,000 shares of our common stock reserved for issuance under the Zoetis 2013 Equity and Incentive Plan, from which we intend to grant at the time of this offering:

 

   

restricted stock units and stock options (or other awards as appropriate with respect to our employees in non-U.S. jurisdictions) with an approximate aggregate target value of $45 million to approximately 2,600 of our employees, including each of our named executive officers, at the time of this offering. If the initial public offering price is equal to $23.50 per share (the midpoint of the price range set forth on the cover of this prospectus), these equity grants would be comprised of an aggregate of 957,447 restricted stock units and options to purchase an aggregate of 3,588,517 shares of Class A common stock. The actual number of restricted stock units and stock options granted pursuant to the 2013 equity grants will vary depending on the actual initial public offering price per share in this offering. See “Management—Compensation discussion and analysis—Proposed Zoetis 2013 equity and incentive plan;” and

 

   

deferred stock units to Michael B. McCallister, Gregory Norden and William C. Steere, Jr., our three director nominees who are not otherwise currently employed by us or Pfizer, with a value of $140,000 for each grant. If the initial public offering price is equal to $23.50 per share (the midpoint of the price range set forth on the cover of this prospectus), each of the three non-employee director grantees would receive 5,957 deferred units. See “Management—Compensation discussion and analysis—Director compensation.”

Unless otherwise indicated, the information presented in this prospectus:

 

 

gives effect to the transactions described under “The Separation and Distribution transactions—The Separation;” and

 

 

assumes an initial public offering price of $23.50 per share of our Class A common stock, the midpoint of the price range set forth on the cover of this prospectus.

 

 

12


Table of Contents

Summary historical and

unaudited pro forma combined financial data

The summary historical combined statement of operations data for the years ended December 31, 2011, 2010 and 2009 presented below have been derived from our audited combined financial statements included elsewhere in this prospectus. The summary historical combined statement of operations data for the nine months ended September 30, 2012 and October 2, 2011 and the summary historical combined balance sheet data as of September 30, 2012 have been derived from our unaudited condensed combined financial statements included elsewhere in this prospectus. In the opinion of management, the unaudited condensed combined financial statements for the interim periods included in this prospectus include all normal and recurring adjustments that we consider necessary for a fair presentation of the financial position and operating results for these periods. The operating results for the nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012.

Our combined financial statements include expense allocations for certain support functions that are provided on a centralized basis within Pfizer, such as expenses for business technology, facilities, legal, finance, human resources, and, to a lesser extent, business development, public affairs and procurement, among others, as well as certain manufacturing and supply costs incurred by manufacturing sites that are shared with other Pfizer business units, Pfizer’s global external supply group and Pfizer’s global logistics and support group. Pfizer does not routinely allocate these costs to any of its business units. These allocations are based on either a specific identification basis or, when specific identification is not practicable, proportional cost allocation methods (e.g., using third-party sales, headcount, animal health manufacturing costs, etc.) depending on the nature of the services and/or costs.

The financial statements included in this prospectus may not be indicative of our future performance and do not necessarily reflect what our financial position and results of operations would have been had we operated as a standalone public company during the periods presented, including changes that will occur in our operations and capital structure as a result of this offering and the Separation. Our combined financial statements have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP.

The summary unaudited pro forma combined financial data has been derived from the unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2012 and for the year ended December 31, 2011, and the unaudited pro forma condensed combined balance sheet as of September 30, 2012 included elsewhere in this prospectus. The unaudited pro forma combined financial data gives effect to certain transactions, which we refer to as the “Transactions,” as if they each had occurred on January 1, 2011 for the unaudited pro forma combined statements of operations data and on September 30, 2012 for the unaudited pro forma combined balance sheet data. For an understanding of the pro forma financial statements that give pro forma effect to the Transactions, see “Unaudited pro forma condensed combined financial statements” included elsewhere in this prospectus.

The summary unaudited pro forma combined financial data is for illustrative and informational purposes only and is not intended to represent what our results of operations or financial position would have been had we operated as a standalone public company during the periods presented or if the Transactions had actually occurred as of the dates indicated above. The unaudited pro forma combined financial data should not be considered indicative of our future results of operations or financial position as a standalone public company.

You should read the summary historical and unaudited pro forma combined financial data set forth below in conjunction with the sections entitled “Selected historical combined financial data,” “Unaudited pro forma condensed combined financial statements” and “Management’s discussion and analysis of financial condition and results of operations” and our combined financial statements and notes thereto included elsewhere in this prospectus.

 

 

13


Table of Contents

Statement of operations data:

 

    Pro Forma     Historical  
    Nine Months
Ended
    Year Ended
December 31,(a)
    Nine Months
Ended
    Year Ended
December 31,(a)
 
(MILLIONS OF DOLLARS, EXCEPT PER
SHARE AMOUNTS)
  September 30,
2012
    2011     September 30,
2012
    October 2,
2011
    2011     2010     2009  

Revenues

  $ 3,160      $ 4,233      $ 3,160      $ 3,106      $ 4,233      $ 3,582      $ 2,760   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses(b)

    2,537        3,771        2,469        2,634        3,685        3,202        2,568   

Restructuring charges and certain acquisition—related costs

 

 

55

  

    154        55        108        154        202        340   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income/(loss) before provision/(benefit) for taxes on income/(loss)

    568        308        636        364        394        178        (148

Provision/(benefit) for taxes on income/(loss)

    164        113        190        126        146        67        (47
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income/(loss) before allocation to noncontrolling interests

 

 

404

  

    195        446        238        248        111        (101

Less: Net income/(loss) attributable to noncontrolling interests

    —          3        —          2        3        1        (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income/(loss) attributable to Zoetis

  $ 404      $ 192      $ 446      $ 236      $ 245      $ 110      $ (100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—basic(c)

  $ 0.81      $ 0.38        NA        NA        NA        NA        NA   

Earnings per common share—fully diluted(c)

  $ 0.81      $ 0.38        NA        NA        NA        NA        NA   

Balance sheet data:

 

(MILLIONS OF DOLLARS)    At September  30,
2012
 
      Pro Forma      Historical  

Working capital

   $ 1,858       $ 1,818   

Property, plant and equipment, less accumulated depreciation

     1,229         1,204   

Total assets

     5,837         5,904   

Allocated long-term debt(d)

     —           580   

Long-term debt(e)

     3,640         —     

Total liabilities

     4,778         1,795   

Total Zoetis equity(f)

     1,044         4,094   

 

Certain amounts may reflect rounding adjustments.

 

(a) Starting in 2011, includes the King Animal Health business, or KAH, acquired as part of Pfizer’s acquisition of King Pharmaceuticals, Inc., commencing on the acquisition date of January 31, 2011. Starting in 2009, includes Fort Dodge Animal Health, or FDAH, operations, acquired as part of Pfizer’s acquisition of Wyeth, commencing on the acquisition date of October 15, 2009.
(b) Excludes restructuring charges and certain acquisition-related costs.
(c) The weighted-average number of shares used to compute pro forma basic and diluted earnings per share is 500 million, which is also the number of shares of our common stock outstanding immediately following the completion of the Transactions.
(d) Starting in 2009, represents an allocation of Pfizer debt that was issued to partially finance the acquisition of Wyeth (including FDAH) in 2009. The debt has been allocated on a pro-rata basis using the deemed acquisition cost of FDAH as a percentage of the total acquisition cost of Wyeth. The allocated long-term debt will be retained by Pfizer following the completion of the Transactions.
(e) Reflects the incurrence of $3,650 million aggregate principal amount of senior notes in connection with the senior notes offering, net of an original issue debt discount of $10 million.
(f) On a pro forma basis, reflects the legal transfer to us of Pfizer’s subsidiaries holding substantially all of the assets and liabilities of Pfizer’s animal health business in consideration for (i) all of the issued and outstanding shares of our Class A common stock; (ii) all of the issued and outstanding shares of our Class B common stock; (iii) $1 billion aggregate principal amount of senior notes, which Pfizer disposed of in connection with the senior notes offering; and (iv) an amount of cash equal to substantially all of the net proceeds we received in the senior notes offering.

 

 

14


Table of Contents

Other data:

 

     Nine Months
Ended
     Year Ended
December 31,
 
(MILLIONS OF DOLLARS)    September 30,
2012
     October 2,
2011
     2011      2010      2009  

Adjusted net income(a)

   $ 482       $ 381       $ 503       $ 275       $ 189   

 

Certain amounts may reflect rounding adjustments.

 

(a) Adjusted net income (a non-GAAP financial measure) is defined as reported net income attributable to Zoetis excluding purchase accounting adjustments, acquisition-related costs and certain significant items. Management uses Adjusted net income, among other factors, to set performance goals and to measure the performance of the overall company, as described in “Management’s discussion and analysis of financial condition and results of operations—Adjusted net income.” We believe that investors’ understanding of our performance is enhanced by disclosing this performance measure. Reconciliations of U.S. GAAP reported net income attributable to Zoetis to non-GAAP Adjusted net income for the nine months ended September 30, 2012 and October 2, 2011, as well as reconciliations of the years ended December 31, 2011, 2010 and 2009, are provided in “Management’s discussion and analysis of financial condition and results of operations—Adjusted net income.” The Adjusted net income measure is not, and should not be viewed as, a substitute for U.S. GAAP reported net income attributable to Zoetis.

 

 

15


Table of Contents

Risk factors

Investing in our Class A common stock involves a high degree of risk. You should consider carefully the following risks, together with all the other information in this prospectus, including our combined financial statements and notes thereto, before you invest in our Class A common stock. If any of the following risks actually materializes, our operating results, financial condition and liquidity could be materially adversely affected. As a result, the trading price of our Class A common stock could decline and you could lose part or all of your investment.

Risks related to our business and industry

Restrictions and bans on the use of antibacterials in food-producing animals may become more prevalent.

The issue of the potential transfer of increased antibacterials resistance in bacteria from food-producing animals to human pathogens, and the causality of that transfer, are the subject of global scientific and regulatory discussion. Antibacterials refer to small molecules that can be used to treat or prevent bacterial infections and are a sub-categorization of the products that make up our anti-infectives and medicinal feed additives portfolios. In some countries, this issue has led to government restrictions and bans on the use of specific antibacterials in some food-producing animals, regardless of the route of administration (in feed or injectable). These restrictions are more prevalent in countries where animal protein is plentiful and governments are willing to take action even when there is scientific uncertainty. For example, in April 2012, the FDA announced guidance calling for the voluntary elimination over a period of time of the use of medically important antibacterials in animal feed for growth promotion in food production animals (medically important antibacterials include classes that are prescribed in animal and human health). The guidance provides for continued use of antibacterials in food-producing animals for treatment, control and prevention of disease under the supervision of a veterinarian. The FDA indicated that they took this action to help preserve the efficacy of medically important antibacterials to treat infections in humans. Our revenues attributable to antibacterials for livestock were approximately $841 million for the nine months ended September 30, 2012 and approximately $1.2 billion for the year ended December 31, 2011. We cannot predict whether antibacterials resistance concerns will result in additional restrictions or bans, expanded regulations or public pressure to discontinue or reduce use of antibacterials in food-producing animals, which could materially adversely affect our operating results and financial condition.

Perceived adverse effects on human health linked to the consumption of food derived from animals that utilize our products could cause a decline in the sales of such products.

Our livestock business depends heavily on a healthy and growing livestock industry. If the public perceives a risk to human health from the consumption of the food derived from animals that utilize our products, there may be a decline in the production of such food products and, in turn, demand for our products. For example, livestock producers may experience decreased demand for their products or reputational harm as a result of evolving consumer views of animal rights, nutrition and health-related or other concerns. Any reputational harm to the livestock industry may also extend to companies in related industries, including our company. Adverse consumer views related to the use of one or more of our products in livestock also may result in a decrease in the use of such products and could have a material adverse effect on our operating results and financial condition.

Increased regulation or decreased governmental financial support relating to the raising, processing or consumption of food-producing animals could reduce demand for our livestock products.

Companies in the livestock industries are subject to extensive and increasingly stringent regulations. If livestock producers are adversely affected by new regulations or changes to existing regulations, they may reduce herd sizes or become less profitable and, as a result, they may reduce their use of our products, which may materially adversely affect our operating results and financial condition. Furthermore, adverse regulations related, directly or indirectly, to the use of one or more of our products may injure livestock producers’ market position. More stringent regulation of the livestock industry or our products could have a material adverse effect on our

 

16


Table of Contents

operating results and financial condition. Also, many food-producing companies, including livestock producers, benefit from governmental subsidies, and if such subsidies were to be reduced or eliminated, these companies may become less profitable and, as a result, may reduce their use of our products.

An outbreak of infectious disease carried by animals could negatively affect the sale and production of our products.

Sales of our livestock products could be materially adversely affected by the outbreak of disease carried by animals, such as avian influenza, foot-and-mouth disease or bovine spongiform encephalopathy (otherwise known as BSE or mad cow disease), which could lead to the widespread death or precautionary destruction of animals as well as the reduced consumption and demand for animal protein. In addition, outbreaks of disease carried by animals may reduce regional or global sales of particular animal-derived food products or result in reduced exports of such products, either due to heightened export restrictions or import prohibitions, which may reduce demand for our products due to reduced herd or flock sizes. For example, in April 2012, the USDA announced that it had identified a case of BSE in California. This announcement caused certain countries to implement additional inspections of, or suspend the importation of, United States beef. Additionally, in December 2012, the World Animal Health Organization announced that a case of BSE had been identified in Brazil. This announcement similarly caused certain countries to suspend the importation of Brazilian beef. While the restrictions that were implemented as a result of these cases of BSE have not significantly affected demand for our products, the discovery of additional cases of BSE may result in additional restrictions related to, or reduced demand for, animal protein, which may have a material adverse effect on our operating results and financial condition. Also, the outbreak of any highly contagious disease near our main production sites could require us to immediately halt production of our products at such sites or force us to incur substantial expenses in procuring raw materials or products elsewhere.

Consolidation of our customers could negatively affect the pricing of our products.

Veterinarians and livestock producers are our primary customers. In recent years, there has been a trend towards the concentration of veterinarians in large clinics and hospitals. In addition, livestock producers, particularly swine and poultry producers, have seen recent consolidation in their industries. If these trends towards consolidation continue, these customers could attempt to improve their profitability by leveraging their buying power to obtain favorable pricing. The resulting decrease in our prices could have a material adverse effect on our operating results and financial condition.

Our business may be negatively affected by weather conditions and the availability of natural resources.

The animal health industry and demand for many of our animal health products in a particular region are affected by weather conditions, as usage of our products follows varying weather patterns and weather-related pressures from pests, such as ticks. As a result, we may experience regional and seasonal fluctuations in our results of operations.

In addition, livestock producers depend on the availability of natural resources, including large supplies of fresh water. Their animals’ health and their ability to operate could be adversely affected if they experience a shortage of fresh water due to human population growth or floods, droughts or other weather conditions. In the event of adverse weather conditions or a shortage of fresh water, livestock producers may purchase less of our products.

For example, the current drought impacting the United States is considered the worst in many years, impacting both the supply of corn and the availability of grazing pasture. The decrease in harvested corn has resulted in higher corn prices, which has impacted the profitability of livestock producers of cattle, pork and poultry. Higher corn prices may contribute to reductions in herd or flock size that may result in reduced spending on animal health products. Reduced availability of grazing pasture may also force cattle producers to cull their herds. Fewer heads of cattle would result in reduced demand for our products. A prolonged drought could have a material adverse effect on our operating results and financial condition.

 

17


Table of Contents

Our business is subject to risk based on global economic conditions.

The global financial markets recently have undergone and may continue to experience significant volatility and disruption. The timing and sustainability of an economic recovery is uncertain and additional macroeconomic, business and financial disruptions could have a material adverse effect on our operating results, financial condition and liquidity. Certain of our customers and suppliers have been affected directly by the economic downturn and continue to face credit issues and could experience cash flow problems that have given rise to and could continue to give rise to payment delays, increased credit risk, bankruptcies and other financial hardships that could decrease the demand for our products or hinder our ability to collect amounts due from customers. If one or more of our large customers, including distributors, discontinue their relationship with us as a result of economic conditions or otherwise, our operating results and financial condition may be materially adversely affected. In addition, economic concerns may cause some pet owners to forgo or defer visits to veterinary practices or could reduce their willingness to treat pet health conditions or even to continue to own a pet.

Our business is subject to risk based on customer exposure to rising costs and reduced customer income.

Feed, fuel and transportation and other key costs for livestock producers may increase or animal protein prices or sales may decrease. Either of these trends could cause deterioration in the financial condition of our livestock product customers, potentially inhibiting their ability to purchase our products or pay us for products delivered. Our livestock product customers may offset rising costs by reducing spending on our products, including by switching to lower-cost alternatives to our products. In addition, concerns about the financial resources of pet owners also could cause veterinarians to alter their treatment recommendations in favor of lower-cost alternatives to our products. These shifts could result in a decrease of sales of our companion animal products, especially in developed countries where there is a higher rate of pet ownership.

Changes in distribution channels for companion animal products could negatively impact our market share, margins and distribution of our products.

In most markets, companion animal owners typically purchase their animal health products directly from veterinarians. Companion animal owners increasingly could purchase animal health products from sources other than veterinarians, such as Internet-based retailers, “big-box” retail stores or other over-the-counter distribution channels. This trend has been demonstrated by the significant shift away from the veterinarian distribution channel in the sale of flea and tick products in recent years. Companion animal owners also could decrease their reliance on, and visits to, veterinarians as they rely more on Internet-based animal health information. Because we market our companion animal prescription products through the veterinarian distribution channel, any decrease in visits to veterinarians by companion animal owners could reduce our market share for such products and materially adversely affect our operating results and financial condition. In addition, companion animal owners may substitute human health products for animal health products if human health products are deemed to be lower-cost alternatives.

Legislation has also been proposed in the United States, and may be proposed in the United States or abroad in the future, that could impact the distribution channels for our companion animal products. For example, such legislation may require veterinarians to provide pet owners with written prescriptions and disclosure that the pet owner may fill prescriptions through a third party, which may further reduce the number of pet owners who purchase their animal health products directly from veterinarians. Such requirements may lead to increased use of generic alternatives to our products or the increased substitution of our products with other animal health products or human health products if such other products are deemed to be lower-cost alternatives. Many states already have regulations requiring veterinarians to provide prescriptions to pet owners upon request and the American Veterinary Medical Association has long-standing policies in place to encourage this practice.

Over time, these and other competitive conditions may increase our reliance on Internet-based retailers, “big-box” retail stores or other over-the-counter distribution channels to sell our companion animal products. We may

 

18


Table of Contents

be unable to sustain our current margins and we may not be adequately prepared or able to distribute our products if an increased portion of our sales is through these channels. Any of these events could materially adversely affect our operating results and financial condition.

The animal health industry is highly competitive.

The animal health industry is highly competitive. We believe many of our competitors are conducting R&D activities in areas served by our products and in areas in which we are developing products. Our competitors include the animal health businesses of large pharmaceutical companies and specialty animal health businesses. These competitors may have access to greater financial, marketing, technical and other resources. As a result, they may be able to devote more resources to developing, manufacturing, marketing and selling their products, initiating or withstanding substantial price competition or more readily taking advantage of acquisitions or other opportunities. In addition to competition from established market participants, new entrants to the animal health medicines and vaccines industry could substantially reduce our market share or render our products obsolete.

To the extent that any of our competitors are more successful with respect to any key competitive factor or we are forced to reduce, or are unable to raise, the price of any of our products in order to remain competitive, our operating results and financial condition could be materially adversely affected. Competitive pressure could arise from, among other things, safety and efficacy concerns, limited demand growth or a significant number of additional competitive products being introduced into a particular market, price reductions by competitors, the ability of competitors to capitalize on their economies of scale, the ability of competitors to produce or otherwise procure animal health products at lower costs than us and the ability of competitors to access more or newer technology than us.

Generic products may be viewed as more cost-effective than our products.

We face competition from products produced by other companies, including generic alternatives to our products. We depend on patents to provide us with exclusive marketing rights for some of our products. Our patent protection for these products extends for varying periods in accordance with the dates of filing or grant and the legal life of patents in countries in which patents are granted. The protection afforded, which varies from country to country, is limited by the scope and applicable terms of our patents and the availability of legal remedies in the applicable country. As a result, we may face competition from lower-priced generic alternatives to many of our products. Generic competitors are becoming more aggressive in terms of pricing, and generic products are an increasing percentage of overall animal health sales in certain regions. In addition, private label products may compete with our products. If animal health customers increase their use of new or existing generic or private label products, our operating results and financial condition could be materially adversely affected. We estimate that approximately 80% of our revenues in 2011 were derived from products that are either unpatented (i.e., never patented or off-patent) or covered by our patents that, while providing a competitive advantage, do not provide market exclusivity. Over the next several years, several of our products’ patents will expire.

We may not successfully acquire and integrate other businesses, license rights to technologies or products, form and manage alliances or divest businesses.

We may pursue acquisitions, technology licensing arrangements, strategic alliances or divestitures of some of our businesses as part of our business strategy. We may not complete these transactions in a timely manner, on a cost-effective basis or at all. In addition, we may be subject to regulatory constraints or limitations or other unforeseen factors that prevent us from realizing the expected benefits. Even if we are successful in making an acquisition, the products and technologies that are acquired may not be successful or may require significantly greater resources and investments than originally anticipated. We may be unable to integrate acquisitions successfully into our existing business, and we may be unable to achieve expected gross margin improvements or efficiencies. We also could incur or assume significant debt and unknown or contingent liabilities. Our reported

 

19


Table of Contents

results of operations could be negatively affected by acquisition or disposition-related charges, amortization of expenses related to intangibles and charges for impairment of long-term assets. We may be subject to litigation in connection with, or as a result of, acquisitions, dispositions, licenses or other alliances, including claims from terminated employees, customers or third parties, and we may be liable for future or existing litigation and claims related to the acquired business, disposition, license or other alliance because either we are not indemnified for such claims or the indemnification is insufficient. These effects could cause us to incur significant expenses and could materially adversely affect our operating results and financial condition.

We may not successfully implement our business strategies or achieve expected gross margin improvements.

We are and may continue to pursue strategic initiatives that management considers critical to our long-term success, including, but not limited to, increasing sales in emerging markets, base revenue growth through new product development and value added brand lifecycle development; improving operational efficiency through manufacturing efficiency improvement and other programs; using cash flow from operations to service or reduce debt; and expanding our complementary products and services. In addition to base revenue growth, we also have historically grown our business through Pfizer’s acquisitions of large pharmaceutical companies that had animal health businesses, including the Fort Dodge Animal Health business of Wyeth and the Alpharma Animal Health business of King Pharmaceuticals, Inc. However, following the Separation, we will no longer be able to benefit from Pfizer’s acquisition activity. We also have acquired or partnered with a number of smaller animal health businesses, and we intend to continue to do so in the future. There are significant risks involved with the execution of these initiatives, including significant business, economic and competitive uncertainties, many of which are outside of our control. Accordingly, we cannot predict whether we will succeed in implementing these strategic initiatives. It could take several years to realize the anticipated benefits from these initiatives, if any benefits are achieved at all. We may be unable to achieve expected gross margin improvements on our products and technologies, including those acquired and those developed internally. Additionally, our business strategy may change from time to time, which could delay our ability to implement initiatives that we believe are important to our business.

Our business could be affected adversely by labor disputes, strikes or work stoppages.

Some of our employees are members of unions, works councils, trade associations or are otherwise subject to collective bargaining agreements in certain jurisdictions, including the United States. As a result, we are subject to the risk of labor disputes, strikes, work stoppages and other labor-relations matters. We may be unable to negotiate new collective bargaining agreements on similar or more favorable terms and may experience work stoppages or other labor problems in the future at our sites. These risks may be increased by the Separation because we will no longer be able to benefit from Pfizer’s prior relationships and negotiations relating to such agreements. We could experience a disruption of our operations or higher ongoing labor costs, which could have a material adverse effect on our operating results and financial condition, potentially resulting in cancelled orders by customers, unanticipated inventory accumulation or shortages and reduced revenues and net income. In addition, labor problems at our suppliers or CMOs could have a material adverse effect on our operating results and financial condition.

Loss of our executive officers could disrupt our operations.

We depend on the efforts of our executive officers. Our executive officers are not currently, and are not expected to be, subject to non-compete provisions. In addition, we have not entered into employment agreements with our executive officers. Any unplanned turnover or our failure to develop an adequate succession plan for one or more of our executive officer positions could deplete our institutional knowledge base and erode our competitive advantage. The loss or limited availability of the services of one or more of our executive officers, or our inability to recruit and retain qualified executive officers in the future, could, at least temporarily, have a material adverse effect on our operating results and financial condition.

 

20


Table of Contents

We may be required to write down goodwill or identifiable intangible assets.

Under U.S. GAAP, if we determine goodwill or identifiable intangible assets are impaired, we will be required to write down these assets and record a non-cash impairment charge. As of September 30, 2012, we had goodwill of $981 million and identifiable intangible assets, less accumulated amortization, of $877 million. Identifiable intangible assets consist primarily of developed technology rights, brands, trademarks, license agreements, patents and in-process R&D.

Determining whether an impairment exists and the amount of the potential impairment involves quantitative data and qualitative criteria that are based on estimates and assumptions requiring significant management judgment. Future events or new information may change management’s valuation of an intangible asset in a short amount of time. The timing and amount of impairment charges recorded in our combined statements of income and write-downs recorded in our combined balance sheets could vary if management’s conclusions change. Any impairment of goodwill or identifiable intangible assets could have a material adverse effect on our operating results and financial position.

Risks related to research and development

Our R&D, acquisition and licensing efforts may fail to generate new products and brand lifecycle developments.

Our future success depends on both our existing product portfolio and our pipeline of new products, including new products that we may develop through joint ventures and products that we are able to obtain through license or acquisition. We commit substantial effort, funds and other resources to R&D, both through our own dedicated resources and through collaborations with third parties.

We may be unable to determine with accuracy when or whether any of our products now under development will be approved or launched, or we may be unable to develop, license or otherwise acquire product candidates or products. In addition, we cannot predict whether any products, once launched, will be commercially successful or will achieve sales and revenues that are consistent with our expectations. The animal health industry is subject to regional and local trends and regulations and, as a result, products that are successful in some of our markets may not achieve similar success when introduced into new markets. Furthermore, the timing and cost of our R&D may increase, and our R&D may become less predictable. For example, changes in regulations applicable to our industry may make it more time-consuming and/or costly to research, test and develop products.

Products in the animal health industry are sometimes derived from molecules and compounds discovered or developed as part of human health research. In addition to the R&D collaboration and license agreement with Pfizer, we expect to enter into other collaboration or licensing arrangements with third parties to provide us with access to compounds and other technology for purposes of our business. Such agreements are typically complex and require time to negotiate and implement. If we enter into these arrangements, we may not be able to maintain these relationships or establish new ones in the future on acceptable terms or at all. In addition, any collaboration that we enter into may not be successful, and the success may depend on the efforts and actions of our collaborators, which we may not be able to control. If we are unable to access human health-generated molecules and compounds to conduct research and development on cost-effective terms, our ability to develop new products could be limited.

Advances in veterinary medical practices and animal health technologies could negatively affect the market for our products.

The market for our products could be impacted negatively by the introduction and/or broad market acceptance of newly-developed or alternative products that address the diseases and conditions for which we sell products, including “green” or “holistic” health products or specially bred disease-resistant animals. In addition, technological breakthroughs by others may obviate our technology and reduce or eliminate the market for our products. Introduction or acceptance of such products or technologies could materially adversely affect our operating results and financial condition.

 

21


Table of Contents

Our R&D relies on evaluations in animals, which may become subject to bans or additional regulations.

As an animal health medicines and vaccines business, the evaluation of our existing and new products in animals is required to register our products. Animal testing in certain industries has been the subject of controversy and adverse publicity. Some organizations and individuals have attempted to ban animal testing or encourage the adoption of additional regulations applicable to animal testing. To the extent that the activities of such organizations and individuals are successful, our R&D, and by extension our operating results and financial condition, could be materially adversely affected. In addition, negative publicity about us or our industry could harm our reputation.

Risks related to manufacturing

Manufacturing problems and capacity imbalances may cause product launch delays, inventory shortages, recalls or unanticipated costs.

In order to sell our products, we must be able to produce and ship sufficient quantities. We have a global manufacturing network consisting of 29 manufacturing sites located in 11 countries. In addition, 14 Pfizer sites located in 13 countries will manufacture certain of our products for us. We also employ a network of approximately 200 CMOs. Many of our products involve complex manufacturing processes and are sole-sourced from certain manufacturing sites.

Minor deviations in our manufacturing processes, such as temperature excursions or improper package sealing, could result in delays, inventory shortages, unanticipated costs, product recalls, product liability and/or regulatory action. In addition, a number of factors could cause production interruptions, including:

 

 

the failure of us or any of our vendors or suppliers to comply with applicable regulations and quality assurance guidelines;

 

 

construction delays;

 

 

equipment malfunctions;

 

 

shortages of materials;

 

 

labor problems;

 

 

natural disasters;

 

 

power outages;

 

 

terrorist activities;

 

 

changes in manufacturing production sites and limits to manufacturing capacity due to regulatory requirements, changes in types of products produced, shipping distributions or physical limitations; and

 

 

the outbreak of any highly contagious diseases near our production sites.

These interruptions could result in launch delays, inventory shortages, recalls, unanticipated costs or issues with our agreements under which we supply third parties, which may adversely affect our operating results. For example, our manufacturing site in Medolla, Italy was damaged in an earthquake in May 2012, which resulted in production interruptions at that site.

Our manufacturing network may be unable to meet the demand for our products or we may have excess capacity if demand for our products changes. The unpredictability of a product’s regulatory or commercial success or failure, the lead time necessary to construct highly technical and complex manufacturing sites, and shifting customer demand (including as a result of market conditions or entry of branded or generic competition) increase the potential for capacity imbalances. In addition, construction of sites is expensive, and our ability to recover costs will depend on the market acceptance and success of the products produced at the new sites, which is uncertain.

 

22


Table of Contents

We rely on third parties to provide us with materials and services and are subject to increased labor and material costs.

The materials used to manufacture our products may be subject to availability constraints and price volatility caused by changes in demand, weather conditions, supply conditions, government regulations, economic climate and other factors. In addition, labor costs may be subject to volatility caused by the supply of labor, governmental regulations, economic climate and other factors. Increases in the demand for, availability or the price of, materials used to manufacture our products and increases in labor costs could increase the costs to manufacture our products. We may not be able to pass all or a material portion of any higher material or labor costs on to our customers, which could materially adversely affect our operating results and financial condition.

In addition, certain third-party suppliers are the sole source of certain materials necessary for production of our products. We may be unable to meet demand for certain of our products if any of our third-party suppliers cease or interrupt operations or otherwise fail to meet their obligations to us.

Risks related to legal matters and regulation

We may incur substantial costs and receive adverse outcomes in litigation and other legal matters.

Our operating results, financial condition and liquidity could be materially adversely affected by unfavorable results in pending or future litigation matters. These matters include, among other things, allegations of violation of United States and foreign competition law, labor laws, consumer protection laws, and environmental laws and regulations, as well as claims or litigations relating to product liability, intellectual property, securities, breach of contract and tort. In addition, changes in the interpretations of laws and regulations to which we are subject, or in legal standards in one or more of the jurisdictions in which we operate, could increase our exposure to liability. For example, in the United States, attempts have been made to allow damages for emotional distress and pain and suffering in connection with the loss of, or injury to, a companion animal. If such attempts were successful, our exposure with respect to product liability claims could increase materially.

Litigation matters, regardless of their merits or their ultimate outcomes, are costly, divert management’s attention and may materially adversely affect our reputation and demand for our products. We cannot predict with certainty the eventual outcome of pending or future litigation matters. An adverse outcome of litigation or legal matters could result in our being responsible for significant damages. Any of these negative effects resulting from litigation matters could materially adversely affect our operating results and financial condition.

The misuse or off-label use of our products may harm our reputation or result in financial or other damages.

Our products have been approved for use under specific circumstances for the treatment of certain diseases and conditions in specific species. There may be increased risk of product liability if veterinarians, livestock producers, pet owners or others attempt to use our products off-label, including the use of our products in species (including humans) for which they have not been approved. For example, Ketamine, the active pharmaceutical ingredient in our Ketaset product, is a commonly abused hallucinogen. Furthermore, the use of our products for indications other than those indications for which our products have been approved may not be effective, which could harm our reputation and lead to an increased risk of litigation. If we are deemed by a governmental or regulatory agency to have engaged in the promotion of any of our products for off-label use, such agency could request that we modify our training or promotional materials and practices and we could be subject to significant fines and penalties, and the imposition of these sanctions could also affect our reputation and position within the industry. Any of these events could materially adversely affect our operating results and financial condition.

Animal health products are subject to unanticipated safety or efficacy concerns, which may harm our reputation.

Unanticipated safety or efficacy concerns can arise with respect to animal health products, whether or not scientifically or clinically supported, leading to product recalls, withdrawals or suspended or declining sales, as

 

23


Table of Contents

well as product liability, and other claims. For example, as a result of safety concerns related to our product, PregSure BVD, in 2010, we voluntarily suspended sales of the product and withdrew the marketing authorization in the EU and, in 2011, we also suspended sales and withdrew the marketing authorization for the product in New Zealand.

In addition, we depend on positive perceptions of the safety and quality of our products, and animal health products generally, by our customers, veterinarians and end-users, and such concerns may harm our reputation. These concerns and the related harm to our reputation could materially adversely affect our operating results and financial condition, regardless of whether such reports are accurate.

Our business is subject to substantial regulation.

We will not be able to market new products unless and until we have obtained all required regulatory approvals in each jurisdiction where we propose to market those products. Even after a product reaches market, it may be subject to re-review and may lose its approvals. In connection with the Separation, we will likely change the location of the manufacture of certain of our products and, because of these changes, may be required to obtain new regulatory approvals. Our failure to obtain approvals, delays in the approval process, or our failure to maintain approvals in any jurisdiction, may prevent us from selling products in that jurisdiction until approval or reapproval is obtained, if ever.

In addition, we cannot predict the nature of future laws or regulations, nor can we determine the effect that additional laws or regulations or changes in existing laws or regulations could have on our business when and if promulgated, or the impact of changes in the interpretation of these laws and regulations, or of disparate federal, state, local and foreign regulatory schemes. Changes to such laws or regulations may include, among other things, changes to taxation requirements, such as tax-rate changes and changes affecting the taxation by the United States of income earned outside the United States.

Changes in applicable federal, state, local and foreign laws and regulations could have a material adverse effect on our operating results and financial condition. For example, regulatory agencies have recently increased their focus on the potential for vaccines to induce immunity anomalies. Absent a clear understanding of these anomalies, regulatory scrutiny of vaccines may become stricter. Additional scrutiny or regulation of our vaccine products could materially adversely affect our operating results and financial condition.

We are subject to complex environmental, health and safety laws and regulations.

We are subject to various federal, state, local and foreign environmental, health and safety laws and regulations. These laws and regulations govern matters such as the emission and discharge of hazardous materials into the ground, air or water; the generation, use, storage, handling, treatment, packaging, transportation, exposure to, and disposal of hazardous and biological materials, including recordkeeping, reporting and registration requirements; and the health and safety of our employees. Due to our operations, these laws and regulations also require us to obtain, and comply with, permits, registrations or other authorizations issued by governmental authorities. These authorities can modify or revoke our permits, registrations or other authorizations and can enforce compliance through fines and injunctions.

Given the nature of our business, we have incurred, are currently incurring and may in the future incur liabilities under the United States Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or CERCLA, or under other federal, state, local and foreign environmental cleanup laws, with respect to our current or former sites, adjacent or nearby third-party sites, or offsite disposal locations. See “Business—Environmental, health and safety.” The costs associated with future cleanup activities that we may be required to conduct or finance could be material. Additionally, we may become liable to third parties for damages, including personal injury and property damage, resulting from the disposal or release of hazardous materials into the environment. Such liability could materially adversely affect our operating results and financial condition.

 

24


Table of Contents

Furthermore, regulatory agencies are showing increasing concern over the impact of animal health products and livestock operations on the environment. This increased regulatory scrutiny may necessitate that additional time and resources be spent to address these concerns in both new and existing products.

Our failure to comply with the environmental, health and safety laws and regulations to which we are subject, including any permits issued thereunder, may result in environmental remediation costs, loss of permits, fines, penalties or other adverse governmental or private actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, installation of pollution control equipment or remedial measures. We could also be held liable for any and all consequences arising out of human exposure to hazardous materials or environmental damage. Environmental laws and regulations are complex, change frequently, have tended to become more stringent and stringently enforced over time and may be subject to new interpretation. We cannot assure you that our costs of complying with current and future environmental, health and safety laws, and our liabilities arising from past or future releases of, or exposure to, hazardous materials will not materially adversely affect our business, results of operations or financial condition.

Risks related to our international operations

A significant portion of our operations are conducted in foreign jurisdictions and are subject to the economic, political, legal and business environments of the countries in which we do business.

Our international operations could be limited or disrupted by any of the following:

 

 

volatility in the international financial markets;

 

 

compliance with governmental controls;

 

 

difficulties enforcing contractual and intellectual property rights;

 

 

compliance with a wide variety of laws and regulations, such as the Foreign Corrupt Practices Act and similar non-U.S. laws and regulations;

 

 

compliance with foreign labor laws;

 

 

burdens to comply with multiple and potentially conflicting foreign laws and regulations, including those relating to environmental, health and safety requirements;

 

 

changes in laws, regulations, government controls or enforcement practices with respect to our business and the businesses of our customers;

 

 

political and social instability, including crime, civil disturbance, terrorist activities and armed conflicts;

 

 

trade restrictions and restrictions on direct investments by foreign entities, including restrictions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury;

 

 

changes in tax laws and tariffs;

 

 

costs and difficulties in staffing, managing and monitoring international operations; and

 

 

longer payment cycles and increased exposure to counterparty risk.

The multinational nature of our business subjects us to potential risks that various taxing authorities may challenge the pricing of our cross-border arrangements and subject us to additional tax, adversely impacting our effective tax rate and our tax liability.

In addition, international transactions may involve increased financial and legal risks due to differing legal systems and customs. Compliance with these requirements may prohibit the import or export of certain products and technologies or may require us to obtain a license before importing or exporting certain products or technology. A failure to comply with any of these laws, regulations or requirements could result in civil or criminal legal proceedings, monetary or non-monetary penalties, or both, disruptions to our business, limitations

 

25


Table of Contents

on our ability to import and export products and services, and damage to our reputation. In addition, variations in the pricing of our products between jurisdictions may result in the unauthorized importation of our products between jurisdictions. While the impact of these factors is difficult to predict, any of them could materially adversely affect our operating results and financial condition. Changes in any of these laws, regulations or requirements, or the political environment in a particular country, may affect our ability to engage in business transactions in certain markets, including investment, procurement and repatriation of earnings.

Foreign exchange rate fluctuations and potential currency controls affect our results of operations, as reported in our financial statements.

We conduct operations in many areas of the world, involving transactions denominated in a variety of currencies. In 2011, we generated approximately 61% of our revenues in currencies other than the U.S. dollar, principally the euro, Australian dollar and Brazilian real. We are subject to currency exchange rate risk to the extent that our costs are denominated in currencies other than those in which we earn revenues. In addition, because our financial statements are reported in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies have had, and will continue to have, an impact on our results of operations.

We also face risks arising from currency devaluations and the imposition of cash repatriation restrictions and exchange controls. Currency devaluations result in a diminished value of funds denominated in the currency of the country instituting the devaluation. Cash repatriation restrictions and exchange controls may limit our ability to convert foreign currencies into U.S. dollars or to remit dividends and other payments by our foreign subsidiaries or businesses located in or conducted within a country imposing restrictions or controls. While we currently have no need, and do not intend, to repatriate or convert cash held in countries that have significant restrictions or controls in place, should we need to do so to fund our operations, we may be unable to repatriate or convert such cash, or unable to do so without incurring substantial costs. We currently have substantial operations in countries that have cash repatriation restrictions or exchange controls in place, including China and Venezuela, and, if we were to need to repatriate or convert such cash, these controls and restrictions may have a material adverse effect on our operating results and financial condition.

We may not be able to realize the expected benefits of our investments in emerging markets.

We have been taking steps to increase our presence in emerging markets, including by expanding our manufacturing presence, sales organization and product offerings in these markets. Failure to continue to maintain and expand our business in emerging markets could also materially adversely affect our operating results and financial condition.

Some countries within emerging markets may be especially vulnerable to periods of local, regional or global economic, political or social instability or crisis. For example, our sales in certain emerging markets have suffered from extended periods of disruption due to natural disasters. Furthermore, we have also experienced lower than expected sales in certain emerging markets due to local, regional and global restrictions on banking and commercial activities in those countries. In addition, certain emerging markets have currencies that fluctuate substantially, which may impact our financial performance. For example, in the past, our revenues in certain emerging markets in Latin America have been adversely impacted by currency fluctuations and devaluations. For all these and other reasons, sales within emerging markets carry significant risks.

Risks related to intellectual property

The actual or purported intellectual property rights of third parties may negatively affect our business.

A third party may sue us or otherwise make a claim, alleging infringement or other violation of the third-party’s patents, trademarks, trade dress, copyrights, trade secrets, domain names or other intellectual property rights. If we do not prevail in this type of litigation, we may be required to:

 

 

pay monetary damages;

 

26


Table of Contents
 

obtain a license in order to continue manufacturing or marketing the affected products, which may not be available on commercially reasonable terms, or at all; or

 

 

stop activities, including any commercial activities, relating to the affected products, which could include a recall of the affected products and/or a cessation of sales in the future.

The costs of defending an intellectual property claim could be substantial and could materially adversely affect our operating results and financial condition, even if we successfully defend such claims.

The intellectual property positions of animal health medicines and vaccines businesses frequently involve complex legal and factual questions, and an issued patent does not guarantee us the right to practice the patented technology or develop, manufacture or commercialize the patented product. We cannot be certain that a competitor or other third party does not have or will not obtain rights to intellectual property that may prevent us from manufacturing, developing or marketing certain of our products, regardless of whether we believe such intellectual property rights are valid and enforceable or we believe we would be otherwise able to develop a more commercially successful product, which may harm our operating results and financial condition.

If our intellectual property rights are challenged or circumvented, competitors may be able to take advantage of our research and development efforts.

Our long-term success largely depends on our ability to market technologically competitive products. We rely and expect to continue to rely on a combination of intellectual property, including patent, trademark, trade dress, copyright, trade secret and domain name protection laws, as well as confidentiality and license agreements with our employees and others, to protect our intellectual property and proprietary rights. If we fail to obtain and maintain adequate intellectual property protection, we may not be able to prevent third parties from using our proprietary technologies or from marketing products that are very similar or identical to ours. Our currently pending or future patent applications may not result in issued patents, or be approved on a timely basis, or at all. Similarly, any term extensions that we seek may not be approved on a timely basis, if at all. In addition, our issued patents may not contain claims sufficiently broad to protect us against third parties with similar technologies or products or provide us with any competitive advantage, including exclusivity in a particular product area. The scope of our patent claims also may vary between countries, as individual countries have their own patent laws. For example, some countries only permit the issuance of patents covering a novel chemical compound itself, and its first use, and thus further methods of use for the same compound, may not be patentable. We may be subject to challenges by third parties regarding our intellectual property, including claims regarding validity, enforceability, scope and effective term. The validity, enforceability, scope and effective term of patents can be highly uncertain and often involve complex legal and factual questions and proceedings. Our ability to enforce our patents also depends on the laws of individual countries and each country’s practice with respect to enforcement of intellectual property rights. In addition, if we are unable to maintain our existing license agreements or other agreements pursuant to which third parties grant us rights to intellectual property, including because such agreements expire or are terminated, our operating results and financial condition could be materially adversely affected.

In addition, patent law reform in the United States and other countries may also weaken our ability to enforce our patent rights, or make such enforcement financially unattractive. For instance, in September 2011, the United States enacted the America Invents Act, which will permit enhanced third-party actions for challenging patents and implement a first-to-invent system, and, in April 2012, Australia enacted the Intellectual Property Laws Amendment (Raising the Bar) Act, which provides higher standards for obtaining patents. These reforms could result in increased costs to protect our intellectual property or limit our ability to patent our products in these jurisdictions.

Additionally, certain foreign governments have indicated that compulsory licenses to patents may be granted in the case of national emergencies, which could diminish or eliminate sales and profits from those regions and materially adversely affect our operating results and financial condition.

 

27


Table of Contents

Likewise, in the United States and other countries, we currently hold issued trademark registrations and have trademark applications pending, any of which may be the subject of a governmental or third party objection, which could prevent the maintenance or issuance of the same and thus create the potential need to rebrand or relabel a product. As our products mature, our reliance on our trademarks to differentiate us from our competitors increases and as a result, if we are unable to prevent third parties from adopting, registering or using trademarks and trade dress that infringe, dilute or otherwise violate our trademark rights, our business could be materially adversely affected.

Many of our vaccine products and other products are based on or incorporate proprietary information, including proprietary master seeds and proprietary or patented adjuvant formulations. We actively seek to protect our proprietary information, including our trade secrets and proprietary know-how, by requiring our employees, consultants, other advisors and other third parties to execute proprietary information and confidentiality agreements upon the commencement of their employment, engagement or other relationship. Despite these efforts and precautions, we may be unable to prevent a third party from copying or otherwise obtaining and using our trade secrets or our other intellectual property without authorization and legal remedies may not adequately compensate us for the damages caused by such unauthorized use. Further, others may independently and lawfully develop substantially similar or identical products that circumvent our intellectual property by means of alternative designs or processes or otherwise.

The misappropriation and infringement of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States, may occur even when we take steps to prevent it. We are currently, and expect to be in the future, party to patent lawsuits and other intellectual property rights claims that are expensive and time consuming, and if resolved adversely, could have a significant impact on our business and financial condition. In the future, we may not be able to enforce intellectual property that relates to our products for various reasons, including licensor restrictions and other restrictions imposed by third parties, and that the costs of doing so may outweigh the value of doing so, and this could have a material adverse impact on our business and financial condition.

Risks related to information technology

We may be unable to successfully manage our online ordering sites.

In many markets around the world, such as the United States and Brazil, we provide online ordering sites to customers, often through third-party service providers. The operation of our online business depends on our ability to maintain the efficient and uninterrupted operation of our online order-taking and fulfillment operations. Risks associated with our online business include: disruptions in telephone service or power outages; failures of the computer systems that operate our website, including inadequate system capacity, computer viruses, human error, changes in programming, security breaches, system upgrades or migration of these services to new systems; reliance on third parties for computer hardware and software as well as delivery of merchandise to our customers; rapid technology changes; credit card fraud; natural disasters or adverse weather conditions; power and network outages; changes in applicable federal and state regulations; liability for online content; and consumer privacy concerns. Problems in any one or more of these areas could have a material adverse effect on our operating results and financial condition and could damage our reputation.

We depend on sophisticated information technology and infrastructure.

We rely on various information systems to manage our operations, and we increasingly depend on third parties and applications on virtualized, or “cloud,” infrastructure to operate and support our information technology systems. These third parties include large established vendors as well as many small, privately owned companies. Failure by these providers to adequately service our operations or a change in control or insolvency of these providers could have an adverse effect on our business, which in turn may materially adversely affect our operating results and financial condition.

 

28


Table of Contents

Prior to the completion of this offering and in connection with the Separation, we will substantially change a number of our business processes, including changes in our financial reporting and supply chain processes. In order to support the new business processes under the terms of our transitional services agreement with Pfizer, we will make significant configuration and data changes within some of our information technology systems. If our information technology and processes are not sufficient to support our business and financial reporting functions, or if we fail to properly implement our new business processes, our financial reporting may be delayed or inaccurate and our operations may be adversely affected and, as a result, our operating results and financial condition may be materially adversely affected.

In addition, over the next few years, we expect to begin implementing a new enterprise resource planning system to better integrate our manufacturing, financial, commercial and business operations. Transitioning to new systems, integrating new systems into current systems or any disruptions or malfunctions (including from circumstances beyond our control) affecting our information systems could cause critical information upon which we rely to be delayed, unreliable, corrupted, insufficient or inaccessible. Any of these potential issues, individually or in aggregation, could have a material adverse effect on our operating results and financial condition.

Even if we are able to implement these systems successfully, all technology systems, despite implementation of security measures, are vulnerable to disability, failures or unauthorized access. If our information technology systems were to fail or be breached, this could materially adversely affect our ability to perform critical business functions and sensitive and confidential data could be compromised.

We may be unable to adequately protect our customers’ privacy or we may fail to comply with privacy laws.

The protection of customer, employee and company data is critical and the regulatory environment surrounding information security, storage, use, processing, disclosure and privacy is demanding, with the frequent imposition of new and changing requirements. In addition, our customers expect that we will adequately protect their personal information. Any actual or perceived significant breakdown, intrusion, interruption, cyber-attack or corruption of customer, employee or company data or our failure to comply with federal, state, local and foreign privacy laws could damage our reputation and result in lost sales, fines and lawsuits. Despite our considerable efforts and technology to secure our computer network, security could be compromised, confidential information could be misappropriated or system disruptions could occur. Our systems and procedures meet the payment card industry, or PCI, data security standards, which require periodic audits by independent third parties to assess compliance. Failure to comply with the security requirements or rectify a security issue may result in fines and the imposition of restrictions on our ability to accept payment by credit or debit cards. In addition, PCI is controlled by a limited number of vendors that have the ability to impose changes in PCI’s fee structure and operational requirements on us without negotiation. Such changes in fees and operational requirements may result in our failure to comply with PCI security standards, as well as significant unanticipated expenses. Such failures could materially adversely affect our operating results and financial condition.

Risks related to our indebtedness

We have substantial indebtedness.

We have a significant amount of indebtedness, which could materially adversely affect our operating results, financial condition and liquidity. We incurred approximately $3.65 billion aggregate principal amount of senior indebtedness in connection with the senior notes offering. As of September 30, 2012, after giving pro forma effect to the Transactions, which include the senior notes offering, our total debt would have been approximately $3.64 billion (net of original issue debt discount of $10 million). Immediately prior to the completion of this offering, we will transfer an amount of cash equal to substantially all of the net proceeds we received in the senior notes offering to Pfizer. In addition, $1.0 billion aggregate principal amount of our senior notes was transferred to Pfizer and subsequently disposed of by Pfizer in connection with the senior notes offering. See “Unaudited pro forma condensed combined financial statements.” In addition, we have entered into an agreement for a $1.0 billion five-year revolving credit facility and expect to enter into a commercial paper program with a

 

29


Table of Contents

capacity of up to $1.0 billion prior to or concurrently with the completion of this offering. The credit facility will not be available for borrowings until the date on which certain conditions, including the completion of this offering and the receipt of certain investment grade ratings, are satisfied. We expect that these conditions will be met concurrently with the completion of this offering, which we refer to as the “credit facility effective date.” While we do not anticipate that any amounts will be drawn under the credit facility or that any commercial paper will be issued under the commercial paper program at the time of this offering, we may incur indebtedness under these arrangements in the future.

We may incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt could intensify. Specifically, our high level of debt could have important consequences, including:

 

 

making it more difficult for us to satisfy our obligations with respect to our debt;

 

 

limiting our ability to obtain additional financing to fund future working capital, capital expenditures, business development or other general corporate requirements, including dividends;

 

 

increasing our vulnerability to general adverse economic and industry conditions;

 

 

exposing us to the risk of increased interest rates as certain of our borrowings are and may in the future be at variable rates of interest;

 

 

limiting our flexibility in planning for and reacting to changes in the animal health industry;

 

 

placing us at a competitive disadvantage to other, less leveraged competitors;

 

 

impacting our effective tax rate; and

 

 

increasing our cost of borrowing.

In addition, the instruments governing our indebtedness contain restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interest. For example, our credit facility contains a financial covenant requiring us to not exceed a maximum total leverage ratio and, unless on the credit facility effective date certain investment grade ratings specified in the revolving credit agreement are received, to maintain a minimum interest coverage ratio. In addition, the credit facility contains covenants that, among other things, limit or restrict our and our subsidiaries’ ability, subject to certain exceptions, to incur liens, merge, consolidate or sell, transfer or lease assets, transact with subsidiaries and incur priority indebtedness. Our failure to comply with such covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all our debt.

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal and interest on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures, or to dispose of material assets or operations, alter our dividend policy, seek additional debt or equity capital or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. The instruments that will govern our indebtedness may restrict our ability to dispose of assets and may restrict the use of proceeds from those dispositions and may also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations when due.

 

30


Table of Contents

In addition, we conduct our operations through our subsidiaries. Accordingly, repayment of our indebtedness will depend on the generation of cash flow by our subsidiaries, including our international subsidiaries, and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Our subsidiaries may not have any obligation to pay amounts due on our indebtedness or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity, and under certain circumstances, legal, tax and contractual restrictions may limit our ability to obtain cash from our subsidiaries. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.

Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, may materially adversely affect our operating results, financial condition and liquidity and our ability to satisfy our obligations under our indebtedness or pay dividends on our common stock.

Risks related to our relationship with Pfizer

The Separation and Distribution, if any, may not be successful and we may not achieve some or all of the expected benefits of the Separation and Distribution.

We may not be successful in implementing the Separation and Distribution. In addition, we may not be able to achieve the full strategic and financial benefits expected to result from the Separation and Distribution, or such benefits may be delayed or not occur at all. These benefits include the following:

 

 

improving strategic and operational flexibility, increasing management focus and streamlining decision-making by providing the flexibility to implement our strategic plan and to respond more effectively to different customer needs and the changing economic environment;

 

 

allowing us to adopt the capital structure, investment policy and dividend policy best suited to our financial profile and business needs, without competing for capital with Pfizer’s other businesses;

 

 

creating an independent equity structure that will facilitate our ability to effect future acquisitions utilizing our common stock; and

 

 

facilitating incentive compensation arrangements for employees more directly tied to the performance of our business, and enhancing employee hiring and retention by, among other things, improving the alignment of management and employee incentives with performance and growth objectives of our business.

We may not achieve the anticipated benefits of the Separation and Distribution for a variety of reasons. In addition, the Separation and Distribution could adversely affect our operating results and financial condition.

Pfizer controls the direction of our business, and the concentrated ownership of our common stock will prevent you and other stockholders from influencing significant decisions.

Immediately following the completion of this offering, Pfizer will own 100% of our outstanding Class B common stock and no shares of our Class A common stock, giving Pfizer 82.8% of the economic interest and the combined voting power in shares of our outstanding common stock other than with respect to the election of directors and 98.0% of the combined voting power of our outstanding common stock with respect to the election of directors (or 80.2% and 97.6%, respectively, if the underwriters exercise their option to purchase additional shares in full). As long as Pfizer beneficially controls a majority of the voting power of our outstanding common stock with respect to a particular matter, it will generally be able to determine the outcome of all corporate actions requiring stockholder approval, including the election and removal of directors. Even if Pfizer were to control less than a majority of the voting power of our outstanding common stock, it may be able to influence the outcome of such corporate actions so long as it owns a significant portion of our common stock. If Pfizer does not complete the Distribution or otherwise dispose of its shares of our common stock, it could remain our controlling stockholder for an extended period of time or indefinitely.

 

31


Table of Contents

Pfizer’s interests may not be the same as, or may conflict with, the interests of our other stockholders. Investors in this offering will not be able to affect the outcome of any stockholder vote while Pfizer controls the majority of the voting power of our outstanding common stock. As a result, Pfizer will be able to control, directly or indirectly and subject to applicable law, all matters affecting us, including:

 

 

any determination with respect to our business direction and policies, including the appointment and removal of officers and directors;

 

 

any determinations with respect to mergers, business combinations or disposition of assets;

 

 

our financing and dividend policy;

 

 

compensation and benefit programs and other human resources policy decisions;

 

 

termination of, changes to or determinations under our agreements with Pfizer relating to the Separation;

 

 

changes to any other agreements that may adversely affect us;

 

 

the payment of dividends on our common stock; and

 

 

determinations with respect to our tax returns.

Because Pfizer’s interests may differ from ours or from those of our other stockholders, actions that Pfizer takes with respect to us, as our controlling stockholder, may not be favorable to us or our other stockholders.

The Distribution may not occur.

Pfizer has no obligation to complete the Distribution. Whether Pfizer proceeds with the Distribution, in whole or in part, is subject to a number of conditions, including the receipt of any necessary regulatory or other approvals, the existence of satisfactory market conditions and the continuing application of Pfizer’s private letter ruling from the IRS and the receipt of opinions of counsel to the effect that such Distribution would be tax-free to Pfizer and its stockholders. Even if Pfizer elects to pursue the Distribution, Pfizer has the right to abandon or change the structure of the Distribution if Pfizer determines, in its sole discretion, that the Distribution is not in the best interest of Pfizer or its stockholders.

Furthermore, if the Distribution does not occur, or if Pfizer does not otherwise dispose of its shares of our common stock, the risks relating to Pfizer’s control of us and the potential business conflicts of interest between Pfizer and us will continue to be relevant to our stockholders. The liquidity of shares of our common stock in the market may be constrained for as long as Pfizer continues to hold a significant position in our stock. A lack of liquidity in our Class A common stock could depress the price of our Class A common stock.

Our Class B common stock may remain as a separate class.

Each share of Class B common stock held by Pfizer or a subsidiary of Pfizer will be convertible at any time into one share of Class A common stock at Pfizer’s option but will not be convertible if held by any other holder. As a result, if Pfizer were to distribute shares of Class B common stock in the Distribution, or otherwise dispose of its shares of Class B common stock, the new holders of such shares would not be able to convert the shares of Class B common stock into Class A common stock. In such event, we may apply to have our Class B common stock listed on a securities exchange. The existence of multiple classes of publicly traded common stock could depress the price of our Class A common stock.

If Pfizer were to distribute shares of Class B common stock in the Distribution, or otherwise dispose of its shares of Class B common stock, our board of directors may in the future consider a proposal to amend our certificate of incorporation to mandatorily convert Class B common stock to Class A common stock on a share-for-share basis, subject to the receipt of the required approval by our stockholders. If the proposal is approved by our board of directors and presented to our stockholders, a vote by (i) a majority of the shares of Class A common stock and

 

32


Table of Contents

Class B common stock, voting together as a single class, and (ii) a majority of the shares of the Class B common stock, voting as a separate class, will be required for the proposal to be approved. There will be no binding commitment by the board to, and our board of directors may elect not to consider the issue or resolve to present any such proposal to our stockholders at any stockholders’ meeting. Moreover, if presented, our stockholders may not approve any such conversion.

If Pfizer sells a controlling interest in our company to a third party in a private transaction, you may not realize any change-of-control premium on shares of our common stock and we may become subject to the control of a presently unknown third party.

Following the completion of this offering, Pfizer will continue to own a significant equity interest in our company. Pfizer will have the ability, should it choose to do so, to sell some or all of its shares of our common stock in a privately negotiated transaction, which, if sufficient in size, could result in a change of control of our company.

The ability of Pfizer to privately sell its shares of our common stock, with no requirement for a concurrent offer to be made to acquire all of the shares of our Class A common stock that will be publicly traded hereafter, could prevent you from realizing any change-of-control premium on your shares of our Class A common stock that may otherwise accrue to Pfizer on its private sale of our common stock. Additionally, if Pfizer privately sells its significant equity interest in our company, we may become subject to the control of a presently unknown third party. Such third party may have conflicts of interest with those of other stockholders. In addition, if Pfizer sells a controlling interest in our company to a third party, our indebtedness may be subject to acceleration, Pfizer may terminate the R&D collaboration agreement and license agreement, and other transitional arrangements, and our other commercial agreements and relationships could be impacted, all of which may adversely affect our ability to run our business as described herein and may have a material adverse effect on our operating results and financial condition.

The Distribution or future sales by Pfizer or others of our common stock, or the perception that the Distribution or such sales may occur, could depress our Class A common stock price.

Immediately following the completion of this offering, Pfizer will own 100% of our outstanding Class B common stock and no shares of our Class A common stock, giving Pfizer 82.8% of the economic interest and the combined voting power in shares of our outstanding common stock other than with respect to the election of directors and 98.0% of the combined voting power of our outstanding common stock with respect to the election of directors (or 80.2% and 97.6%, respectively, if the underwriters exercise their option to purchase additional shares in full). Subject to the restrictions described in the paragraph below, future sales of these shares in the public market will be subject to the volume and other restrictions of Rule 144 under the Securities Act of 1933, or the Securities Act, for so long as Pfizer is deemed to be our affiliate, unless the shares to be sold are registered with the Securities and Exchange Commission, or SEC. We are unable to predict with certainty whether or when Pfizer will sell a substantial number of shares of our common stock to the extent it retains shares following the Distribution or in the event the Distribution does not occur. The Distribution or sale by Pfizer of a substantial number of shares after this offering, or a perception that the Distribution or such sales could occur, could significantly reduce the market price of our Class A common stock. Upon completion of this offering, except as otherwise described herein, all shares that are being offered hereby will be freely tradable without restriction, assuming they are not held by our affiliates.

We, our officers and directors and Pfizer have agreed with the underwriters that, without the prior written consent of J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC, we and they will not, subject to certain exceptions and extensions, during the period ending 180 days after the date of this prospectus, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, or enter into any swap or other agreement that transfers to another, in

 

33


Table of Contents

whole or in part, any of the economic consequences of ownership of shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock or publicly disclose the intention to make any such offer, sale, pledge or disposition. J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC may, in their sole discretion and at any time without notice, release all or any portion of the shares of our common stock subject to the lock-up.

Immediately following this offering, we intend to file a registration statement registering under the Securities Act the shares of our common stock reserved for issuance under the Zoetis 2013 Equity and Incentive Plan. If equity securities granted under the Zoetis 2013 Equity and Incentive Plan are sold or it is perceived that they will be sold in the public market, the trading price of our Class A common stock could decline substantially. These sales also could impede our ability to raise future capital.

We will be a “controlled company” within the meaning of the rules of the NYSE and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

Upon completion of this offering, Pfizer will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the NYSE. Under these rules, a listed company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

 

the requirement that a majority of the board of directors consist of independent directors;

 

 

the requirement that our corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

 

the requirement that our compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

 

the requirement for an annual performance evaluation of our corporate governance and compensation committees.

While Pfizer controls a majority of the voting power of our outstanding common stock, we may not have a majority of independent directors or corporate governance and compensation committees consisting entirely of independent directors and we will not be required to have written charters addressing these committees’ purposes and responsibilities or have annual performance evaluations of these committees. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.

As a result of the Separation, we will lose Pfizer’s brand, reputation, capital base and other resources.

Prior to the completion of this offering, as a business unit of Pfizer, we have generally used the name “Pfizer Animal Health,” and we believe the association with Pfizer has contributed to our building relationships with our customers due to Pfizer’s globally recognized brand and perceived high-quality products. This offering, the Separation and Distribution could adversely affect our ability to attract and retain customers, which could result in reduced sales of our products.

The loss of Pfizer’s scale, capital base and financial strength may also prompt suppliers to reprice, modify or terminate their relationships with us. In addition, Pfizer’s reduction of its ownership of our company may cause some of our existing agreements and licenses to be terminated. We cannot predict with certainty the effect that this offering, the Separation or the Distribution will have on our business, our clients, vendors or other persons, or whether our new brand, Zoetis, will be accepted in the marketplace.

 

34


Table of Contents

Pfizer may compete with us.

Pfizer will not be restricted from competing with us in the animal health business, including as a result of acquiring a company that operates an animal health business. Due to the significant resources of Pfizer, including financial resources, name recognition and know-how resulting from the previous management of our business, Pfizer could have a significant competitive advantage over us should it decide to engage in the type of business we conduct, which may cause our operating results and financial condition to be materially adversely affected.

Certain of our directors may have actual or potential conflicts of interest because of their positions with Pfizer.

Following this offering, Frank A. D’Amelio (Executive Vice President, Chief Financial Officer and Business Operations for Pfizer), Geno J. Germano (President and General Manager, Specialty Care and Oncology for Pfizer), Douglas E. Giordano (Senior Vice President, Worldwide Business Development for Pfizer), Charles H. Hill (Executive Vice President, Worldwide Human Resources for Pfizer) and Amy W. Schulman (Executive Vice President and General Counsel, Business Unit Lead, Consumer Healthcare for Pfizer) will serve on our board of directors and retain their positions with Pfizer. In addition, such directors may own Pfizer common stock, options to purchase Pfizer common stock or other Pfizer equity awards. These individual’s holdings of Pfizer common stock, options to purchase common stock of Pfizer or other equity awards may be significant for some of these persons compared to these persons’ total assets. Their position at Pfizer and the ownership of any Pfizer equity or equity awards creates, or may create the appearance of, conflicts of interest when these directors are faced with decisions that could have different implications for Pfizer than the decisions have for us.

Pfizer and its directors and officers will have limited liability to us or you for breach of fiduciary duty.

Our certificate of incorporation provides that, subject to any contractual provision to the contrary, Pfizer will have no obligation to refrain from:

 

 

engaging in the same or similar business activities or lines of business as we do;

 

 

doing business with any of our clients or consumers; or

 

 

employing or otherwise engaging any of our officers or employees.

Under our certificate of incorporation, neither Pfizer nor any officer or director of Pfizer, except as provided in our certificate of incorporation, is liable to us or to our stockholders for breach of any fiduciary duty by reason of any of these activities.

To preserve the tax-free treatment to Pfizer and/or its stockholders of the Separation, the debt-for-debt exchange, the debt-for-equity exchange, the transfer of cash proceeds of the senior notes offering to Pfizer and the potential Distribution, we may not be able to engage in certain transactions.

To preserve the tax-free treatment to Pfizer and/or its stockholders of the Separation, the debt-for-debt exchange, the debt-for-equity exchange, the transfer of cash proceeds of the senior notes offering to Pfizer, the potential Distribution and certain related transactions, under the tax matters agreement, we will be restricted from taking any action that prevents the Separation, the debt-for-debt exchange, the debt-for-equity exchange, the transfer of cash proceeds of the senior notes offering to Pfizer, the potential Distribution and certain related transactions from being tax-free for U.S. federal, state, local and foreign income tax purposes. These restrictions may limit our ability to pursue certain strategic transactions or engage in other transactions, including taking certain actions with respect to our 3.250% Senior Notes due 2023, which we refer to as the “2023 notes” and the use of our common stock to make acquisitions and equity capital market transactions that might increase the value of our business. See “Certain relationships and related party transactions—Relationship with Pfizer—Tax matters agreement.”

 

35


Table of Contents

The assets and resources that we acquire from Pfizer in the Separation may not be sufficient for us to operate as a standalone company, and we may experience difficulty in separating our assets and resources from Pfizer.

Because we have not operated as a standalone company in the past, we may have difficulty doing so. We may need to acquire assets and resources in addition to those provided by Pfizer to our company, and in connection with the Separation, may also face difficulty in separating our assets from Pfizer’s assets and integrating newly acquired assets into our business. Our business, financial condition and results of operations could be harmed if we have difficulty operating as a standalone company, fail to acquire assets that prove to be important to our operations or incur unexpected costs in separating our assets from Pfizer’s assets or integrating newly acquired assets.

We will incur significant charges in connection with this offering and the Separation and incremental costs as a standalone public company.

We will need to replicate or replace certain functions, systems and infrastructure to which we will no longer have the same access after this offering. We may also need to make investments or hire additional employees to operate without the same access to Pfizer’s existing operational and administrative infrastructure. These initiatives may be costly to implement. Due to the scope and complexity of the underlying projects relative to these efforts, the amount of total costs could be materially higher than our estimate, and the timing of the incurrence of these costs is subject to change.

Pfizer currently performs or supports many important corporate functions for our company. Our combined financial statements reflect charges for these services on an allocation basis. Following this offering, many of these services will be governed by our transitional services agreement with Pfizer. Under the transitional services agreement we will be able to use these Pfizer services for a fixed term established on a service-by-service basis. However, we generally will have the right to terminate a service earlier if we give notice to Pfizer. Partial reduction in the provision of any service requires Pfizer’s consent. In addition, either party will be able to terminate the agreement due to a material breach of the other party, upon prior written notice, subject to limited cure periods.

We will pay Pfizer mutually agreed-upon fees for these services, which will be based on Pfizer’s costs of providing the services. During the two years following the completion of this offering, the markup for these services will be 0% and, for the remainder of the term of the agreement, Pfizer may introduce a markup of 7%, which we believe is consistent with arm’s length pricing for the services provided. However, since our transitional services agreement was negotiated in the context of a parent-subsidiary relationship, the terms of the agreement, including the fees charged for the services, may be higher or lower than those that would be agreed to by parties bargaining at arm’s length for similar services and may be higher or lower than the costs reflected in the allocations in our historical financial statements. Third party costs will be passed through to us at Pfizer’s or its affiliates’ cost. In addition, while these services are being provided to us by Pfizer, our operational flexibility to modify or implement changes with respect to such services or the amounts we pay for them will be limited. Prior to the Distribution, if effected, Pfizer will have the unilateral right to resolve disputes under the transitional services agreement.

We may not be able to replace these services or enter into appropriate third-party agreements on terms and conditions, including cost, comparable to those that we will receive from Pfizer under our transitional services agreement. Additionally, after the agreement terminates, we may be unable to sustain the services at the same levels or obtain the same benefits as when we were receiving such services and benefits from Pfizer. When we begin to operate these functions separately, if we do not have our own adequate systems and business functions in place, or are unable to obtain them from other providers, we may not be able to operate our business effectively or at comparable costs, and our profitability may decline. In addition, we have historically received informal support from Pfizer, which may not be addressed in our transitional services agreement. The level of this informal support will diminish or be eliminated following this offering.

 

36


Table of Contents

We may not be able to fully realize the expected benefits of our R&D agreement with Pfizer.

Prior to the Separation, as a business unit of Pfizer, we had the ability to leverage Pfizer’s proprietary compound library and database to identify, research and develop compounds suitable as new product candidates for the animal health field. As part of the Separation, we intend to enter into an R&D collaboration and license agreement with Pfizer, which we refer to as the “R&D agreement.” Pursuant to the R&D agreement, subject to certain restrictions, we will have continued access to Pfizer’s compound library and database for a period of seven years and will have, subject to Pfizer’s approval, the possibility to exclusively license compounds from Pfizer that we develop under the R&D agreement.

While the R&D agreement is intended to bolster our post-Separation R&D capabilities, certain terms of the R&D agreement may limit our ability to achieve this expected benefit, including:

 

 

Pfizer will retain ownership of, and license to us, the intellectual property that we develop under the R&D agreement. In many circumstances, the intellectual property we license from Pfizer will be non-exclusive as to Pfizer and third parties.

 

 

We are not assured access to Pfizer’s newest programs.

 

 

Pfizer can prevent us from progressing pre-development compounds and, under certain circumstances, Pfizer may terminate our rights to a development stage compound by paying us the fair market value for such compound.

 

 

The R&D agreement may be terminated before the expiration of the seven year term in certain circumstances, including if we acquire an interest in or assets of a human pharmaceutical business, we enter into a definitive agreement relating to or undergo a change of control other than the Distribution or Pfizer acquires, or is acquired by, an animal health business.

Each of the foregoing terms and Pfizer’s other rights under the R&D agreement and related licenses (if any), could limit our ability to realize the expected benefits of the R&D agreement. If we fail to achieve the expected benefits of the R&D agreement, it may be more difficult, time consuming or expensive for us to develop and commercialize certain new products, or may result in our products being later to market than those of our competitors. We may experience delays in new product development, which may result in our loss of the first-in-class products in a given therapeutic area.

For a summary description of the terms of the R&D collaboration and license agreement, see “Certain relationships and related party transactions—Relationship with Pfizer—Research and development collaboration and license agreement.”

We are dependent on Pfizer to prosecute, maintain and enforce certain intellectual property.

Under the patent and know-how license agreement (Pfizer as licensor), Pfizer will be responsible for filing, prosecuting and maintaining patents that Pfizer licenses to us. Pfizer also has the first right, and in some cases the sole right, to enforce such patents. In addition, under the patent and know-how license agreement (Zoetis as licensor), subject to certain exceptions, Pfizer will have the sole right to enforce the licensed patents if the enforcement relates to the human health field. If Pfizer fails to fulfill its obligations or chooses to not enforce the licensed patents under these agreements, we may not be able to prevent competitors from making, using and selling competitive products.

Pfizer’s rights as licensor under the patent and know-how license could limit our ability to develop and commercialize certain products.

Under the patent and know-how license, Pfizer licenses to us certain of its intellectual property. If we fail to comply with our obligations under this license agreement and Pfizer exercises its right to terminate it, our ability to continue to research, develop and commercialize products incorporating that intellectual property will be

 

37


Table of Contents

limited. In addition, in circumstances where Pfizer has an interest in the licensed intellectual property in connection with its human health development programs, our rights to use the licensed intellectual property are restricted and/or in limited instances, subject to Pfizer’s right to terminate such license at will. These limitations and termination rights may make it more difficult, time consuming or expensive for us to develop and commercialize certain new products, or may result in our products being later to market than those of our competitors.

For a summary description of the terms of the patent and know-how license (Pfizer as licensor), see “Certain relationships and related party transactions—Relationship with Pfizer—Intellectual property license agreements.”

Risks related to this offering and ownership of our Class A common stock

An active trading market for our Class A common stock may not develop, and you may not be able to sell your Class A common stock at or above the initial public offering price.

Prior to the completion of this offering, there has been no public market for our common stock. An active trading market for shares of our Class A common stock may never develop or be sustained following this offering. If an active trading market does not develop, you may have difficulty selling your shares of Class A common stock at an attractive price, or at all. The price for our Class A common stock in this offering will be determined by negotiations among Pfizer, us and representatives of the underwriters, and it may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell your Class A common stock at or above the initial public offering price or at any other price or at the time that you would like to sell. An inactive market may also impair our ability to raise capital by selling our common stock, and it may impair our ability to attract and motivate our employees through equity incentive awards and our ability to acquire other companies, products or technologies by using our common stock as consideration.

The price of our Class A common stock may fluctuate substantially.

You should consider an investment in our Class A common stock to be risky, and you should invest in our Class A common stock only if you can withstand a significant loss and wide fluctuations in the market value of your investment. Some factors that may cause the market price of our Class A common stock to fluctuate, in addition to the other risks mentioned in this section of the prospectus, are:

 

 

our announcements or our competitors’ announcements regarding new products or services, enhancements, significant contracts, acquisitions or strategic investments;

 

 

changes in earnings estimates or recommendations by securities analysts, if any, who cover our common stock;

 

 

failures to meet external expectations or management guidance;

 

 

fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;

 

 

changes in our capital structure or dividend policy, including as a result of the Distribution, future issuances of securities, sales of large blocks of common stock by our stockholders, including Pfizer, or our incurrence of additional debt;

 

 

reputational issues;

 

 

changes in general economic and market conditions in or any of the regions in which we conduct our business;

 

 

changes in industry conditions or perceptions;

 

 

changes in applicable laws, rules or regulations and other dynamics; and

 

 

announcements or actions taken by Pfizer as our principal stockholder.

 

38


Table of Contents

In addition, if the market for stocks in our industry or industries related to our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our Class A common stock could decline for reasons unrelated to our business, financial condition and results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.

You will incur immediate dilution as a result of this offering.

If you purchase Class A common stock in this offering, you will pay more for your shares than the net tangible book value of your shares. As a result, you will incur immediate dilution of $25.10 per share, representing the difference between the assumed initial public offering price of $23.50 per share (the midpoint of the price range on the cover of this prospectus) and our pro forma net tangible book deficit per share as of September 30, 2012 after giving effect to the Transactions, as defined in “Unaudited pro forma condensed combined financial statements” of $(1.60). Accordingly, should we be liquidated at our book value, you would not receive the full amount of your investment.

Our historical combined financial data is not necessarily representative of the results we would have achieved as a standalone company and may not be a reliable indicator of our future results.

Our historical combined financial data included in this prospectus does not reflect the financial condition, results of operations or cash flows we would have achieved as a standalone company during the periods presented or those we will achieve in the future. This is primarily the result of the following factors:

 

 

our historical combined financial data does not reflect the Separation;

 

 

our historical combined financial data reflects expense allocations for certain support functions that are provided on a centralized basis within Pfizer, such as expenses for business technology, facilities, legal, finance, human resources, business development, public affairs and procurement, as well as certain manufacturing and supply costs incurred by manufacturing sites that are shared with other Pfizer business units that may be higher or lower than the comparable expenses we would have actually incurred, or will incur in the future, as a standalone company;

 

 

our cost of debt and our capital structure will be different from that reflected in our historical combined financial statements;

 

 

significant increases may occur in our cost structure as a result of this offering, including costs related to public company reporting, investor relations and compliance with the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act; and

 

 

this offering may have a material effect on our customers and other business relationships, including supplier relationships, and may result in the loss of preferred pricing available by virtue of our reduced relationship with Pfizer.

Our financial condition and future results of operations, after giving effect to the Separation, will be materially different from amounts reflected in our historical combined financial statements included elsewhere in this prospectus. As a result of the Separation, it may be difficult for investors to compare our future results to historical results or to evaluate our relative performance or trends in our business.

As a standalone public company, we may expend additional time and resources to comply with rules and regulations that do not currently apply to us, and failure to comply with such rules may lead investors to lose confidence in our financial data.

As a standalone public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, and regulations of the NYSE. Such requirements will increase our legal, accounting and financial compliance costs, will make some activities more difficult, time-consuming and costly and could be burdensome on our personnel, systems and resources. We will devote significant

 

39


Table of Contents

resources to address these public company-associated requirements, including compliance programs and investor relations, as well as our financial reporting obligations. Complying with these rules and regulations has and will substantially increase our legal and financial compliance costs and make some activities more time-consuming and costly.

In particular, as a public company, our management will be required to conduct an annual evaluation of our internal controls over financial reporting and include a report of management on our internal controls in our annual reports on Form 10-K. Under current rules, we will be subject to these requirements beginning with our annual report on Form 10-K for the year ended December 31, 2013. In addition, we will be required to have our independent registered public accounting firm attest to the effectiveness of our internal controls over financial reporting pursuant to Auditing Standard No. 5 beginning with our annual report on Form 10-K for the year ended December 31, 2014. If we are unable to conclude that we have effective internal controls over financial reporting, or if our registered public accounting firm is unable to provide us with an attestation and an unqualified report as to the effectiveness of our internal controls over financial reporting, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our Class A common stock.

While we currently intend to pay a quarterly cash dividend to our common stockholders, we may change our dividend policy at any time.

Although we currently intend to pay a quarterly cash dividend to our Class A common stockholders and Class B common stockholders, we have no obligation to do so, and our dividend policy may change at any time without notice to our stockholders. We currently intend to pay a quarterly cash dividend on our common stock of $0.065 per share. Returns on your investment will primarily depend on the appreciation, if any, in the price of our Class A common stock. We anticipate that we will retain most of our future earnings, if any, for use in the development and expansion of our business, repayment of indebtedness and for general corporate purposes. The declaration and payment of dividends to holders of our Class A common stock and Class B common stock will be at the discretion of our board of directors in accordance with applicable law after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, cash flows available in the United States, impact on our effective tax rate, indebtedness, legal requirements and other factors that our board of directors deems relevant.

Provisions in our amended and restated certificate of incorporation, amended and restated by-laws and Delaware law may prevent or delay an acquisition of us, which could decrease the trading price of our Class A common stock.

Our amended and restated certificate of incorporation, which we refer to as “our certificate of incorporation,” and amended and restated by-laws, which we refer to as “our by-laws,” contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids and to encourage prospective acquirers to negotiate with our board of directors rather than to attempt a hostile takeover. These provisions include:

 

 

a board of directors that is divided into three classes with staggered terms;

 

 

a dual class equity structure;

 

 

rules regarding how our stockholders may present proposals or nominate directors for election at stockholder meetings;

 

 

the right of our board of directors to issue preferred stock without stockholder approval; and

 

 

limitations on the right of stockholders to remove directors.

In addition, Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. These provisions apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our board of directors determines is not in our and our stockholders’ best interests.

 

40


Table of Contents

If Pfizer makes the Distribution, and there is later a determination that the Separation, the debt-for-debt exchange, the debt-for-equity exchange, the transfer of cash proceeds of the senior notes offering to Pfizer and/or the Distribution is taxable for U.S. federal income tax purposes because the facts, assumptions, representations or undertakings underlying the IRS private letter ruling and/or any tax opinion are incorrect or for any other reason, then Pfizer and its stockholders could incur significant U.S. federal income tax liabilities, and we could incur significant liabilities.

Pfizer has received a private letter ruling from the IRS substantially to the effect that, among other things, the Distribution will qualify as a transaction that is tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. If pursued, completion by Pfizer of the Distribution would be conditioned on, among other things, the continuing application of Pfizer’s private letter ruling from the IRS and the receipt of opinions of tax counsel, to the effect that, among other things, the Distribution will qualify as a transaction that is tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. The ruling relies and the opinions will rely on certain facts, assumptions, representations and undertakings from Pfizer and us regarding the past and future conduct of the companies’ respective businesses and other matters. If any of these facts, assumptions, representations or undertakings are incorrect or not otherwise satisfied, Pfizer and its stockholders may not be able to rely on the ruling or the opinions of tax counsel and could be subject to significant tax liabilities. Notwithstanding the private letter ruling and opinions of tax counsel, the IRS could determine on audit that the Separation, the debt-for-debt exchange, the debt-for-equity exchange, the transfer of cash proceeds of the senior notes offering to Pfizer and/or the Distribution is taxable if it determines that any of these facts, assumptions, representations or undertakings are not correct or have been violated or if it disagrees with the conclusions in the opinions that are not covered by the private letter ruling, or for other reasons, including as a result of certain significant changes in the stock ownership of Pfizer or us after the Distribution. If the Separation, the debt-for-debt exchange, the debt-for-equity exchange, the transfer of cash proceeds of the senior notes offering to Pfizer and/or the Distribution is determined to be taxable for U.S. federal income tax purposes, Pfizer and/or its stockholders could incur significant U.S. federal income tax liabilities, and we could incur significant liabilities under applicable law or as a result of certain agreements we intend to enter into with Pfizer.

 

41


Table of Contents

Cautionary statement concerning forward-looking statements

This prospectus contains “forward-looking” statements. Forward-looking statements reflect our current views with respect to, among other things, future events and performance. We generally identify forward-looking statements by words such as “anticipate,” “estimate,” “expect,” “intend,” “project,” “plan,” “predict,” “believe,” “seek,” “continue,” “outlook,” “may,” “might,” “will,” “should,” “can have,” “likely” or the negative version of these words or comparable words or by using future dates in connection with any discussion of future performance, actions or events. Forward-looking statements are based on beliefs and assumptions made by management using currently available information.

These statements are not guarantees of future performance, actions or events. In particular, forward-looking statements include statements relating to future actions, business plans or prospects, prospective products, product approvals or products under development, R&D costs, timing and likelihood of success, future operating or financial performance, future results of current and anticipated products and services, strategies, sales efforts, expenses, production efficiencies, production margins, interest rates, foreign exchange rates, growth in emerging markets, the outcome of contingencies, such as legal proceedings, dividend plans, the Distribution, our agreements with Pfizer, Pfizer’s control of our company, government regulation and financial results. Forward-looking statements are subject to risks and uncertainties, many of which are beyond our control and potentially inaccurate assumptions. These risks and uncertainties include those set forth under “Risk factors.” However, there may also be other risks that we are unable to predict at this time. If one or more of these risks or uncertainties materialize, or if management’s underlying beliefs and assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward-looking statement. You should not put undue reliance on forward-looking statements. Forward-looking statements speak only as of the date on which they are made. We expressly disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

 

42


Table of Contents

Use of proceeds

We will not receive any proceeds from the sale of our Class A common stock in this offering. All of the net proceeds from this offering will be received by the debt-for-equity exchange parties. On the settlement date of this offering immediately prior to the settlement of the debt-for-equity exchange parties’ sale of the shares to the underwriters, the debt-for-equity exchange parties will acquire the Class A common stock being sold in this offering from Pfizer in exchange for outstanding Pfizer indebtedness held by the debt-for-equity exchange parties. See “Summary—The underwriting and the debt-for-equity exchange,” “Underwriting—The debt-for-equity exchange” and “Underwriting—Conflicts of interest.”

 

43


Table of Contents

Dividend policy

We initially expect to pay quarterly cash dividends to holders of our Class A common stock and Class B common stock of $0.065 per share, subject to the discretion of our board of directors. The declaration and payment of dividends to holders of our Class A common stock and Class B common stock will be at the discretion of our board of directors in accordance with applicable law after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, cash flows available in the United States, impact on our effective tax rate, indebtedness, legal requirements and other factors that our board of directors deems relevant. In addition, the instruments governing our indebtedness may limit our ability to pay dividends. Therefore, no assurance is given that we will pay any dividends to our common stockholders, or as to the amount of any such dividends if our board of directors determines to do so.

Because we are a holding company, our ability to pay cash dividends on our common stock will depend on the receipt of dividends or other distributions from our subsidiaries.

 

44


Table of Contents

Dilution

If you invest in our Class A common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of Class A common stock and the pro forma net tangible book deficit per share of our Class A common stock and Class B common stock after giving effect to the Transactions, as defined in “Unaudited pro forma condensed combined financial statements”. Net tangible book deficit per share represents:

 

 

total assets less intangible assets;

 

 

reduced by our total liabilities; and

 

 

divided by the number of shares of our common stock outstanding.

Dilution per share represents the difference between the amount per share paid by purchasers of our Class A common stock in this offering and the pro forma net tangible book deficit per share after giving effect to the Transactions. As of September 30, 2012, after giving effect to the Transactions, our pro forma net tangible book deficit was approximately $(799) million, or $(1.60) per share based on 86.1 million shares of our Class A common stock and 413.9 million shares of our Class B common stock outstanding prior to this offering. This represents an immediate dilution of $25.10 per share to investors purchasing shares of our Class A common stock in this offering. The following table illustrates this dilution per share assuming an initial public offering price per share at the midpoint of the price range on the cover of this prospectus:

 

Assumed initial public offering price per share

     $ 23.50   

Pro forma net tangible book deficit per share as of September 30, 2012 after giving effect to the Transactions

   $ (1.60  
  

 

 

   

Dilution per share to new investors in this offering

     $ 25.10   
    

 

 

 

A $1.00 increase/(decrease) in the assumed initial public offering price of $23.50 per share, which is the midpoint of the price range set forth on the cover of this prospectus would not impact our pro forma net tangible book deficit or our pro forma net tangible book deficit per share but it would increase/(decrease) dilution per share to new investors in this offering by $1.00.

 

45


Table of Contents

Capitalization

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2012 on a historical basis, and on a pro forma basis to reflect the Transactions, as defined in “Unaudited pro forma condensed combined financial statements.”

As the net proceeds of this offering are received by the debt-for-equity exchange parties, this offering has no impact on our capitalization.

The information below is not necessarily indicative of what our cash and cash equivalents and capitalization would have been had the Transactions been completed as of September 30, 2012. In addition, it is not indicative of our future cash and cash equivalents and capitalization. This table is derived from, and is qualified in its entirety by reference to, our historical and pro forma financial statements and the notes thereto included elsewhere in this prospectus, and should be read in conjunction with “Unaudited pro forma condensed combined financial statements,” “Management’s discussion and analysis of financial condition and results of operations” and our combined financial statements and notes thereto included elsewhere in this prospectus.

 

     As of
September 30, 2012
 
     Actual     Pro forma  
(MILLIONS, EXCEPT PER SHARE AMOUNTS)       

Cash and cash equivalents

   $ 133      $ 300   
  

 

 

   

 

 

 

Allocated long-term debt

   $ 580      $ —     

Revolving credit facility(1)

     —          —     

Senior notes(2)

     —          3,640   

Equity(3):

    

Business unit equity

     4,263        —     

Class A common stock, $0.01 par value, 5,000 shares authorized; 86.1 issued and outstanding on a pro forma basis

     —          1   

Class B common stock, $0.01 par value, 1,000 shares authorized; 413.9 issued and outstanding on a pro forma basis

     —          4   

Additional paid-in capital

       1,234   

Accumulated other comprehensive loss

     (169     (195
  

 

 

   

 

 

 

Total Zoetis equity

     4,094        1,044   

Equity attributable to noncontrolling interests

     15        15   
  

 

 

   

 

 

 

Total equity

   $ 4,109      $ 1,059   
  

 

 

   

 

 

 

Total capitalization

   $ 4,689      $ 4,699   
  

 

 

   

 

 

 

 

(1) In December 2012, we entered into a $1.0 billion five-year revolving credit facility. The credit facility will not be available for borrowings until the date on which certain conditions, including the completion of this offering and the receipt of certain investment grade ratings, are satisfied. We expect that these conditions will be met concurrently with the completion of this offering. Subject to certain conditions, we will have the right to increase the credit facility to up to $1.5 billion. No borrowings under the revolving credit facility are assumed on a pro forma basis.
(2) Reflects an original issue debt discount of $10 million.
(3) The number of shares of Class A common stock and Class B common stock issued and outstanding on a pro forma basis assumes the underwriters’ option to purchase 12.9 million additional shares is not exercised. We have authorized preferred stock, but no preferred shares are assumed to be issued and outstanding on a pro forma basis.

 

46


Table of Contents

Selected historical combined financial data

The following table sets forth our selected historical combined financial data for the periods indicated.

The selected historical combined statement of operations data for the years ended December 31, 2011, 2010 and 2009 and the selected historical combined balance sheet data as of December 31, 2011 and 2010 presented below have been derived from our audited combined financial statements included elsewhere in this prospectus. The selected historical combined balance sheet data as of December 31, 2009 and 2008 have been derived from unaudited combined financial information not included in this prospectus.

The revenue data for the years ended December 31, 2008 and 2007 are derived from unaudited combined financial information not included in this prospectus.

The selected historical combined statement of operations data for the nine months ended September 30, 2012 and October 2, 2011 and the selected historical combined balance sheet data as of September 30, 2012 have been derived from our unaudited condensed combined financial statements included elsewhere in this prospectus. The selected historical combined balance sheet data as of October 2, 2011 has been derived from unaudited combined financial information not included in this prospectus. In the opinion of management, the unaudited condensed combined financial statements for the interim periods included in this prospectus include all normal and recurring adjustments that we consider necessary for a fair presentation of the financial position and operating results for these periods. The operating results for the nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012.

Our combined financial statements include expense allocations for certain support functions that are provided on a centralized basis within Pfizer, such as expenses for business technology, facilities, legal, finance, human resources, and, to a lesser extent, business development, public affairs and procurement, among others, as well as certain manufacturing and supply costs incurred by manufacturing sites that are shared with other Pfizer business units, Pfizer’s global external supply group and Pfizer’s global logistics and support group. Pfizer does not routinely allocate these costs to any of its business units. These allocations are based on either a specific identification basis or, when specific identification is not practicable, proportional cost allocation methods (e.g., using third-party sales, headcount, animal health identified manufacturing costs, etc.), depending on the nature of the services and/or costs.

The financial statements included in this prospectus may not be indicative of our future performance and do not necessarily reflect what our financial position and results of operations would have been had we operated as a standalone public company during the periods presented, including changes that will occur in our operations and capital structure as a result of this offering and the Separation.

 

47


Table of Contents

You should read the selected historical combined financial data set forth below in conjunction with the sections entitled “Management’s discussion and analysis of financial condition and results of operations” and our combined financial statements and notes thereto included elsewhere in this prospectus.

 

      Nine Months Ended(a)    Year Ended
December 31,(a)
(MILLIONS OF DOLLARS)    September 30,
2012
   October 2,
2011
   2011    2010    2009   2008(b)    2007(b)

Statement of operations data:

                                 

Revenues

     $ 3,160        $ 3,106        $ 4,233        $ 3,582        $ 2,760       $ 2,825        $ 2,639  

Net income/(loss) before allocation to noncontrolling interests(c)

       446          238          248          111          (101 )       NA          NA  

Balance sheet data:

                                 

Total assets

     $ 5,904        $ 5,844        $ 5,711        $ 5,284        $ 5,598       $ 2,993          NA  

Long-term obligations(d)

       580          689          575          673          728         —            NA  

Other data:

                                 

Adjusted net income(e)

     $ 482        $ 381        $ 503        $ 275        $ 189         NA          NA  

 

NA: Not Available

Certain amounts may reflect rounding adjustments.

 

(a) Starting in 2011, includes the KAH business acquired as part of Pfizer’s acquisition of King Pharmaceuticals, Inc., commencing on the acquisition date of January 31, 2011. Starting in 2009, includes FDAH operations, acquired as part of Pfizer’s acquisition of Wyeth, commencing on the acquisition date of October 15, 2009.
(b) Certain information for 2007 and 2008 is not available. Over the last five years, there have been significant changes in Pfizer’s corporate structure and a number of restructurings and personnel changes which have impacted our business. As such, it is not practicable for us to determine net income/(loss) for the years ended December 31, 2008 and 2007 or to determine Total assets and Long-term obligations at December 31, 2007.
(c) Defined as net income/(loss) before allocation to noncontrolling interests.
(d) Starting in 2009, primarily includes an allocation of Pfizer debt that was issued to partially finance the acquisition of Wyeth (including FDAH) in 2009. The debt has been allocated on a pro-rata basis using the deemed acquisition cost of FDAH as a percentage of the total acquisition cost of Wyeth.
(e) Adjusted net income (a non-GAAP financial measure) is defined as reported net income attributable to Zoetis excluding purchase accounting adjustments, acquisition-related costs and certain significant items. Management uses Adjusted net income, among other factors, to set performance goals and to measure the performance of the overall company, as described in “Management’s discussion and analysis of financial condition and results of operations—Adjusted net income.” We believe that investors’ understanding of our performance is enhanced by disclosing this performance measure. Reconciliations of U.S. GAAP reported net income attributable to Zoetis to non-GAAP Adjusted net income for the nine months ended September 30, 2012 and October 2, 2011, as well as reconciliations of the years ended December 31, 2011, 2010 and 2009, are provided in “Management’s discussion and analysis of financial condition and results of operations—Adjusted net income.” The Adjusted net income measure is not, and should not be viewed as, a substitute for U.S. GAAP reported net income attributable to Zoetis.

 

48


Table of Contents

Unaudited pro forma condensed combined financial statements

The following unaudited pro forma condensed combined financial statements should be read in conjunction with the section entitled “Management’s discussion and analysis of financial condition and results of operations” and our audited combined annual and unaudited condensed combined interim financial statements and accompanying notes included elsewhere in this prospectus.

Our unaudited pro forma condensed combined financial statements consist of unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2012 and for the year ended December 31, 2011, and an unaudited pro forma condensed combined balance sheet as of September 30, 2012. The unaudited pro forma condensed combined financial statements are based on and have been derived from our historical combined annual and condensed combined interim financial statements included elsewhere in this prospectus.

In management’s opinion, the unaudited pro forma condensed combined financial statements reflect certain adjustments that are necessary to present fairly our unaudited pro forma condensed combined results of operations and our unaudited pro forma condensed combined balance sheet as of and for the periods indicated. The pro forma adjustments give effect to events that are (i) directly attributable to the transactions described below, (ii) factually supportable; and, with respect to the statement of operations, (iii) expected to have a continuing impact on us. The pro forma adjustments are based on assumptions that management believes are reasonable given the best information currently available.

The unaudited pro forma condensed combined financial statements are for illustrative and informational purposes only and are not intended to represent what our results of operations or financial position would have been had we operated as a standalone public company during the periods presented or if the transactions described below had actually occurred as of the dates indicated. The unaudited pro forma condensed combined financial statements should not be considered indicative of our future results of operations or financial position as a standalone public company.

The unaudited pro forma condensed combined financial statements give effect to the following transactions, which we refer to as the “Transactions,” as if they each had occurred on January 1, 2011 for the unaudited pro forma condensed combined statements of operations and on September 30, 2012 for the unaudited pro forma condensed combined balance sheet:

 

   

Pfizer’s transfer to us of its subsidiaries holding substantially all of the assets and liabilities of its animal health business in consideration for (i) all of the issued and outstanding shares of our Class A common stock; (ii) all of the issued and outstanding shares of our Class B common stock; (iii) $1 billion aggregate principal amount of senior notes with a stated interest rate of 3.25%, which Pfizer disposed of in connection with the senior notes offering; and (iv) an amount of cash equal to substantially all of the net proceeds we received in the senior notes offering;

 

   

the incurrence of $2.650 billion aggregate principal amount of senior notes in connection with the senior notes offering with a weighted-average stated interest rate of 3.17% (this debt is in addition to the $1 billion of senior notes mentioned above);

 

   

the incurrence of $25 million of costs related to the issuance of senior notes in the senior notes offering and the establishment of a $1.0 billion five-year revolving credit facility; and

 

   

certain transactions contemplated by certain agreements between us and Pfizer described in “Certain relationships and related party transactions—Relationship with Pfizer,” and the provisions contained therein.

Due to local regulatory and operational requirements, in certain non-U.S. jurisdictions, the transfer of certain assets and liabilities of Pfizer’s animal health business may not legally occur prior to this offering. We have not adjusted the accompanying unaudited pro forma condensed combined balance sheet for the potential impact of the delayed transfers because these assets and liabilities are not material to our unaudited pro forma condensed combined financial statements, individually or in the aggregate.

 

49


Table of Contents

Our historical condensed combined financial statements include expense allocations for certain support functions that are provided on a centralized basis within Pfizer, such as expenses for business technology, facilities, legal, finance, human resources, and, to a lesser extent, business development, public affairs and procurement, among others. Following this offering, pursuant to agreements with Pfizer, we expect that Pfizer will continue to provide us with some of the services related to these functions on a transitional basis in exchange for agreed-upon fees, and we expect to incur other costs to replace the services and resources that will not be provided by Pfizer. We will also incur additional costs related to being a standalone public company. As a standalone public company, our total costs related to such support functions may differ from the costs that were historically allocated to us from Pfizer. We estimate that these costs may exceed the allocated amounts for full year 2011 by a range of approximately $15 million to $25 million in 2013. In addition, we expect to incur internal costs to implement certain new systems, including infrastructure and an enterprise resource planning system, while our legacy systems are being fully supported by Pfizer under the transitional services agreement. We expect these costs to range between approximately $30 million to $40 million in 2013 and 2014. We have not adjusted the accompanying unaudited pro forma condensed combined statements of operations for any of these estimated costs as they are projected amounts based on estimates and, therefore, are not factually supportable.

The unaudited pro forma condensed combined statements of operations exclude certain non-recurring costs that we expect to incur related to the separation, including new branding (which includes changes to the manufacturing process for new packaging required), the creation of a standalone infrastructure, site separation and certain legal registration and patent assignment costs. We expect these costs to range between approximately $170 million to $200 million in 2013 and $70 million to $100 million in 2014. These estimates exclude the impact of any depreciation or amortization of capitalized separation expenditures.

Some of our products are manufactured at sites that will be retained by Pfizer or that will be operated by Pfizer under a sale-leaseback arrangement. Following this offering, pursuant to the master manufacturing and supply agreement with Pfizer, we expect to purchase these products from Pfizer. The historical condensed combined statements of operations include allocations of certain manufacturing and supply costs incurred by the manufacturing sites that would not have been charged to us under the master manufacturing and supply agreement with Pfizer had such agreement been in effect in the periods presented, such as operating variances as well as purchase price and volume variances under a certain threshold. The costs allocated in the historical condensed combined statements of operations are higher than the amounts that would have been charged by Pfizer under the master manufacturing and supply agreement, had it been in effect during the periods presented, by approximately $10 million for the nine months ended September 30, 2012 and approximately $14 million for the year ended December 31, 2011. We have not adjusted the accompanying unaudited pro forma condensed combined statements of operations for the aforementioned differences. Such an adjustment is not factually supportable due to the unpredictability and variability of such costs, which could be gains or losses in any particular period, and due to the fact that, as a standalone company, we will operate under our own supply manufacturing network, which may be different than the one operated by Pfizer.

 

50


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2012

 

(MILLIONS, EXCEPT PER SHARE AMOUNTS)    Historical     Pro Forma
Adjustments
    Notes     Pro
Forma
 

 

 

Revenues

   $ 3,160      $   —          $ 3,160   

Costs and expenses:

        

Cost of sales(1)

     1,130        —            1,130   

Selling, general and administrative expenses(1)

     1,017        —            1,017   

Research and development expenses(1)

     288        —            288   

Amortization of intangible assets

     48        —            48   

Restructuring charges and certain acquisition-related costs

     55        —            55   

Other (income)/deductions—net

     (14     68        (a ),(b)      54   

 

 

Income before provision for taxes on income

     636        (68       568   

Provision for taxes on income

     190        (26     (c     164   

 

 

Net income before allocation to noncontrolling interests

     446        (42       404   

Less: Net income attributable to noncontrolling interests

     —          —            —     

 

 

Net income attributable to Zoetis

   $ 446      $ (42     $ 404   

 

 

Earnings per common share—basic

     N/A          (d   $ 0.81   

Earnings per common share—fully diluted

     N/A          (d   $ 0.81   

 

 

Weighted average shares outstanding:

        

Basic

     N/A          (d     500   

Diluted

     N/A          (d     500   

 

 
(1) Exclusive of amortization of intangible assets, except as disclosed in Note 8C. Goodwill and Other Intangible Assets: Amortization in the Notes to Unaudited Condensed Combined Financial Statements.

Certain amounts may reflect rounding adjustments.

See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

 

51


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2011

 

(MILLIONS, EXCEPT PER SHARE AMOUNTS)    Historical(1)      Pro Forma
Adjustments
    Notes     Pro
Forma
     

 

Revenues

   $ 4,233       $   —          $ 4,233     

Costs and expenses:

           

Cost of sales(2)

     1,652         —            1,652     

Selling, general and administrative expenses(2)

     1,453         —            1,453     

Research and development expenses(2)

     427         —            427     

Amortization of intangible assets

     69         —            69     

Restructuring charges and certain acquisition-related costs

     154         —            154     

Other deductions—net

     84         86        (a),(b)        170     

 

Income before provision for taxes on income

     394         (86       308     

Provision for taxes on income

     146         (33     (c)        113     

 

Net income before allocation to noncontrolling interests

     248         (53       195     

Less: Net income attributable to noncontrolling interests

     3         —            3     

 

Net income attributable to Zoetis

   $ 245       $ (53     $ 192     

 

Earnings per common share—basic

     N/A           (d   $ 0.38     

Earnings per common share—fully diluted

     N/A           (d   $ 0.38     

 

Weighted average shares outstanding:

           

Basic

     N/A           (d     500     

Diluted

     N/A           (d     500     

 

(1) Includes revenues and expenses from acquisitions from the acquisition date, see Note 2. Basis of Presentation in the Notes to Combined Financial Statements.

 

(2) Exclusive of amortization of intangible assets, except as disclosed in Note 3J. Significant Accounting Policies: Amortization of Intangible Assets, Depreciation and Certain Long-Lived Assets in the Notes to Combined Financial Statements.

Certain amounts may reflect rounding adjustments.

 

See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

 

52


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AS OF SEPTEMBER 30, 2012

 

(MILLIONS, EXCEPT PER SHARE AMOUNTS)    Historical     Pro Forma
Adjustments
    Notes    Pro
Forma
 

 

 

Assets

         

Cash and cash equivalents

   $ 133      $ 167      (m),(n)    $ 300   

Accounts receivable, less allowance for doubtful accounts

     848        —             848   

Inventories

     1,272        (136   (e),(f)      1,136   

Current deferred tax assets

     72        (4   (e),(f)      68   

Other current assets

     230        (5   (e),(f)      225   

 

 

Total current assets

     2,555        22           2,577   

Property, plant and equipment, less accumulated depreciation

     1,204        25      (e),(f)      1,229   

Identifiable intangible assets, less accumulated amortization

     877        —             877   

Goodwill

     981        —             981   

Noncurrent deferred tax assets

     218        (118   (e),(h),(i),(k)      100   

Other noncurrent assets

     69        4      (i),(l),(m),(n)      73   

 

 

Total assets

   $ 5,904      $ (67      $ 5,837   

 

 

Liabilities and Equity

         

Accounts payable

   $ 195      $ (3   (e)    $ 192   

Income taxes payable

     42        3      (i)      45   

Accrued compensation and related items

     145        (4   (e)      141   

Other current liabilities

     355        (14   (e),(l)      341   

 

 

Total current liabilities

     737        (18        719   

Allocated long-term debt

     580        (580   (l)      —     

Long-term debt

     —          3,640      (m),(n)      3,640   

Noncurrent deferred tax liabilities

     299        (45   (e),(g),(h),(j),(k)      254   

Other taxes payable

     88        (65   (i)      23   

Other noncurrent liabilities

     91        51      (e),(g)      142   

 

 

Total liabilities

     1,795        2,983           4,778   

 

 

Commitments and Contingencies

         

Business unit equity

     4,263        (4,263   (e),(f),(g),(h),(i),

(j),(k),(l),(m),(n)

     —     

Class A common stock, $0.01 par value, 5,000 shares authorized; 86.1 issued and outstanding on a pro forma basis

     —          1      (n)      1   

Class B common stock, $0.01 par value, 1,000 shares authorized; 413.9 issued and outstanding on a pro forma basis

     —          4      (n)      4   

Additional paid-in capital

     —          1,234      (n)      1,234   

Accumulated other comprehensive loss

     (169     (26   (g)      (195

 

 

Total Zoetis equity

     4,094        (3,050        1,044   

Equity attributable to noncontrolling interests

     15        —             15   

 

 

Total equity

     4,109        (3,050        1,059   

 

 

Total liabilities and equity

   $ 5,904      $ (67      $ 5,837   

 

 

See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

 

53


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

Certain amounts and percentages may reflect rounding adjustments.

 

(a) Reflects the elimination of net interest expense of $23 million and $36 million for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively, related to the portion of Pfizer’s net interest expense allocated to us and included in our historical combined statements of operations. The associated Allocated long-term debt will be retained by Pfizer following the completion of the Transactions.

 

(b) Reflects the addition of interest expense (which includes amortization of deferred issuance costs) of $91 million and $122 million for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively, related to the senior notes issued in connection with the senior notes offering at a weighted-average effective interest rate of 3.30%, and costs associated with the revolving credit facility.

 

(c) Reflects the tax effect of the pre-tax pro forma adjustments impacting Income before provision for taxes on income, calculated using the applicable statutory tax rate in the relevant jurisdictions.

 

(d) The weighted-average number of shares used to compute pro forma basic and diluted earnings per share is 500 million, which is also the number of shares of our common stock outstanding immediately following the completion of the Transactions.

 

(e) Reflects the elimination of assets and liabilities at certain manufacturing sites that will be retained by Pfizer following the completion of the Transactions. These assets and liabilities are included in the historical condensed combined balance sheet as they are specifically identifiable to the animal health business. The adjustment follows:

 

 

 
(MILLIONS OF DOLLARS)   

Debit/
(Credit)

 

 

 

Inventories

   $ (98

Current deferred tax assets*

     (3

Other current assets

     (3

Property, plant and equipment, less accumulated depreciation

     (28

Noncurrent deferred tax assets*

     (1

Accounts payable

     3   

Accrued compensation and related items

     4   

Other current liabilities

     8   

Noncurrent deferred tax liabilities*

     2   

Other noncurrent liabilities

     7   

Business unit equity

     109   

 

 
   $     —     

 

 
  * Calculated using the applicable statutory tax rate in the relevant jurisdictions.

 

54


Table of Contents
(f) Reflects the addition of property, plant and equipment (PP&E) at the Guarulhos, Brazil manufacturing site, that will be transferred to us by Pfizer and then leased back to Pfizer under operating leases, and the elimination of inventory, at that site, that will be retained by Pfizer, following the completion of the Transactions. The PP&E are excluded from the historical condensed combined balance sheet as they are not specifically identifiable to the animal health business, while the inventory is included as it is specifically identifiable to the animal health business. Pfizer will use the site to manufacture, among other things, animal health products for us pursuant to the master manufacturing and supply agreement. Pfizer will pay us lease income equivalent to the depreciation expense that we expect to record for the PP&E and, as such, we do not expect the arrangement to have a significant impact on our combined statements of operations. The adjustment follows:

 

 

 
(MILLIONS OF DOLLARS)   

Debit/
(Credit)

 

 

 

Inventories

   $ (38

Current deferred tax assets*

     (1

Other current assets

     (2

Property, plant and equipment, less accumulated depreciation

     53   

Business unit equity

     (12

 

 
   $     —     

 

 
  * Calculated using the applicable statutory tax rate in the relevant jurisdictions.

 

(g) Reflects the addition of net benefit plan liabilities that will be transferred to us by Pfizer following the completion of the Transactions. These net benefit plan liabilities are excluded from the historical condensed combined balance sheet as the related benefit plans are not dedicated to animal health employees. The benefit plan expenses associated with these liabilities are included in our historical condensed combined statements of operations. Specifically, this adjustment reflects the transfer of certain defined benefit pension liabilities, net of related assets, in several countries outside the U.S., as well as certain unfunded postretirement benefit liabilities in the U.S. The adjustment follows:

 

 

 
(MILLIONS OF DOLLARS)     
 
Debit/
(Credit)
 
  

 

 

Noncurrent deferred tax liabilities*

   $ 19   

Other noncurrent liabilities

     (58

Business unit equity

     13   

Accumulated other comprehensive loss

     26   

 

 
   $     —     

 

 
  * Calculated using the applicable statutory tax rate in the relevant jurisdictions.

 

(h) Represents the elimination of noncurrent deferred tax assets (which may be included within noncurrent deferred tax liabilities due to jurisdictional netting) related to net operating loss and tax credit carryforwards that will be retained by Pfizer following the completion of the Transactions. These tax assets are included in the historical condensed combined balance sheet as they are considered in the computation of the historical provision for taxes on income. The adjustment follows:

 

 

 
(MILLIONS OF DOLLARS)     
 
Debit/
(Credit)
 
  

 

 

Noncurrent deferred tax assets

   $ (139

Noncurrent deferred tax liabilities

     (66

Business unit equity

     205   

 

 
   $     —     

 

 

 

55


Table of Contents
(i) Reflects the elimination of net tax liabilities associated with uncertain tax positions that will be retained by Pfizer following the completion of the Transactions. These tax liabilities are included in the historical condensed combined balance sheet as they are considered in the computation of the historical provision for taxes on income. The adjustment follows:

 

 

 
(MILLIONS OF DOLLARS)     
 
Debit/
(Credit)
 
  

 

 

Noncurrent deferred tax assets

   $ 4   

Other noncurrent assets

     (19

Income taxes payable

     (3

Other taxes payable

     65   

Business unit equity

     (47

 

 
   $     —     

 

 

 

(j) Reflects the elimination of noncurrent deferred tax liabilities relating to deferred income taxes on unremitted earnings that will be retained by Pfizer following the completion of the Transactions. These tax liabilities are included in the historical condensed combined balance sheet as they are considered in the computation of the historical provision for taxes on income. The adjustment follows:

 

 

 
(MILLIONS OF DOLLARS)     
 
Debit/
(Credit)
 
  

 

 

Noncurrent deferred tax liabilities

   $ 86   

Business unit equity

     (86

 

 
   $     —     

 

 

 

(k) Reflects the recognition of deferred tax assets, on the temporary differences between the financial reporting and tax bases of certain assets and liabilities, that will be created as a result of various legal entity reorganization transactions within Pfizer. These reorganization transactions are performed in preparation for the legal transfer to us of Pfizer subsidiaries that hold substantially all of the assets and liabilities of Pfizer’s animal health business. The adjustment follows:

 

 

 
(MILLIONS OF DOLLARS)    Debit/
(Credit)
 

 

 

Noncurrent deferred tax assets

   $ 18   

Noncurrent deferred tax liabilities

     4   

Business unit equity

     (22

 

 
   $     —     

 

 

 

(l) Reflects the elimination of allocated long-term debt, allocated accrued interest payable and allocated unamortized deferred debt issuance costs that will be retained by Pfizer following the completion of the Transactions. These assets and liabilities are included in the historical condensed combined balance sheet. The adjustment follows:

 

 

 
(MILLIONS OF DOLLARS)   

Debit/
(Credit)

 

 

 

Other noncurrent assets

   $ (2

Other current liabilities

     6   

Allocated long-term debt

     580   

Business unit equity

     (584

 

 
   $     —     

 

 

 

56


Table of Contents
(m) Reflects the incurrence of $2,650 million aggregate principal amount of senior notes in connection with the senior notes offering (net of an original issue debt discount of $9 million) with a weighted-average stated interest rate of 3.17%, as well as the deferred costs associated with both the incurrence of the senior notes and the establishment of a $1.0 billion five-year revolving credit facility. The deferred issuance costs associated with the five-year revolving credit facility in the amount of $1 million were paid by Pfizer. The adjustment follows:

 

 

 
(MILLIONS OF DOLLARS)   

Debit/
(Credit)

 

 

 

Cash and cash equivalents

   $ 2,624   

Other noncurrent assets*

     18   

Long-term debt*

     (2,641

Business unit equity

     (1

 

 
   $ —     

 

 
  * The long-term debt net of deferred issuance costs of $18 million has a weighted-average effective interest rate of 3.28%.

 

(n) Reflects the legal transfer to us of Pfizer’s subsidiaries holding substantially all of the assets and liabilities of Pfizer’s animal health business in consideration for (i) all of the issued and outstanding shares of our Class A common stock; (ii) all of the issued and outstanding shares of our Class B common stock; (iii) $1 billion aggregate principal amount of senior notes (net of an original issue debt discount of $1 million) with a stated interest rate of 3.25%, which Pfizer disposed of in connection with the senior notes offering (the issuance of these senior notes is in addition to the senior notes mentioned in (m) above; and (iv) an amount of cash equal to substantially all of the net proceeds we received in the senior notes offering. The adjustment follows:

 

 

 
(MILLIONS OF DOLLARS)    Debit/
(Credit)
 

 

 

Cash and cash equivalents

   $ (2,457

Other noncurrent assets*

     7   

Long-term debt*

     (999

Business unit equity

     4,688   

Common stock**

     (5

Additional paid-in capital

     (1,234

 

 
   $ —     

 

 
  * The long-term debt net of deferred issuance costs of $7 million has an effective interest rate of 3.34%
  ** Represents 500 million shares of Class A and Class B common stock at a par value per share of $0.01.

We and Pfizer have agreed that our cash balance on the date of the completion of this offering will be at least $300 million. As such, our pro forma condensed combined balance sheet as of September 30, 2012 includes a balance of $300 million in Cash and cash equivalents.

 

57


Table of Contents

The Separation and Distribution transactions

The Separation

Pfizer formed Zoetis in July 2012. Prior to the completion of this offering, we will be a wholly-owned subsidiary of Pfizer, and all of our outstanding shares of common stock will be owned by Pfizer. In addition, as a result of a series of steps which occurred prior to the date of the senior notes offering, Pfizer transferred substantially all of the assets and liabilities of its animal health business to various segregated subsidiaries.

In connection with this offering, we and Pfizer intend to enter into, or have entered into, agreements and take certain actions to transfer substantially all of the assets and liabilities of Pfizer’s animal health business to us and separate our business from Pfizer. We refer to these separation transactions, collectively, as the “Separation.” The following are the principal steps of the Separation:

 

 

In September 2012, the agreements related to our facility in Brazil described in “Certain relationships and related party transactions—Relationship with Pfizer—Brazil lease agreements” were entered into.

 

 

In October 2012, the master manufacturing and supply agreements described in “Certain relationships and related party transactions—Relationship with Pfizer—Master manufacturing and supply agreements” were entered into.

 

 

In January 2013, Pfizer transferred to us its subsidiaries holding substantially all of the assets and liabilities of its animal health business. In exchange, we issued or agreed to transfer to Pfizer: (i) all of the issued and outstanding shares of our Class A common stock; (ii) all of the issued and outstanding shares of our Class B common stock; (iii) the Pfizer-owned notes; and (iv) an amount of cash equal to substantially all of the net proceeds we received in the senior notes offering, which amount will be paid immediately prior to the completion of this offering.

 

 

Immediately prior to the completion of this offering, we intend to enter into the additional agreements with Pfizer described in “Certain relationships and related party transactions—Relationship with Pfizer.”

 

 

Following this offering, Pfizer intends to transfer to us certain assets and liabilities of the animal health business that, due to business, regulatory or other legal constraints, could not be transferred prior to this offering.

Following the Separation, we will own or have the right to use substantially all of the assets that were used, or held for use, exclusively in Pfizer’s animal health business, including the following:

 

 

Intellectual Property. As part of the Separation, Pfizer will assign to us ownership of approximately 4,000 patents, 2,000 pending patent applications, and more than 9,500 trademark applications and registrations. In addition, Pfizer will license to us the right to use certain intellectual property rights in the animal health field. We will license to Pfizer the right to use certain of our trademarks and substantially all of our other intellectual property rights in the human health field and all other fields outside of animal health. In addition, Pfizer will grant us a transitional license to use certain of Pfizer’s trademarks and we will grant Pfizer a transitional license to use certain of our trademarks for a period of time following the completion of this offering.

 

 

Manufacturing Facilities. Our global manufacturing network consists of 13 “anchor” manufacturing sites and 16 “satellite” manufacturing sites. Ownership of, or the existing leasehold interest in, these facilities will be conveyed to us by Pfizer as part of the Separation. Among these 29 manufacturing sites is our facility in Guarulhos, Brazil, which we will lease back to Pfizer. Certain of our products are currently manufactured at 14 manufacturing sites that will be retained by Pfizer. The products manufactured by Pfizer at these sites and at our Guarulhos, Brazil facility will continue to be supplied to us under the terms of a manufacturing and supply agreement we entered into with Pfizer.

 

 

R&D Facilities. We have R&D operations co-located with certain of our manufacturing sites in Australia, Brazil, Belgium, Canada, China, Spain and the United States to facilitate the efficient transfer of production

 

58


Table of Contents
 

processes from our laboratories to manufacturing sites. In addition, we maintain R&D operations at non-manufacturing locations in Brazil, Belgium, India and the United States. As part of the Separation, Pfizer conveyed to us its interest in each of these R&D facilities, with the exception of our Mumbai, India facility, which we expect Pfizer to transfer to us for agreed upon cash consideration after the completion of this offering, and, in the interim, we will lease this facility from Pfizer.

 

 

Employees. Following the Separation, we expect that we will have more than 9,500 employees worldwide. We expect that as part of the Separation, substantially all employees of Pfizer who were substantially dedicated to the animal health business will become our employees. However, labor and employment laws or other business considerations in some jurisdictions may impede or delay Pfizer from transferring to us employees who are substantially dedicated to the animal health business. In those instances, to the extent permissible under applicable law, we and Pfizer intend to enter into a mutually-acceptable arrangement, such as a staffing agreement, to provide for continued operation of the business until such time as the employees in those jurisdictions can be transitioned to us.

For more information regarding the agreements we and Pfizer intend to enter into, or have entered into, see “Certain relationships and related party transactions—Relationship with Pfizer.”

The Distribution

Pfizer has informed us that, following this offering, it may make a tax-free distribution to its stockholders of all or a portion of its remaining equity interest in us, which may include one or more distributions effected as a dividend to all Pfizer stockholders, one or more distributions in exchange for Pfizer shares or other securities, or any combination thereof. We refer to any such potential distribution as the “Distribution.”

Pfizer has no obligation to pursue or consummate any further dispositions of its ownership interest in us, including through the Distribution, by any specified date or at all. If pursued, the Distribution would be subject to various conditions, including receipt of any necessary regulatory or other approvals, the existence of satisfactory market conditions and the continuing application of Pfizer’s private letter ruling from the IRS and the receipt of opinions of counsel to the effect that such Distribution would be tax-free to Pfizer and its stockholders. The conditions to the Distribution may not be satisfied, Pfizer may decide not to consummate the Distribution even if the conditions are satisfied or Pfizer may decide to waive one or more of these conditions and consummate the Distribution even if all of the conditions are not satisfied.

 

59


Table of Contents

Management’s discussion and analysis of

financial condition and results of operations

Introduction

Our management’s discussion and analysis of financial condition and results of operations, or MD&A, is provided to assist readers in understanding our performance, as reflected in the results of our operations, our financial condition and our cash flows. This MD&A should be read in conjunction with our combined financial statements and notes thereto included elsewhere in this prospectus. The discussion in this MD&A contains a description of our historical performance for periods in which we operated as a business unit of Pfizer. Our future results could differ materially from historical performance as a result of various factors such as those discussed in “Risk factors,” “The Separation and Distribution transactions” and “—Comparability of historical results.”

This MD&A is organized as follows:

 

 

Overview of our business. This section, beginning on page 61, provides a general description of our business and the industry in which we operate. For more information regarding our business and the animal health industry, see “Business” and “Industry.”

 

 

Factors affecting our performance. This section, beginning on page 61, provides information regarding certain factors that may affect our financial performance.

 

 

Components of revenues and costs and expenses. This section, beginning on page 64, provides an explanation of the components of our combined statements of operations.

 

 

Comparability of historical results and our relationship with Pfizer. This section, beginning on page 65, provides information about the limitations of the predictive value of the combined financial statements.

 

 

Analysis of the combined statements of operations. This section, beginning on page 67, consists of the following for all periods presented:

 

   

Revenues. This section, beginning on page 68, provides an analysis of our revenues in total, by operating segment and by sector.

 

   

Costs and expenses. This section, beginning on page 74, provides a discussion about the drivers of our costs and expenses.

 

   

Provision for taxes on income. This section, beginning on page 79, provides a discussion of items impacting our effective tax rates.

 

 

Adjusted net income. This section, beginning on page 81, provides a discussion of Adjusted net income, an alternative view of performance used by management. Adjusted net income is a non-GAAP financial measure.

 

 

Analysis of the combined statements of comprehensive income/(loss). This section, beginning on page 85, provides an analysis of the components of comprehensive income for all periods presented.

 

 

Analysis of the combined balance sheets. This section, beginning on page 85, provides a discussion of changes in certain balance sheet accounts for all balance sheets presented.

 

 

Analysis of the combined statements of cash flows. This section, beginning on page 86, provides an analysis of the drivers of our operating, investing and financing cash flows for all periods presented.

 

 

Analysis of financial condition, liquidity and capital resources. This section, beginning on page 88, provides an analysis of our ability to meet our short-term and long-term financing needs.

 

 

New accounting standards. This section, beginning on page 91, discusses accounting standards that we have recently adopted.

 

 

Significant accounting policies and application of critical accounting estimates. This section, beginning on page 91, discusses those accounting policies and estimates that we consider important to an understanding our combined financial statements.

 

60


Table of Contents
 

Contingencies. This section, beginning on page 94, discusses contingencies related to legal and tax matters.

 

 

Qualitative and quantitative disclosures about market risk. This section, beginning on page 95, discusses financial risk management, specifically with respect to foreign currency risk.

Overview of our business

We are a global leader in the discovery, development, manufacture and commercialization of animal health medicines and vaccines, with a focus on both livestock and companion animals. For more than 60 years, as a business unit of Pfizer, we have been committed to enhancing the health of animals and bringing solutions to our customers who raise and care for them. Measured by our revenues of $4.2 billion for the year ended December 31, 2011, we are the largest animal health medicines and vaccines business, with our products sold in more than 120 countries.

The animal health medicines and vaccines industry is characterized by meaningful differences in customer needs across different regions. As a result of these differences, among other things, we manage our operations through four geographic regions. Within each of these regional segments, we offer a diversified product portfolio for both livestock and companion animal customers in order to capitalize on local and regional trends and customer needs. Our four regional operating segments are the United States (“U.S.”), Europe/Africa/Middle East (“EuAfME”), Canada/Latin America (“CLAR”) and Asia/Pacific (“APAC”). See Notes to Combined Financial Statements—Note 16. Segment, Geographic and Revenue Information.

With our sales organization of approximately 3,400 employees, we directly market our portfolio of more than 300 product lines to livestock producers and veterinarians located in approximately 70 countries across North America, Europe, Africa, Asia, Australia and Latin America, and are a market leader in nearly all of the major regions in which we operate. Through our efforts to establish an early and direct presence in many emerging markets, such as Brazil, China and India, we believe we are the largest animal health medicines and vaccines business as measured by revenues across emerging markets as a whole. Emerging markets contributed 27% of our revenues for the year ended December 31, 2011. In markets where we do not have a direct commercial presence, we generally contract with distributors that provide logistics and sales and marketing support for our products.

We believe our investments in the industry’s largest sales organization, including our extensive network of technical and veterinary operations specialists, our high-quality manufacturing and reliability of supply, and our long track record of developing products that meet customer needs, has led to enduring and valued relationships with our customers. Our R&D efforts enable us to deliver innovative products to address unmet needs and evolve our product lines so they remain relevant for our customers.

For the year ended December 31, 2011, our revenues, Adjusted net income (a non-GAAP financial measure, see page 81) and Net income attributable to Zoetis were $4.2 billion, $503 million and $245 million, respectively; for the year ended December 31, 2010, our revenues, Adjusted net income and Net income attributable to Zoetis were $3.6 billion, $275 million and $110 million, respectively. As a result, growth in revenue, Adjusted net income and Net income attributable to Zoetis in 2011 were 18%, 83% and 123%, respectively, when compared to 2010.

Factors affecting our performance

Industry growth

According to Vetnosis, a research and consulting firm specializing in global animal health and veterinary medicine, the animal health medicines and vaccines market for livestock and companion animals represented a global market of $22 billion, as measured by 2011 revenues. The market grew at a compound annual growth rate, or CAGR, of 6% between 2006 and 2011 and, excluding the impact of foreign exchange, the market is projected to grow at a CAGR of 6% per year between 2011 and 2016. As discussed below, we believe several trends have supported and will continue to support this growth.

 

61


Table of Contents

The livestock medicines and vaccines sector represented $13.1 billion of sales in 2011, or 60% of the total animal health medicines and vaccines market. This sector grew at a CAGR of 7% between 2006 and 2011 and, excluding the impact of foreign exchange, this sector is projected to grow at a CAGR of 6% per year between 2011 and 2016, according to Vetnosis. Factors influencing growth in demand for livestock medicines and vaccines include:

 

 

human population growth and increasing standards of living, particularly in many emerging markets;

 

 

consequently increasing demand for improved nutrition, particularly animal protein;

 

 

natural resource constraints, such as scarcity of arable land, fresh water and increased competition for cultivated land, resulting in fewer resources that will be available to meet this increased demand for animal protein; and

 

 

increased focus on food safety.

The companion animal medicines and vaccines sector represented $8.9 billion of sales in 2011, or 40% of the total animal health medicines and vaccines market. This sector grew at a CAGR of 6% between 2006 and 2011 and, excluding the impact of foreign exchange, this sector is projected to grow at a CAGR of 5% per year between 2011 and 2016, according to Vetnosis. Factors influencing growth in demand for companion animal medicines and vaccines include:

 

 

economic development and related increases in disposable income, particularly in many emerging markets;

 

 

increasing pet ownership; and

 

 

companion animals living longer, increasing medical treatment of companion animals and advances in companion animal medicines and vaccines.

Product development initiatives

Our future success depends on both our existing product portfolio and our pipeline of new products, including new products that we may develop through joint ventures and products that we are able to obtain through license or acquisition. We believe we are an industry leader in animal health R&D, with a track record of generating new products and brand lifecycle developments. From 2004 to 2011, we obtained approximately one-fourth of all animal health medicine approvals granted by the FDA, and approximately one-fifth of all animal health vaccine approvals granted by the USDA. The majority of our R&D programs focus on brand lifecycle development, which is defined as R&D programs that leverage existing animal health products by adding new species or claims, achieving approvals in new markets or creating new combinations and reformulations.

Perceptions of product quality, safety and reliability

We believe that animal health medicines and vaccines customers value high-quality manufacturing and reliability of supply. The importance of quality and safety concerns to pet owners, veterinarians and livestock producers also contributes to animal health brand loyalty, which we believe often continues after the loss of patent-based and regulatory exclusivity. We depend on positive perceptions of the safety and quality of our products, and animal health products generally, by our customers, veterinarians and end-users.

The issue of the potential transfer of increased antibacterial resistance in bacteria from food-producing animals to human pathogens, and the causality of that transfer, are the subject of global scientific and regulatory discussion. In some countries, this issue has led to government restrictions and bans on the use of specific antibacterials in some food-producing animals, regardless of the route of administration (topical, oral, intramuscular/subcutaneous injections, or intravenous). These restrictions are more prevalent in countries where animal protein is plentiful and governments are willing to take restrictive actions even when there is scientific uncertainty. Historically, antibacterials for livestock have represented a significant portion of our revenues. We cannot predict whether antibacterial resistance concerns will result in additional restrictions or bans, expanded regulations or public pressure to discontinue or reduce use of antibacterials in food-producing animals.

 

62


Table of Contents

The overall economic environment

In addition to industry-specific factors, we, like other businesses, continue to face the effects of the current challenging economic environment. Growth in both the livestock and companion animal sectors is driven by overall economic development and related growth, particularly in many emerging markets. Certain of our customers and suppliers have been affected directly by the economic downturn, which could decrease the demand for our products or hinder our ability to collect amounts due from customers.

However, the cost of medicines and vaccines to our livestock producer customers is small relative to other production costs, including feed, and the use of these products improves livestock producers’ economic outcomes. As a result, demand for our products has typically been more stable than demand for other production inputs. Similarly, industry sources report that pet owners indicate a preference for reducing spending on other aspects of their lifestyle, including entertainment, clothing and household goods, before reducing spending on petcare.

Weather conditions and the availability of natural resources

The animal health industry and demand for many of our animal health products in a particular region are affected by weather conditions, as usage of our products follows varying weather patterns and weather-related pressures from pests, such as ticks. As a result, we may experience regional and seasonal fluctuations in our results of operations.

In addition, livestock producers depend on the availability of natural resources, including large supplies of fresh water. Their animals’ health and their ability to operate could be adversely affected if they experience a shortage of fresh water due to human population growth or floods, droughts or other weather conditions. In the event of adverse weather conditions or a shortage of fresh water, livestock producers may purchase less of our products.

For example, the current drought impacting the United States is considered the worst in many years, impacting both the supply of corn and the availability of grazing pasture. The decrease in harvested corn has resulted in higher corn prices, which has impacted the profitability of livestock producers of cattle, pork and poultry. Higher corn prices may contribute to reductions in herd or flock size that may result in reduced spending on animal health products. Reduced availability of grazing pasture may also force cattle producers to cull their herds. Fewer heads of cattle would result in reduced demand for our products. A prolonged drought could have a material adverse effect on our operating results and financial condition. Our current expectations are that the drought will have an impact on our performance through the first half of 2013 with second half recovery dependent on a normalization of weather patterns.

Competition

The animal health industry is competitive. Although our business is the largest by revenues in the animal health medicines and vaccines industry, we face competition in the regions and sectors in which we compete. Principal methods of competition vary depending on the particular region, species, product category or individual product. Some of these methods include new product development, quality, price, service and promotion to veterinary professionals, pet owners and livestock producers. Our competitors include the animal health businesses of large pharmaceutical companies and specialty animal health businesses. In addition to competition from established market participants, there could be new entrants to the animal health medicines and vaccines industry in the future. In certain markets, we also compete with companies that produce generic products, but the level of competition from generic products varies from market to market. For example, the level of generic competition is higher in Europe and certain emerging markets than in the United States. However, there is no large, well-capitalized company focused on generic animal health products that exists as a global competitor in the industry.

Disease outbreaks in livestock

Our livestock products could be adversely affected by the outbreak of disease carried by animals. Outbreaks of disease may reduce regional or global sales of particular animal-derived food products or result in reduced exports of such products, either due to heightened export restrictions or import prohibitions, which may reduce

 

63


Table of Contents

demand for our products. Also, the outbreak of any highly contagious disease near our main production sites could require us to immediately halt production of our products at such sites or force us to incur substantial expenses in procuring raw materials or products elsewhere.

Foreign exchange rates

Significant portions of our revenues and costs are exposed to changes in foreign exchange rates. Our products are sold in more than 120 countries and, as a result, our revenues are influenced by changes in foreign exchange rates. In 2011, approximately 61% of our revenues were denominated in foreign currencies. As a business unit of Pfizer and under Pfizer’s global cash management system, we have sought to manage our foreign exchange risk in part through operating means, including managing same-currency revenues in relation to same-currency costs and same-currency assets in relation to same-currency liabilities. Going forward, we will evaluate if a similar approach to managing foreign exchange risk is appropriate for our company. As we operate in multiple foreign currencies, including the euro, the Brazilian real, the Australian dollar and other currencies, changes in those currencies relative to the U.S. dollar will impact our revenues and expenses, and consequently, net income. Exchange rate fluctuations may also have an impact beyond our reported financials and directly impact operations. These fluctuations may affect the ability to buy and sell our goods and services between markets impacted by significant exchange rate variances. Approximately 39% of our total revenues occur in U.S. dollars and, in 2011 our year-over-year revenue growth benefited by 3% from changes in foreign currency values relative to the U.S. dollar. In the first nine months of 2012, our period-over-period revenue growth was unfavorably impacted by 4% from changes in foreign currency.

Execution of our growth strategies

We seek to enhance the health of animals and to bring solutions to our customers who raise and care for them. We have a global presence in both developed and emerging markets and we intend to grow our business by pursuing the following core strategies:

 

 

leverage our direct local presence and strong customer relationships—Through our direct selling commercial model, we can deepen our understanding of our customers’ businesses and can encourage the adoption by our customers of more sophisticated animal health products;

 

 

further penetrate emerging markets—We seek to maximize our presence where economic development is driving increased demand for animal protein and increased demand for and spending on companion animals;

 

 

pursue new product development and value-added brand lifecycle development to extend our product portfolio—New product R&D and brand lifecycle development enable us to deliver innovative products to address unmet needs and evolve our product lines so they remain relevant for our customers. We seek to leverage our strong direct presence in many regions and cost-effectively develop new products;

 

 

remain the partner of choice for access to new products and technologies—We seek to continue to support cutting-edge research and secure the right to develop and commercialize new products and technologies;

 

 

continue to provide high-quality products and improve manufacturing production margins—We believe our manufacturing and supply chain provides us with a global platform for continued expansion, including in emerging markets, and that our quality and reliability differentiate us from our competitors; and

 

 

expand into complementary businesses to become a more complete, trusted partner in providing solutions—We believe we have the potential to generate incremental and complementary revenues, in the areas of diagnostics, genetics, devices and services such as dairy data management, e-learning and professional consulting, which could also enhance the loyalty of our customer base and may lead to increased product sales.

For additional discussion of our growth strategies, see “Business—Our growth strategies.”

Components of revenues and costs and expenses

Our revenues, costs and expenses are reported for the fiscal year ended December 31 for each year presented, except for operations outside the U.S., for which the financial information is included in our combined financial statements for the fiscal year ended November 30 for each year presented.

 

64


Table of Contents

Revenues

Our revenues are primarily derived from our diversified product portfolio of medicines and vaccines used to treat livestock and companion animals. Our portfolio contains more than 300 product lines. Generally, our products are sold to veterinarians and livestock producers, by our sales organization which includes sales representatives and technical and veterinary operations specialists. The depth of our product portfolio enables us to address the varying needs of different customers. In 2011, our top selling product line, the ceftiofur line, contributed less than 8% of our revenues, and our top ten best selling product lines contributed less than 38% of our revenues. For additional information regarding our products, including descriptions of our product lines that each represented approximately 1% or more of our revenues in 2011, see “Business—Our products.”

Costs and expenses

Costs of sales consist primarily of cost of materials, facilities and other infrastructure used to manufacture our medicine and vaccine products and royalty expenses associated with the intellectual property of our products, when relevant.

Selling, general and administrative, or SG&A, expenses consist of, among other things, the internal and external costs of marketing, promotion, advertising and shipping and handling as well as certain costs related to business technology, facilities, legal, finance, human resources, business development, public affairs and procurement.

Research and development, or R&D, expenses consist primarily of project costs specific to new product R&D and brand lifecycle development, overhead costs associated with R&D operations and investments that support local market clinical trials for approved indications. We do not disaggregate R&D expenses by research stage or by therapeutic area for purposes of managing our business.

Amortization of intangible assets consists primarily of the amortization expense for identifiable finite-life intangible assets that have been acquired through business combinations. These assets consist of, but are not limited to, developed technology, brands and trademarks.

Restructuring charges and certain acquisition-related costs consist of all restructuring charges (those associated with acquisition activity and those associated with cost reduction/productivity initiatives) as well as costs associated with acquiring and integrating businesses. Restructuring charges are associated with employees, assets and activities that will not continue in the company. Acquisition-related costs are associated with acquiring and integrating acquired businesses, such as the King Animal Health business in 2011 and the Fort Dodge Animal Health business in 2009 and may include transaction costs and expenditures for consulting and the integration of systems and processes.

Other (income)/deductionsnet consist primarily of various items including net interest (income)/expense, net (gains)/losses on asset disposals, royalty-related income and certain asset impairment charges.

Comparability of historical results and our relationship with Pfizer

We currently operate as a business unit of Pfizer. The combined financial statements have been derived from the consolidated financial statements and accounting records of Pfizer and include allocations for direct costs and indirect costs attributable to the operations of the animal health business of Pfizer. These combined financial statements do not purport to reflect what the results of operations, comprehensive income/(loss), financial position, equity or cash flows would have been had we operated as a standalone public company during the periods presented.

For a detailed description of the basis of presentation and an understanding of the limitations of the predictive value of the historical combined financial statements, see Notes to Combined Financial Statements—Note 2. Basis of Presentation and see Notes to Unaudited Condensed Combined Financial Statements—Note 1. Basis of Presentation.

 

65


Table of Contents

In addition, the historical combined financial statements may not be reflective of what our results of operations, comprehensive income/(loss), financial position, equity or cash flows might be in the future as a standalone public company.

For example, our historical expenses are not necessarily indicative of the expenses we may incur in the future as a standalone public company. In connection with this offering and the Separation, we and Pfizer intend to enter into, or have entered into, certain agreements that will provide a framework for our ongoing relationship with Pfizer. See “Certain relationships and related party transactions—Relationship with Pfizer.”

With respect to support functions, for example, our historical condensed combined financial statements include expense allocations for certain support functions that are provided on a centralized basis within Pfizer, such as expenses for business technology, facilities, legal, finance, human resources, and, to a lesser extent, business development, public affairs and procurement, among others. Following this offering, pursuant to agreements with Pfizer, we expect that Pfizer will continue to provide us with some of the services related to these functions on a transitional basis in exchange for agreed-upon fees, and we expect to incur other costs to replace the services and resources that will not be provided by Pfizer. We will also incur additional costs as a standalone public company. As a standalone public company, our total costs related to such support functions may differ from the costs that were historically allocated to us from Pfizer. We estimate that these costs may exceed the allocated amounts for full year 2011 by a range of approximately $15 million to $25 million in 2013. In addition, we expect to incur internal costs to implement certain new systems, including infrastructure and an enterprise resource planning system, while our legacy systems are being fully supported by Pfizer under the transitional services agreement. We estimate these costs to range between approximately $30 million to $40 million in 2013 and 2014.

Another example is that the historical balance sheets may not be comparable to the opening balance sheet of the standalone company, which we expect will reflect the transfer by Pfizer of substantially all of its animal health business to us. Non-comparable elements will include, for example, the allocation of Pfizer debt, which will not be transferred, and may include, for example, cash and cash equivalents, which may be adjusted other than by operations prior to or concurrently with the completion of this offering. For a detailed description of our unaudited pro forma condensed combined financial statements, see “Unaudited pro forma condensed combined financial statements.”

Compensation

We expect to institute competitive compensation policies and programs as a standalone public company, the expense for which may differ from the compensation expense allocated by Pfizer in our combined financial statements. For a detailed description of our current compensation policies as a business unit of Pfizer and anticipated compensation policies following this offering, see “Management—Compensation discussion and analysis.”

Public company expenses

As a result of this offering, we will become subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act. We will have additional procedures and practices to establish as a standalone public company. As a result, we will incur additional costs including internal audit, investor relations, stock administration and regulatory compliance costs.

Recent significant acquisitions and government-mandated divestitures

The assets, liabilities, operating results and cash flows of acquired businesses are included in our results commencing from their respective acquisition dates.

 

 

The King Animal Health business, or KAH, was acquired by Pfizer as part of its acquisition of King Pharmaceuticals, Inc. (acquired on January 31, 2011), strengthening our position in the poultry business with a medicinal feed additives business and other poultry products and further strengthening our position in

 

66


Table of Contents
 

the cattle and swine businesses. See Notes to Combined Financial Statements—Note 4A. Acquisitions, Divestitures and Certain Investments: Acquisition of King Animal Health.

 

 

The Fort Dodge Animal Health business, or FDAH, was acquired by Pfizer as part of its acquisition of Wyeth (acquired on October 15, 2009), adding to our portfolio a broad array of companion animal and livestock brands and strengthening our vaccine portfolio, including a complementary poultry vaccines business. In connection with this acquisition, we made certain government-mandated divestitures. See Notes to Combined Financial Statements—Note 4B. Acquisitions, Divestitures and Certain Investments: Acquisition of Fort Dodge Animal Health and Note 4D. Acquisitions, Divestitures and Certain Investments: Divestitures.

Our combined financial statements for the year ended December 31, 2011 reflect eleven months of KAH’s U.S. operations and ten months of KAH’s international operations and for the nine months ended October 2, 2011 our unaudited condensed combined financial statements reflect eight months of KAH’s U.S. operations and seven months of KAH’s international operations. Our combined financial statements for the year ended December 31, 2009 reflect approximately two-and-a-half months of FDAH’s U.S. operations and approximately one-and-a-half months of FDAH’s international operations.

Analysis of the combined statements of operations

The following discussion and analysis of our combined statements of operations should be read along with our combined financial statements and the notes thereto as well as our unaudited condensed combined financial statements and the notes thereto included elsewhere in this prospectus, which reflect the results of operations of the business transferred to us from Pfizer. For more information on the carve-out basis of presentation, see Notes to Combined Financial Statements—Note 2. Basis of Presentation and see Notes to Unaudited Condensed Combined Financial Statements—Note 1. Basis of Presentation.

 

    Nine Months
Ended
    %
Change
    Year Ended
December 31,
    %
Change
 
(MILLIONS OF DOLLARS)   September  30,
2012(a)
    October  2,
2011(a)
    12/11     2011(a)     2010(a)     2009(a)     11/10     10/09  

Revenues

  $ 3,160      $ 3,106        2      $ 4,233      $ 3,582      $ 2,760        18        30   

Costs and expenses:

               

Cost of sales(b)

    1,130        1,233        (8     1,652        1,444        1,078        14        34   

% of revenues

    36     40       39     40     39    

Selling, general and administrative expenses(b)

    1,017        1,026        (1     1,453        1,382        1,066        5        30   

% of revenues

    32     33       34     39     39    

Research and development expenses(b)

    288        308        (6     427        411        368        4        12   

% of revenues

    9     10       10     11     13    

Amortization of intangible assets

    48        51        (6     69        58        33        19        76   

Restructuring charges and certain acquisition-related costs

    55        108        (49     154        202        340        (24     (41

Other (income)/deductions—net(c)

    (14     16        *        84        (93     23        *        *   

Income/(loss) before provision/(benefit) for taxes on income

  $ 636      $ 364        75      $ 394      $ 178        ($148     121        *   

% of revenues

    20     12       9     5     (5 %)     

Provision/(benefit) for taxes on income/(loss)

    190        126        51        146        67        (47     118        *   

Effective tax rate

    29.9     34.6       37.1     37.6     (31.8 %)     

Net income/(loss) before allocation to noncontrolling interests

  $ 446      $ 238        87      $ 248      $ 111        ($101     123        *   

Less: Net income/(loss) attributable to noncontrolling interests

           2        *        3        1        (1     200        *   

Net income/(loss) attributable to Zoetis

    446        236        89        245        110        (100     123        *   

% of revenues

    14     8       6     3     (4 %)     

 

Certain amounts and percentages may reflect rounding adjustments.

 

67


Table of Contents
* Calculation not meaningful.
(a) Includes revenues and expenses from acquisitions from the acquisition date. For the years ended December 31, 2011, 2010 and 2009, see Notes to Combined Financial Statements—Note 2. Basis of Presentation and for the nine months ended September 30, 2012 and October 2, 2011, see Notes to Unaudited Condensed Combined Financial Statements—Note 1. Basis of Presentation.
(b) Exclusive of amortization of intangible assets, except as disclosed in Notes to Combined Financial Statements—Note 3J. Significant Accounting Policies: Amortization of Intangible Assets, Depreciation and Certain Long-Lived Assets.
(c) Includes interest expense on allocated long-term debt of $36 million, $37 million and $26 million for the years ended December 31, 2011, 2010 and 2009, respectively. See Notes to Combined Financial Statements—Note 6. Other (Income)/Deductions—Net. For the nine months ended September 30, 2012 and October 2, 2011 includes interest expense on allocated long-term debt of $23 million and $27 million, respectively. See Notes to Unaudited Condensed Combined Financial Statements—Note 4. Other (Income)/Deductions—Net.

Revenues

Revenues-Overview

Global revenues by operating segment were as follows:

 

     Nine Months
Ended
     % Change     Year Ended
December 31,
     % Change  

(MILLIONS OF DOLLARS)

   September 30,
2012
     October 2,
2011
     12/11     2011      2010      2009      11/10      10/09  

U.S.

   $ 1,294       $ 1,210         7      $ 1,659       $ 1,384       $ 1,105         20         25   

EuAfME

     799         851         (6     1,144         1,020         880         12         16   

CLAR

     549         565         (3     788         664         451         19         47   

APAC

     518         480         8        642         514         324         25         59   
  

 

 

    

 

 

      

 

 

    

 

 

    

 

 

       

Total

   $ 3,160       $ 3,106         2      $ 4,233       $ 3,582       $ 2,760         18         30   
  

 

 

    

 

 

      

 

 

    

 

 

    

 

 

       

 

Certain amounts and percentages may reflect rounding adjustments.

On a global basis, the mix of our revenues between livestock and companion animal products was as follows:

 

     Nine Months
Ended
     % Change      Year Ended
December 31,
     % Change  

(MILLIONS OF DOLLARS)

   September 30,
2012
     October 2,
2011
     12/11      2011      2010      2009      11/10      10/09  

Livestock

   $ 2,015       $ 2,017         —         $ 2,778       $ 2,233       $ 1,686         24         32   

Companion Animal

     1,145         1,089         5         1,455         1,349         1,074         8         26   
  

 

 

    

 

 

       

 

 

    

 

 

    

 

 

       

Total

   $ 3,160       $ 3,106         2       $ 4,233       $ 3,582       $ 2,760         18         30   
  

 

 

    

 

 

       

 

 

    

 

 

    

 

 

       

 

Certain amounts and percentages may reflect rounding adjustments.

 

68


Table of Contents

As a result of the impact of recent significant acquisitions and related government-mandated divestitures on the revenue numbers in our statement of operations, during the nine months ended September 30, 2012 and October 2, 2011 and the years ended December 31, 2011, 2010 and 2009 the growth trend on our existing portfolio from year to year is not readily apparent. We believe that it is not only important to understand overall revenue growth, but also existing portfolio growth year over year. As such, we utilize “base revenue growth.” Base revenue growth is defined as revenue growth excluding the impact of incremental revenues from recent significant acquisitions, government-mandated divestitures and foreign exchange.

 

% Change in Revenue:

increases/(decreases)

   Reported               Resulting from
Base Revenue
Growth(a)
    Resulting
from
Acquisitions(b)
     Resulting from
Government-
Mandated
Divestitures(c)
    Resulting from
Foreign
Exchange
 

First nine months of 2012 vs. first nine months of 2011

                  

Total revenues

     2               5        1         —          (4

U.S.

     7               6        1         —          —     

EuAfME

     (6            —          1         —          (7

CLAR

     (3            4        1         —          (8

APAC

     8               8        2         —          (2

2011 vs. 2010

                  

Total revenues

     18               7        9         (1     3   

U.S.

     20               7        13         —          —     

EuAfME

     12               3        6         —          3   

CLAR

     19               9        7         (1     4   

APAC

     25               12        7         (2     8   

2010 vs. 2009

                  

Total revenues

     30               7        23         (3     3   

U.S.

     25               13        13         (1     —     

EuAfME

     16               (1     26         (8     (1

CLAR

     47               5        32         —          10   

APAC

     59               15        36         (2     10   

 

Certain amounts and percentages may reflect rounding adjustments.

(a) Reflects changes in reported growth excluding the impact of incremental revenues from recent significant acquisitions, government-mandated divestitures and foreign exchange.
(b) Reflects the acquisition of KAH, acquired by Pfizer on January 31, 2011, and FDAH, acquired by Pfizer on October 15, 2009.
(c) Reflects government-mandated divestitures of legacy FDAH and our legacy products in connection with the FDAH acquisition.

Nine months ended September 30, 2012 vs. nine months ended October 2, 2011

Total revenues increased $54 million, or 2%, in the first nine months of 2012 compared to the first nine months of 2011, due to:

 

 

base revenue growth of $136 million, or 5%, primarily from growth in the U.S., APAC and CLAR segments; and

 

 

the inclusion of an incremental one month of U.S. and two months of international revenues of $37 million, or 1%, from the KAH acquisition;

partially offset by:

 

 

the unfavorable impact of foreign exchange, which decreased revenues by approximately $119 million, or (4%).

2011 vs. 2010

Total revenues increased $651 million, or 18%, in 2011 compared to 2010, due to:

 

 

base revenue growth of $239 million, or 7%, from growth across all operating segments;

 

 

the inclusion of revenues of $329 million, or 9%, from the acquisition of KAH; and

 

 

the favorable impact of foreign exchange, which increased revenues by approximately $104 million, or 3%;

 

69


Table of Contents

partially offset by:

 

 

the unfavorable impact of government-mandated divestitures of $21 million, or (1%).

2010 vs. 2009

Total revenues increased, $822 million, or 30%, in 2010 compared to 2009, due to:

 

 

base revenue growth of $208 million, or 7%, primarily from growth in the U.S. and APAC segments;

 

 

the inclusion of incremental revenues of $640 million, or 23%, from the full year impact of the acquisition of FDAH; and

 

 

the favorable impact of foreign exchange, which increased revenues by approximately $69 million, or 3%;

partially offset by:

 

 

the unfavorable impact of government-mandated divestitures of $95 million, or (3%).

Revenues-Operating segment

Nine months ended September 30, 2012 vs. Nine months ended October 2, 2011

U.S. operating segment

U.S. segment revenues increased by $84 million, or 7%, in the first nine months of 2012 compared to the first nine months of 2011. Base revenue growth was $70 million, or 6%, of which approximately $23 million in growth came from livestock products and approximately $47 million in growth came from companion animal products.

 

 

Livestock product revenue growth was due principally to increased demand for medicinal feed additives in swine, which was partially due to an outbreak of gut infections in late stage pigs. There was also increased demand for premium anti-infectives in cattle and swine as a result of new promotional campaigns focused on superior efficacy supported by economic outcomes studies. Additionally, revenue growth was positively impacted by the launch of an improved formulation of a swine vaccine that prevents porcine circovirus type 2. This revenue growth was partially offset by the impact of the drought in the U.S.

 

 

Companion animal product revenue growth was driven by parasiticides, benefiting from an extended flea and tick season caused by unusually warm weather and by a temporary competitor supply disruption. Companion animal products also benefited from continued growth in canine vaccines and the success of targeted marketing efforts for anti-infectives and other pharmaceutical products.

Segment revenues were also favorably impacted by the inclusion of $14 million, or 1%, attributable to an additional one month of revenues from KAH.

EuAfME operating segment

EuAfME segment revenues decreased by $52 million, or (6%), in the first nine months of 2012 compared to the first nine months of 2011. Base revenue growth was $3 million, or less than 1%, of which $1 million in decline came from livestock products and was more than offset by approximately $4 million in growth from companion animal products.

 

 

Livestock product revenues were negatively impacted by continued adverse macroeconomic conditions throughout Western Europe and pressure from the ongoing restrictions on the use of certain antibacterials. Results were partially offset by performance in emerging markets, which continue to benefit from growing demand for animal protein.

 

 

Companion animal product revenues were favorably impacted by parasiticides and the launch of new branded generic products throughout the region. Revenue was also favorably impacted by equine vaccines due to a temporary competitor supply disruption. Results were partially offset by continued adverse macroeconomic conditions throughout Western Europe.

 

70


Table of Contents

Segment revenues were also favorably impacted by the inclusion of $8 million, or 1%, attributable to an additional two months of revenues from KAH. Additionally, revenues were unfavorably impacted by 7% due to foreign exchange.

CLAR operating segment

CLAR segment revenues decreased by $16 million, or (3%), in the first nine months of 2012 compared to the first nine months of 2011. Base revenue growth was $25 million, or 4%, of which approximately $7 million in growth came from livestock products and approximately $18 million in growth came from companion animal products.

 

 

Livestock product revenues were favorably impacted by swine vaccines, which benefited from the launch in multiple markets, of an improved formulation of a swine vaccine that prevents porcine circovirus type 2. Swine vaccines also benefited from continued demand for Improvac/Improvest, a product that reduces boar taint without the need for surgical castration, in Brazil. Additionally, marketing initiatives focused on legacy KAH products drove increased demand for poultry medicinal feed additives in Brazil. Results were partially offset by increased competition in the Brazil cattle market. Also, certain markets within the region continue to feel the impact of the North American drought.

 

 

Companion animal product revenue growth was attributable to canine vaccines especially in Brazil and parasiticides in Canada. Parasiticides in Canada benefited from an extended flea and tick season caused by unusually warm weather and by a temporary competitor supply disruption.

Segment revenues were also favorably impacted by the inclusion of $7 million, or 1%, attributable to an additional two months of revenues from KAH. Additionally, revenues were unfavorably impacted by 8% due to foreign exchange.

APAC operating segment

APAC segment revenues increased by $38 million, or 8%, in the first nine months of 2012 compared to the first nine months of 2011. Base revenue growth was $38 million, or 8%, of which approximately $21 million in growth came from livestock products and approximately $17 million in growth came from companion animal products.

 

 

Livestock product revenues were favorably impacted by growth in Australia, China and India. Australia experienced growth in the dairy cattle segment due to higher sales of intramammary products. Increased sales force presence in China drove growth in premium priced swine products. The launch, in multiple markets, of an improved formulation of a swine vaccine that prevents porcine circovirus type 2 was also a key growth driver.

 

 

Companion animal product revenues benefited from promotional campaigns in Japan and the resulting increased adoption of our products into veterinarian treatment protocols. Australia benefited from growth in parasiticides as a result of focused sales force efforts that drove demand for these products. China experienced growth in canine vaccines due to expansion of the sales organization.

Segment revenues were also favorably impacted by the inclusion of $8 million, or 2%, attributable to an additional two months of revenues from KAH. Additionally, revenues were unfavorably impacted by 2% due to foreign exchange.

2011 vs. 2010

U.S. operating segment

U.S. segment revenues increased by $275 million, or 20%, in 2011 compared to 2010. Base revenue growth was $89 million, or 7%, of which approximately $65 million in growth came from livestock products and approximately $24 million came from growth in companion animal products.

 

 

Livestock product revenue growth was in large part due to increased demand for anti-infectives in cattle and swine as a result of new promotional campaigns focused on superior efficacy supported by economic

 

71


Table of Contents
 

outcomes studies, as well as general growth in the cattle market. Cattle vaccine growth was driven by FDA approvals for new treatment indications. Additionally, the re-launch of Inovocox, a poultry vaccine, contributed to growth.

 

 

Companion animal product revenue growth was primarily attributable to Rimadyl, an anti-inflammatory, Convenia, a single-injection anti-infective, and canine respiratory vaccines. In addition, we benefited from the full year impact of contracts signed with large veterinary clinic networks during 2010.

Segment revenues were also favorably impacted by the inclusion of $186 million, or 13%, from the acquisition of KAH.

EuAfME operating segment

EuAfME segment revenues increased by $124 million, or 12%, in 2011 compared to 2010. Base revenue growth in the EuAfME operating segment was $31 million, or 3%, of which approximately $13 million in growth came from livestock products and approximately $18 million in growth came from companion animal products. Adverse macroeconomic conditions throughout Western Europe negatively impacted growth rates for both livestock and companion animal product sales.

 

 

Livestock product revenues were driven by emerging markets, including Turkey, Russia and North Africa, due to strong demand for animal health products used in swine and poultry production. Additionally, growth was driven by Draxxin, a premium anti-infective used in cattle and swine. Livestock product revenues were negatively impacted by $22 million due to the loss of government subsidies of a FDAH product in France, Germany and Spain for the eradication of blue tongue virus in cattle and sheep.

 

 

Companion animal product revenue growth was primarily driven by increased use of Convenia and Clavamox across the region, and by other anti-infective medicines in Germany, France and emerging markets. Increases in vaccine utilization drove additional growth in the U.K. and emerging markets.

Segment revenues were also favorably impacted by the inclusion of $59 million, or 6%, from the acquisition of KAH. Additionally, revenues were favorably impacted by 3% due to foreign exchange.

CLAR operating segment

CLAR segment revenues increased by $124 million, or 19%, in 2011 compared to 2010. Base revenue growth was $56 million, or 9%, of which approximately $38 million in growth came from livestock products and approximately $18 million in growth came from companion animal products.

 

 

Livestock product revenue growth was driven by the demand for Improvac/Improvest, a product that reduces boar taint without the need for surgical castration, in Brazil and Colombia. Growth also resulted from the implementation of marketing initiatives in Brazil and Mexico, which increased demand for Draxxin and Lincospectin for cattle and poultry, respectively, across the region.

 

 

Companion animal product revenue growth was driven by the demand for canine vaccines, primarily in Brazil and other emerging Latin America markets, and demand for parasiticides in Brazil and Canada.

Segment revenues were also favorably impacted by the inclusion of $49 million, or 7%, from the acquisition of KAH and were negatively impacted by government-mandated divestitures in 2011 related to the acquisition of FDAH, which decreased revenues by 1%. Additionally, revenues were favorably impacted by 4% due to foreign exchange.

 

72


Table of Contents

APAC operating segment

APAC segment revenues increased $128 million, or 25%, in 2011 compared to 2010. Base revenue growth in the APAC operating segment was $63 million, or 12%, of which approximately $38 million in growth came from livestock products and approximately $25 million in growth came from companion animal products.

 

 

Livestock product revenue growth was broad-based, driven by both developed and emerging markets. Sales organization investments in China and India further accelerated growth in anti-infectives and vaccines in these two countries. Growth also continued in sheep and cattle vaccines in Australia.

 

 

Companion animal product revenue growth was impacted by broad-based demand for parasiticides, canine vaccines and anti-infectives due to favorable market conditions in developed and emerging markets.

Segment revenues were also favorably impacted by the inclusion of $35 million, or 7%, from the acquisition of KAH and were negatively impacted by government-mandated divestitures in 2011 related to the acquisition of FDAH, which decreased revenues by 2%. Additionally, revenues were favorably impacted by 8% due to foreign exchange.

2010 vs. 2009

U.S. operating segment

U.S. segment revenues increased by $279 million, or 25%, in 2010 compared to 2009. Base revenue growth was $145 million, or 13%, of which approximately $117 million in growth came from livestock products and approximately $28 million came from companion animal products.

 

 

Livestock product revenue growth was driven by rising beef prices and a strong export market, which resulted in increased utilization of cattle products across all product categories. Increased demand for Draxxin by cattle producers was an additional driver of segment growth.

 

 

Companion animal product revenue growth was driven by promotional efforts targeted toward veterinarians, which increased demand for vaccines, parasiticides and anti-infectives. Revenues were unfavorably impacted by weakness in pain and sedation medicines due to a one-time supply disruption.

Segment revenues were also favorably impacted by the inclusion of an incremental $147 million, or 13%, from the acquisition of FDAH and were negatively impacted by government-mandated divestitures in 2010 related to the acquisition of FDAH, which decreased revenues by 1%.

EuAfME operating segment

EuAfME segment revenues increased by $140 million, or 16%, in 2010 compared to 2009. Base revenue decline was $9 million, or (1%), of which approximately $10 million of the decline came from livestock products partially offset by a growth of approximately $1 million in companion animal products.

 

 

Livestock product revenues were unfavorably impacted by weak economic conditions in Western Europe and declining cattle and sheep populations. This was partially offset by growth in emerging markets including Russia, Turkey and North Africa.

 

 

Companion animal product revenues were favorably impacted by growth in Convenia/Cefovecin primarily in Germany and the U.K. Segment performance also benefited from growth in Mavacoxib, a pain medicine, in Germany, Italy and emerging markets. This was partially offset by macro-economic conditions in Western Europe, which resulted in the contraction of the overall market.

Segment revenues were also favorably impacted by the inclusion of an incremental $229 million, or 26%, from the acquisition of FDAH and were negatively impacted by government-mandated divestitures in 2010 related to the FDAH acquisition, which decreased revenues by 8%. Additionally, revenues were unfavorably impacted by 1% due to foreign exchange.

 

73


Table of Contents

CLAR operating segment

CLAR segment revenues increased by $213 million, or 47%, in 2010 compared to 2009. Base revenue growth was $23 million, or 5%, of which approximately $8 million in growth came from livestock products and approximately $15 million in growth came from companion animal products.

 

 

Livestock product revenue growth was driven by the continued expansion of the domestic and export-oriented cattle market in Brazil.

 

 

Companion animal product revenue growth was driven by increased sales of canine vaccines and parasiticides, resulting from promotional efforts in Brazil focused on the rapidly growing petcare market. Revenue growth was also driven by increased sales of canine parasiticides in Canada due to an extended flea and tick season.

Segment revenues were also favorably impacted by the inclusion of an incremental $146 million, or 32%, from the acquisition of FDAH. Additionally, revenues were favorably impacted by 10% due to foreign exchange.

APAC operating segment

APAC segment revenues increased by $190 million, or 59%, in 2010 compared to 2009. Base revenue growth in the APAC operating segment was $49 million, or 15%, of which approximately $45 million in growth came from livestock products and approximately $4 million in growth came from companion animal products.

 

 

Livestock product revenue growth was particularly strong in Australia across all species and product categories. Additionally, emerging market investments in our sales organization and marketing initiatives drove growth in anti-infectives for swine, poultry and cattle. China continued to contribute to segment growth as a result of the continued progression of industrialization of livestock production.

 

 

Companion animal product revenue growth was primarily driven by increased sales of anti-infectives in Japan and Australia, as well as increased sales of parasiticides in Japan and emerging markets in Asia.

Segment revenues were also favorably impacted by the inclusion of an incremental $118 million, or 36% from the acquisition of FDAH and were negatively impacted by government-mandated divestitures in 2010 related to the acquisition of FDAH, which decreased revenues by 2%. Additionally, revenues were favorably impacted by 10% due to foreign exchange.

Costs and expenses

Cost of sales

 

     Nine Months
Ended
    % Change     Year Ended
December 31,
    % Change  
(MILLIONS OF DOLLARS)    September 30,
2012
    October 2,
2011
    12/11     2011     2010     2009     11/10      10/09  

Cost of sales(a)

   $ 1,130      $ 1,233        (8   $ 1,652      $ 1,444      $ 1,078        14         34   

% of revenues

     36     40       39     40     39     

 

Certain amounts and percentages may reflect rounding adjustments.

(a) Allocation of corporate enabling functions was: $1 million and $2 million in the first nine months of 2012 and 2011, respectively, and $3 million in 2011, $6 million in 2010 and $0 million in 2009.

Nine months ended September 30, 2012 vs. nine months ended October 2, 2011

Cost of sales decreased $103 million, or (8%), in the first nine months of 2012 compared to the first nine months of 2011, primarily as a result of:

 

 

the non-recurrence of approximately $24 million of incremental purchase accounting charges in 2011 reflecting the fair value adjustments to inventory acquired from KAH that was subsequently sold in 2011;

 

74


Table of Contents
 

the non-recurrence of a $12 million inventory write-off in 2011 related to suspended sales of 3-Nitro;

 

 

favorable product mix;

 

 

increased operational efficiencies and savings associated with margin improvement initiatives, including plant network optimization, yield improvements and overall cost reductions; and

 

 

favorable foreign exchange.

2011 vs. 2010

Cost of sales increased $208 million, or 14%, in 2011 compared to 2010, primarily as a result of:

 

 

the addition of approximately $200 million in costs associated with KAH products inclusive of incremental purchase accounting charges of $24 million reflecting the fair value adjustments to inventory acquired from KAH that was subsequently sold;

 

 

base revenue growth; and

 

 

unfavorable product mix between our legacy portfolio and KAH portfolio;

partially offset by:

 

 

increased operational efficiencies and savings associated with margin improvement initiatives, including plant network optimization, yield improvements and overall cost reductions.

2010 vs. 2009

Cost of sales increased $366 million, or 34%, in 2010 compared to 2009, primarily as a result of:

 

 

the addition of approximately $300 million in costs associated with the inclusion of FDAH products, for a full year in 2010 compared to a partial year in 2009 inclusive of purchase accounting charges of $66 million reflecting the fair value adjustments to inventory acquired from FDAH that was subsequently sold; and

 

 

unfavorable product mix between our legacy portfolio and FDAH portfolio;

partially offset by:

 

 

increased operational efficiencies and savings associated with margin improvement initiatives, including plant network optimization, yield improvements and overall cost reductions.

Selling, general and administrative expenses

 

     Nine Months
Ended
    % Change     Year Ended
December 31,
    % Change  
(MILLIONS OF DOLLARS)    September 30,
2012
    October 2,
2011
    12/11     2011     2010     2009     11/10      10/09  

Selling, general and administrative expenses(a)

   $ 1,017      $ 1,026        (1   $ 1,453      $ 1,382      $ 1,066        5         30   

% of revenues

     32     33       34     39     39     

 

Certain amounts and percentages may reflect rounding adjustments.

 

(a) Allocation of corporate enabling functions was: $185 million and $199 million in the first nine months of 2012 and 2011, respectively, and $268 million in 2011, $260 million in 2010 and $219 million in 2009.

 

75


Table of Contents

Nine months ended September 30, 2012 vs. nine months ended October 2, 2011

SG&A expenses decreased by $9 million, or (1%), in the first nine months of 2012 compared to the first nine months of 2011, primarily as a result of:

 

 

reductions in costs due to both acquisition-related synergies and cost reduction initiatives, which are also reflected in the decreased allocation of corporate enabling functions; and

 

 

favorable foreign exchange;

partially offset by:

 

 

the inclusion of an incremental one month of U.S. and two months of international KAH operations; and

 

 

initiatives to increase our direct sales and marketing presence in certain emerging markets.

2011 vs. 2010

SG&A expenses increased $71 million, or 5%, in 2011 compared to 2010, primarily as a result of:

 

 

the addition of KAH operations, eleven months in the U.S. and ten months internationally; and

 

 

initiatives to increase our direct sales and marketing presence in certain emerging markets;

partially offset by:

 

 

reductions in costs due to both acquisition-related synergies and cost reduction initiatives.

2010 vs. 2009

SG&A expenses increased $316 million, or 30%, in 2010 compared to 2009, primarily as a result of:

 

 

the addition of a full year of FDAH operations; and

 

 

promotional efforts to increase awareness of recently acquired FDAH products;

partially offset by:

 

 

reductions in costs due to cost reduction initiatives.

Research and development expenses

 

     Nine Months Ended     % Change     Year Ended
December 31,
    % Change  
(MILLIONS OF DOLLARS)    September 30,
2012
    October 2,
2011
    12/11     2011     2010     2009     11/10      10/09  

Research and development expenses(a)

   $ 288      $ 308        (6   $ 427      $ 411      $ 368        4         12   

% of revenues

     9     10       10     11     13     

 

Certain amounts and percentages may reflect rounding adjustments.

 

(a) Allocation of corporate enabling functions was: $43 million and $48 million in the first nine months of 2012 and 2011, respectively, and $64 million in 2011, $79 million in 2010 and $72 million in 2009.

Nine months ended September 30, 2012 vs. nine months ended October 2, 2011

R&D expenses decreased $20 million, or (6%), in the first nine months of 2012 compared to the first nine months of 2011, primarily as a result of:

 

   

cost reduction initiatives including a decreased allocation of enabling functions; and

 

   

favorable foreign exchange.

 

76


Table of Contents

2011 vs. 2010

R&D expenses increased $16 million, or 4% in 2011 compared to 2010, primarily as a result of $19 million in accelerated depreciation related to the closing of an R&D facility in the U.K. Also, the incremental $10 million of R&D expenses from the acquisition of KAH and the acquisition of a diagnostics business (in December 2010) contributed to the increase in R&D expenses. These expenses were partially offset by reductions in costs due to acquisition related synergies and cost reduction initiatives.

2010 vs. 2009

R&D expenses increased $43 million, or 12%, in 2010 compared to 2009, primarily as a result of the inclusion of a full year of FDAH R&D costs.

Amortization of intangible assets

 

     Nine Months
Ended
     % Change      Year Ended
December 31,
     % Change  
(MILLIONS OF DOLLARS)    September 30,
2012
     October 2,
2011
     12/11      2011      2010      2009      11/10      10/09  

Amortization of intangible assets

   $ 48       $ 51         (6)       $ 69       $ 58       $ 33         19         76   

 

Certain amounts and percentages may reflect rounding adjustments.

Nine months ended September 30, 2012 vs. nine months ended October 2, 2011

Amortization of intangible assets decreased $3 million, or (6%), in the first nine months of 2012 compared to the first nine months of 2011, which includes the impact of impairments taken at the end of 2011.

2011 vs. 2010

Amortization of intangible assets increased $11 million, or 19%, in 2011 compared to 2010, primarily as a result of the addition of finite-lived intangible assets acquired as part of our acquisition of KAH.

2010 vs. 2009

Amortization of intangible assets increased $25 million, or 76%, in 2010 compared to 2009, primarily as a result of a full year of amortization related to the finite-lived intangible assets acquired as part of our acquisition of FDAH.

Restructuring charges and certain acquisition-related costs

 

     Nine Months Ended      % Change      Year Ended
December 31,
     % Change  
(MILLIONS OF DOLLARS)    September 30,
2012
     October 2,
2011
     12/11      2011      2010      2009      11/10     10/09  

Restructuring charges and certain acquisition-related costs(a)

   $ 55       $ 108         (49)       $ 154       $ 202       $ 340         (24     (41

 

Certain amounts and percentages may reflect rounding adjustments.

 

(a) Allocation of Restructuring charges and certain acquisition-related costs was: $47 million and $51 million in the first nine months of 2012 and 2011, respectively, and $70 million in 2011, $104 million in 2010 and $121 million in 2009.

We have incurred significant direct costs for restructuring and integrating acquired businesses, such as KAH on January 31, 2011 and FDAH on October 15, 2009, among others, and, to a lesser extent, in connection with our ongoing cost reduction/productivity initiatives.

 

77


Table of Contents

Our acquisition-related costs primarily relate to restructuring charges for employees, assets and activities that will not continue in the combined company. The majority of these charges are termination costs, but we also exited a number of distributor and other contracts and performed some facility rationalization efforts. Our integration costs are generally comprised of consulting costs related to the integration of systems and processes. As our acquired businesses are substantively integrated, we are no longer incurring significant acquisition-related costs.

The costs associated with our cost reduction/productivity initiatives are predominately termination costs associated with plant closings initiated by Pfizer’s manufacturing division. These cost reduction/productivity initiatives are ongoing.

Nine months ended September 30, 2012 vs. nine months ended October 2, 2011

Restructuring charges and certain acquisition-related costs decreased $53 million, or (49%), primarily as a result of:

 

 

a net $49 million decrease in employee termination expenses which results from terminations related to acquisitions; and

 

 

a $17 million decrease in integration costs primarily related to the KAH acquisition;

partially offset by:

 

 

a $9 million increase in asset impairment charges primarily from the allocation of the impairment of a Pfizer facility.

2011 vs. 2010

Restructuring charges and certain acquisition-related costs decreased $48 million, or (24)%, in 2011 compared to 2010, primarily as a result of lower integration and restructuring costs related to the KAH acquisition in 2011 and the integration and restructuring costs related to FDAH in 2010 as the FDAH acquisition was significantly larger and more complex than the KAH acquisition.

2010 vs. 2009

Restructuring charges and certain acquisition-related costs decreased $138 million, or (41)%, in 2010, compared to 2009, primarily as a result of:

 

 

a $167 million decrease in restructuring costs related to employee termination costs in 2010 compared to 2009, primarily due to the higher level of restructuring costs associated with the FDAH acquisition that occurred in 2009; and

 

 

the non-recurrence of $23 million in allocated FDAH transaction costs recorded in 2009;

partially offset by:

 

 

a $65 million increase in 2010 integration and exit costs related to the FDAH acquisition.

Other (income)/deductions—net

 

     Nine Months Ended      % Change      Year Ended
December 31,
     % Change  
(MILLIONS OF DOLLARS)    September 30,
2012
     October 2,
2011
     12/11      2011      2010     2009      11/10      10/09  

Other (income)/deductions—net

   $ (14)       $ 16         *       $ 84       ($ 93   $ 23         *         *   

 

Certain amounts may reflect rounding adjustments.

* Calculation not meaningful.

 

78


Table of Contents

Nine months ended September 30, 2012 vs. nine months ended October 2, 2011

The change in other (income)/deductions—net had a favorable impact of $30 million on net income attributable to Zoetis in the first nine months of 2012 compared to the first nine months of 2011, primarily as a result of:

 

 

a favorable $14 million settlement in the first nine months of 2012 regarding an intellectual property matter, as well as a $7 million change in an estimate for an environmental-related reserve; and

 

 

lower asset impairment charges of identifiable intangible assets of approximately $4 million. See Notes to Unaudited Condensed Combined Financial Statements—Note 4. Other (Income)/Deductions—Net.

2011 vs. 2010

The change in other (income)/deductions—net had an unfavorable impact of $177 million on net income attributable to Zoetis in 2011 compared to 2010, primarily as a result of:

 

 

the non-recurrence of net gains of $104 million on asset disposals included in 2010 on government-mandated divestitures in connection with the acquisition of FDAH; and

 

 

asset impairment charges of identifiable intangible assets of $69 million. See Notes to Combined Financial Statements—Note 6. Other (Income)/Deductions—Net.

2010 vs. 2009

The change in other (income)/deductions—net had a favorable impact of $116 million on net income attributable to Zoetis in 2010 compared to 2009, primarily as a result of:

 

 

net gains of $104 million on sales of government-mandated divestitures in connection with the acquisition of FDAH. See Notes to Combined Financial Statements—Note 4D. Acquisitions, Divestitures and Certain Investments: Divestitures; and

 

 

the incremental impact of royalty related income of $25 million resulting from agreements from FDAH;

partially offset by:

 

 

the full-year impact of interest expense on allocated long-term debt of Pfizer of $11 million. See Notes to Combined Financial Statements—Note 6. Other (Income)/Deductions—Net.

Provision for taxes on income

 

     Nine Months Ended     % Change      Year Ended
December 31,
    % Change  
(MILLIONS OF DOLLARS)    September 30,
2012
    October 2,
2011
    12/11      2011     2010     2009     11/10      10/09  

Provision/(benefit) for taxes on income

   $ 190      $ 126        51       $ 146      $ 67        ($47     118         *   

Effective tax rate

     29.9     34.6        37.1     37.6     (31.8 %)      

 

Certain amounts and percentages may reflect rounding adjustments.

 

* Calculation not meaningful.

During the third quarter of 2012, Pfizer reached a settlement with the U.S. Internal Revenue Service (IRS) with respect to the audits of the Pfizer Inc. tax returns for the years 2006 through 2008. The settlement resulted in an income tax benefit to Zoetis of approximately $29.3 million, representing tax and interest.

During the first quarter of 2011, Pfizer reached a settlement with the IRS with respect to the audits of the Wyeth tax returns for the years 2002 through 2005. The settlement resulted in an income tax benefit to Zoetis of approximately $9.5 million, representing tax and interest.

 

79


Table of Contents

During the fourth quarter of 2010, Pfizer reached a settlement with the IRS related to issues Pfizer had appealed with respect to the audits of the Pfizer Inc. tax returns for the years 2002 through 2005, as well as the Pharmacia audit for the year 2003 through the date of merger with Pfizer (April 16, 2003). As a result of settling these audit years, in the fourth quarter of 2010, we reduced our unrecognized tax benefits by approximately $25.5 million and recorded a corresponding tax benefit for Zoetis. The full year 2010 effective tax rate of Zoetis was also favorably impacted by the reversal of $7.9 million of accruals related to interest on these unrecognized tax benefits.

For the nine months ended September 30, 2012 and October 2, 2011, see Notes to Unaudited Condensed Combined Financial Statements—Note 5A. Tax Matters: Taxes on Income. For the years ended December 31, 2011, 2010 and 2009, see Notes to Combined Financial Statements—Note 7A. Tax Matters: Taxes on Income.

Nine months ended September 30, 2012 vs. nine months ended October 2, 2011

The lower effective tax rate in the first nine months of 2012 compared to the first nine months of 2011 is primarily due to:

 

   

the tax benefit resulting from the aforementioned $29.3 million settlement in 2012; and

 

   

the change in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and as a result of operating fluctuations in the normal course of business, the impact of non-deductible items and the extent and location of other income and expense items, such as restructuring charges, asset impairments and gains and losses on asset divestitures;

partially offset by:

 

   

the non-recurrence of the aforementioned $9.5 million settlement in 2011; and

 

   

the expiration of the U.S. research and development credit.

2011 vs. 2010

The lower effective tax rate in 2011 compared to 2010 is primarily due to:

 

   

the change in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and as a result of operating fluctuations in the normal course of business, the impact of non-deductible items and the extent and location of other income and expense items, such as restructuring charges, asset impairments and gains and losses on asset divestitures;

 

   

the aforementioned $9.5 million reduction in unrecognized tax benefits in 2011, which were recorded as a result of the favorable tax audit settlement pertaining to prior years; and

 

   

the non-recurrence of the write-off of a deferred tax asset of approximately $21.3 million in 2010 to record the impact of the U.S. healthcare legislation concerning the tax treatment of the Medicare Part D subsidy for retiree prescription drug coverage;

partially offset by:

 

   

the non-recurrence of the aforementioned $25.5 million reduction in our unrecognized tax benefits and $7.9 million in interest on those unrecognized tax benefits in 2010 resulting from the resolution of certain tax positions which were recorded as a result of the favorable tax audit settlement pertaining to prior years.

 

80


Table of Contents

2010 vs. 2009

The higher effective tax rate in 2010 compared to 2009 is primarily due to:

 

   

the write-off of a deferred tax asset of approximately $21.3 million to record the impact of the U.S. healthcare legislation concerning the tax treatment of the Medicare Part D subsidy for retiree prescription drug coverage; and

 

   

the change in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and as a result of operating fluctuations in the normal course of business, the impact of non-deductible items and the extent and location of other income and expense items, such as restructuring charges, asset impairments and gains and losses on asset divestitures;

partially offset by:

 

   

the aforementioned $25.5 million reduction in our unrecognized tax benefits and $7.9 million in interest on those unrecognized tax benefits in 2010 resulting from the resolution of certain tax positions which were recorded as a result of the favorable tax audit settlement pertaining to prior years.

Adjusted net income

General description of Adjusted net income (a non-GAAP financial measure)

Adjusted net income is an alternative view of performance used by management, and we believe that investors’ understanding of our performance is enhanced by disclosing this performance measure. We report Adjusted net income to portray the results of our major operations, the discovery, development, manufacture and commercialization of animal health medicine and vaccine products, prior to considering certain income statement elements. We have defined Adjusted net income as net income attributable to Zoetis before the impact of purchase accounting adjustments, acquisition-related costs and certain significant items. The Adjusted net income measure is not, and should not be viewed as, a substitute for U.S. GAAP reported net income attributable to Zoetis.

The Adjusted net income measure is an important internal measurement for us. We measure our overall performance on this basis in conjunction with other performance metrics. The following are examples of how the Adjusted net income measure is utilized:

 

 

senior management receives a monthly analysis of our operating results that is prepared on an Adjusted net income basis;

 

 

our annual budgets are prepared on an Adjusted net income basis; and

 

 

other goal setting and performance measurements.

Despite the importance of this measure to management in goal setting and performance measurement, Adjusted net income is a non-GAAP financial measure that has no standardized meaning prescribed by U.S. GAAP and, therefore, has limits in its usefulness to investors. Because of its non-standardized definition, Adjusted net income, unlike U.S. GAAP net income, may not be comparable to the calculation of similar measures of other companies. Adjusted net income is presented to permit investors to more fully understand how management assesses performance.

We also recognize that, as an internal measure of performance, the Adjusted net income measure has limitations, and we do not restrict our performance-management process solely to this metric. A limitation of the Adjusted net income measure is that it provides a view of our operations without including all events during a period, such as the effects of an acquisition or amortization of purchased intangibles, and does not provide a comparable view of our performance to other companies. We also use other specifically tailored tools designed to achieve the highest levels of performance.

 

81


Table of Contents

Purchase accounting adjustments

Adjusted net income is calculated prior to considering certain significant purchase accounting impacts that result from business combinations and net asset acquisitions. These impacts, primarily associated with the Pharmacia Animal Health business (acquired in 2003), FDAH (acquired in 2009) and KAH (acquired in 2011), include the incremental charge to cost of sales from the sale of acquired inventory that was written up to fair value, amortization related to the increase in fair value of the acquired finite-lived intangible assets and depreciation related to the increase/decrease in fair value of the acquired fixed assets. Therefore, the Adjusted net income measure includes the revenues earned upon the sale of the acquired products without considering the aforementioned significant charges.

While certain purchase accounting adjustments can occur through 20 or more years, this presentation provides an alternative view of our performance that is used by management to internally assess business performance. We believe the elimination of amortization attributable to acquired intangible assets provides management and investors an alternative view of our business results by providing a degree of parity to internally developed intangible assets for which R&D costs previously have been expensed.

A completely accurate comparison of internally developed intangible assets and acquired intangible assets cannot be achieved through Adjusted net income. These components of Adjusted net income are derived solely from the impact of the items listed above. We have not factored in the impact of any other differences in experience that might have occurred if we had discovered and developed those intangible assets on our own, and this approach does not intend to be representative of the results that would have occurred in those circumstances. For example, our R&D costs in total, and in the periods presented, may have been different; our speed to commercialization and resulting revenues, if any, may have been different; or our costs to manufacture may have been different. In addition, our marketing efforts may have been received differently by our customers. As such, in total, there can be no assurance that our Adjusted net income amounts would have been the same as presented had we discovered and developed the acquired intangible assets.

Acquisition-related costs

Adjusted net income is calculated prior to considering transaction, integration, restructuring and additional depreciation costs associated with significant business combinations or net-asset acquisitions because these costs are unique to each transaction and represent costs that were incurred to restructure and integrate certain businesses as a result of the acquisition decision. We have made no adjustments for the resulting synergies.

We believe that viewing income prior to considering these charges provides investors with a useful additional perspective because the significant costs incurred in a business combination result primarily from the need to eliminate duplicate assets, activities or employees––a natural result of acquiring a fully integrated set of activities. For this reason, we believe that the costs incurred to convert disparate systems, to close duplicative facilities or to eliminate duplicate positions (for example, in the context of a business combination) can be viewed differently from those costs incurred in the ordinary course of business.

The integration and restructuring costs associated with a business combination may occur over several years, with the more significant impacts ending within three years of the transaction. Because of the need for certain external approvals for some actions, the span of time needed to achieve certain restructuring and integration activities can be lengthy. For example, due to the regulated nature of the animal health medicines and vaccines business, the closure of excess facilities can take several years, as all manufacturing changes are subject to extensive validation and testing and must be approved by the FDA and/or other regulatory authorities.

Certain significant items

Adjusted net income is calculated prior to considering certain significant items. Certain significant items represent substantive, unusual items that are evaluated on an individual basis. Such evaluation considers both the quantitative and the qualitative aspect of their unusual nature. Unusual, in this context, may represent items that are not part of our ongoing business; items that, either as a result of their nature or size, we would not expect to

 

82


Table of Contents

occur as part of our normal business on a regular basis; items that would be non-recurring; or items that relate to products that we no longer sell. While not all-inclusive, examples of items that could be included as certain significant items would be a major non-acquisition-related restructuring charge and associated implementation costs for a program that is specific in nature with a defined term, such as those related to our non-acquisition-related cost-reduction and productivity initiatives; amounts related to disposals of products or facilities that do not qualify as discontinued operations as defined by U.S. GAAP; certain intangible asset impairments; adjustments related to the resolution of certain tax positions; the impact of adopting certain significant, event-driven tax legislation; or charges related to legal matters. For the nine months ended September 30, 2012 and October 2, 2011, see Notes to Unaudited Condensed Combined Financial Statements—Note 10. Segment, Geographic and Revenue Information. For the years ended December 31, 2011, 2010 and 2009, see Notes to Combined Financial Statements—Note 16. Segment, Geographic and Revenue Information. Our normal, ongoing defense costs or settlements of and accruals on legal matters made in the normal course of our business would not be considered certain significant items.

Reconciliation and detailed descriptions

A reconciliation of net income attributable to Zoetis, as reported under U.S. GAAP, to Adjusted net income follows:

 

     Nine Months Ended      Year Ended December 31,  
(MILLIONS OF DOLLARS)    September 30,
2012
    October 2,
2011
     2011      2010     2009  

Reported net income attributable to Zoetis

   $ 446      $ 236       $ 245       $ 110      $ (100

Purchase accounting adjustments—net of tax

     26        46         55         103        27   

Acquisition-related costs—net of tax

     23        57         78         145        168   

Certain significant items—net of tax

     (13     42         125         (83     94   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Adjusted net income

   $ 482      $ 381       $ 503       $ 275      $ 189   

The effective tax rate on Adjusted pre-tax income is 34.6% and 33.7% in the first nine months of 2012 and 2011, respectively. The higher effective tax rate in the first nine months of 2012 is due to the non-recurrence of approximately $9.5 million reduction in unrecognized tax benefits in 2011, which were recorded as a result of a favorable tax audit settlement pertaining to prior years, and the expiration of the U.S. research and development credit; partially offset by the change in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs.

The effective tax rate on Adjusted pre-tax income is 34.3%, 39.9% and 36.5% for full year 2011, 2010 and 2009, respectively. The lower effective tax rate for the full year 2011 is primarily due to a reduction in unrecognized tax benefits in 2011, which were recorded as a result of a favorable tax audit settlement pertaining to prior years, the non-recurrence of the write-off in 2010 of a deferred tax asset to record the impact of the U.S. healthcare legislation concerning the tax treatment of the Medicare Part D subsidy for retiree prescription drug coverage, as well as the change in the jurisdictional mix of earnings.

Throughout 2012, we have undertaken a number of internal reorganization steps designed to improve our operational efficiency and reduce costs. As a result of these actions, which will change our jurisdictional mix of earnings, among other impacts, we expect that our future effective tax rate on Adjusted pre-tax income will be lower than historical levels.

Adjusted net income includes the following charges for each of the periods presented:

 

     Nine Months Ended      Year Ended December 31,  
(MILLIONS OF DOLLARS)    September 30,

2012

     October 2,

2011

     2011      2010      2009  

Interest

   $ 23       $ 27       $ 36       $ 37       $ 26   

Taxes

     255         195         264         183         108   

Depreciation

     93         85         117         103         86   

Amortization

     14         15         20         19         17   

 

83


Table of Contents

Adjusted net income, as shown above, excludes the following items:

 

    Nine Months Ended     Year Ended
December 31,
 
(MILLIONS OF DOLLARS)   September 30,
2012
    October 2,
2011
    2011     2010     2009  

Purchase accounting adjustments:

         

Amortization and depreciation(a)

  $ 36      $ 36      $ 48      $ 41      $ 16   

Cost of sales, primarily related to fair value adjustments of acquired inventory(b)

    3        33        34        107        24   

 

 

Total purchase accounting adjustments, pre-tax

    39        69        82        148        40   

Income taxes(k)

    13        23        27        45        13   

 

 

Total purchase accounting adjustments—net of tax

    26        46        55        103        27   

 

 

Acquisition-related costs(c):

         

Transaction costs(d)

    —          1        2        1        23   

Integration costs(d)

    31        47        71        92        46   

Restructuring charges(d)

    (8     35        41        107        178   

Additional depreciation—asset restructuring(g)

    11        4        8        17        —     

 

 

Total acquisition-related costs, pre-tax

    34        87        122        217        247   

Income taxes(k)

    11        30        44        72        79   

 

 

Total acquisition-related costs—net of tax

    23        57        78        145        168   

 

 

Certain significant items(e):

         

Restructuring charges(f)

    32        24        40        2        93   

Implementation costs and additional depreciation—asset restructuring(g)

    14        13        22        —          66   

Certain asset impairment charges(h)

    —          9        69        —          —     

Inventory write-off (in Cost of sales)

    —          12        12        13        —     

Net gains on sale of assets(i)

    —          —          —          (104     (2

Other(j)

    (18     —          29        5        —     

 

 

Total certain significant items, pre-tax

    28        58        172        (84     157   

Income taxes(k)

    41        16        47        (1     63   

 

 

Total certain significant items—net of tax

    (13     42        125        (83     94   

 

 

Total purchase accounting adjustments, acquisition-related costs, and certain significant items—net of tax

  $ 36      $ 145      $ 258      $ 165      $ 289   

 

Certain amounts and percentages may reflect rounding adjustments.

(a) Amortization and depreciation expense related to purchase accounting adjustments with respect to identifiable intangible assets and property, plant and equipment were distributed as follows in the first nine months of 2012, in the first nine months of 2011, and in 2011, 2010 and 2009, respectively: $37 million, $37 million, $49 million, $41 million and $17 million in Amortization of intangible assets; $0 million, $0 million, $1 million, $0 million and $0 million in Research and development expenses; $1 million income, $1 million income, $2 million income, $0 million and $1 million income in Selling, general and administrative expenses.
(b) Also includes depreciation expense in Cost of Sales of $3 million, $9 million, $10 million, $22 million and $5 million in the first nine months of 2012, in the first nine months of 2011 and in 2011, 2010 and 2009 respectively.
(c) Acquisition-related costs were distributed as follows in the first nine months of 2012, in the first nine months of 2011, and in 2011, 2010 and 2009, respectively: $9 million, $3 million, $6 million, $0 million and $0 million in Cost of sales; $2 million, $2 million, $3 million, $17 million and $0 million in Selling, general and administrative expenses; $0 million, $1 million income, $1 million income, $0 million and $0 million in Other (income)/deductions—net; $23 million, $83 million, $114 million, $200 million and $247 million in Restructuring charges and certain acquisition related costs.
(d) Included in Restructuring charges and certain acquisition-related costs. For the nine months ended September 30, 2012 and October 2, 2011, see Notes to Unaudited Condensed Combined Financial Statements—Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives. For the years ended December 31, 2011, 2010 and 2009, see Notes to Combined Financial Statements—Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives.
(e)

Certain significant items were distributed as follows in the first nine months of 2012, in the first nine months of 2011, and in 2011, 2010 and 2009, respectively: $4 million income, $12 million, $31 million, $19 million and $53 million in Cost of sales; $4 million, $2 million,

 

84


Table of Contents
  $5 million, $0 million and $10 million in Selling, general and administrative expenses; $10 million, $11 million, $19 million, $0 million and $3 million in Research and development expenses; $14 million income, $9 million, $77 million, $105 million income and $2 million income in Other (income)/deductions—net; $32 million, $24 million, $40 million, $2 million and $93 million in Restructuring charges and certain acquisition-related costs.
(f) Represents restructuring charges incurred for our cost-reduction/productivity initiatives. Included in Restructuring charges and certain acquisition-related costs. For the nine months ended September 30, 2012 and October 2, 2011, see Notes to Unaudited Condensed Combined Financial Statements—Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives. For the years ended December 31, 2011, 2010 and 2009, see Notes to Combined Financial Statements—Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives.
(g) Amounts in certain significant items relate to our cost-reduction/productivity initiatives and amounts in acquisition-related costs relate to our acquisition activity. For the nine months ended September 30, 2012 and October 2, 2011, see Notes to Unaudited Condensed Combined Financial Statements—Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives. For the years ended December 31, 2011, 2010 and 2009, see Notes to Combined Financial Statements—Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives.
(h) Included in Other (income)/deductions—net. For the nine months ended September 30, 2012 and October 2, 2011, see Notes to Unaudited Condensed Combined Financial Statements—Note 4. Other (Income)/Deductions—Net. For the years ended December 31, 2011, 2010 and 2009, see Notes to Combined Financial Statements—Note 6. Other (Income)/Deductions—Net.
(i) Included in Other (income)/deductions—net. See Notes to Combined Financial Statements—Note 6. Other (Income)/Deductions—Net for more information.
(j) In the nine months ended September 30, 2012, certain significant items included income related to a favorable legal settlement for an intellectual property matter of $14 million and $4 million income related to a change in estimate with respect to transitional manufacturing agreements associated with divestitures. See Notes to Unaudited Condensed Combined Financial Statements—Note 4. Other (Income)/Deductions—Net. For the years ended December 31, 2011 and 2010, significantly all reflected charges are related to transitional manufacturing purchase agreements associated with divestitures. See Notes to Combined Financial Statements—Note 4D. Acquisitions, Divestitures and Certain Investments: Divestitures.
(k) Included in Provision/(benefit) for taxes on income/(loss). Income taxes includes the tax effect of the associated pre-tax amounts, calculated by determining the jurisdictional location of the pre-tax amounts and applying that jurisdiction’s applicable tax rate. In addition, income taxes for Certain significant items in the nine months ended September 30, 2012 includes a $29.3 million tax benefit and for the year ended December 31, 2010 includes a $33 million tax benefit recorded in the fourth quarter, both as a result of settlements of certain audits. For the nine months ended September 30, 2012 and the nine months ended October 2, 2011, see Notes to Unaudited Condensed Combined Financial Statements—Note 5A. Tax Matters: Taxes on Income. For the years ended December 31, 2011, 2010 and 2009, see Notes to Combined Financial Statements—Note 7A. Tax Matters: Taxes on Income.

Analysis of the combined statements of comprehensive income/(loss)

Discussion of changes

Virtually all changes in other comprehensive income for all periods presented are related to foreign currency translation adjustments. These changes result from the strengthening or weakening of the U.S. dollar as compared to the currencies in the countries in which we do business. The gains and losses associated with these changes are deferred on the balance sheet in Accumulated other comprehensive loss until realized. Specifically, the changes to Accumulated other comprehensive loss for the first nine months of 2012 reflect the strengthening of the U.S. dollar against the euro and the Brazilian real. The changes for the first nine months of 2011 reflect the weakening of the U.S. dollar against the Australian dollar and the Brazilian real partially offset by the strengthening of the U.S. dollar against the euro.

Analysis of the combined balance sheets

Discussion of changes

September 30, 2012 vs. December 31, 2011

Virtually all changes in our assets and liabilities as of September 30, 2012 compared to December 31, 2011, reflect, among other things, decreases due to the impact of foreign exchange.

For information about certain of our financial assets and liabilities, including Cash and cash equivalents, Accounts receivable, less allowance for doubtful accounts and Allocated long-term debt, see “—Analysis of financial condition, liquidity and capital resources” below.

For Inventories, the change also reflects the annual inventory build of cattle products in advance of seasonal movements and the establishment of higher targeted inventory levels for certain products.

 

85


Table of Contents

For Other current liabilities, the change also reflects a decrease in restructuring liabilities.

For Other non-current liabilities, the change also reflects the movement of certain balances to Other current liabilities and certain changes to estimates related to contingency reserves.

December 31, 2011 vs. December 31, 2010

Virtually all changes in our assets and liabilities as of December 31, 2011 compared to December 31, 2010 reflect, among other things, increases associated with our acquisition of KAH. See Notes to Combined Financial Statements—Note 4A. Acquisitions, Divestitures and Certain Investments: Acquisition of King Animal Health.

For information about certain of our financial assets and liabilities, including Cash and cash equivalents, Accounts receivable, less allowance for doubtful accounts, Current portion of allocated long-term debt and Allocated long-term debt, see “—Analysis of financial condition, liquidity and capital resources” below. In addition, changes in Current portion of allocated long-term debt, and Allocated long-term debt reflects scheduled principal payments as well as the call on December 31, 2011 of a senior unsecured note due in March 2012.

For Accounts receivable, less allowance for doubtful accounts, the change also reflects an increase due to increased sales at the end of 2011, as compared to the end of 2010.

For Goodwill, the change also reflects the goodwill recorded as a result of the formation of the Jilin Pfizer Guoyuan joint venture. See Notes to Combined Financial Statements—Note 4E. Acquisitions, Divestitures and Certain Investments: Certain Investments.

For Identifiable intangible assets, less accumulated amortization, the change also includes the impact of impairments of certain assets. See Notes to Combined Financial Statements—Note 6. Other (Income)/Deductions—Net.

Analysis of the combined statements of cash flows

 

     Nine Months Ended     % Change     Year Ended December 31,     % Change  
(MILLIONS OF DOLLARS)    September 30,
2012
    October 2,
2011
    12/11     2011     2010     2009     11/10      10/09  

Cash provided by/(used in):

                 

Operating activities

   $ 144      $ 383        (62   $ 497      $ 254      $ 98        96         159   

Investing activities

     (89     (423     (79     (449     (9     (1,821     *         *   

Financing activities

            122        *        (30     (277     1,823        *         *   

Effect of exchange-rate changes on cash and cash equivalents

     (1     (1     *        (2     (4     (7     *         *   
  

 

 

     

 

 

      

Net increase/(decrease) in cash and cash equivalents

   $ 54      $ 81        (33   $ 16      $ (36   $ 93        *         *   
  

 

 

     

 

 

      

 

Certain amounts and percentages may reflect rounding adjustments.

* Calculation not meaningful.

Operating activities

Nine months ended September 30, 2012 vs. nine months ended October 2, 2011

Our net cash provided by operating activities was $144 million in the first nine months of 2012 compared to $383 million in the first nine months of 2011. This decrease in operating cash flows was primarily attributable to:

 

 

increased pre-tax earnings;

 

 

86


Table of Contents

more than offset by:

 

 

the annual inventory build of cattle products in advance of seasonal movements and the establishment of higher targeted inventory levels for certain products; and

 

 

higher net payments for income taxes.

The change in the line item called Other changes in assets and liabilities, net of acquisitions and divestitures reflects the change in inventory described above.

2011 vs. 2010

Our net cash provided by operating activities was $497 million in 2011 compared to $254 million in 2010. The increase in operating cash flows was primarily attributable to:

 

 

the inclusion of operating cash flows from KAH acquired on January 31, 2011; and

 

 

the timing of receipts and payments in the ordinary course of business.

2010 vs. 2009

Our net cash provided in operating activities was $254 million in 2010 compared to $98 million in 2009. The increase in operating cash flows was primarily attributable to:

 

 

the inclusion of a full year of operating cash flows from FDAH acquired on October 15, 2009; and

 

 

the timing of receipts and payments in the ordinary course of business.

Investing activities

Nine months ended September 30, 2012 vs. nine months ended October 2, 2011

Our net cash used in investing activities was $89 million in the first nine months of 2012 compared to $423 million in the first nine months of 2011. In the first nine months of 2011, Pfizer acquired KAH for $345 million in cash. See Notes to Combined Financial Statements—Note 4A. Acquisitions, Divestitures and Certain Investments: Acquisition of King Animal Health.

2011 vs. 2010

Our net cash used in investing activities was $449 million in 2011 compared to $9 million in 2010. The increase in net cash used by investing activities was primarily attributable to:

 

 

net cash of $345 million paid for the acquisition of KAH; and

 

 

higher 2010 proceeds of $169 million from sales of assets.

See Notes to Combined Financial Statements—Note 4. Acquisitions, Divestitures and Certain Investments.

2010 vs. 2009

Our net cash used in investing activities was $9 million in 2010 compared to $1.8 billion in 2009. The decrease in net cash used by investing activities was primarily attributable to:

 

 

net cash of $2.3 billion paid in 2009 for the acquisition of FDAH;

partially offset by:

 

 

lower cash proceeds of $369 million from the sale of assets.

See Notes to Combined Financial Statements—Note 4B. Acquisitions, Divestitures and Certain Investments: Acquisition of Fort Dodge Animal Health.

 

87


Table of Contents

Financing activities

Nine months ended September 30, 2012 vs. nine months ended October 2, 2011

Our net cash provided by financing activities was less than $1 million in the first nine months 2012 compared to $122 million in the first nine months of 2011. The decrease in net cash provided by financing activities was attributable to a decrease in net financing from Pfizer.

2011 vs. 2010

Our net cash used in financing activities was $30 million in 2011 compared to $277 million in 2010. The decrease in net cash used in 2011 was primarily attributable to:

 

 

an increase in our financing activities with Pfizer of $596 million primarily related to the acquisition of KAH in 2011;

partially offset by:

 

 

an allocation of principal payments of long-term debt of $143 million; and

 

 

an increase in dividends paid of $209 million.

2010 vs. 2009

Our net cash used in financing activities was $277 million in 2010 compared to cash provided by financing activities of $1.8 billion in 2009. The decrease in net cash provided by financing activities was primarily attributable to:

 

 

proceeds of $719 million in 2009 from allocated long-term debt from Pfizer;

 

 

a decrease of $1.3 billion in our financing activities with Pfizer related to the acquisition of FDAH in 2009; and

 

 

an increase in dividends paid of $106 million.

Analysis of financial condition, liquidity and capital resources

We and Pfizer have agreed that our cash balance on the date of the completion of this offering will be at least $300 million. To the extent that our cash balance on the date of the completion of this offering is less than $300 million, Pfizer will pay us an amount in cash equal to the shortfall. While we believe our cash on hand, our operating cash flows and our anticipated financing arrangements will be sufficient to support our future cash needs, we can provide no assurance that our liquidity and capital resources will meet future funding requirements. Risks to our meeting future funding requirements include global economic conditions described in the following paragraph.

The global financial markets recently have undergone and may continue to experience significant volatility and disruption. The timing and sustainability of an economic recovery is uncertain and additional macroeconomic, business and financial disruptions may arise. As markets change, we will continue to monitor our liquidity position, and there can be no assurance that the challenging economic environment or a further economic downturn would not impact our liquidity or our ability to obtain future financing.

 

88


Table of Contents

Selected measures of liquidity and capital resources

Certain relevant measures of our liquidity and capital resources follow:

 

     Nine Months
Ended
     As of
December 31,
 
(MILLIONS OF DOLLARS)    September 30,
2012
     2011      2010  

Cash and debt

        

Cash and cash equivalents

   $ 133       $ 79       $ 63   

Current portion of allocated long-term debt

     —           —           38   

Allocated long-term debt

     580         575         673   

Accounts receivable, less allowance for doubtful accounts: 2011—$29 and 2010—$26

     848         871         773   

Working capital

     1,818         1,468         1,308   

Ratio of current assets to current liabilities

     3.47:1         2.74:1         2.62:1   

 

Certain amounts may reflect rounding adjustments.

We participate in Pfizer’s centralized cash management system, and generally all of our excess cash is transferred to Pfizer on a daily basis. Cash disbursements for operations and/or investing activities are funded as needed by Pfizer. The cash and cash equivalents presented here are amounts recorded on legal entities that are dedicated to Zoetis.

The combined financial statements include an allocation of long-term debt from Pfizer that was issued to partially finance the acquisition of Wyeth (including FDAH). The debt has been allocated on a pro-rata basis using the deemed acquisition cost of FDAH as a percentage of the total acquisition cost of Wyeth. No other allocations of debt have been made as none are specifically related to our operations.

For additional information about the sources and uses of our funds, see “—Analysis of the combined balance sheets” and “—Analysis of the combined statements of cash flows.”

In December 2012, we entered into a revolving credit agreement with a syndicate of banks providing for a five-year $1.0 billion senior unsecured revolving credit facility. The credit facility will not be available for borrowings until the date on which certain conditions, including the completion of this offering and the receipt of certain investment grade ratings, are satisfied. We expect that these conditions will be met concurrently with the completion of this offering. The credit facility contains a financial covenant requiring us to not exceed a maximum total leverage ratio and, unless on the effective date of the credit facility certain investment grade ratings specified in the revolving credit agreement are received, to maintain a minimum interest coverage ratio. In addition, the credit facility contains other customary covenants. Subject to certain conditions, we will have the right to increase the credit facility to up to $1.5 billion. See “Description of certain indebtedness—Credit facility.”

In connection with the senior notes offering, we incurred approximately $3.65 billion aggregate principal amount of senior indebtedness, including the $1.0 billion of our senior notes that was transferred to Pfizer and subsequently disposed of by Pfizer. Immediately prior to the completion of this offering, we will transfer an amount of cash equal to substantially all of the net proceeds we received in the senior notes offering to Pfizer. These transactions will result in a change to our balance sheet as it will replace the Current portion of allocated long-term debt and Allocated long-term debt presented in the table above. Upon the completion of the senior notes offering, we anticipate the Current portion of long-term debt to be $0 million and the Long-term debt to be $3.64 billion (net of original issue debt discount of $10 million).

Accounts receivable are usually collected over a period of 60 to 90 days. For the nine months ended September 30, 2012 and for the years ended December 31, 2011 and 2010, we have achieved an overall reduction

 

89


Table of Contents

in the number of days that accounts receivables are outstanding. We regularly monitor our accounts receivable for collectability, particularly in markets where economic conditions remain uncertain. We believe that our allowance for doubtful accounts is appropriate. Our assessment is based on such factors as past due history, historical and expected collection patterns, the financial condition of our customers, the robust nature of our credit and collection practices and the economic environment.

Contractual obligations

Payments due under contractual obligations as of December 31, 2011 are set forth below:

 

       Total        Years  
(MILLIONS OF DOLLARS)         2012        2013-
  2014  
     2015-
  2016  
       Thereafter    

Allocated long-term debt, including allocated interest obligations(a)

   $ 1,040       $ 31       $ 135       $ 312       $ 562   

Other long-term liabilities reflected on our combined balance sheet under U.S. GAAP(b)

     10         2         2         2         4   

Operating lease commitments

     62         16         21         11         14   

Purchase obligations and other(c)

     202         68         65         21         48   

Uncertain tax positions(d)

                                       

 

Certain amounts may reflect rounding adjustments.

(a) Allocated long-term debt obligations include both expected principal and interest obligations of Pfizer that have been allocated to Zoetis in the combined financial statements. The allocated debt is comprised of U.S. dollar and foreign currency denominated senior unsecured notes issued by Pfizer to partially finance the acquisition of FDAH. Our calculations of expected interest payments incorporate only current period assumptions for interest rates, foreign currency translation rates and Pfizer hedging strategies, see Notes to Combined Financial Statements—Note 9D. Financial Instruments: Allocated Long-Term Debt.
(b) Includes expected payments relating to our future benefit payments net of plan assets (included in determination of the projected benefit obligation) for pension plans that are dedicated to Zoetis employees in the Netherlands, Germany, India, the Philippines and Korea. Excludes approximately $120 million of liabilities related to employee terminations, legal and environmental contingencies and other matters, most of which do not represent contractual obligations. See Notes to Combined Financial Statements—Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives and Note 15. Commitments and Contingencies.
(c) Includes agreements to purchase goods and services that are enforceable and legally binding and includes amounts relating to advertising, information technology services, employee benefit administration services, and potential milestone payments deemed reasonably likely to occur.
(d) Except for amounts reflected in Income taxes payable, we are unable to predict the timing of tax settlements, as tax audits can involve complex issues and the resolution of those issues may span multiple years, particularly if subject to negotiation or litigation.

The table above excludes amounts for potential milestone payments unless the payments are deemed reasonably likely to occur. Payments under these agreements generally become due and payable only upon the achievement of certain development, regulatory and/or commercialization milestones, which may span several years and/or which may never occur. Our historical contractual obligations in the table above are not necessarily indicative of our contractual obligations in the future as a standalone public company.

Following the completion of the Transactions, as defined in “Unaudited pro forma condensed combined financial statements,” the allocated long-term debt presented in the table above will be retained by Pfizer and it will be replaced by payments due under contractual obligations associated with the $3,650 million aggregate principal amount of notes issued in connection with the senior notes offering. Immediately after the senior notes offering, in the table above our total payments due under contractual obligations associated with the senior notes was $5,794 million, representing expected principal and interest obligations of $233 million in 2013 through 2014, $629 million in 2015 through 2016 and $4,932 million thereafter.

Off-balance sheet arrangements

We do not currently use off-balance sheet arrangements for the purpose of credit enhancement, hedging transactions, investment or other financial purposes.

 

90


Table of Contents

In the ordinary course of business and in connection with the sale of assets and businesses, we may indemnify our counterparties against certain liabilities that may arise in connection with a transaction or that are related to activities prior to a transaction. These indemnifications typically pertain to environmental, tax, employee and/or product-related matters, and patent-infringement claims. If the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we would be required to reimburse the loss. These indemnifications generally are subject to threshold amounts, specified claim periods and other restrictions and limitations. Historically, we have not paid significant amounts under these provisions and, as of September 30, 2012 or December 31, 2011, recorded amounts for the estimated fair value of these indemnifications are not significant.

New accounting standards

For discussion of our new accounting standards, see Notes to Combined Financial Statements—Note 3A. Significant Accounting Policies: New Accounting Standards.

Significant accounting policies and application of critical accounting estimates

In presenting our financial statements in conformity with U.S. GAAP, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures.

We believe that the following accounting policies are critical to an understanding of our combined financial statements as they require the application of the most difficult, subjective and complex judgments and, therefore, could have the greatest impact on our financial statements: (i) acquisitions and fair value; (ii) revenues; and (iii) impairment reviews—long-lived assets, including goodwill and other intangible assets.

Below are some of our more critical accounting estimates.

For more information regarding our significant accounting policies, estimates and assumptions, see Notes to Combined Financial Statements—Note 3. Significant Accounting Policies.

Acquisitions and fair value

For a discussion about the application of fair value to our recent acquisitions, see Notes to Combined Financial Statements—Note 4. Acquisitions, Divestitures and Certain Investments.

For a discussion about the application of fair value to our allocated long-term debt, see Notes to Combined Financial Statements—Note 9D. Financial Instruments: Allocated Long-Term Debt.

For a discussion about the application of fair value to our asset impairment reviews, see Notes to Combined Financial Statements—Note 6. Other (Income)/Deductions—Net and Unaudited Condensed Combined Financial Statements—Note 4. Other (Income)/Deductions—Net.

Revenues

Our gross product revenues are subject to deductions that are generally estimated and recorded in the same period that the revenues are recognized and primarily represent sales returns and revenue incentives. For example:

 

 

for sales returns, we perform calculations in each market that incorporate the following, as appropriate: local returns policies and practices; returns as a percentage of revenues; an understanding of the reasons for past returns; estimated shelf life by product; an estimate of the amount of time between shipment and return or lag time; and any other factors that could impact the estimate of future returns, product recalls, discontinuation of products or a changing competitive environment; and

 

 

for revenue incentives, we use our historical experience with similar incentives programs to estimate the impact of such programs on revenues.

 

91


Table of Contents

If any of our ratios, factors, assessments, experiences or judgments are not indicative or accurate predictors of our future experience, our results could be materially affected. Although the amounts recorded for these revenue deductions are heavily dependent on estimates and assumptions, historically our adjustments to actual results have not been material. The sensitivity of our estimates can vary by program, type of customer and geographic location.

Amounts recorded for revenue deductions can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For further information about the risks associated with estimates and assumptions, see Notes to Combined Financial Statements—Note 3B. Significant Accounting Policies: Estimates and Assumptions.

Impairment reviews––long-lived assets

We review all of our long-lived assets for impairment indicators throughout the year and we perform detailed testing whenever impairment indicators are present. In addition, we perform detailed impairment testing for goodwill and indefinite-lived assets at least annually. When necessary, we record charges for impairments of long-lived assets for the amount by which the fair value is less than the carrying value of these assets.

Our impairment review processes are described in Notes to Combined Financial Statements—Note 3J. Significant Accounting Policies: Amortization of Intangible Assets, Depreciation and Certain Long-Lived Assets and, for deferred tax assets, in Note 3M. Significant Accounting Policies: Deferred Tax Assets and Liabilities and Income Tax Contingencies.

Examples of events or circumstances that may be indicative of impairment include:

 

 

a significant adverse change in the extent or manner in which an asset is used. For example, restrictions imposed by the regulatory authorities could affect our ability to manufacture or sell a product.

 

 

a projection or forecast that demonstrates losses or reduced profits associated with an asset. This could result, for example, from the introduction of a competitor’s product that results in a significant loss of market share or the inability to achieve the previously projected revenue growth, or from the lack of acceptance of a product by customers.

Our impairment reviews of most of our long-lived assets depend heavily on the determination of fair value, as defined by U.S. GAAP, and these judgments can materially impact our results of operations. A single estimate of fair value can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Notes to Combined Financial Statements—Note 3B. Significant Accounting Policies: Estimates and Assumptions.

Intangible assets other than goodwill—impairment discussion

As a result of our intangible asset impairment review work, described in detail below, we recognized a number of impairments of identifiable intangible assets other than goodwill.

We recorded the following identifiable intangible asset impairment charges in Other (income)/deductions—net:

 

 

In the first nine months of 2012, the asset impairment charges include (i) approximately $2 million of finite-lived companion animal developed technology rights; (ii) approximately $1 million of finite-lived trademarks related to genetic testing services; and (iii) approximately $2 million of finite-lived patents related to poultry technology. The intangible asset impairment charges for 2012 reflect, among other things, the loss of revenues as a result of negative market conditions and, with respect to the poultry technology, a re-assessment of economic viability.

 

92


Table of Contents
 

In 2011, the asset impairment charges include: (i) approximately $30 million of finite-lived intangible assets related to parasiticides technology as a result of declining gross margins and increased competition; (ii) approximately $12 million of finite-lived intangible assets related to equine influenza and tetanus technology due to third-party supply issues; (iii) approximately $10 million of finite-lived intangible assets related to genetic testing services that did not find consumer acceptance; and (iv) approximately $17 million related to IPR&D projects (acquired from Vetnex in 2010 and from FDAH in 2009), as a result of the termination of the development programs due to a re-assessment of their economic viability.

 

 

In 2009, the asset impairment charges include: (i) approximately $3 million write-off related to an equine licensing arrangement, which was required to be surrendered in connection with Pfizer’s acquisition of Wyeth; and (ii) approximately $2 million write-off of finite-lived intangible assets related to a canine product that could not find consumer acceptance.

For a description of our accounting policy, see Notes to Combined Financial Statements—Note 3J. Significant Accounting Policies: Amortization of Intangible Assets, Depreciation and Certain Long-Lived Assets.

When we are required to determine the fair value of intangible assets other than goodwill, we use an income approach, specifically the multi-period excess earnings method, also known as the discounted cash flow method. We start with a forecast of all the expected net cash flows associated with the asset, which includes the application of a terminal value for indefinite-lived assets, and then we apply an asset-specific discount rate to arrive at a net present value. Some of the more significant estimates and assumptions inherent in this approach include: the amount and timing of the projected net cash flows, which includes the expected impact of competitive, legal and/or regulatory forces on the projections, the impact of technological risk associated with IPR&D assets, as well as the selection of a long-term growth rate; the discount rate, which seeks to reflect the risks inherent in the projected cash flows; and the tax rate, which seeks to incorporate the geographic diversity of the projected cash flows.

While all identifiable intangible assets can be impacted by events and thus lead to impairment, in general, identifiable intangible assets that are at the highest risk of impairment include IPR&D assets and newly acquired or recently impaired indefinite-lived brand assets. IPR&D assets are higher-risk assets, because R&D is an inherently risky activity. Newly acquired and recently impaired indefinite-lived assets are more vulnerable to impairment because the assets are recorded at fair value and are then subsequently measured at the lower of fair value or carrying value at the end of each reporting period. As such, immediately after acquisition or impairment, even small declines in the outlook for these assets can negatively impact our ability to recover the carrying value and can result in an impairment charge.

Goodwill—impairment discussion

As a result of our goodwill impairment review work, described in detail below, we concluded that none of our goodwill is impaired as of September 30, 2012 and December 31, 2011, and we do not believe the risk of impairment is significant at this time.

For a description of our accounting policy, see Notes to Combined Financial Statements—Note 3J. Significant Accounting Policies: Amortization of Intangible Assets, Depreciation and Certain Long-Lived Assets.

In determining the fair value of each reporting unit, the income approach was used. The income approach is a forward-looking approach to estimating fair value and relies primarily on internal forecasts. Within the income approach, the method that we use is the discounted cash flow method. We start with a forecast of all the expected net cash flows associated with the reporting unit, which includes the application of a terminal value, and then we apply a reporting unit-specific discount rate to arrive at a net present value amount. Some of the more significant estimates and assumptions inherent in this approach include: the amount and timing of the projected net cash flows, which includes the expected impact of technological risk and competitive, legal and/or regulatory forces on the projections, as well as the selection of a long-term growth rate; the discount rate, which seeks to reflect the various risks inherent in the projected cash flows; and the tax rate, which seeks to incorporate the geographic diversity of the projected cash flows.

 

93


Table of Contents

While all reporting units can confront events and circumstances that can lead to impairment, we do not believe that the risk of goodwill impairment for any of our reporting units is significant at this time.

For all of our reporting units, there are a number of future events and factors that may impact future results and that could potentially have an impact on the outcome of subsequent goodwill impairment testing. For a list of these factors, see “—Factors affecting our performance.”

Contingencies

Legal matters

We are subject to numerous contingencies arising in the ordinary course of business, such as product liability and other product-related litigation, commercial litigation, environmental claims and proceedings, patent litigation and government investigations. See Notes to Combined Financial Statements—Note 15A. Commitments and Contingencies: Legal Proceedings and see Unaudited Condensed Combined Financial Statements—Note 9A. Commitments and Contingencies: Legal Proceedings.

Certain of these contingencies could result in losses, including damages, fines and/or civil penalties, and/or criminal charges, which could be substantial.

We believe that we have strong defenses in these types of matters, but litigation is inherently unpredictable and excessive verdicts do occur. We do not believe that any of these matters will have a material adverse effect on our financial position. However, we could incur judgments, enter into settlements or revise our expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on our results of operations or cash flows in the period in which the amounts are paid and/or accrued.

We have accrued for losses that are both probable and reasonably estimable. Substantially all of these contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss can be complex. Consequently, we are unable to estimate the range of reasonably possible loss in excess of amounts accrued. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but the assessment process relies heavily on estimates and assumptions that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions.

Tax matters

We account for income tax contingencies using a benefit recognition model. See Notes to Combined Financial Statements—Note 3M. Significant Accounting Policies: Deferred Tax Assets and Liabilities and Income Tax Contingencies. If our initial assessment fails to result in the recognition of a tax benefit, we regularly monitor our position and subsequently recognize the tax benefit if: (i) there are changes in tax law, analogous case law or there is new information that sufficiently raise the likelihood of prevailing on the technical merits of the position to more likely than not; (ii) the statute of limitations expires; or (iii) there is a completion of an audit resulting in a favorable settlement of that tax year with the appropriate agency. We regularly re-evaluate our tax positions based on the results of audits of federal, state and foreign income tax filings, statute of limitations expirations, and changes in tax law or receipt of new information that would either increase or decrease the technical merits of a position relative to the “more-likely-than-not” standard.

Our assessments concerning uncertain tax positions are based on estimates and assumptions that have been deemed reasonable by management, but our estimates of unrecognized tax benefits and potential tax benefits may not be representative of actual outcomes, and variation from such estimates could materially affect our financial statements in the period of settlement or when the statutes of limitations expire, as we treat these events as discrete items in the period of resolution. Finalizing audits with the relevant taxing authorities can include formal administrative and

 

94


Table of Contents

legal proceedings, and, as a result, it is difficult to estimate the timing and range of possible changes related to our uncertain tax positions, and such changes could be significant. See Notes to Unaudited Condensed Combined Financial Statements—Note 5B. Tax Matters: Tax Contingencies and Notes to Combined Statements—Note 7C. Tax Matters: Tax Contingencies.

Qualitative and quantitative disclosures about market risk

Foreign exchange risk

A significant portion of our revenues and costs are exposed to changes in foreign exchange rates. Our primary net foreign currency translation exposures are the euro, the Brazilian real and the Australian dollar. As a business unit of Pfizer and under Pfizer’s risk management umbrella, we seek to manage our foreign exchange risk in part through operational means, including managing same-currency revenues in relation to same-currency costs and same-currency assets in relation to same-currency liabilities. Additionally, as a standalone public company, we may implement a foreign currency hedging strategy to limit our foreign exchange risk.

 

95


Table of Contents

Industry

Overview

The animal health industry, which focuses on both livestock and companion animals, is a growing industry that impacts billions of people worldwide. The demand for animal protein to feed the world continues to increase, even as arable land, fresh water and other natural resources important to global animal protein production become more scarce. In addition, threats to human health associated with livestock are of growing concern to consumers, livestock producers and regulators. Therefore, increasing the efficiency of livestock production and keeping herds and flocks free from disease, including through the use of medicines and vaccines, is a key market need. Growth in the companion animal products category is driven by economic development and related increases in disposable income, increasing pet ownership and companion animals living longer. Therefore, increasing medical treatment of companion animals and advances in animal health medicines and vaccines, is a key market need. Pet ownership continues to be popular, with approximately 62% of households in the United States having at least one pet, according to the American Pet Products Association, or APPA.

Broadly defined, as measured by revenues, the approximately $100 billion animal health industry includes all products and services, other than livestock feed and pet food, that promote livestock productivity and health and companion animal health, such as medicines and vaccines, diagnostics, medical devices, pet supplies, nutritional supplements, veterinary services and other related services. Within this broad market, medicines and vaccines, our core area of operation, represented a global market of $22 billion, as measured by 2011 revenues, grew at a CAGR of 6% between 2006 and 2011 and, excluding the impact of foreign exchange, is projected to grow at a CAGR of 6% per year between 2011 and 2016, according to Vetnosis.

Zoetis is a global leader in the discovery, development, manufacture and commercialization of animal health medicines and vaccines, with a focus on both livestock and companion animals. According to Vetnosis, as measured by revenues in 2011, we are the largest business in the animal health medicines and vaccines business, and we are the market leader in all of the major regions in which we operate, with the exception of Western Europe, where we hold the number two position. Following this offering, we expect that we will be the largest standalone company exclusively focused on animal health medicines and vaccines.

Our business is diversified across many regions, species and product categories. Our products are sold in more than 120 countries, including developed markets and emerging markets, and our products are primarily used in eight different types of animals, which we refer to as species.

We believe we have the largest and most customer-focused sales organization in the industry and a reputation for providing value-added products, high-quality manufacturing and reliability of supply, with high brand recognition and strong brand loyalty. We have a track record of developing products that meet the needs of our customers, and we believe we are a leader in animal health R&D. From 2004 to 2011, we obtained approximately one-fourth of all animal health medicine approvals granted by the FDA, and approximately one-fifth of all animal health vaccine approvals granted by the USDA. We believe these strengths are important drivers of our leadership in the animal health industry.

 

96


Table of Contents

2011 revenues for top animal health businesses, in millions

 

LOGO

 

Sources: Zoetis combined financial statements for Zoetis revenues and Vetnosis for other animal health businesses’ revenues.

Livestock

The primary livestock species for the production of animal protein are cattle (both beef and dairy), swine, poultry, sheep and fish. Livestock health and production are essential to meeting the growing demand for animal protein of a global population that is increasing in size and standard of living, particularly in many emerging markets. As part of the global ecosystem, livestock health is critical to assuring a safe, sustainable global food supply and reducing the outbreak of infectious disease in both humans and animals. The livestock medicines and vaccines sector represented $13.1 billion of sales in 2011, or 60% of the total animal health medicines and vaccines market. This sector grew at a CAGR of 7% between 2006 and 2011 and, excluding the impact of foreign exchange, is projected to grow at a CAGR of 6% per year between 2011 and 2016, according to Vetnosis.

Factors influencing growth in demand for livestock medicines and vaccines include:

 

 

human population growth and increasing standards of living, particularly in many emerging markets;

 

 

consequently increasing demand for improved nutrition, particularly animal protein;

 

 

natural resource constraints, such as scarcity of arable land, fresh water and increased competition for cultivated land, resulting in fewer resources that will be available to meet this increased demand for animal protein; and

 

 

increased focus on food safety.

These and other factors have increased the demand for animal protein and the need for greater livestock production efficiency. The global population continues to grow in both size and standard of living, with people consuming an increasing amount of animal protein and dairy per capita. Recent projections by the United Nations suggest that the world will add over two billion people by 2050, mostly in developing countries.

Since the early 1960s, per capita consumption of milk in certain developed markets has almost doubled, meat consumption has more than tripled, and egg consumption has increased fivefold, according to the Food and

 

97


Table of Contents

Agriculture Organization of the United Nations, or the FAO. Current per capita consumption of animal protein and dairy products in emerging markets, including China, are a fraction of the consumption levels in developed markets. When coupled with increasing pressures on natural resources, this rising animal protein demand must be met more efficiently, using fewer production resources.

Animal health medicines and vaccines have contributed to improvements in production efficiency over the last 50 years by improving feed conversion ratios, production yields and cycle times and by reducing disease in animals. We believe that improvements in production efficiency will continue to depend on effective animal health products, such as vaccines to protect herds from disease, medicines to treat diseases and limit their spread and automated high-throughput devices, such as those used to vaccinate poultry eggs. Because of this dependence, we believe that animal health medicines and vaccines will continue to be among the most important tools used by livestock producers to meet their productivity imperative.

Livestock producers are exposed to (a) commodity price fluctuations, such as livestock feed prices, (b) the market price for animal protein products and (c) changes in the regulatory environment. Additionally, diseases in herds and flocks are a significant threat to livestock producer economics. The cost to livestock producers of animal health medicines and vaccines is small relative to other livestock production costs, including feed, and animal health medicines and vaccines help protect producers’ investments by treating and preventing diseases in herds and flocks before they become widespread, thus improving economic outcomes for producers. As a result, demand for animal health medicines and vaccines has typically been more stable than demand for other production inputs.

Threats to human health associated with the livestock industry are of growing concern to consumers, livestock producers and regulators and are another key area of concern that animal health medicines and vaccines help to address. These threats come in two basic forms—zoonotic diseases and foodborne illnesses.

Zoonotic diseases are diseases that can be transmitted between animals and humans, including potentially pandemic viruses, such as influenza, as well as infectious diseases, such as rabies, brucellosis and anthrax. Approximately 75% of the new diseases that have affected humans over the past ten years have been caused by zoonotic pathogens originating from animals or from products of animal origin, according to the FAO. Products that address the risk of zoonotic diseases include vaccines that protect animals against Lyme disease or rabies and parasiticides that kill intestinal parasites in animals, such as roundworms or hookworms.

Foodborne illness can arise from disease agents or contaminants that enter the food chain during the production and processing of animal-based foods. The Centers for Disease Control and Prevention estimates that approximately one in six Americans suffers from foodborne diseases each year. Products that help address the risk of foodborne illnesses include anti-infectives, such as those used to treat salmonella or E. coli infections in animals, and vaccines, such as those used to prevent salmonella in poultry. In the United States, outbreaks of foodborne illnesses linked to animal sources are estimated to create a loss of more than $8 billion per year due to illness, deaths and lost productivity, according to the FAO.

Companion animals

The primary companion animal species are dogs, cats and horses. Industry sources indicate that companion animals improve the physical and emotional well-being of pet owners. Pet ownership and spending per pet are increasing globally, and industry sources report that pet owners indicate a preference for reducing spending on other aspects of their lifestyle, including entertainment, clothing and household goods, before reducing spending on petcare. The companion animal medicines and vaccines sector represented $8.9 billion of sales in 2011, or 40% of the total animal health medicines and vaccines market. This sector grew at a CAGR of 6% between 2006 and 2011 and, excluding the impact of foreign exchange, is projected to grow at a CAGR of 5% per year between 2011 and 2016, according to Vetnosis.

 

98


Table of Contents

Factors influencing growth in demand for companion animal medicines and vaccines include:

 

 

economic development and related increases in disposable income, particularly in many emerging markets;

 

 

increasing pet ownership; and

 

 

companion animals living longer, increasing medical treatment of companion animals and advances in companion animal medicines and vaccines.

Approximately 78% of dog owners in the United States gave their dog(s) medications in 2010 as compared to 50% in 1998, and approximately 47% of cat owners in the United States treated their cat(s) with medications in 2010 as compared to 31% in 1998, according to the APPA. Further, economic development in many emerging markets is driving significant growth in pet ownership and spending in many of those markets. For example, pet ownership in Latin America (including Argentina, Brazil, Chile, Colombia, Mexico, and Venezuela) grew at a CAGR of 3% between 2007 and 2012, according to Euromonitor International data as of June 2012. Pet spending, which includes spending on pet food and non-prescription pet products, grew at a CAGR of 3% in the United States and a CAGR of 14% in Latin America between 2007 and 2012, according to Euromonitor International data as of June 2012.

The companion animal sector has been experiencing the use of more aggressive and expensive medical interventions, including an increase in the use of medicines and vaccines. Companion animal medicines and vaccines improve the quality of and extend the life of pets and help veterinarians achieve better medical outcomes. Advances in medicines and vaccines have created new opportunities for chronic care in pets for diseases associated with old age, such as dermatological infections, cardiovascular diseases, osteoarthritis and cancer. In addition, animal health medicines and vaccines businesses can increase convenience and compliance for pet owners by introducing medicines and vaccines with simplified dosage forms and delivery mechanisms.

Animal health industry distinctions from human health industry

The business of developing and marketing animal health medicines and vaccines shares a number of characteristics with the business of developing medicines and vaccines for human health. These similarities include complex and regulated product manufacturing, products that must be proven efficacious and safe in clinical trials to be approved by regulators, a reliance on new product development through R&D and products that are marketed based on labeled claims regarding impacts on health. However, there are also significant differences between the animal health medicines and vaccines and human health businesses, including:

 

 

animal health generally has faster, less expensive and more predictable R&D processes as well as more sustainable R&D pipelines;

 

 

animal health businesses often have more diversified product portfolios;

 

 

animal health sales representatives have better access to customer decision makers and generally spend more time with a customer on a sales visit;

 

 

animal health primarily has a self-pay nature; and

 

 

animal health products have less generic competition and higher brand loyalty.

R&D is faster, less expensive and more predictable and sustainable

R&D for animal health is generally faster and less expensive than for human health because it requires fewer clinical studies, involves fewer subjects and is conducted directly in the target species. Because there is no need to bridge from pre-clinical investigations in one species to the final target species, decisions on the potential efficacy and safety of products often can be made more quickly, and the likelihood of success often can be established earlier in development than in human health R&D.

 

99


Table of Contents

There are also differences in the composition of animal health R&D pipelines. While the development of new chemical and biological entities through new product R&D continues to play an important role, the majority of animal health R&D investment is focused on brand lifecycle development. New product R&D leverages discoveries of agribusiness, pharmaceutical and biotechnology R&D. Brand lifecycle development leverages existing animal health products by adding new species or claims, achieving approvals in new markets and creating new combinations and reformulations. The ability to leverage both the prior discoveries of other industries and of existing animal health R&D generally yields faster, less expensive and more predictable R&D processes and more sustainable R&D pipelines as compared to human health.

More diverse product portfolios

Animal health medicines and vaccines businesses have generally diversified product portfolios across many products and, in general, animal health medicines and vaccines businesses are less reliant on a small number of top selling key products than human health businesses. This contrasts with many large human health businesses that have significant product sales concentration. Animal health products are developed for multiple species, leading to greater product diversification than in human health. In addition, products are sold across different regions, which may have environmental, cultural, epidemiological and other differences that contribute to distinct product requirements in each region. As a result, animal health products often have a smaller market size, and the performance of any single product typically has less impact on an animal health medicines and vaccines business as compared to human health businesses. For example, in 2011, our top selling product line contributed less than 8% of our revenues, and our top ten best selling product lines contributed less than 38% of our revenues.

Partnership relationships with customers

The animal health medicines and vaccines industry typically uses a combination of sales representatives to inform customers about the attributes of animal health products and technical and veterinary operations specialists to provide advice regarding local, regional and global trends in animal health. These direct relationships allow animal health medicines and vaccines businesses to understand the needs of their customers and develop products to better meet those needs. Additionally, sales representatives focus on partnering with their customers to educate and support them on topics such as local disease awareness and to help them adopt new and more sophisticated animal health medicines and vaccines solutions, including the use of medicines and vaccines. As a result of these relationships, sales and consulting visits are typically longer and more meaningful, and sales representatives have better access to customer decision makers as compared to human health. However, some industry participants do continue to rely on distributors to market and sell their products, particularly in certain emerging markets.

Primarily self-pay

Livestock producers and pet owners generally pay for animal healthcare out-of-pocket. Purchasers make decisions without the influence of insurance companies or government payors that are often involved in product and pricing decisions in human healthcare. We believe that this dynamic results in less pricing pressure than in human health.

Livestock producers and veterinarians make the product and therapy decisions for livestock. Livestock producers more readily adopt new technologies and products that improve their profitability. Livestock producers are able to see measurable economic outcomes related to the use of animal health medicines and vaccines, as compared to human health in which outcomes can be less certain and more difficult to demonstrate. Therefore, we believe that animal health medicines and vaccines businesses can market new technologies and products at attractive price points.

Companion animal veterinarians continue to be key decision-makers and dispensers of medicines and vaccines for companion animals. Pet owners often purchase medicines and vaccines directly from veterinarians. As a result, the sale of animal health products directly to pet owners is a meaningful contributor to veterinary practice economics.

 

100


Table of Contents

Strong brand loyalty and less generic competition

There is no large, well-capitalized company principally focused on generic animal health products that exists as a global competitor in the industry. The reasons for this include the smaller average market size of each product opportunity, the importance of direct distribution and education to veterinarians and livestock producers and the primarily self-pay nature of the business. In addition, companion animal health products are often directly prescribed and dispensed by veterinarians. We believe that this dynamic results in less pricing pressure than in human health. For example, although Rimadyl lost patent exclusivity in the United States in 2001, our revenues from Rimadyl have increased 35% since 2001 despite generic competition.

The importance of quality and safety concerns to pet owners, veterinarians and livestock producers also contributes to animal health brand loyalty. As a result, we believe that significant brand loyalty to products often continues after the loss of patent-based and regulatory exclusivity.

Regional differences in animal health markets

The animal health medicines and vaccines market is characterized by meaningful differences in customer needs across different regions. This variability of needs means that the breadth of a business’s product portfolio and a real-time understanding of regional and local trends are key success factors for animal health medicines and vaccines businesses. Variability is due to a number of factors, including:

 

 

Economic differences. In developed markets, there are generally higher standards of living and a greater degree of disposable income. Emerging markets are generally characterized by a higher level of economic growth leading to a rapidly growing middle class with increasing disposable income. Higher levels of economic development are generally correlated with higher levels of consumption of animal protein as well as increased pet ownership and spending per pet.

 

 

Cultural differences. Dietary preferences and restrictions based on cultural traditions and trends shape livestock production and animal protein choices. The human-pet relationship also varies according to differing social norms and traditions, leading to differences in pet ownership and petcare standards.

 

 

Epidemiological differences. Degree of urbanization, endemic diseases, animal housing practices and veterinary public health standards can vary across regions. These factors can result in differences in the prevalence of certain bacterial and viral strains and disease dynamics.

 

 

Treatment differences. Utilization of different types of medicines and vaccines, in particular high technology products, differs across markets. In many emerging markets, as compared to developed markets, the level of sophistication in livestock production is lower but is becoming more industrialized and the medical treatment for companion animals is less established but is advancing. We have observed that the use of medicines and vaccines, including more sophisticated products, is increasing in many emerging markets, in both the livestock and companion animal sectors, to more closely resemble activity in developed markets.

 

 

Environmental differences. Differences in climate, in particular rainfall and temperature, and the availability of arable land and fresh water, can have meaningful impacts on livestock productivity. Climate conditions and seasonal weather patterns also influence infectious disease and parasite prevalence.

 

 

Regulatory differences. Regulatory standards differ across markets and impact the ability to introduce, market, manufacture and distribute certain types of animal health products.

We believe these regional differences are reflected in differing growth rates of sales of animal health medicines and vaccines in various markets.

 

101


Table of Contents

Business

Overview

Zoetis is a global leader in the discovery, development, manufacture and commercialization of animal health medicines and vaccines, with a focus on both livestock and companion animals. For more than 60 years, as a business unit of Pfizer, we have been committed to enhancing the health of animals and bringing solutions to our customers who raise and care for them. Measured by our revenues of $4.2 billion for the year ended December 31, 2011, we are the largest animal health medicines and vaccines business. We market a diverse range of products across four regions: the United States, Europe/Africa/Middle East, Canada/Latin America and Asia/Pacific; eight core species: the livestock species of cattle, swine, poultry, sheep, and fish, and the companion animal species of dogs, cats and horses; and five major product categories: vaccines, parasiticides, anti-infectives, medicinal feed additives and other pharmaceutical.

With our sales organization of approximately 3,400 employees, we directly market our portfolio of more than 300 product lines to livestock producers and veterinarians located in approximately 70 countries across North America, Europe, Africa, Asia, Australia and Latin America, and are a market leader in nearly all of the major regions in which we operate. Through our efforts to establish an early and direct presence in many emerging markets, such as Brazil, China and India, emerging markets contributed 27% of our revenues for the year ended December 31, 2011, which we believe makes us the largest animal health medicines and vaccines business as measured by revenues across emerging markets as a whole. In markets where we do not have a direct commercial presence, we generally contract with distributors that provide logistics and sales and marketing support for our products.

We believe our investments in the industry’s largest sales organization, which includes an extensive network of technical and veterinary operations specialists, our high-quality manufacturing and reliability of supply, and our long track record of developing products that meet customer needs, lead to enduring and valued relationships with our customers. From 2004 to 2011, we obtained approximately one-fourth of all animal health medicine approvals granted by the FDA, and approximately one-fifth of all animal health vaccine approvals granted by the USDA. The majority of our R&D programs focus on brand lifecycle development, which is defined as R&D programs that leverage existing animal health products by adding new species or claims, achieving approvals in new markets or creating new combinations and reformulations.

We believe our ability to successfully position our diverse portfolio of products with high brand recognition in attractive markets and execute our operating plan has contributed to our financial performance over the last several years. For the nine months ended September 30, 2012, our revenues were $3.2 billion, reflecting growth of 2% compared to the nine months ended October 2, 2011. In 2011 and 2010, our revenues were $4.2 billion and $3.6 billion, reflecting growth of 18% and 30% compared to the prior year periods.

As a result of the impact of recent significant acquisitions and related government-mandated divestitures on the revenue numbers in our statement of operations, during the nine months ended September 30, 2012 and October 2, 2011 and the years ended December 31, 2011, 2010 and 2009, the growth trend on our existing portfolio from year to year is not readily apparent. We believe that it is not only important to understand overall revenue growth, but also existing portfolio growth year over year. As such, we utilize “base revenue growth.” Base revenue growth is defined as revenue growth excluding the impact of incremental revenues from recent significant acquisitions, government-mandated divestitures and foreign exchange. Our base revenue growth was 5% in the nine months ended September 30, 2012, 7% in 2011 and 7% in 2010 compared to the prior year periods. For a more complete description of base revenue growth, see “Management’s discussion and analysis of financial condition and results of operations—Analysis of the combined statements of operations.”

For the nine months ended September 30, 2012, our Adjusted net income (a non-GAAP financial measure) was $482 million, reflecting growth of 27% compared to the nine months ended October 2, 2011. In 2011 and 2010, our

 

102


Table of Contents

Adjusted net income was $503 million and $275 million, reflecting growth of 83% and 46% compared to the prior year periods. For the nine months ended September 30, 2012, our net income attributable to Zoetis was $446 million, reflecting growth of 89% compared to the nine months ended October 2, 2011. In 2011 and 2010, our net income attributable to Zoetis was $245 million and $110 million, reflecting growth of 123% and 210% compared to the prior year periods. For a reconciliation of Adjusted net income to net income attributable to Zoetis, see “Management’s discussion and analysis of financial condition and results of operations—Adjusted net income.”

We organize and operate our business in four regions, and our products are sold in more than 120 countries. Within each of these regional segments we offer a diversified product portfolio for both livestock and companion animal customers in order to capitalize on regional and local trends and customer needs.

Our livestock products primarily prevent or treat conditions, enabling the cost-effective production of safe, high-quality animal protein. Growth in the livestock medicines and vaccines sector is driven by human population growth and increasing standards of living, consequently increasing demand for improved nutrition, particularly animal protein, increasing natural resource constraints driving a need for enhanced productivity, and increased focus on food safety. Livestock products represented approximately 66% of our revenues for the year ended December 31, 2011.

Our companion animal products improve the quality of and extend the life of pets, increase convenience and compliance for pet owners and help veterinarians improve the quality of care they provide. Growth in the companion animal medicines and vaccines sector is driven by economic development and related increases in disposable income, increasing pet ownership, companion animals living longer, increasing medical treatment of companion animals and advances in animal health medicines and vaccines. Companion animal products represented approximately 34% of our revenues for the year ended December 31, 2011.

We have a diversified product portfolio with revenues generated in different regions for different species by different product categories. We refer to a single product brand in all of its dosage forms for all species as a product line. Our global product portfolio is diversified across more than 300 product lines. In 2011, our top selling product line, the ceftiofur line, contributed less than 8% of our revenues, and our top ten product lines contributed less than 38% of our revenues.

Our vaccine products prevent diseases of the respiratory, gastrointestinal and reproductive tracts or induce an immune response. Our parasiticide products prevent or eliminate external and internal parasites such as fleas, ticks and worms. Our anti-infective products prevent, kill or slow the growth of bacteria, fungi or protozoa. We also provide medicines, nutrients and probiotics to livestock through our medicinal feed additive products. Our other pharmaceutical products include pain and sedation, oncology and antiemetic products. Our product portfolio is enhanced by complementary businesses, including diagnostics, genetics, devices and services such as dairy data management, e-learning and professional consulting.

 

103


Table of Contents
LOGO

Following this offering, we expect that we will be the largest standalone company exclusively focused on animal health medicines and vaccines. Our largest competitors are all captive divisions of large pharmaceutical companies in which animal health sales comprise a relatively small portion of the overall business. By becoming a separate public company, we will be able to focus exclusively on our animal health business with increased strategic and operational flexibility.

While the development of new chemical and biological entities through new product R&D continues to play an important role in our growth strategies, the majority of our R&D investment is focused on brand lifecycle development. New product R&D leverages discoveries of agribusiness, pharmaceutical and biotechnology R&D. Our brand lifecycle development leverages our existing product portfolio to expand our product lines by adding new species or claims, achieving approvals in new countries and creating new combinations and reformulations. Our ability to leverage both the discoveries of other industries and of our existing R&D generally yields a faster, less expensive and more predictable R&D process and a more sustainable R&D pipeline as compared to human health.

 

104


Table of Contents

We believe we are the industry leader in animal health R&D. From 2004 to 2011, we obtained approximately one-fourth of all animal health medicine approvals granted by the FDA, and approximately one-fifth of all animal health vaccine approvals granted by the USDA. The majority of our R&D programs focus on brand lifecycle development, which is defined as R&D programs that leverage existing animal health products by adding new species or claims, achieving approvals in new markets or creating new combinations and reformulations.

Our business segments

The animal health medicines and vaccines market is characterized by meaningful differences in customer needs across different regions. This is due to a variety of factors, including:

 

 

economic differences, such as standards of living in developed markets as compared to emerging markets;

 

 

cultural differences, such as dietary preferences for different animal proteins, pet ownership preferences and petcare standards;

 

 

epidemiological differences, such as the prevalence of certain bacterial and viral strains and disease dynamics;

 

 

treatment differences, such as utilization of different types of medicines and vaccines, in particular high technology products;

 

 

environmental differences, such as seasonality, climate and the availability of arable land and fresh water; and

 

 

regulatory differences, such as standards for product approval and manufacturing.

As a result of these differences, among other things, we organize and operate our business in four regions: the United States, Europe/Africa/Middle East, Canada/Latin America and Asia/Pacific. Within each of these regional segments, we offer a diversified product portfolio for both livestock and companion animal customers so that we can capitalize on local trends and customer needs. Our business segments are:

 

 

United States with revenues of $1,294 million and $1,659 million that represented 41% and 39% of total revenues for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively.

 

 

Europe/Africa/Middle East with revenues of $799 million and $1,144 million that represented 25% and 27% of total revenues for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. Key developed markets in this segment include the United Kingdom, Germany and France. Key emerging markets in this segment include Russia, Turkey and South Africa.

 

 

Canada/Latin America with revenues of $549 million and $788 million that represented 18% and 19% of total revenues for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. The developed market in this segment is Canada. Key emerging markets in this segment include Brazil and Mexico.

 

 

Asia/Pacific with revenues of $518 million and $642 million that represented 16% and 15% of total revenues for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. Key developed markets in this segment include Australia, Japan, New Zealand and South Korea. Key emerging markets in this segment include India and China.

For additional information regarding our performance in each of these regional segments and the impact of foreign exchange rates as well as significant acquisitions that Pfizer completed in recent years, see “Management’s discussion and analysis of financial condition and results of operations.”

Our global scale and scope enable us to leverage our diversified product portfolio as well as our understanding of animal health industry trends across different regions and customer types. Our global product portfolio is

 

105


Table of Contents

diversified across more than 300 product lines, and our products are sold in more than 120 countries, with operations in developed markets and emerging markets. The markets we consider to be emerging markets contributed approximately 27% of our revenues for the year ended December 31, 2011. Continuing to expand in emerging markets is a core element of our growth strategy, which we believe will continue to make us the largest animal health medicines and vaccines business as measured by revenues across emerging markets as a whole.

Our history

As a business unit of Pfizer, our business has been built over the course of more than 60 years, with key developments including the following:

 

Year

  

Event(s)

1952    Pfizer established the Agricultural Division to promote Terramycin
1988   

Agricultural Division renamed Pfizer Animal Health

1995    Pfizer acquired SmithKline Beecham Animal Health, expanding our business into vaccines and companion animal markets
1997   

Launched Rimadyl, the first approved non-steroidal anti-inflammatory for dogs; although Rimadyl lost patent exclusivity in the United States in 2001, our revenues from Rimadyl have increased 35% since 2001 despite generic competition

2003   

Pfizer acquired Pharmacia Corporation, which added a variety of animal health assets, most notably strengthening our cattle portfolio

 

Established dedicated R&D headquarters in Kalamazoo, Michigan

 

Pfizer acquired CSL Animal Health, strengthening our global pipeline and portfolio of vaccines in Australia and New Zealand

2004    Launched Draxxin, a premium anti-infective for livestock delivering a full course of therapy in one dose
2006    Launched Convenia, the first antibiotic for skin infections in dogs and cats that provides an entire course of therapy in one injection
2007   

Pfizer acquired Embrex, Inc., expanding our business into poultry devices and vaccines

 

Launched Cerenia, the first antiemetic therapy developed specifically for dogs

2008    Pfizer acquired Catapult Pty Ltd. and Bovigen LLC, expanding our business into animal genetics
2009   

Pfizer acquired Wyeth, and with it Fort Dodge Animal Health, providing key brands such as ProHeart for dogs, Synovex for cattle and Innovator/Duvaxyn West Nile Virus vaccine for horses, as well as a complementary poultry vaccines business

 

Pfizer acquired Vetnex Animal Health Ltd. in India, further expanding in a key emerging market

2010   

Pfizer acquired Microtek International, Inc., expanding our business into aquaculture vaccines

 

Pfizer acquired Synbiotics Corporation, strengthening our position in veterinary diagnostics

2011   

Pfizer acquired King Pharmaceuticals, Inc. and with it Alpharma, strengthening our position in the poultry business with a medicinal feed additives business and further strengthening our position in the cattle and swine businesses

 

Established vaccine manufacturing capabilities in China through formation of the Jilin Pfizer Guoyuan joint venture

 

Launched Improvest in the United States, the first product to reduce boar taint without the need for surgical castration

 

106


Table of Contents

Our competitive strengths

We believe that the following strengths create sustainable competitive advantages that will enable us to continue our growth as a leader in the animal health medicines and vaccines industry:

Global leader with scale and scope

Zoetis is a global leader in the discovery, development, manufacture and commercialization of animal health medicines and vaccines. Measured by revenues, we were the largest animal health medicines and vaccines business in the world in 2011. We had approximately $3.2 billion and $4.2 billion in revenues and $446 million and $245 million of net income attributable to Zoetis for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively.

According to Vetnosis, as measured by revenues in 2011, we were the market leader in all of the major regions in which we operate, with the exception of Western Europe, where we held the number two position. We believe we have an industry-leading global footprint, with products sold in more than 120 countries and direct operations in approximately 70 countries, which provides us with direct access to our customer base through customer relationships and with early knowledge of local emerging trends and customer needs.

Following this offering, we expect that we will be the largest standalone company exclusively focused on animal health medicines and vaccines. By becoming a separate public company, we will be able to focus exclusively on our animal health business with increased strategic and operational flexibility.

Established direct presence in emerging markets

We have an established direct presence in many important emerging markets, and we are a leader in many of the emerging markets in which we operate. We believe this direct presence has enabled us to become the largest animal health medicines and vaccines business as measured by revenues across emerging markets as a whole. Emerging markets contributed approximately 27% of our revenues for the year ended December 31, 2011. In 2011, we experienced 12% base revenue growth in our Asia/Pacific segment and 9% base revenue growth in our Canada/Latin America segment.

For example, we have a strong direct presence in Brazil where we have manufacturing sites in Guarulhos and Campinas and an R&D site in São Paulo. We believe this direct presence has contributed to our role as a market leader in Latin America and allows us to meet the needs of our customers in Brazil and in other emerging markets in this region.

In addition, we have more than thirty years of direct presence in India and currently maintain a strong commercial and manufacturing presence in India with specialized livestock and companion animal operations. We have a manufacturing site in Haridwar, India and an R&D site in Thane, India, where we are developing products specifically for the Indian market, as well as products for other regions. Through the acquisition of Vetnex Animal Health Ltd. in 2009, we further expanded our presence in India.

We also have a strong direct presence in China. We have three manufacturing sites in China and we believe that we have the largest sales organization of any multinational animal health medicines and vaccines business in China. In 2011, we established the Jilin Pfizer Guoyuan joint venture in China, which will provide us with biological manufacturing capabilities and access to local swine vaccine candidates.

Diversified product portfolio

We market products across eight core species and five major product categories. Livestock products represented approximately 66% of our revenues and companion animals products represented approximately 34% of our revenues for the year ended December 31, 2011.

 

107


Table of Contents

Generally, because we have lower product sales concentration than many of our competitors, the performance of any single product has less impact on our company as compared to other, less-diversified animal health businesses. In 2011, our top selling product line contributed less than 8% of our revenues, and our top ten best selling product lines contributed less than 38% of our revenues.

According to Vetnosis, as measured by revenues in 2011 on a global basis, our product portfolio ranked number one in anti-infectives, which represented approximately 31% of our revenues, number two in medicinal feed additives, which represented approximately 8% of our revenues, number two in vaccines, which represented approximately 26% of our revenues, and number three in parasiticides, which represented approximately 15% of our revenues.

The depth of our product portfolio enables us to address the varying needs of different customers with a high degree of expertise. Our medicines and vaccines portfolio is enhanced by complementary businesses, including diagnostics, genetics, devices and services such as dairy data management, e-learning and professional consulting.

Leader in direct sales and marketing with strong customer relationships

We believe our sales organization, consisting of approximately 3,400 employees, is the largest in our industry, with direct operations in approximately 70 countries. Our sales organization is supported by our technical and veterinary operations specialists, who advise our customers with in-depth technical and medical expertise and disease education. This allows us to offer animal healthcare solutions for both livestock producers and veterinarians and simultaneously strengthen our partnership relationships with these customers. In addition, our direct global presence supports specialized local R&D initiatives, allows us to rapidly capitalize on market-specific situations and provides a global platform for R&D and business expansion.

Our commercial model emphasizes direct selling, and we believe we are less reliant on distributors than our competitors. We believe we achieve both stronger customer relationships and better economic returns on our products by emphasizing these direct relationships with veterinarians and livestock producers. Our direct relationships create a high level of regional and local specialization and allow us to focus on partnering with our customers to educate and support them on topics such as disease awareness and to help them adopt new and more sophisticated animal health solutions, including the use of medicines and vaccines. As a result, we believe veterinarians and livestock producers increasingly view us as advisors.

Leader in product development—new product R&D and brand lifecycle development

We believe that we are a leader in animal health R&D, both through our own product development capabilities as well as through our leverage of external product development partnerships. We have a track record of developing products that meet the needs of our customers. For example, for the convenience of livestock producers and veterinarians, we have introduced Draxxin, which delivers a full course of antibiotics in one injection. Similarly, we have introduced injectable products that we believe to be more convenient for veterinarians and pet owners, including Convenia, which provides a full course of antibiotics in one injection, and ProHeart 6, which provides six months of heartworm prevention in one injection.

From 2004 to 2011, we obtained approximately one-fourth of all animal health medicine approvals granted by the FDA, and approximately one-fifth of all animal health vaccine approvals granted by the USDA. While the development of new chemical and biological entities through new product R&D continues to play an important role in our growth strategies, the majority of our R&D investment is focused on brand lifecycle development, which is defined as R&D programs that leverage existing animal health products by adding new species or claims, achieving approvals in new markets or creating new combinations and reformulations. New product R&D leverages discoveries of agribusiness, pharmaceutical and biotechnology R&D. Our ability to leverage both the discoveries of other industries and of our existing R&D generally yields a faster, less expensive and more predictable R&D process and a more sustainable R&D pipeline as compared to human health.

 

108


Table of Contents

High-quality products delivered reliably by our world-class manufacturing operations

We believe that we are a leader in manufacturing quality and in supply reliability. We have strong globally managed and coordinated quality control and quality assurance programs in place at our manufacturing sites, and conduct internal and external inspections and audits at these sites. Our manufacturing sites experienced approximately 170 regulatory inspections globally between 2007 and 2011, with no findings that required material remediation or other penalties. In addition, our regional and global manufacturing teams seek to ensure that all of our CMOs adhere to our standards of manufacturing quality, and they are regularly audited.

We utilize a diversified network of proprietary manufacturing sites and CMOs to maximize operational efficiencies and to help meet demand for our products. Our proprietary manufacturing network is based on centralized oversight of a system of “anchor” and “satellite” sites to maximize cost efficiencies. Additionally, we co-locate R&D centers at many of our manufacturing sites in order to embed production design into the R&D process and to facilitate the efficient transfer of R&D projects to commercial-scale manufacturing.

The breadth and reliability of our manufacturing and supply chain enable us to produce medicines and vaccines for distribution in all major regions globally. Our manufacturing and supply chain provide us with a global platform for continued expansion. Due to the geographic breadth of our manufacturing operations, we believe that we are able to introduce products quickly and efficiently.

Dedicated employees and experienced management team

Our employees include skilled animal healthcare professionals helping to sustain and grow our business. Our research team has an average tenure of more than ten years, and our sales organization employees have, on average, been with us for more than five years. Additionally, with our veterinarians and veterinary researchers, we believe that we have more professionally educated animal health experts on our team than any of our competitors.

Several members of our executive team lead and have led important and influential animal health industry organizations, such as the International Federation for Animal Health and the Animal Health Institute, helping to ensure that we are a leader in identifying and addressing key market trends and challenges.

Track record of top-line revenue growth and significant cash flow generation

We have generated revenue growth at a CAGR of 24% over the three years ended December 31, 2011, and base revenue growth of 7% and 7% for the years ended December 31, 2011 and December 31, 2010, respectively. For the nine months ended September 30, 2012, we generated revenue growth of 2% and base revenue growth of 5% as compared to the nine months ended October 2, 2011. Our revenue growth has been driven by increased demand across our diversified product portfolio and acquisitions. For a description of base revenue growth, see “Management’s discussion and analysis of financial condition and results of operations—Analysis of the combined statements of operations.”

Our business is diversified across many regions, species and product categories. In 2011, our top selling product line contributed less than 8% of our revenues, and our top ten best selling product lines contributed less than 38% of our revenues. Our revenue growth, driven by a diverse product portfolio and acquisitions, has generated significant cash flow.

Our growth strategies

We are committed to enhancing the health of animals and bringing solutions to our customers who raise and care for them. We intend to continue to grow our business by pursuing the following core strategies:

Leverage our direct local presence and strong customer relationships

With our sales organization of approximately 3,400 employees, we directly market our portfolio of more than 300 product lines to livestock producers and veterinarians located in approximately 70 countries and provide

 

109


Table of Contents

additional support through our technical and veterinary operations specialists. We believe this model and the brand loyalty enjoyed by our existing products provide us with operational efficiencies and access to an array of new growth opportunities, including a platform to encourage the adoption by our customers of more sophisticated animal health products. We believe our close contact with customers provides us with an in-depth understanding of their businesses, which allows us to develop products that address unmet customer needs.

We also believe that we have a high degree of specialized knowledge of our markets and that our local sales organization, regional R&D presence, global supply chain infrastructure and reliable delivery of high-quality products that are relevant for local diseases and challenges will continue to differentiate us from our competitors. Our brand lifecycle development R&D projects are a result of, among other things, our ability to leverage our global platform of direct selling and strong customer relationships.

Further penetrate emerging markets

Human population and economic development are also driving increased demand for animal protein in many emerging markets. In addition, rising standards of living in many emerging markets are associated with an increase in pet ownership and spending per pet.

We believe we are well-positioned in many emerging markets, based on our diverse product portfolio and our regional and local focus, and that we have further opportunities to expand in emerging markets by reaching new customers, by introducing more of our products and by supporting the adoption by our customers of more sophisticated animal health products, such as new vaccines and single-injection anti-infectives, including Draxxin for livestock and Convenia for companion animals. Furthermore, we believe that consolidation of livestock producers in certain emerging markets will drive adoption of our products, as they seek to achieve greater benefits of scale.

We believe we will be able to efficiently develop and market new products that respond to the needs of our emerging market customers and provide strong customer service and technical support in these markets.

Pursue new product development and value-added brand lifecycle development to extend our product portfolio

We intend to continue to develop and grow our product portfolio by developing new chemical and biological entities through new product R&D as well as by expanding our product lines by adding new species or claims, achieving approvals in new countries and creating new combinations and reformulations. For example, the periodic emergence of novel bacterial and viral strains provides opportunities for new product R&D and brand lifecycle development of our existing product lines. Our R&D efforts enable us to deliver innovative products to address unmet needs and evolve our product lines so they remain relevant for our customers. We leverage our strong direct presence in many regions, which we believe allows us to cost-effectively develop and introduce new products, including brand lifecycle development products.

The majority of our R&D programs focus on brand lifecycle development, which is defined as R&D programs that leverage existing animal health products by adding new species or claims, achieving approvals in new markets or creating new combinations and reformulations. Subject to certain restrictions, we also expect to maintain access to Pfizer’s proprietary compound library and database to develop new products pursuant to the R&D collaboration and license agreement.

Remain the partner of choice for access to new products and technologies

We intend to continue to expand our extensive network of research partnerships around the globe in order to gain access to new technologies, pharmaceutical targets and vaccine antigens. Through participation in over 100 research alliances with leading universities and research institutes, we support cutting-edge research and secure the right to develop and commercialize new products and technologies. We participate as the sole industry partner in a number of multi-institution research alliances that are supported by an investment of over $100

 

110


Table of Contents

million from local or regional government funds. Examples of these key research alliances include our partnership with several European universities in a research consortium that was awarded approximately $11 million from the European Union to progress research into a number of economically important parasite vaccines, as well as our 2010 partnership with the Easter Bush Research Consortium, an alliance of four top research centers in the U.K. focused on progressing research for the prevention and treatment of livestock diseases. In addition, once we become a standalone public company, we intend to explore opportunities to enter into collaboration agreements and external alliances with other parties, including parties that may have chosen not to collaborate with us while we were a business unit of Pfizer.

In the past we have benefited from Pfizer’s acquisitions of large pharmaceutical companies with animal health operations. In the future, we intend to continue to grow our business through smaller scale acquisitions, asset purchases, in-licensing transactions, supply and distribution agreements and other strategic partnerships. We have completed numerous business development transactions in the last five years to support our growth. In 2007, we entered into the poultry segment through the acquisition of Embrex, Inc., a biotechnology company with a focus on in ovo delivery of poultry vaccines. In 2009, we licensed novel food safety vaccines for livestock from Epitopix LLC. Through the acquisition of Vetnex Animal Health Ltd. in 2009, we expanded our presence in India and gained access to branded generics manufacturing and development. In 2011, we established the Jilin Pfizer Guoyuan joint venture in China, which will provide us with biological manufacturing capabilities and access to local swine vaccine candidates.

Continue to provide high-quality products and improve manufacturing production margins

Our global commercial and manufacturing teams collaborate on various operational efficiency initiatives, including yield improvements, procurement, site and area synergies and manufacturing support rationalization, intended to improve our manufacturing production margins. These operational efficiency initiatives have delivered consistent gross margin improvements for our legacy products, and as we have integrated acquisitions we have also applied these operational efficiency initiatives to improve production margins. Following this offering, we intend to continue our efficiency improvement programs, including Six Sigma and Lean capabilities.

We believe that we are a leader in manufacturing quality and in supply reliability. Our manufacturing and supply chain provide us with a global platform for continued expansion, including in emerging markets, and we believe that we will continue to increase our production efficiencies and expand production margins as our business grows.

Expand into complementary businesses to become a more complete, trusted partner in providing solutions

We intend to continue to expand our presence in complementary businesses, including diagnostics, genetics, devices and services. As part of our 2007 acquisition of Embrex, Inc., we entered into the business of poultry devices, which facilitate in ovo vaccine delivery. In 2008, we entered the livestock genetics business through the acquisition of Bovigen LLC and Catapult Pty Ltd. In 2010, we entered the complementary business of animal diagnostics through the acquisition of Synbiotics Corporation.

We also intend to expand our complementary services, including dairy data management, e-learning and professional consulting, to help our customers improve their practice management capabilities and production efficiencies. We believe that these expanded offerings, supported by our technical expertise, will drive an outcomes-based approach to animal healthcare that has the potential to generate incremental revenues, as well as increase customer loyalty and sales of our products.

Our products

Since the inception of our business, we have focused on developing a broad portfolio of animal health products. Our product portfolio has grown to a total of more than 300 product lines. We have comprehensive product lines for both livestock and companion animals across each of our major product categories.

 

111


Table of Contents

Our major product categories are:

 

 

vaccines: biological preparations that prevent diseases of the respiratory, gastrointestinal and reproductive tracts or induce a specific immune response;

 

 

parasiticides: products that prevent or eliminate external and internal parasites such as fleas, ticks and worms;

 

 

anti-infectives: products that prevent, kill or slow the growth of bacteria, fungi or protozoa;

 

 

medicinal feed additives: products that provide medicines, nutrients and probiotics to livestock; and

 

 

other pharmaceutical: complementary products, such as pain and sedation, oncology and antiemetic products.

Our remaining revenues are derived from other product categories, such as nutritionals and agribusiness, as well as products in complementary areas, including diagnostics, genetics, devices and services. We believe many of these complementary areas represent potential growth opportunities for our business to expand in the future.

Historically, a substantial portion of our products and revenues have been the result of brand lifecycle development. For example, the first product in our ceftiofur line was an anti-infective approved for treating Bovine Respiratory Disease in cattle that was administered via intramuscular injection. Through follow-on studies and reformulations, we have expanded the product line into additional cattle claims and administration routes as well as other species and regions. Several products in the line provide a full course of therapy in one injection. The ceftiofur product line currently includes the brands Excede, Excenel and Naxcel.

In addition to brand lifecycle development, we also pursue the development of new chemical and biological entities through new product R&D as part of our growth strategies. Examples of our first-in-class or best-in-class products that we have launched in the past ten years and products that we believe may represent platforms for future brand lifecycle development include:

 

 

Draxxin, a novel antibiotic for livestock that delivers a full course of therapy in one dose, launched in 2003;

 

 

Inforce, the first and only respiratory vaccine for cattle that prevents respiratory disease caused by bovine respiratory syncytial virus (BRSV) while also aiding in the prevention of infectious bovine rhinotracheitis (IBR) and parainfluenza3 (PI3), launched in 2010;

 

 

Improvac/Improvest, the only product that reduces boar taint in male swine without surgical castration, launched in 2004 in Australia and New Zealand and in 2011 in the United States;

 

 

Convenia, the first single-injection anti-infective for common bacterial skin infections in cats and dogs, launched in 2006; and

 

 

Palladia, the first drug to be approved by the FDA for treating cancer in dogs, launched in 2009.

We pursue the development of new vaccines for emerging infectious diseases, with an operating philosophy of “first to know and fast to market.” Examples of the successful execution of this strategy include the first equine vaccine for West Nile Virus in the United States and European Union and the first swine vaccine for Pandemic H1N1 Influenza Virus in the United States.

 

112


Table of Contents

Our product lines and products that represented approximately 1% or more of our revenues in 2011 include:

Livestock products

 

Product line / product

  

Description

  

Primary species

Vaccines

     
Bovishield line    Aid in preventing diseases, including infectious bovine rhinotracheitis (IBR), bovine viral diarrhea (BVD, Types 1 and 2), parainfluenza3 (PI3) virus and bovine respiratory syncytial virus (BRSV), Leptospira borgpetersenii, L. pomona, L. grippotyphosa, L. canicola and L. icterohaemorrhagiae, depending on formulation    Cattle
Improvac / Improvest    Vaccination to reduce boar taint, as an alternative to surgical castration    Swine
RespiSure line    Aid in preventing chronic pneumonia caused by Mycoplasma hyopneumoniae    Swine
Rispoval line    Aid in preventing three key viruses involved in cattle pneumonia—BRSV, PI3 and BVD—as well as other respiratory diseases, depending on formulation    Cattle

Parasiticides

     
Cydectin    Injectable or pour-on endectocide to treat and control internal and external cattle parasites, including gastrointestinal roundworms, lungworms, cattle grubs, mites and lice    Cattle, sheep
Dectomax    Injectable or pour-on endectocide, characterized by extended duration of activity, for the treatment and control of internal and external parasite infections    Cattle, swine

Anti-infectives

     
Aureomycin    Provides livestock producers treatment and convenience against a wide range of respiratory, enteric and reproductive diseases    Cattle, poultry, sheep, swine
BMD    Aid in preventing and controlling enteritis, thereby increasing rate of weight gain and improving feed efficiency    Cattle, poultry, swine
Ceftiofur line    Broad-spectrum cephalosporin antibiotic active against Gram-positive and Gram-negative bacteria, including ß-lactamase-producing strains, with some formulations producing a single course of therapy in one injection    Cattle, horses, sheep, swine
Draxxin    Single-dose low-volume antibiotic for the treatment and prevention of bovine and swine respiratory disease, infectious bovine kerato conjunctivitis and bovine foot rot    Cattle, swine
Lincomycin line    Aid in preventing and treating Chronic Respiratory Disease associated with Mycoplasma and coliform infections in growing chickens and for the treatment of swine dysentery (bloody scours) associated with Brachyspira (Serpulina) hyodysenteriae    Swine, poultry
Spectramast    Aid in preventing and treating mastitis, delivered via intramammary administration. Same active ingredient as the ceftiofur line    Cattle
Terramycin    Antibiotic for the treatment of susceptible infections    Cattle, poultry, sheep, swine

Other

     
Eazi-Breed CIDR    Progesterone-releasing device for the control of the estrus cycle    Cattle, sheep
Embrex devices    Devices for enhancing hatchery operations efficiency through in ovo detection and vaccination    Poultry
Lutalyse    For estrus control or in the induction of parturition or abortion    Cattle, swine

 

113


Table of Contents

Companion animal products

 

Product line / product

  

Description

  

Primary species

Vaccines

     
Vanguard 4-way Lepto    Compatible with Vanguard High Titer and protects against leptospirosis caused by Leptospira canicola, L. grippotyphosa, L. icterohaemorrhagiae and L. pomona    Dogs
Vanguard High Titer    Aid in preventing canine distemper caused by canine distemper virus, infectious canine hepatitis caused by canine adenovirus type 1, respiratory disease caused by canine adenovirus type 2, canine parainfluenza caused by canine parainfluenza virus and canine parvoviral enteritis caused by canine parvovirus    Dogs

Parasiticides

     
Revolution    Protects against adult fleas, flea larvae, heartworm, ear mites and other parasites such as sarcoptic mites and American ticks for dogs and roundworms and hookworms for cats    Cats, dogs

Anti-infectives

     
Clavamox / Synulox    A broad-spectrum antibiotic and the first and only potentiated penicillin approved for use in dogs and cats    Cats, dogs
Convenia    Anti-infective for the treatment of common bacterial skin infections that provides a course of treatment in a single injection    Cats, dogs
Terramycin    Antibiotic for the treatment of susceptible ophthalmic infections    Cats, dogs, horses

Other

     
Rimadyl    For the relief of pain and inflammation associated with osteoarthritis and for the control of postoperative pain associated with soft tissue and orthopedic surgeries    Dogs

Sales and marketing

Our sales organization includes sales representatives and technical and veterinary operations specialists. In markets where we do not have a direct commercial presence, we generally contract with distributors that provide logistics and sales and marketing support for our products.

Our sales representatives visit our customers, including veterinarians and livestock producers, to inform, promote and sell our products and services. Our technical and veterinary operations specialists provide scientific consulting focused on disease management and herd management, training and education on diverse topics, including responsible product use, and generally have advanced veterinary medicine degrees. These direct relationships with customers allow us to understand their needs. Additionally, our sales representatives and technical and veterinary operations specialists focus on partnering with our customers to educate and support them on topics such as local disease awareness and to help them adopt new and more sophisticated animal health solutions, including through the use of our products. As a result of these relationships, our sales and consulting visits are typically longer, more meaningful and provide us with better access to customer decision makers as compared to human health. As of September 2012, our sales organization consisted of 3,400 employees.

Our livestock and companion animal products are primarily available by prescription through a veterinarian. On a more limited basis, in certain markets, we sell certain products through local agricultural and farming retail outlets, pharmacies and pet stores. We also market our products by advertising to veterinarians, livestock producers and pet owners.

 

114


Table of Contents

Customers

We consider veterinarians and a diverse set of livestock producers, including beef and dairy farmers as well as pork and poultry operations, to be the primary customers of our livestock products. We sell our livestock products directly to livestock producers (including aquaculture operations) and we also sell our products to veterinarians, third-party veterinary distributors and retail outlets that typically then sell the products to livestock producers. We also consider veterinarians to be the primary customers of our companion animal products. We primarily sell our companion animal products to veterinarians or to third-party veterinary distributors that typically then sell our products to veterinarians, and in each case veterinarians then typically sell our products to pet owners. Our two largest customers, both distributors, each represented approximately 8% of our revenues for the nine months ended September 30, 2012 and no other customer represented more than 6% of our revenues for the same period.

Research and development

Our R&D operations are comprised of our dedicated veterinary medicine research and development organization, research alliances and other operations focused on the development of our products.

While the development of new chemical and biological entities through new product R&D continues to play an important role in our growth strategies, the majority of our R&D investment is focused on brand lifecycle development. New product R&D leverages discoveries of agribusiness, pharmaceutical and biotechnology R&D. Our brand lifecycle development leverages our existing product portfolio to expand our product lines by adding new species or claims, achieving approvals in new countries and creating new combinations and reformulations. Our ability to leverage both the discoveries of other industries and of our existing R&D generally yields a faster, less expensive and more predictable R&D process and a more sustainable R&D pipeline as compared to human health. In addition, our other R&D activities include the development of branded generic products, genetics and diagnostics, as well as biodevices and engineering investments for in ovo applications.

We prioritize our R&D spending on an annual basis with the goal of transparency and alignment of research and business objectives and do not disaggregate our R&D operations by research stage or by therapeutic area for purposes of managing our business. Instead, we allocate capital based on return on investment criteria, taking into account customer needs, revenues and profitability potential, the probability of technical and regulatory success, and timing of launch. A centralized portfolio management function links development plans with financial systems to build a comprehensive view of the status of project progression and spend without a focus on spending by research stage or by therapeutic area. This comprehensive view facilitates our ability to set targets for project timing and goals for investment efficiency.

Following this offering, we will continue to offer our existing products, and pursuant to the R&D collaboration and license agreement, subject to certain restrictions, we also expect to maintain access to Pfizer’s proprietary compound library and database to develop new products. In addition, once we become a standalone public company, we intend to explore opportunities to enter into collaboration agreements and external alliances with other parties, including parties that may have chosen not to collaborate with us while we were a business unit of Pfizer. As a result, we will continue to offer and develop products that add value for veterinary professionals, livestock producers and pet owners.

As of September 30, 2012, we employed over 1,000 individuals in our global R&D operations, with over 100 research veterinarians and 175 scientists with PhDs. Our R&D headquarters is located in Kalamazoo, Michigan. We have R&D operations co-located with manufacturing sites in Melbourne, Australia, Louvain-la-Neuve, Belgium, Guarulhos, Brazil, Jilin, China, Olot, Spain and San Diego, California, Charles City, Iowa, and Lincoln, Nebraska in the United States. We co-located R&D operations with manufacturing sites to facilitate the efficient transfer of production processes from our laboratories to manufacturing sites. In addition, we maintain R&D operations in Zaventem, Belgium, Sao Paulo, Brazil, Mumbai, India, New Delhi, India and Durham, North Carolina in the United States. As part of the Separation, Pfizer conveyed to us its interest in each of these R&D facilities, with the

 

115


Table of Contents

exception of our Mumbai, India facility, which we expect Pfizer to transfer to us for agreed upon cash consideration after the completion of this offering, and, in the interim, we will lease the facility from Pfizer. Each site is designed to meet the regulatory requirements for working with chemical or infectious disease agents.

Our regional research operations are based in Australia, Belgium, Brazil, Canada, China, India, Spain and the United States, which enables local and regional development and the cultivation of relationships with academic institutions and non-government research organizations. Regional hubs are essential for local and regional development, particularly for vaccines that contain antigens unique to a region. We have a significant investment in a pharmaceutical sciences operation in India, including a good manufacturing practices-compliant pilot plant, with an extensive vendor network to support cost-effective external development activities.

Many of our research programs involve an external partnership, often with funding from a non-governmental organization or a government grant. We are generally responsible for providing technical direction and supplemental direct and indirect expertise in, as well as investment for, such external partnerships. Depending on the nature of the agreement, we may act as the commercialization partner for discoveries that originate during the period of collaborative research, or we may own or have exclusive rights to any intellectual property that enables the development of proprietary products or models.

Manufacturing and supply chain

Prior to the Separation, our products have been manufactured at both sites operated by Pfizer and sites operated by third-party contract manufacturing organizations, which we refer to as CMOs.

In connection with the Separation, Pfizer will transfer 29 manufacturing sites to us. These 29 sites consist of all of the sites operated by Pfizer that, immediately prior to the Separation, predominately manufactured animal health products. We refer to these 29 sites as our global manufacturing network. See “Certain relationships and related party transactions—Relationship with Pfizer—Global separation agreement.”

Our global manufacturing network utilizes centralized oversight of a system of 13 “anchor” and 16 “satellite” manufacturing sites to maximize cost efficiencies. In the year ended December 31, 2011, products that represented 58% of our cost of goods sold were manufactured at our global manufacturing network sites.

Our global manufacturing network is comprised of the following sites:

 

Anchor Sites

    

Satellite Sites

Site

  

Location

    

Site

  

Location

Catania

  

Italy

    

Campinas

  

Brazil

Charles City

  

Iowa, U.S.

    

Durham

  

North Carolina, U.S.

Chicago Heights

  

Illinois, U.S.

    

Eagle Grove

  

Iowa, U.S.

Guarulhos*

  

Brazil

    

Hannibal

  

Missouri, U.S.

Haridwar

  

India

    

Hsinchu

  

Taiwan

Jilin**

  

China

    

Laurinburg

  

North Carolina, U.S.

Kalamazoo***

  

Michigan, U.S.

    

Longmont

  

Colorado, U.S.

Lincoln

  

Nebraska, U.S.

    

Medolla

  

Italy

Louvain-la-Neuve

  

Belgium

    

Salisbury

  

Maryland, U.S.

Melbourne

  

Australia

    

San Diego

  

California, U.S.

Olot

  

Spain

    

Shenzhou

  

China

Suzhou

  

China

    

Van Buren

  

Arkansas, U.S.

Willow Island

  

West Virginia, U.S.

    

Victoria

  

British Columbia, Canada

       

Wellington

  

New Zealand

       

White Hall

  

Illinois, U.S.

       

Yantai

  

China

 

* This site is subject to a sale-leaseback arrangement with Pfizer, pursuant to which Pfizer will continue to operate the manufacturing operations at the site for a period of time. See “Certain relationships and related party transactions—Relationship with Pfizer—Brazil lease agreements.”
** This site is operated by the Jilin Pfizer Guoyuan joint venture.
*** Prior to the Separation, Pfizer’s manufacturing site in Kalamazoo manufactured both human health and animal health products. After the Separation, we will own the portions of this site that predominantly manufacture animal health products and Pfizer will own the portions of this site that predominantly manufacture human health products.

 

116


Table of Contents

Ownership of these facilities will be conveyed to us by Pfizer as part of the Separation, with the exception of our facilities in Hannibal, Missouri and San Diego, California, both of which are leased sites. The leasehold interests in these sites will be conveyed to us by Pfizer as part of the Separation.

Following the Separation, in addition to our global manufacturing network, Pfizer will continue to manufacture products for us at 14 Pfizer sites located in 13 countries pursuant to a master manufacturing and supply agreement. Included in these 14 Pfizer sites is our facility in Guarulhos, Brazil, where Pfizer will continue its manufacturing operations for a period of time. These 14 Pfizer sites consist of sites operated by Pfizer that, immediately prior to the Separation, predominately manufactured human health products. The decision to continue manufacturing our products at Pfizer sites will be reevaluated in the future based on several factors, including manufacturing costs and the needs of our business. See “Certain relationships and related party transactions—Relationship with Pfizer—Master manufacturing and supply agreement.”

The Pfizer sites that will continue to manufacture products for us following this offering pursuant to a master manufacturing and supply agreement are:

 

Site

  

Location

Amboise

   France

Andover

   Massachusetts, U.S.

Ascoli

   Italy

Cairo

   Egypt

El Jadida

   Morocco

Guarulhos*

   Brazil

Istanbul

   Turkey

Jakarta

   Indonesia

Kalamazoo**

   Michigan, U.S.

Nagoya

   Japan

Puurs

   Belgium

Ringaskiddy

   Ireland

Valencia

   Venezuela

West Ryde

   Australia

 

* This site is subject to a sale-leaseback arrangement with Pfizer, pursuant to which Pfizer will continue to operate the manufacturing operations at the site for a period of time. See “Certain relationships and related party transactions—Relationship with Pfizer—Brazil lease agreements.”
** Prior to the Separation, Pfizer’s manufacturing site in Kalamazoo manufactured both human health and animal health products. After the Separation, we will own the portions of this site that predominantly manufacture animal health products and Pfizer will own the portions of this site that predominantly manufacture human health products.

Additionally, following the Separation, our global manufacturing network will continue to be supplemented by approximately 200 CMOs. We select CMOs based on capacity and financial efficiency analyses, and our regional and global manufacturing teams seek to ensure that all of the CMOs we use adhere to our standards of manufacturing quality and are regularly audited.

We purchase certain raw materials necessary for the commercial production of our products from a variety of third-party suppliers. We utilize distributors as a part of our global supply chain, primarily for shipping and logistics support.

 

117


Table of Contents

We intend to continue our efficiency improvement programs in our manufacturing and supply chain organization, including Six Sigma and Lean capabilities, which are processes intended to improve manufacturing efficiency. We have strong globally managed and coordinated quality control and quality assurance programs in place at our global manufacturing network sites, and we regularly inspect and audit our global manufacturing network and CMO sites.

Our global manufacturing network sites experienced approximately 170 regulatory inspections globally between 2007 and 2011, conducted by the FDA, the USDA and similar agencies in areas outside of the United States. These inspections resulted in no findings that required material remediation or other penalties.

Competition

Although our business is the largest by revenues in the animal health medicines and vaccines industry, we face competition in the regions and sectors in which we compete. Principal methods of competition vary depending on the particular region, species, product category or individual product. Some of these methods include new product development, quality, price, service and promotion to veterinary professionals, pet owners and livestock producers.

Our primary competitors include animal health medicines and vaccines companies such as Merck Animal Health, the animal health division of Merck & Co., Inc. (formerly known as Intervet/Schering-Plough); Merial, the animal health division of Sanofi S.A.; Elanco, the animal health division of Eli Lilly and Company; Bayer Animal Health, the animal health division of Bayer AG; Novartis Animal Health, the animal health division of Novartis AG; and Boehringer Ingelheim Animal Health, the animal health division of Boehringer Ingelheim GmbH. In addition, we compete with hundreds of other animal health product producers throughout the world.

The level of competition from generic products varies from market to market. For example, the level of generic competition is higher in Europe and certain emerging markets than in the United States. However, there is no large, well-capitalized company focused on generic animal health products that exists as a global competitor in the industry. The reasons for this include the smaller average market size of each product opportunity, the importance of direct distribution and education to veterinarians and livestock producers and the primarily self-pay nature of the business. In addition, companion animal health products are often directly prescribed and dispensed by veterinarians.

Our livestock products tend to experience lower generic competition than our companion animal products for several reasons:

 

 

livestock producers tend to be loyal to medicines and vaccines that have been demonstrated to be efficacious; as medicines and vaccines are a small portion of a livestock producer’s total production costs and ineffective medicines and vaccines could result in the loss of animals, causing disproportionate harm to such producer’s investment. Therefore we believe that livestock producers value brand name medicines and vaccines and are reluctant to try alternatives to methods that have already been proven to be reliably effective;

 

 

the economic benefits of our livestock medicines and vaccines are easier to measure because livestock production success can be measured solely in economic terms, with the goal of livestock medicines and vaccines tied to better food production; and

 

 

the success of medicines and vaccines used on livestock is generally observed more quickly.

The importance of quality and safety concerns to pet owners, veterinarians and livestock producers also contributes to animal health brand loyalty. As a result, we believe that significant brand loyalty to products often continues after the loss of patent-based and regulatory exclusivity.

 

118


Table of Contents

Intellectual property

Our technology, brands and other intellectual property are important elements of our business. We rely on patent, trademark, copyright and trade secret laws, as well as regulatory exclusivity periods and non-disclosure agreements to protect our intellectual property rights. Our policy is to vigorously protect, enforce and defend our rights to our intellectual property, as appropriate.

Our product portfolio enjoys the protection of approximately 4,000 patents and 2,000 pending patent applications, filed in more than 60 countries, with concentration in our major market countries as well as other countries with strong patent systems, such as Australia, Brazil, Canada, Europe, Japan and the United States. Many of the patents and patent applications in our portfolio are the result of our own and Pfizer’s work, while other patents and patent applications in our portfolio were at least partially developed by, and are licensed to us, by third parties.

Patents for individual products extend for varying periods depending on the date of the patent filing or grant and the legal term of patents in the countries where such patents are obtained. Several patents cover the ceftiofur product line, including formulation and use patents that begin expiring in the United States in 2015, with others extending until 2024. Draxxin and Convenia are covered by patents in the United States with terms that expire in 2021 and 2023, respectively. The compound patent on doramectin, which is the active ingredient in Dectomax, an antiparasitic, has expired in all regions; however, process patents and the injectable formulation patent for this product do not expire in the United States until 2020 and 2016, respectively. The compound patent on selamectin, which is active in Revolution, a parasiticide, expires in the United States, Canada and Europe in 2014.

Additionally, many of our vaccine products are based on proprietary master seeds and proprietary or patented adjuvant formulations. We actively seek to protect our proprietary information, including our trade secrets and proprietary know-how, including by seeking to require our employees, consultants, advisors and partners to enter into confidentiality agreements and other arrangements upon the commencement of their employment or engagement.

In order to facilitate the Separation and allow Pfizer and our operations to continue with minimal interruption, Pfizer will license to us the right to use certain intellectual property rights in the animal health field. We will license to Pfizer the right to use certain of our trademarks and substantially all of our other intellectual property rights in the human health field and all other fields outside of animal health. In addition, Pfizer will grant us a transitional license to use certain of Pfizer’s trademarks and we will grant Pfizer a transitional license to use certain of our trademarks for a period of time following the completion of this offering.

Prior to the Separation, as a business unit of Pfizer, we had the ability to leverage Pfizer’s proprietary compound library and database to identify, research and develop compounds suitable as new product candidates for the animal health field. As part of the Separation, we intend to enter into an R&D collaboration and license agreement with Pfizer. Pursuant to the R&D collaboration and license agreement, subject to certain restrictions, we will have continued access to Pfizer’s compound library and database for a period of seven years and will have, subject to Pfizer’s approval, the possibility to exclusively license compounds from Pfizer that we develop under the R&D collaboration and license agreement using portions of Pfizer’s proprietary compound library and database. We believe that this agreement may help bolster our own post-Separation R&D capability to support the continued long-term viability of our product pipeline for animal health.

We seek to file and maintain trademarks around the world based on commercial activities in most regions where we have, or desire to have, a business presence for a particular product or service. We currently maintain more than 9,500 trademark applications and registrations in major regions, identifying goods and services dedicated to the care of livestock and companion animals.

Regulatory

The sale of animal health products is governed by the laws and regulations specific to each country in which we sell our products. To maintain compliance with these regulatory requirements, we have established processes,

 

119


Table of Contents

systems and dedicated resources with end-to-end involvement from product concept to launch and maintenance in the market. Our regulatory function actively seeks to engage in dialogue with various global agencies regarding their policies that relate to animal health products. In the majority of our markets, the relevant health authority is separate from those governing human medicinal products.

United States

United States Food and Drug Administration. The regulatory body that is responsible for the regulation of animal health pharmaceuticals in the United States is the Center for Veterinary Medicine, or the CVM, housed within the FDA. All manufacturers of animal health pharmaceuticals must show their products to be safe, effective and produced by a consistent method of manufacture as defined under the Federal Food, Drug and Cosmetic Act. The Agency’s basis for approving a drug application is documented in a Freedom of Information Summary. Post-approval monitoring of products is required by law, with reports being provided to the CVM’s Surveillance and Compliance group. Reports of product quality defects, adverse events or unexpected results are produced in accordance with the law. Additionally, we are required to submit all new information for a product, regardless of the source.

United States Department of Agriculture. The regulatory body in the United States for veterinary vaccines is the USDA. The USDA’s Center for Veterinary Biologics is responsible for the regulation of animal health vaccines, including immunotherapeutics. All manufacturers of animal health biologicals must show their products to be pure, safe, effective and produced by a consistent method of manufacture as defined under the Virus Serum Toxin Act. Post-approval monitoring of products is required. Reports of product quality defects, adverse events or unexpected results are produced in accordance with the agency requirements.

Environmental Protection Agency. The main regulatory body in the United States for veterinary pesticides is the Environmental Protection Agency, or the EPA. The EPA’s Office of Pesticide Programs is responsible for the regulation of pesticide products applied to animals. All manufacturers of animal health pesticides must show their products will not cause “unreasonable adverse effects to man or the environment” as stated in the Federal Insecticide, Fungicide, and Rodenticide Act. Within the United States, pesticide products that are approved by the EPA must also be approved by individual state pesticide authorities before distribution in that state. Post-approval monitoring of products is required, with reports provided to the EPA and some state regulatory agencies.

Outside of the United States

European Union. The European Medicines Agency, or EMA, is a decentralized agency of the EU, located in London. The agency is responsible for the scientific evaluation of medicines developed by pharmaceutical companies for use in the European Union. The agency has a veterinary review section distinct from the medical review section. The Committee for Veterinary Medicinal Products is responsible for scientific review of the submissions for pharmaceuticals and vaccines. The EMA makes the final decision on the approval of products. Once granted by the European Commission, a centralized marketing authorization is valid in all EU and European Economic Area-European Free Trade Association states. A series of Directives, Guidelines and EU Pharmacopeia Monographs provide the requirements for approval in the EU. In general, these requirements are similar to those in the United States, requiring demonstrated evidence of purity, safety, efficacy, and consistency of manufacturing processes.

Brazil. The Ministry of Agriculture, Livestock Production and Supply, or MAPA, is the regulatory body in Brazil that is responsible for the regulation and control of pharmaceuticals, biologicals and medicinal feed additives for animal use. MAPA’s regulatory activities are conducted through the Secretary of Agricultural Defense and its Livestock Products Inspection Department. In addition, regulatory activities are conducted at a local level through the Federal Agriculture Superintendence. These activities include the inspection and licensing of both manufacturing and commercial establishments for veterinary products, as well as the submission, review and

 

120


Table of Contents

approval of pharmaceuticals, biologicals and medicinal feed additives. MAPA is one of the most active regulatory agencies in Latin America, having permanent seats at several international animal health forums, such as Codex Alimentarius, World Organization for Animal Health and Committee of Veterinary Medicines for the Americas. MAPA was also recently invited to be a Latin American representative at International Cooperation on Harmonisation of Technical Requirements for Registration of Veterinary Medicinal Products, or VICH, meetings. Several normative instructions issued by MAPA have set regulatory trends in Latin America.

Australia. The Australian Pesticides and Veterinary Medicines Authority, or APVMA, is an Australian government statutory authority established in 1993 to centralize the registration of all agricultural and veterinary products into the Australian marketplace. Previously each State and Territory government had its own system of registration. The APVMA assesses applications from companies and individuals seeking registration so they can supply their product to the marketplace. Applications undergo rigorous assessment using the expertise of the APVMA’s scientific staff and drawing on the technical knowledge of other relevant scientific organizations, Commonwealth government departments and state agriculture departments. If the product works as intended and the scientific data confirms that when used as directed on the product label it will have no harmful or unintended effects on people, animals, the environment or international trade, the APVMA will register the product. As well as registering new agricultural and veterinary products, the APVMA reviews older products that have been on the market for a substantial period of time to ensure they still do the job users expect and are safe to use. The APVMA also reviews registered products when particular concerns are raised about their safety and effectiveness. The review of a product may result in confirmation of its registration or it may see registration continue with some changes to the way the product can be used. In some cases the review may result in the registration of a product being cancelled and the product taken off the market.

Rest of world. Country-specific regulatory laws have provisions that include requirements for certain labeling, safety, efficacy and manufacturers’ quality control procedures (to assure the consistency of the products), as well as company records and reports. With the exception of the European Union, most other countries’ regulatory agencies will generally refer to the FDA, USDA, European Union and other international animal health entities, including the World Organization for Animal Health, Codex Alimentarius, in establishing standards and regulations for veterinary pharmaceuticals and vaccines.

Global policy and guidance

Joint FAO/WHO Expert Committee on Food Additives. The Joint FAO/WHO Expert Committee on Food Additives is an international expert scientific committee that is administered jointly by the FAO and the World Health Organization, or WHO. They provide a risk assessment/safety evaluation of residues of veterinary drugs in animal products, exposure and residue definition and maximum residue limit proposals for veterinary drugs. We work with them to establish acceptable safe levels of residual product in food-producing animals after treatment. This in turn enables the calculation of appropriate withdrawal times for our products prior to an animal entering the food chain.

Advertising and promotion review. Promotion of ethical animal health products is controlled by regulations in many countries. These rules generally restrict advertising and promotion to those claims and uses that have been reviewed and endorsed by the applicable agency. We conduct a review of promotion material for compliance with the local and regional requirements in the markets where we sell animal health products.

Food Safety Inspection Service / generally recognized as safe. The FDA is authorized to determine the safety of substances (including “generally recognized as safe” substances, food additives and color additives), as well as prescribing safe conditions of use. However, although the FDA has the responsibility for determining the safety of substances, the Food Safety and Inspection Service, the public health agency in the USDA, still retains, under the tenets of the Federal Meat Inspection Act and the Poultry Products Inspection Act and their implementing regulations, the authority to determine that new substances and new uses of previously approved substances are suitable for use in meat and poultry products.

 

121


Table of Contents

Employees

We expect we will have more than 9,500 employees worldwide following the Separation, which we expect will include approximately 3,900 employees in the United States and approximately 5,600 in other jurisdictions. We anticipate, that approximately 3,400 and 4,000 of these employees will be sales or manufacturing employees, respectively. Some of these employees are members of unions, works councils, trade associations or are otherwise subject to collective bargaining agreements, including approximately 50 union employees in the United States.

Properties

We have R&D operations co-located with certain of our manufacturing sites in Australia, Brazil, Belgium, Canada, China, Spain and the United States to facilitate the efficient transfer of production processes from our laboratories to manufacturing sites. In addition, we maintain R&D operations at non-manufacturing locations in Brazil, Belgium, India and the United States. As part of the Separation, Pfizer conveyed to us its interest in each of these R&D facilities, with the exception of our Mumbai, India facility, which we expect Pfizer to transfer to us for agreed upon cash consideration after the completion of this offering, and, in the interim, we will lease this facility from Pfizer. Our largest R&D facility is our owned United States research and development site located in Kalamazoo, Michigan, which represented approximately 1.4 million square feet. None of our other non-manufacturing sites is more than 0.2 million square feet.

The address of our principal executive offices is currently c/o Pfizer, 5 Giralda Farms, Madison, New Jersey 07940 and we expect that our principal executive offices will be relocated following the completion of this offering.

Following the Separation, our global manufacturing network will be comprised of 13 “anchor” and 16 “satellite” manufacturing sites and Pfizer will continue to manufacture products for us at 14 Pfizer sites located in 13 countries. The largest manufacturing site in our global manufacturing network is our manufacturing site located in Kalamazoo, MI, which represented approximately 0.6 million square feet. No other site in our global manufacturing network was more than 0.6 million square feet. In addition, our global manufacturing network will continue to be supplemented by approximately 200 CMOs. See “—Manufacturing and supply chain” and “Certain relationships and related party transactions—Relationship with Pfizer—Master manufacturing and supply agreement.”

We own or lease various additional properties for other business purposes including office space, warehouses and logistics centers. In addition, under the transitional services agreement, Pfizer will provide us with continued access to certain of its premises currently occupied by our employees.

We believe that our existing properties, as supplemented by manufacturing by CMOs, including Pfizer, and access to Pfizer facilities provided under the transitional services agreement are adequate for our current requirements and for our operations in the foreseeable future.

Environmental, health and safety

We are subject to various federal, state, local and foreign environmental, health and safety laws and regulations. These laws and regulations govern matters such as the emission and discharge of hazardous materials into the ground, air or water; the generation, use, storage, handling, treatment, packaging, transportation, exposure to, and disposal of hazardous and biological materials, including recordkeeping, reporting and registration requirements; and the health and safety of our employees. Due to our operations, these laws and regulations also require us to obtain, and comply with, permits, registrations or other authorizations issued by governmental authorities. These authorities can modify or revoke our permits, registrations or other authorizations and can enforce compliance through fines and injunctions.

Certain environmental laws, such as CERCLA, impose joint and several liability, without regard to fault, for cleanup costs on persons who have disposed of or released hazardous substances into the environment, including at third party sites or offsite disposal locations, or that currently own or operate (or formerly owned or operated)

 

122


Table of Contents

sites where such a release occurred. In addition to clean-up actions brought by federal, state, local and foreign governmental entities, private parties could raise personal injury or other claims against us due to the presence of, or exposure to, hazardous materials on, from or otherwise relating to such a property.

We have made, and intend to continue to make, necessary expenditures for compliance with applicable environmental, health and safety laws and regulations. We are also a party to proceedings in which the primary relief sought is the cost of past and/or future remediation, or remedial measures to mitigate or remediate pollution. In connection with such proceedings, and otherwise, we are investigating and cleaning up environmental contamination from past industrial activity at certain sites, or financing other parties’ completion of such activities. However, we may not have identified all of the potential environmental liabilities relating to our current and former properties, or those liabilities associated with off-site disposal locations. Such liability could materially adversely affect our operating results and financial condition. Furthermore, regulatory agencies are showing increasing concern over the impact of animal health products and livestock operations on the environment. This increased regulatory scrutiny may necessitate that additional time and resources be spent to address these concerns in both new and existing products.

In connection with past acquisitions and divestitures, we have undertaken certain indemnification obligations that require us, or may require us in the future, to conduct or finance environmental cleanups at sites that we no longer own or operate. We have also entered into indemnification agreements in which we are being indemnified for various environmental cleanups; however, such indemnities are limited in both time and scope and may be further limited in the presence of new information, or may not be available at all.

While we cannot predict with certainty our future capital expenditures or operating costs for environmental compliance or remediation of contaminated sites, we have no reason to believe that they will have a material adverse effect on our operating results or financial condition.

Legal proceedings

We are from time to time subject to claims and litigation arising in the ordinary course of business. These claims and litigation may include, among other things, allegations of violation of United States and foreign competition law, labor laws, consumer protection laws, and environmental laws and regulations, as well as claims or litigation relating to product liability, intellectual property, securities, breach of contract and tort. We operate in multiple jurisdictions and, as a result, a claim in one jurisdiction may lead to claims or regulatory penalties in other jurisdictions. We intend to defend vigorously against any pending or future claims and litigation. For a description of certain legal proceedings, see Notes to Combined Financial Statements—Note 15A. Commitments and Contingencies: Legal Proceedings and Notes to Unaudited Condensed Combined Financial Statements—Note 9A. Commitments and Contingencies: Legal Proceedings.

At this time, in the opinion of management, the likelihood is remote that the impact of such proceedings, either individually or in the aggregate, would have a material adverse effect on our combined results of operations, financial condition or cash flows. However, one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which they are resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially adversely affect our reputation, even if resolved in our favor.

 

123


Table of Contents

Management

Directors and executive officers

The following table sets forth information regarding our directors, nominees for director and executive officers at the time of this offering. At the time of this offering, our board of directors will consist of nine members.

 

Name

   Age     

Position

Juan Ramón Alaix

     61       Chief Executive Officer, Director

Richard A. Passov

     54       Executive Vice President and Chief Financial Officer

Sandra J. Beaty

     55       Executive Vice President of Corporate Affairs

Alejandro Bernal

     40       Executive Vice President and Area President of the Europe, Africa and Middle East region

Heidi C. Chen

     46       Executive Vice President, General Counsel and Corporate Secretary

Catherine A. Knupp

     52       Executive Vice President and President of Research and Development

Roxanne Lagano

     48       Executive Vice President and Chief Human Resources Officer

Joyce J. Lee

     40       Executive Vice President and Area President of the Canada and Latin America region

Clinton A. Lewis, Jr.

     46       Executive Vice President and President of U.S. Operations

Kristin C. Peck

     41       Executive Vice President and Group President

Stefan Weiskopf

     53       Executive Vice President and Area President of the Asia Pacific region

Frank A. D’Amelio

     55       Chairman and Director

Geno J. Germano

     52       Director

Douglas E. Giordano

     50       Director

Charles H. Hill

     56       Director

Amy W. Schulman

     52       Director

Michael B. McCallister

     60      

Director Nominee

Gregory Norden

     55      

Director Nominee

William C. Steere, Jr.

     76      

Director Nominee

Set forth below is information concerning our directors and executive officers as of the date of this prospectus.

Juan Ramón Alaix has served as our Chief Executive Officer and director since July 2012 and as President of Pfizer’s animal health business unit since 2006. Mr. Alaix joined Pfizer in 2003 and held various positions, including Regional President of Central/Southern Europe for Pfizer’s pharmaceutical business. Mr. Alaix held various positions, including Market President, Spain at Pharmacia Spain from 1998 until its acquisition by Pfizer in 2003. Mr. Alaix currently serves as President and as a member of the board of directors and the executive committee of the International Federation for Animal Health.

Mr. Alaix’s experience described above, including his knowledge and leadership of our company, his business and management experience and his experience in the animal health industry, provides him with the qualifications and skills to serve as a director on our board.

 

124


Table of Contents

Richard A. Passov has served as our Executive Vice President and Chief Financial Officer since July 2012. Mr. Passov joined Pfizer in 1997 and served as Senior Vice President and Treasurer for Pfizer from 2001 to 2012 and served as Assistant Treasurer from 1997 to 2001.

Sandra J. Beaty has served as our Executive Vice President of Corporate Affairs since October 2012. Ms. Beaty joined Pfizer in 1996 and held various positions, including Senior Vice President of Public Affairs and Chief of Staff to the former Pfizer Chairman and CEO.

Alejandro Bernal has served as our Executive Vice President and Area President of the Europe, Africa and Middle East region since October 2012 and as Area President of that region for Pfizer’s animal health business unit since 2010. Mr. Bernal joined Pfizer in 2000 and held various positions, including Area President Canada and Latin America region; Regional Director of Southwest and Central Latin America; Division Director for Central America and Colombia; Swine and Poultry Team Leader for Mexico; and Swine Product Manager for Northern Latin America for Pfizer’s animal health business unit.

Heidi C. Chen has served as our Executive Vice President and General Counsel since October 2012, as our Corporate Secretary since July 2012 and as Vice President and Chief Counsel of Pfizer’s animal health business unit since 2009. Ms. Chen joined Pfizer in 1998 and held various legal and compliance positions, including lead counsel for Pfizer’s Established Products business unit.

Catherine A. Knupp has served as our Executive Vice President and President of Research and Development since October 2012 and as Vice President of Pfizer’s Veterinary Medicine Research and Development since September 2005. Dr. Knupp joined Pfizer in July 2001 and held various positions, including Vice President of Pfizer’s Michigan laboratories for Pharmacokinetics, Dynamics and Metabolism.

Roxanne Lagano has served as our Executive Vice President and Chief Human Resources Officer since October 2012. Ms. Lagano joined Pfizer in 1997 and held various positions, including Senior Vice President, Pfizer Global Compensation, Benefits and Wellness and Senior Director, Business Transactions, Pfizer Worldwide Human Resources.

Joyce J. Lee has served as our Executive Vice President and Area President of the Canada and Latin America region since October 2012 and as Area President of the same region for Pfizer’s animal health business unit since December 2010. Ms. Lee joined Pfizer in 2003 with the acquisition of Pharmacia and held various positions, including Vice President of Global Poultry and Vice President of Global Business Technology for Pfizer’s animal health business unit.

Clinton A. Lewis, Jr. has served as our Executive Vice President and President of U.S. Operations since October 2012 and as President of U.S. Operations for Pfizer’s animal health business unit since 2007. Mr. Lewis joined Pfizer in 1988 and held various positions across sales, marketing and general management including Senior Vice President of Sales, U.S.; General Manager, Pfizer Caribbean; and General Manager, U.S. Anti-Infectives.

Kristin C. Peck has served as our Executive Vice President and Group President since October 2012. Ms. Peck joined Pfizer in 2004 and held various positions, including Executive Vice President, Worldwide Business Development and Innovation; Senior Vice President of Worldwide Business Development, Strategy and Innovation; Senior Vice President, Worldwide Strategy and Innovation; Vice President, Strategic Planning; Chief of Staff to the Vice Chairman; and Senior Director, Strategic Planning. Ms. Peck also served as a member of Pfizer’s Executive Leadership Team.

Stefan Weiskopf has served as our Executive Vice President and Area President of the Asia Pacific region, which expands to Australia and New Zealand, since October 2012 and as Area President of that region for Pfizer’s animal health unit since 2007. Mr. Weiskopf joined Pfizer in 1988 and held various positions, including Division Director Animal Health for Germany, Austria and Switzerland.

 

125


Table of Contents

Frank A. D’Amelio has served as a member of our board since July 2012 and as Executive Vice President, Chief Financial Officer and Business Operations for Pfizer since December 2010. Mr. D’Amelio joined Pfizer in September 2007 and held various positions, including Senior Vice President and Chief Financial Officer. From November 2006 to August 2007, Mr. D’Amelio held the position of Senior Executive Vice President of Integration and Chief Administrative Officer at Alcatel-Lucent, S.A. Mr. D’Amelio currently serves on the board of directors of Humana Inc. and is Chair of the Humana Inc. Audit Committee. Mr. D’Amelio also currently serves as a member of the National Advisory Board of JPMorgan Chase & Co.

Mr. D’Amelio’s experience described above, including his business, management and leadership experience and his experience serving on the board of another public company, provides him with the qualifications and skills to serve as a member of our board.

Geno J. Germano has served as a member of our board since July 2012 and as President and General Manager, Specialty Care and Oncology for Pfizer since December 2010. Mr. Germano joined Pfizer in October 2009 and held various positions, including President and General Manager, Specialty Care. From 2004, Mr. Germano held various positions with Wyeth, including President, U.S. Pharmaceuticals Business Units; Executive Vice President and General Manager for Wyeth Global Vaccines; Managing Director, Wyeth Australia and New Zealand; and Executive Vice President and General Manager of the Wyeth Pharmaceutical Business Unit, until Pfizer’s acquisition of Wyeth in October 2009.

Mr. Germano’s experience described above, including his business, operational and management experience and his many years of leadership roles in the pharmaceutical industry, provides him with the qualifications and skills to serve as a member of our board.

Douglas E. Giordano has served as a member of our board since July 2012 and as Senior Vice President, Worldwide Business Development for Pfizer since June 2010. Mr. Giordano joined Pfizer in 1991 and held various positions in finance, manufacturing, operations and business development, including Vice President, Worldwide Business Development; and Vice President, U.S. Planning and Business Development.

Mr. Giordano’s experience described above, including his knowledge of our company, his leadership experience, his experience in the pharmaceutical industry and his business development and management background, provides him with the qualifications and skills to serve as a member of our board.

Charles H. Hill has served as a member of our board since July 2012 and as Executive Vice President, Worldwide Human Resources for Pfizer since December 2010. Mr. Hill joined Pfizer in 1987 and held various positions, including Senior Vice President of Human Resources for Pfizer’s Worldwide Biopharmaceuticals Businesses; Vice President, Human Resources, Worldwide Pharmaceuticals Operations; Vice President, Human Resources, Pfizer Global Pharmaceuticals in the Europe/Canada, AfME (which includes South America, Central America, Mexico, Africa and the Middle East) and Latin America regions; Vice President, Corporate Finance; and Director of Human Resources, Health & Safety and Community Relations, Pfizer Global Manufacturing.

Mr. Hill’s experience described above, including his business and leadership experience, his experience in the pharmaceutical industry and his extensive experience as an executive officer at Pfizer, provides him with the qualifications and skills to serve as a director on our board.

Amy W. Schulman has served as a member of our board since July 2012, as Executive Vice President and General Counsel for Pfizer since December 2010 and as Business Unit Lead, Consumer Healthcare for Pfizer since August 2012. Ms. Schulman joined Pfizer in June 2008 and held various positions, including Senior Vice President and General Counsel and President and General Manager, Nutrition. Prior to joining Pfizer, from 1997 to June 2008, Ms. Schulman was a partner at DLA Piper LLP (US).

 

126


Table of Contents

Ms. Schulman’s experience described above, including her business and leadership experience, her experience in the pharmaceutical industry and her legal expertise, provides her with the qualifications and skills to serve as a member of our board.

Michael B. McCallister has agreed to join our board effective as of the date of this prospectus. Mr. McCallister has been the Chairman of the board of directors of Humana Inc. since 2010. Mr. McCallister joined Humana Inc. in 1974 and has held various positions, including Chief Executive Officer from 2000 until December 31, 2012. Humana Inc. is a healthcare company that offers a wide range of insurance products and health and wellness services. Mr. McCallister currently serves on the board of directors of Fifth Third Bancorp and Bellarmine University. Mr. McCallister also served on the board of directors of National City Corporation until its merger with PNC Financial Services Group in December 2008 as well as on the board of directors and as Chairman of the Health and Retirement Task Force of the Business Roundtable.

Mr. McCallister’s experience described above, including experience in the healthcare industry and his knowledge of the operational, financial and strategic development of another public company, provides him with the qualifications and skills to serve as a member of our board.

Gregory Norden has agreed to join our board effective as of the date of this prospectus. Mr. Norden is the Managing Director of G9 Capital Group LLC which invests in early stage ventures and provides corporate finance advisory services. From 1989 to 2010, Mr. Norden held various senior positions with Wyeth/American Home Products, most recently as Wyeth’s Senior Vice President and Chief Financial Officer (from 2007 to 2010). Prior to this role, Mr. Norden was Executive Vice President and Chief Financial Officer of Wyeth Pharmaceuticals. Prior to his affiliation with Wyeth, Mr. Norden served as Audit Manager at Arthur Andersen & Co. Mr. Norden also serves on the Board of Directors of Welch Allyn, a provider of medical diagnostic equipment, and NanoString Technologies, a provider of life science tools for translational research and development of molecular diagnostic products. Mr. Norden is a former director of Human Genome Sciences, Inc., where he served until 2012.

Mr. Norden’s experience described above, including his background in finance and experience as a senior executive in the global healthcare and pharmaceutical industries, provides him with the qualifications and skills to serve as a member of our board.

William C. Steere, Jr. has agreed to join our board effective as of the date of this prospectus. Mr. Steere has been Chairman Emeritus of Pfizer since July 2001. Mr. Steere joined Pfizer in 1959 and held various positions, including Chief Executive Officer from 1991 until 2000; Chairman of the board of directors from 1992 until 2001; and member of the board of directors until 2011. Mr. Steere is currently on the board of directors of Health Management Associates, Inc. Mr. Steere also served on the boards of directors of Dow Jones & Company, Inc. until 2007 and MetLife, Inc. until 2010.

Mr. Steere’s experience described above, including his expertise leading another public company and knowledge of, and experience with, the pharmaceutical and health care industries, provides him with the qualifications and skills to serve as a member of our board.

Composition of board; classes of directors

At the time of this offering, our board of directors will consist of nine members.

We expect that our board of directors will comply with the applicable standards of the NYSE and the Exchange Act. Upon effectiveness of this registration statement, at least one member of our board of directors will be independent under the applicable rules of the NYSE and the Exchange Act. In addition, within 90 days of our listing on the NYSE, our board of directors will include two directors who will be independent under the applicable rules of the NYSE and the Exchange Act and within one year of our listing on the NYSE, our board of directors will include three directors who will be independent under the NYSE standards and the Exchange Act.

 

127


Table of Contents

After this offering, Pfizer will continue to beneficially own a majority of our outstanding common stock and we will be a “controlled company” under the corporate governance rules of the NYSE. As a controlled company, we will be eligible for exemptions from some of the requirements of these rules, including:

 

 

the requirement that a majority of the board of directors consist of independent directors;

 

 

the requirement that our corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

 

the requirement that our compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

 

the requirement for an annual performance evaluation of our corporate governance and compensation committees.

While Pfizer continues to control a majority of our outstanding common stock, we may not have a majority of independent directors or corporate governance and compensation committees consisting entirely of independent directors and we will not be required to have written charters addressing these committees’ purposes and responsibilities or have annual performance evaluations of these committees. In the event that we cease to be a controlled company within the meaning of these rules, we will be required to comply with these requirements after specified transition periods. Following the Distribution, if any, we may no longer be a “controlled company.”

Our board of directors is divided into three classes, denominated as class I, class II and class III. Members of each class will hold office for staggered three-year terms. At each annual meeting of our stockholders beginning in 2014, the successors to the directors whose term expires at that meeting will be elected to serve until the third annual meeting after their election or until their successors have been elected and qualified. Mr. Germano, Mr. Giordano and Mr. Norden will serve as class I directors whose terms expire at the 2014 annual meeting of stockholders. Mr. Hill, Ms. Schulman and Mr. Steere will serve as class II directors whose terms expire at the 2015 annual meeting of stockholders. Mr. Alaix, Mr. D’Amelio and Mr. McCallister will serve as class III directors whose terms expire at the 2016 annual meeting of stockholders.

Committees of the board of directors

The standing committees of our board of directors are described below.

Audit Committee

The Audit Committee will initially be composed of three directors, Mr. Norden (Chair), and Messrs. McCallister and Steere, who are not otherwise currently employed by either us or Pfizer. Mr. Norden and Mr. McCallister each qualifies as an “audit committee financial expert” as such term is defined in the regulations under the Exchange Act. We expect that the Audit Committee will comply with the applicable standards of the NYSE and the Exchange Act. The Audit Committee is responsible for, among other things, the oversight of the integrity of our financial statements and system of internal controls, the qualifications and independence of our independent registered accounting firm and the performance of our internal auditor and independent auditor. The Audit Committee also has the sole authority and responsibility to select, determine the compensation of, evaluate and, when appropriate, replace our independent registered public accounting firm. In addition, the Audit Committee will review reports from management, legal counsel and third parties relating to the status of compliance with laws, regulations and internal procedures. The Audit Committee will also be responsible for reviewing and discussing with management our policies with respect to risk assessment and risk management. For so long as the “controlled company” exception applies to our company, the Audit Committee will be responsible for administering policies and procedures regarding related persons transactions.

A copy of our Audit Committee Charter will be available on our website upon consummation of this offering.

Corporate Governance Committee

The Corporate Governance Committee will initially be composed of Ms. Schulman (Chair), and Messrs. Germano, Giordano, McCallister and Steere. The Corporate Governance Committee is responsible for, among

 

128


Table of Contents

other things, matters of corporate governance and matters relating to the practices, policies and procedures of the board of directors, identifying and recommending candidates for election to our board of directors and each committee of our board of directors, and reviewing, at least annually, our corporate governance principles. The Corporate Governance Committee will also advise on and recommend director compensation, which will be approved by the full board of directors. As a “controlled company,” we will not be required to have a corporate governance committee comprised entirely of independent directors. After the “controlled company” exception no longer applies to our company, the Corporate Governance Committee will be responsible for administering policies and procedures regarding related persons transactions.

A copy of our Corporate Governance Committee Charter will be available on our website upon consummation of this offering.

Compensation Committee

The Compensation Committee will initially be composed of Mr. Hill (Chair), and Messrs. D’Amelio, Germano and Norden. The Compensation Committee is responsible for, among other things, reviewing and approving our overall compensation philosophy and overseeing the administration of related compensation benefit programs, policies and practices. The Compensation Committee is also responsible for annually reviewing and approving the corporate goals and objectives relevant to the compensation of our chief executive officer and other executive officers and evaluating their performance in light of these goals, reviewing the compensation of our executive officers and other appropriate officers, and administering our incentive and equity-based compensation plans. As a “controlled company,” we will not be required to have a compensation committee comprised entirely of independent directors.

A copy of our Compensation Committee Charter will be available on our website upon consummation of this offering.

Compensation Committee interlocks and insider participation

We do not have any interlocking relationships between any member of our Compensation Committee and any of our executive officers that would require disclosure under the applicable rules promulgated under the federal securities laws.

Compensation discussion and analysis

Introduction

For purposes of this prospectus, our executive officers whose compensation is discussed in this compensation discussion and analysis, or CD&A, and who we refer to as our named executive officers, or NEOs, are Juan Ramón Alaix, Chief Executive Officer, or CEO; Richard A. Passov, Executive Vice President and Chief Financial Officer, or CFO; Kristin C. Peck, Executive Vice President and Group President; Catherine A. Knupp, Executive Vice President and President of Research and Development; and Clinton A. Lewis, Jr., Executive Vice President and President of U.S. Operations.

Background

We currently operate as a business unit of Pfizer and will continue to do so until the completion of this offering. As a result, Pfizer has determined the 2012 compensation of our employees, including our NEOs, and will continue to do so until the completion of this offering. Accordingly, the compensation arrangements discussed in this CD&A are those of Pfizer. These compensation arrangements, as well as the compensation program we expect to adopt in connection with this offering are discussed below. Because our NEOs (other than Ms. Peck) were not executive officers of Pfizer, their cash compensation was initially determined by Pfizer’s senior management in accordance with the philosophy adopted by the Compensation Committee of Pfizer’s Board of

 

129


Table of Contents

Directors, but was not specifically determined or reviewed by the Compensation Committee of Pfizer’s Board of Directors. As a member of Pfizer’s Executive Leadership Team, Ms. Peck’s cash compensation was reviewed and determined by Pfizer’s Compensation Committee, with the advice of the Committee’s independent consultant.

Philosophy, goals and principles of Pfizer’s executive compensation program

Pfizer’s executive compensation philosophy, which is set by the Compensation Committee of Pfizer’s Board of Directors, is to align each executive’s compensation with Pfizer’s short-term and long-term performance and to provide the compensation and incentives needed to attract, motivate and retain key executives who are crucial to Pfizer’s long-term success. A significant portion of the total compensation opportunity for each of Pfizer’s executives (including our NEOs) is directly related to Pfizer’s stock price performance and to other performance factors that measure progress against the goals of Pfizer’s strategic and operating plans, as well as Pfizer’s performance against that of the pharmaceutical peer group described below.

Pfizer seeks to implement its compensation philosophy and achieve the goals of its program by following three key principles:

 

 

positioning total direct compensation and each compensation element at approximately the median of its peer companies, with emphasis on pharmaceutical companies with large market capitalization;

 

 

aligning annual short-term incentive awards with annual operating and financial objectives; and

 

 

rewarding absolute and relative performance in total shareholder return through long-term equity incentive awards.

Pfizer’s executive compensation framework

In support of its compensation philosophy, Pfizer targets the median compensation values of both a peer group of pharmaceutical companies and a general industry comparator group to determine an appropriate total value and mix of pay for our executives. Pfizer’s Compensation Committee reviews these peer groups on an annual basis.

Pfizer’s pharmaceutical peer group for 2012 consisted of the following companies, which were selected based on their size and market capitalization and the complexity of their businesses, as well as the availability of comparative data. Pfizer’s Compensation Committee recognizes that while data is available on the performance of Pfizer’s non-U.S.-based peer companies, the compensation data is limited in terms of comparable benchmarks and other information as compared to peers based in the United States.

Pfizer’s 2012 pharmaceutical peer group

 

Abbott Laboratories

   Johnson & Johnson

Amgen

   Merck

AstraZeneca

   Novartis

Bristol-Myers Squibb

   Roche

Eli Lilly

   Sanofi-Aventis

GlaxoSmithKline

  

The general industry comparator group for 2012 was selected by Pfizer’s Compensation Committee from other industry sectors based on the same criteria as described above.

 

130


Table of Contents

Pfizer’s 2012 general industry comparator group

 

Alcoa    Honeywell
Altria Group    IBM
Boeing    Lockheed Martin
Caterpillar    PepsiCo
Chevron    Procter & Gamble
Coca-Cola    TimeWarner
Comcast    United Parcel Service
Dell    United Technologies
Dow Chemical    UnitedHealth Group
DuPont    Verizon
FedEx    Walt Disney
General Electric   

Given the differences between Pfizer and us in industry focus, market capitalization and other factors that impact executive compensation, we expect that our Compensation Committee will select a different group of peer companies as described under “—Our anticipated compensation program following this offering.”

Applying Pfizer’s compensation framework to executive positions

Pfizer uses median compensation data for similar positions in its pharmaceutical peer and general industry comparator groups, as well as an evaluation of internal equity among Pfizer executives, as a guide in setting compensation targets for each of its executives, including our NEOs. Each compensation target is assigned a numbered salary grade to simplify the compensation administration process and help maintain internal equity.

Pfizer uses salary grades to determine the preliminary salary recommendation, target annual incentive award opportunity, and target long-term equity incentive award value for each executive position. Each salary grade is expressed as a range, with minimum, midpoint, and maximum salary levels. Minimum and maximum salary range levels for each grade are set 25% below and above the salary range midpoint, which is intended to approximate the bottom and top quartiles for positions assigned to that grade. This framework provides a guide for Pfizer’s Compensation Committee determinations. The actual total compensation and/or amount of each compensation element for an individual executive may be more or less than this median.

Overview of Pfizer’s compensation program design

This section will explain how Pfizer determined the design of its 2012 executive compensation program as it relates to our NEOs.

Role of Pfizer’s compensation consultant. Since 2003, Pfizer’s Compensation Committee has engaged the firm of Frederic W. Cook & Co., represented by George Paulin, its Chief Executive Officer, as the Committee’s independent compensation consultant. Below are some of the consultant’s primary responsibilities:

 

 

advise Pfizer’s Compensation Committee on management proposals, as requested;

 

 

attend Pfizer’s Compensation Committee meetings;

 

 

review Pfizer’s compensation philosophy, peer group and competitive positioning and advise Pfizer’s Compensation Committee on their reasonableness and appropriateness;

 

 

review Pfizer’s executive compensation program and advise Pfizer’s Compensation Committee of plans or practices that might be changed to improve effectiveness;

 

 

review the selected peer group and survey data for competitive comparisons;

 

131


Table of Contents
 

oversee and review survey data on executive pay practices and amounts that come before Pfizer’s Compensation Committee;

 

 

provide market data and recommendations on Chief Executive Officer compensation without prior review by management (except for necessary fact-checking); and

 

 

proactively advise Pfizer’s Compensation Committee on best-practice approaches for governance of executive compensation as well as areas of concern and risk in Pfizer’s program.

Elements of pay

Base salary. In accordance with Pfizer practice, base salaries for our NEOs have generally been determined by evaluating the responsibilities of the executive’s position, the executive’s experience and the competitive marketplace. The competitive marketplace has been determined with the use of survey data, as described under “—Role of Pfizer’s compensation consultant.” Future base salary adjustments for our NEOs are expected to take into account changes in the executive’s responsibilities, the executive’s performance and changes in the competitive marketplace.

Annual incentive plan. For 2012, eligible employees, including our NEOs, participate in Pfizer’s annual incentive program—the Global Performance Plan, or GPP. The GPP utilizes a funded pool based on Pfizer’s performance on three financial metrics: total revenues (revenues), weighted 40%; adjusted diluted earnings per share, weighted 40%; and cash flow from operations (cash flow), weighted 20%. The following table sets forth the threshold and target financial metrics, which excludes the Nutrition Business Unit of Pfizer.

 

Financial objective

   Revenues      Adj. diluted EPS      Cash flow  

2012 Threshold

   $ 54.5 billion       $ 1.97       $ 15.5 billion   

2012 Target

   $ 59.0 billion       $ 2.17       $ 19.0 billion   

The GPP pool funding percentage ranges from 0% to 200% of target award levels; however, the pool is not funded unless performance exceeds a threshold level. Earned individual payouts also range from 0% to 200% of target and reflect allocations from the available earned pool based on corporate, business unit/function, and individual performance. The incentive awards earned by our NEOs under the GPP for 2012 have not yet been determined. We will provide the relevant disclosures following the determination of the 2012 incentive awards, which will occur in February 2013.

Our NEOs’ 2012 annual incentives will be based on:

 

 

the financial performance of Pfizer (measured by revenues, adjusted diluted earnings per share and cash flow, as described above);

 

 

the financial performance of their respective business unit/function measured by annual budgets for revenues and income before adjustments;

 

 

the achievement of selected strategic and operational goals for their respective business unit/function; and

 

 

an assessment by Pfizer’s Chief Executive Officer of each executive’s individual performance.

The 2012 annual incentives for Mr. Alaix will be recommended by the appropriate member of Pfizer’s Executive Leadership Team. With respect to our other NEOs, Messrs. Passov and Lewis, Ms. Peck and Dr. Knupp, their 2012 annual incentives will be recommended by Mr. Alaix, as head of the Pfizer Animal Health business. Our NEOs’ 2012 annual incentives will be reviewed and approved by Pfizer’s Chief Executive Officer. Pfizer’s Compensation Committee is not involved in making the specific annual incentive awards to our NEOs.

2012 strategic and operational objectives. As President of the Pfizer Animal Health business, Mr. Alaix’s 2012 strategic and operational objectives included: (i) improving effectiveness of field force and veterinary operations; (ii) growing income before taxes faster than revenue; (iii) expanding the product portfolio through superior

 

132


Table of Contents

research and development and targeted business development and global alliances; (iv) realizing targeted savings in operational expenses; (v) improving the engagement of Pfizer Animal Health colleagues at all levels; and (vi) realizing operational readiness for the Pfizer Animal Health strategic alternatives review.

As Treasurer of Pfizer, Mr. Passov’s 2012 strategic and operational objectives included: (i) contributing at least $250 million of income from portfolio and pension plan initiatives; (ii) establishing a debt refinancing program; (iii) maximizing the EPS impact of the share repurchases; and (iv) maximizing the value of any potential transaction involving Pfizer Animal Health.

As Executive Vice President, Worldwide Business Development and Innovation of Pfizer, Ms. Peck’s 2012 strategic and operational objectives included: (i) identifying and closing key business development acquisition, licensing and partnership opportunities; (ii) increasing the return and reducing the risk of Pfizer’s R&D portfolio through creative partnerships and business development; (iii) maximizing the value of business units and assets identified for divestiture to create optimal shareholder value; (iv) developing an enterprise-wide digital strategy that will create opportunities to drive growth and efficiency and add value for Pfizer’s key stakeholders; and (v) supporting initiatives to reduce costs and ensure efficiency in Pfizer’s commercial operating model.

As head of Veterinary Medicine Research and Development of the Pfizer Animal Health business, Dr. Knupp’s 2012 strategic and operational objectives included: (i) delivering the product portfolio by implementing investment strategies across all segments (vaccines and medicines) and stages; (ii) creating opportunities to position new businesses (genetics, diagnostics, etc.) and emerging markets for value generation; (iii) ensuring ongoing success of the global research organization in a new operating model; and (iv) ensuring business stability through the Pfizer Animal Health strategic alternatives review.

As head of U.S. Operations for Pfizer Animal Health, Mr. Lewis’ 2012 strategic and operational objectives included: (i) achieving revenue targets of $1.6 billion; (ii) developing a plan to expand coverage of the Inside Sales Team; (iii) continuing to strengthen colleague engagement; (iv) ensuring the successful integration of new business/service platforms into a comprehensive solutions offering; and (v) supporting the Pfizer Animal Health strategic alternatives review.

The threshold, target and maximum incentive award opportunities for each of our NEOs for 2012 are set forth in the “2012 grants of plan-based awards table.”

2012 long-term equity incentives. A key element of Pfizer’s compensation program is long-term equity incentive awards granted under the Pfizer Inc. 2004 Stock Plan, as amended and restated, or the 2004 Stock Plan. In 2012, our employees received equity awards under the 2004 Stock Plan intended to:

 

 

align the interests of our executives with Pfizer’s stockholders;

 

 

focus our executives’ efforts on improving Pfizer’s total shareholder return, both on an absolute and relative basis; and

 

 

promote retention through the use of multi-year vesting schedules.

The 2012 grants to our NEOs were made in the form of (1) restricted stock units, or RSUs, (2) 5- and 7-year total shareholder return units, or TSRUs, and (3) performance share awards, or PSAs.

RSUs represent the right to receive shares of Pfizer common stock in the future, subject to continued service with Pfizer. Pfizer RSUs vest on the third anniversary of the date of grant. Dividend equivalent units, or DEUs, are accumulated during the vesting period. Both RSUs and DEUs are payable in shares of Pfizer common stock, and only on vesting.

TSRUs vest in three years and are settled on the fifth or seventh anniversary of the date of grant. The number of shares that may be earned for each TSRU is equal to the difference between the settlement price (the 20-day

 

133


Table of Contents

average of the closing prices of Pfizer common stock prior to settlement) and the grant price (the closing price of Pfizer common stock on the date of grant) plus the value of dividend equivalents accumulated over the term, subject to the results being positive.

PSAs vest in three years and provide an opportunity for executives to receive shares of Pfizer common stock contingent upon corporate performance in relation to the performance of the Pfizer pharmaceutical peer group over a designated period of time (generally, three years). The number of shares that may be earned under the PSAs over the performance period is based on Pfizer’s Total Shareholder Return, or TSR (defined as change in stock price plus dividends), relative to the TSR of the Pfizer pharmaceutical peer group and ranges from 0% to 200% of the initial award. Dividend equivalents are applied to the shares actually earned.

Prior to this offering, the amounts, terms and conditions of the equity awards granted to our NEOs have been determined by Pfizer. Our equity awards going forward will be determined by our Compensation Committee.

Treatment of outstanding Pfizer equity awards

Following the offering, the equity awards previously granted to our NEOs will continue to relate to Pfizer equity, provided that service with Zoetis will be counted as service with Pfizer for all purposes. Upon the Distribution, if any, it is intended that each outstanding, unvested Pfizer stock option will vest and, in general, Pfizer stock options will be exercisable for Pfizer common stock until the earliest to occur of (i) the three year anniversary of the Distribution, (ii) the option-holder’s termination of employment from Zoetis and (iii) the expiration of the stock option. Upon the Distribution, Pfizer may determine to accelerate the vesting and, in some cases the settlement, of certain of the equity awards, subject, in each case, to the requirements of Section 409A of the Code, the terms of the Pfizer Stock Plan and the applicable award agreements and any outstanding deferral elections.

Employment and retirement benefits

Deferred compensation. Pfizer permits its executives, including our NEOs, to defer receipt of earned annual incentives and any shares earned under PSAs. Annual incentives may be deferred into either a Pfizer stock unit fund or a cash fund earning interest at 120% of the applicable federal long-term rate (which fluctuated between 2.59% and 3.42% in 2012). The Pfizer stock unit fund is credited with reinvested dividend equivalent units. PSAs may be deferred only into Pfizer common stock units. Certain RSUs are mandatorily deferred on vesting if payment would result in the loss of a tax deduction for Pfizer, see “—Tax deductibility of NEO compensation.”

Insurance plans. Pfizer provides a number of health and family security benefits, such as medical insurance, dental insurance, life insurance and long-term disability insurance. These benefits are available to all U.S. and Puerto Rico-based employees, including our NEOs, and are comparable to those provided by the companies in the Pfizer pharmaceutical and general industry comparator groups. These programs are designed to provide certain basic quality of life benefits and protections to Pfizer employees, including our NEOs, and at the same time enhance Pfizer’s attractiveness as an employer of choice. The annual cost of benefits for each of our NEOs for these Pfizer benefits ranges from approximately $13,000 to $25,000.

Pension and savings plans. Pfizer maintains qualified defined benefit pension plans for the benefit of all its eligible U.S. and Puerto Rico-based employees, including our NEOs, hired prior to January 1, 2011. For those U.S. employees earning in excess of the Code limit ($250,000 for 2012), including our NEOs, Pfizer maintains related supplemental benefit restoration plans. The provisions and features of the qualified defined benefit pension plans and the related supplemental benefit restoration plans apply to all participants in those plans, including our NEOs. Pfizer also maintains savings plans that permit participants to make pre-tax, after-tax and/or Roth contributions of a portion of their eligible pay, up to certain limits. In addition, Pfizer maintains non-qualified savings plans that permit eligible participants to make pre-tax contributions in excess of tax law limitations on qualified plans. Pfizer provides matching contributions with respect to employee contributions, up to certain limits. The provisions and

 

134


Table of Contents

features of the qualified savings plans and the related non-qualified supplemental savings plans apply to all participants in those plans, including our NEOs. These plans are described in the narrative accompanying the “2012 pension benefits table” and the “2012 non-qualified deferred compensation table” below.

Post-employment compensation. Pfizer’s Senior Leadership Council Separation Plan, or the SLC Separation Plan, provides a competitive level of severance protection for certain senior executives to help Pfizer attract and retain key talent. Our NEOs participate in the SLC Separation Plan, which provides severance upon a termination of employment without cause, equal to the sum of one-times pay (defined as base salary and target bonus). In addition, the executive would be eligible for 12 months of health and insurance benefits continuation at active rates, plus outplacement assistance as offered by Pfizer.

Effective November 1, 2012, Pfizer adopted a severance plan, the Sale of Business Severance Plan, to cover certain of our executives, including each of our NEOs, in the event of a sale of the Pfizer Animal Health business. The Sale of Business Severance Plan is intended to give key executives assurances as to severance pay and benefits in the event of a sale of the Pfizer Animal Health business to a third party, in order to allow them to focus on making decisions that are in the best overall interests of Pfizer and Zoetis. The Sale of Business Severance Plan provides benefits in the event that an executive’s employment is involuntarily terminated other than for cause or the executive resigns for good reason within two years following the consummation of a sale to a third party. The Sale of Business Severance Plan would not be triggered by an initial public offering of Zoetis or the Distribution. For our NEOs, the severance plan provides for a cash payment equal to the sum of two times the executive’s base salary, plus two times the executive’s bonus target (each determined as of the date of termination). In addition, the executive would be eligible for 12 months of health and insurance benefits continuation at active rates, plus outplacement assistance as offered by Pfizer. Payments made under the Sale of Business Severance Plan would be offset to the extent that severance is payable under the SLC Separation Plan, in order to avoid duplication of benefits. Severance payments and benefits for our NEOs under the SLC Separation Plan, and the Sale of Business Severance Plan, are described in “—Estimated benefits upon termination.”

Our anticipated compensation program following this offering

The following section describes the compensation program we anticipate implementing for our senior executives, including our NEOs, following the completion of this offering. Pfizer has engaged Compensation Advisory Partners (CAP), on our behalf, to assist in designing our anticipated executive compensation program. Following the offering, our Compensation Committee is expected to retain its own compensation consultant to advise the Compensation Committee in its compensation planning decisions.

Zoetis Compensation Committee

Following this offering, our Compensation Committee, which will be appointed by our Board of Directors, will determine the appropriate compensation plans and programs for our executives. Our Compensation Committee will review and evaluate our executive compensation plans and programs to ensure they are aligned with our compensation philosophy.

Peer group analysis

Based upon the advice of CAP, we have identified the following eleven companies as our “core” peers:

 

Agilent Technologies Inc.    Life Technologies Corp.
Allergan Inc.    Mead Johnson Nutrition
Biogen Idec Inc.    Monsanto Co.
Covance Inc.    Mylan Inc.
Endo Health Solutions Inc.    Watson Pharmaceuticals Inc.
Forest Laboratories Inc.   

 

135


Table of Contents

Based on their sales and market capitalization, as well as the nature of their businesses, histories, industries and the availability of relevant comparative compensation data, we believe this core peer group is appropriate given the unique nature of our business and industry.

In addition to these eleven core peer companies, we have identified six additional companies (Bio-Rad Laboratories, Celgene, Hospira, Mettler-Toledo International, PerkinElmer, and Perrigo) that have similar sales and market capitalization, but do not have readily available comparative compensation data, that we will use as “supplemental” peer companies, as appropriate. We will utilize the proxy data for these supplemental peer companies for purposes of determining comparative compensation for certain of our executives.

In addition to the data from these peer companies, additional data from similarly-sized companies in life sciences and general industry may be used for benchmarking purposes to ensure robust data.

Proposed Zoetis 2013 equity and incentive plan

The following is a brief description of the material features of the proposed Zoetis 2013 Equity and Incentive Plan (the “Equity Plan”). This description is qualified in its entirety by reference to the full text of the proposed Equity Plan, a copy of which is filed as an exhibit to the registration statement of which this prospectus forms a part. The Equity Plan is a comprehensive incentive compensation plan that will permit us to grant both equity-based and non-equity based compensation awards to employees of Zoetis (and its subsidiaries) and to our directors. The purpose of the plan is to attract, motivate and retain such persons and to encourage stock ownership by such persons, thereby aligning their interest with those of our stockholders.

The Equity Plan will be effective prior to the completion of this offering. Unless earlier terminated, the Equity Plan will terminate on the tenth anniversary of the effective date, provided, however, that any grant that was made prior to the termination of the Equity Plan will remain outstanding in accordance with its terms.

Awards under the Equity Plan may be in the form of stock options, or other stock-based awards, including awards of restricted stock, restricted stock units and performance share awards. The Equity Plan also provides for the grant of cash awards. The following is a summary of the principal types of stock-based awards available under the Equity Plan:

 

   

Stock Options. Stock options represent the right to purchase shares of our common stock within a specified period of time at a specified price. The exercise price for a stock option will be not less than 100% of the fair market value of the common stock on the date of grant. Stock options will have a maximum term of ten years from the date of grant. Stock options granted may include those intended to be “incentive stock options” within the meaning of Section 422 of the Code.

 

   

Restricted Stock and Restricted Stock Units. Restricted stock is a share of our common stock that is subject to a risk of forfeiture or other restrictions that will lapse subject to the recipient’s continued employment, the attainment of performance goals, or both. Restricted stock units represent the right to receive shares of our common stock in the future (or cash determined by reference to the value of our common stock), subject to the recipient’s continued employment, the attainment of performance goals, or both.

 

   

Performance-Based Awards. Our Compensation Committee may grant performance awards, which may be awards of a specified cash amount or may be equity-based awards. Generally, performance awards will require satisfaction of pre-established performance goals, consisting of one or more business criteria (discussed in greater detail below) and a targeted performance level with respect to such criteria as a condition of awards vesting or being settled. Performance may be measured over a period of any length specified by our Compensation Committee.

 

   

Other Equity-Based or Cash-Based Awards. Our Compensation Committee will be authorized to grant awards in the form of other equity-based awards or other cash-based awards, as deemed to be consistent with the purposes of the Equity Plan. The maximum value of the aggregate payment to be paid to any participant with respect to cash-based awards under the Equity Plan in respect of an annual performance period will be $10 million.

 

136


Table of Contents

The number of shares reserved for the grant or settlement of awards under the Equity Plan will be equal to five percent (5%) of the number of all outstanding shares of our common stock as of the effective date of the Equity Plan. Not more than 1.5 million shares subject to options or stock appreciation rights and not more than 1.5 million shares subject to awards other than options and stock appreciation rights may be granted to any participant under the Equity Plan in any twelve-month period. The shares subject to the plan and to the individual award limitations are subject in each case to adjustment in the event of a dividend or other distribution, recapitalization, stock split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase or share exchange or other similar corporate transaction. Any shares subject to awards that are cancelled, forfeited or otherwise terminated without the issuance of shares will again be available for grants under the Equity Plan.

Our Compensation Committee will administer the Equity Plan, which will include designating participant eligibility; selecting the types of awards to be granted; determining the terms and conditions of awards, including the number of shares, the purchase price of awards (if applicable), and restrictions and performance goals relating to any award; establishing the time when the awards and/or restrictions become exercisable, vest or lapse; determining whether options will be incentive stock options; and making all other determinations deemed necessary or advisable for the administration of the Equity Plan. In the event of a “change in control” of our company, which would not be triggered by the Distribution, the Equity Plan provides for unvested awards to become fully vested and/or exercisable upon certain terminations of employment within 24 months, and if an acquiring company does not assume or otherwise substitute awards, unvested awards will immediately become vested and/or exercisable upon the change in control.

As noted above, certain awards granted under the Equity Plan may be contingent upon the achievement of pre-established performance goals. The performance goals may be based upon one or more of the following performance goals established by our Compensation Committee (in each case, as determined in accordance with generally accepted accounting principles, if applicable): (i) net earnings (either before or after one or more of the following: (A) interest, (B) taxes, (C) depreciation, (D) amortization and (E) non-cash equity-based compensation expense); (ii) gross or net sales or revenue; (iii) net income (either before or after taxes); (iv) adjusted net income; (v) operating earnings or profit; (vi) cash flow (including, but not limited to, operating cash flow and free cash flow); (vii) return on assets; (viii) return on capital; (ix) return on stockholders’ equity; (x) total stockholder return; (xi) return on sales; (xii) gross or net profit or operating margin; (xiii) costs; (xiv) funds from operations; (xv) expenses; (xvi) working capital; (xvii) earnings per share; (xviii) adjusted earnings per share; (xix) price per share; (xx) implementation or completion of critical projects; (xxi) market share; (xxii) debt levels or reduction; (xxiii) customer retention; (xxiv) sales-related goals; (xxv) customer satisfaction and/or growth; (xxvi) research and development achievements; (xxvii) financing and other capital raising transactions; (xxviii) capital expenditures; and (xxix) economic profit, any of which may be measured in absolute terms for Zoetis or any operating unit of Zoetis or as compared to any incremental increase or decrease or as compared to results of a peer group or to market performance indicator or indices.

Performance goals may be expressed in terms of our overall performance or the performance of an affiliate or one or more divisions, business units or product lines. In addition, such performance goals may be based upon the attainment of specified levels of performance under one or more of the measures described above relative to the performance of other corporations or the performance of an index, survey or other benchmark. Further, the Compensation Committee may provide objectively determinable adjustments be made to one or more of the performance goals. Such adjustments may include: (i) items related to a change in accounting principle; (ii) items relating to financing activities; (iii) expenses for restructuring or productivity initiatives; (iv) other non-operating items; (v) items related to acquisitions; (vi) items attributable to the business operations of any entity acquired by us during the performance period; (vii) items related to the disposal or sale of a business or segment of a business; (viii) items related to discontinued operations that do not qualify as a segment of a business under applicable accounting standards; (ix) items attributable to any stock dividend, stock split, combination or exchange of stock occurring during the performance period; (x) any other items of significant income or expense which are determined to be appropriate adjustments; (xi) items relating to unusual or extraordinary corporate

 

137


Table of Contents

transactions, events or developments; (xii) items related to amortization of acquired intangible assets; (xiii) items that are outside the scope of our core, on-going business activities; (xiv) items related to acquired in-process research and development; (xv) items relating to changes in tax laws; (xvi) items relating to major licensing or partnership arrangements; (xvii) items relating to asset impairment charges; (xviii) items relating to gains or losses for litigation, arbitration and contractual settlements; or (xix) items relating to any other unusual or nonrecurring events or changes in applicable laws, accounting principles or business conditions.

To the extent permitted under Section 162(m) of the Code (including, without limitation, compliance with any requirements for stockholder approval), our Compensation Committee may adjust, modify or amend the aforementioned performance criteria.

Under the Equity Plan, awards generally will be nontransferable other than by will or by the laws of descent and distribution. However, our Compensation Committee, in its sole discretion, may grant transferable nonqualified stock options or other transferable awards.

Our Compensation Committee may grant dividend equivalent rights. These are rights to payments equal in value to the amount of dividends paid on a specified number of shares. These amounts may be in the form of cash or rights to receive additional awards or additional shares equal in value to the cash amount.

Our Board of Directors, on the recommendation of our Compensation Committee, may amend, alter or discontinue the Equity Plan, but no amendment, alteration or discontinuation will be made that would impair the rights of a participant under any award previously granted without such participant’s consent. In addition, stockholder approval may be required with respect to certain amendments, due to stock exchange rules or requirements of applicable law. The Board of Directors may amend or terminate the Equity Plan, but may not, without the prior approval of our stockholders, increase the maximum number of shares of common stock that may be issued under the Equity Plan or the number of shares of common stock that may be issued to any one participant; extend the term of the Equity Plan or of options granted under the Equity Plan; grant options with an exercise price below the fair market value of the common stock on the date of grant; or take any other action that requires stockholder approval to comply with any tax or other regulatory requirement.

In order to provide long-term incentives to, and facilitate the retention of, our employees, we intend to grant, subject to approval of our board or an authorized committee thereof, restricted stock units and stock options (or other awards as appropriate with respect to our employees in non-U.S. jurisdictions) under the Equity Plan to approximately 2,600 of our employees, including each of our NEOs, at the time of this offering. We refer to these grants as the “2013 equity grants.” These 2013 equity grants represent the long-term incentive compensation component of such individuals’ total 2013 compensation.

We expect that these awards will vest on the third anniversary of the date of grant. The 2013 equity grant target value for each employee will be based on each employee’s job level. The target value of the award to an employee will be split equally among restricted stock units and stock options (or such other awards as appropriate with respect to our employees in non-U.S. jurisdictions). The approximate aggregate target value of the 2013 equity grants to all employees is $45 million. Of that amount, the approximate target values of the 2013 equity grants to our NEOs are as follows: Mr. Alaix – $4.0 million, Mr. Passov – $1.4 million, Ms. Peck – $1.12 million, Mr. Lewis – $0.6 million, and Dr. Knupp – $0.6 million. However, the actual value realized by the recipients of the 2013 equity grants will depend on a number of factors, including future vesting and the future market value of Zoetis shares.

If the initial public offering price is equal to $23.50 per share (the midpoint of the price range set forth on the cover of this prospectus), the 2013 equity grants would be comprised of an aggregate of 957,447 restricted stock units and options to purchase an aggregate of 3,588,517 shares of Class A common stock. The actual number of restricted stock units and stock options granted pursuant to the 2013 equity grants will vary depending on the actual initial public offering price per share in this offering.

 

138


Table of Contents

Stock ownership and holding requirements

We have adopted share ownership guidelines for our NEOs. Our guidelines require Mr. Alaix to hold Zoetis shares with a value of five times his annual base salary, Mr. Passov and Ms. Peck to hold Zoetis shares with a value of three times their respective base salaries, and all remaining executive officers to hold Zoetis shares with a value of two times their respective base salaries, before they can sell any shares upon the exercise of options or the vesting of other awards. Our NEOs will have five years from the establishment of the guidelines to achieve the share ownership requirement.

Clawback policy

We are developing a clawback policy whereby our Compensation Committee may, if permitted by law, make retroactive adjustments to any cash- or equity-based incentive compensation paid to NEOs and other executives where a payment is predicated upon the achievement of specified financial results that are the subject of a subsequent restatement. Where applicable, we may seek to recover any amount determined to have been inappropriately received by the individual executive officer. In addition, we expect that all of the equity incentive awards that we grant will contain such compensation recovery provisions. Our Compensation Committee will monitor the regulatory developments related to clawbacks and expects to modify its policy, to the extent necessary, once final rules are issued.

Hedging policy

We intend to adopt a policy prohibiting any of our directors or employees, including the NEOs, from “hedging” their ownership in shares of our common stock or other equity-based interests in our company, including by engaging in short sales or trading in derivative securities relating to our common stock.

Tax deductibility of NEO compensation

Section 162(m) of the Code generally disallows a tax deduction to public corporations for compensation greater than $1 million paid in any fiscal year to the CEO and four other most highly compensated executive officers, other than the CFO, as of the end of any fiscal year. None of the compensation paid to our NEOs in 2012 was subject to the limitations on deductibility under Section 162(m), because our NEOs were not among the executives of Pfizer who were subject to Section 162(m).

We generally intend to structure our equity-based and cash-based incentive awards to meet the exception under Section 162(m) for “performance-based” compensation, taking advantage of transitional rules under Section 162(m) that will apply to Zoetis, such that these amounts are fully deductible for tax purposes. RSUs do not qualify as “performance-based” compensation. Consequently, certain of our NEOs may be required to defer the receipt of RSUs. However, to maintain flexibility in compensating our executives, we do not have a policy requiring compensation to be deductible.

Compensation tables

Unless otherwise stated, the compensation tables included in this section reflect amounts paid or payable or awards granted to our NEOs by Pfizer under Pfizer’s compensation plans and programs. Following the completion of this offering, the NEOs will receive compensation and benefits under our compensation programs and plans.

 

139


Table of Contents

2012 summary compensation table

 

Name and principal position

  Year     Salary
($)
    Bonus
($)
  Stock
awards(2)
($)
    Option
awards(3)
($)
    Non-equity
incentive plan
compensation(4)
($)
    Change in
pension

value and
non-

qualified
deferred
compensation
earnings(5)
($)
    All other
compensation(6)
($)
    Total
($)
 

Juan Ramón Alaix Chief Executive Officer

    2012        613,533          438,013        441,787          544,675        49,559        2,087,567   
    2011        566,075          412,106        368,983        400,000        687,446        57,658        2,492,268   

Richard A. Passov Executive Vice President and Chief Financial Officer

    2012        587,875          297,322        299,889          572,840        42,729        1,800,655   
    2011        591,700 (1)        332,519        297,732        335,000        589,014        44,148        2,190,113   

Kristin C. Peck
Executive Vice President and Group President

    2012        526,250          421,189        424,843          262,413        51,316        1,686,011   

Clinton A. Lewis Jr. Executive Vice President and President of U.S. Operations

    2012        373,800          428,837        129,951          384,147        13,946        1,330,681   

Catherine A. Knupp Executive Vice President and President of Research and Development

    2012        362,733          423,874        124,954          208,798        25,375        1,145,734   

 

(1) The amount shown in the “Salary” column for Mr. Passov in 2011 includes a one-time lump sum merit increase payment of $18,000.
(2) The amounts shown in this column represent the aggregate grant date fair values for the RSUs and PSAs granted in 2012 and for Messrs. Alaix and Passov, in 2011. Further information regarding the 2012 awards is included in the “2012 grants of plan-based awards table” and “2012 outstanding equity awards at fiscal year-end table.” The aggregate grant date fair values of the PSAs reflected in this column are the target payouts based on the probable outcome of the performance condition, determined as of the grant date. The maximum potential values of the 2012 PSAs would be as follows: Mr. Alaix—$438,013, Mr. Passov—$297,322, Ms. Peck—$421,189, Mr. Lewis—$128,830 and Dr. Knupp—$123,867. The maximum potential values of the 2011 PSAs were as follows: Mr. Alaix—$461,520, and Mr. Passov—$372,390. Additional information related to the PSAs is included in “—2012 long-term equity incentives.” The aggregate grant date fair values have been determined based on the assumptions and methodologies set forth in Pfizer’s 2011 Financial Report (Note 13, Share-Based Payments).
(3) The amounts shown in this column represent the aggregate grant date fair values of the TSRUs awarded in 2012 and for Messrs. Alaix and Passov, in 2011. The aggregate grant date fair values have been determined based on the assumptions and methodologies set forth in Pfizer’s 2011 Financial Report (Note 13, Share-Based Payments).
(4) Awards earned during 2012 are not calculable until after the performance period ends on December 31, 2012. The awards will be determined in February of 2013. Amounts for Messrs. Alaix and Passov for 2011 represent annual cash incentives made under the GPP.
(5) Pfizer does not pay “above market” interest on non-qualified deferred compensation to employees; therefore, this column reflects pension accruals only. The 2012 pension accrual amounts represent the difference between the December 31, 2012 and December 31, 2011 present values of age 65 accrued pensions under the Pfizer Retirement Plan and supplemental retirement plan, based on the pension plan assumptions for each year, as shown in the footnotes to the “Pension plan assumptions table.” Further information regarding pension plans is included in the “2012 pension benefits table.”
(6) The amounts shown in this column represent, as of December 31, 2012, the sum of Pfizer’s Savings Plan and Supplemental Savings Plan matching contributions, for Mr. Alaix, gross-up payments of $1,776 related to taxes due on relocation benefits and for Ms. Peck, a health assessment credit, financial counseling services and use of Pfizer’s aircraft. The savings plan matching contributions include matching funds under the Pfizer Savings Plan (a tax-qualified retirement savings plan) and under the related Supplemental Savings Plan. The matching contributions for each NEO were as follows: Mr. Alaix—$45,609, Mr. Passov—$41,529, Ms. Peck—$40,331, Mr. Lewis—$11,250 and Dr. Knupp—$25,375. These plans are discussed in more detail in the “2012 non-qualified deferred compensation table.”

 

140


Table of Contents

The following “2012 grants of plan-based awards table” provides additional information about non-equity incentive awards and long-term incentive awards granted to our NEOs by Pfizer during the year ended December 31, 2012. The long-term incentive awards were made under the 2004 Stock Plan, as amended and restated, and are described in “—2012 long-term equity incentives.”

2012 grants of plan-based awards table

 

    Estimated future  payouts
under non-equity incentive
plan awards
    Estimated future  payouts
under equity incentive plan
awards
                   

Name (A)

  Grant
date (B)
    Threshold
($) (C)
    Target
($) (D)
    Maximum
($) (E)
    Threshold
(#) (F)
    Target
(#)(1)
(G)
    Maximum
(#) (H)
    All
other
stock
awards:

number
of
shares

of stock
or
units(1)

(#) (I)
    All  other
TSRU
awards:

number
of
securities
underlying
TSRUs(1)

(#) (J)
    Exercise
or base
price of
TSRU
awards

($/Sh)
(K)
    Grant
date
fair
value
of
stock
and
TSRUs(2)
($) (L)
 

Juan Ramón Alaix

    2/23/2012        0 (3)      344,820 (3)      689,640 (3)              53,635        21.03        219,904   
                    45,468        21.03        221,884   
                  10,414            219,006   
            0 (4)      10,414 (4)      20,828 (4)            219,006   

Richard A. Passov

    2/23/2012        0 (3)      258,168 (3)     516,336 (3)              36,408        21.03        149,273   
                    30,864        21.03        150,616   
                  7,069            148,661   
            0 (4)      7,069 (4)      14,138 (4)            148,661   

Kristin C. Peck

    2/23/2012        0 (3)      344,820 (3)      689,640 (3)              51,578        21.03        211,470   
                    43,724        21.03        213,373   
                  10,014            210,594   
            0 (4)      10,014 (4)      20,028 (4)            210,594   

Clinton A.
Lewis, Jr.

    2/23/2012        0 (3)      139,224 (3)      278,448 (3)              15,777        21.03        64,686   
                    13,374        21.03        65,265   
                  3,063            64,415   
            0 (4)      3,063 (4)      6,126 (4)            64,415   
    12/31/2012                    11,962            300,007   

Catherine A. Knupp

    2/23/2012        0 (3)      139,224 (3)     278,448 (3)              15,170        21.03        62,197   
                    12,860        21.03        62,757   
                  2,945            61,933   
            0 (4)      2,945 (4)      5,890 (4)            61,933   
    12/31/2012                    11,962            300,007   

 

(1) The PSA and RSU award values were converted to units using the Pfizer closing stock price of $21.22 on February 21, 2012; the 5-Year and 7-Year TSRU values were converted using $4.12, and $4.86, respectively, the estimated value using the Monte Carlo Simulation model as of February 21, 2012. Pfizer’s closing stock price on December 31, 2012 was $25.08.
(2) The amounts shown in this column represent the award values as of the grant dates. The values of RSUs, PSAs and 5-Year and 7-Year TSRUs are shown at the respective fair values of $21.03, $21.03, $4.10 and $4.88, as of February 23, 2012.
(3) The amounts represent the threshold, target and maximum non-equity incentive plan awards under the GPP for 2012.
(4) The amounts represent the threshold, target, and maximum share payouts under the Pfizer Performance Share Award Program for the January 1, 2012—December 31, 2014 performance period. The payment for threshold performance is 0% of target.

 

141


Table of Contents

The following table summarizes the equity awards Pfizer made to our NEOs that were outstanding as of December 31, 2012.

2012 outstanding equity awards at fiscal year-end table

 

          Option/SAR Awards (2)     Stock Awards(3)  

Name (a)

  Grant Date/
Perf Share
Period (1)
    Number of
Securities
Underlying
Unexercised
Options (#)

Exercisable
(b)
    Number of
Securities
Underlying
Unexercised
Options (#)

Unexercisable
(c)
  Number of
Securities
Underlying
Unexercised
SARs
(#) Vested
(d)
    Number of
Securities
Underlying
Unexercised
SARs (#)

Unvested (e)
    Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#) (f)
  Option
Exercise
Price
($) (g)
    Option
Expiration
Date (h)
    Number
of
Shares
or Units
of Stock
That
Have
Not
Vested
(#) (i)
    Market
Value of
Shares or
Units of
Stock That
Have Not
Vested

($) (j)
    Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(#) (k)
    Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested

($) (l)
 

Juan Ramón Alaix

    4/30/2003        49,000                30.74        4/29/2013           
    2/26/2004        40,000                37.15        2/25/2014           
    2/24/2005        49,500                26.20        2/23/2015           
    2/23/2006        80,000                26.20        2/22/2016           
    2/22/2007        63,500                25.87        2/21/2017           
    2/28/2008            23,595            22.55        2/28/2013           
    2/26/2009            38,557            12.70        2/26/2014           
    12/31/2009            37,473            18.19        12/31/2014           
    2/25/2010              36,599          17.69        2/25/2015        10,122      $ 253,861       
    2/24/2011              42,348          18.90        2/24/2016        10,280      $ 257,810       
    2/24/2011              35,058          18.90        2/24/2018           
    2/23/2012              53,635          21.03        2/23/2017        10,707      $ 268,532       
    2/23/2012              45,468          21.03        2/23/2019           
   
 
1/1/2010-
12/31/2012
 
  
                      9,053      $ 227,049   
   
 
1/1/2011-
12/31/2013
 
  
                      9,595      $ 240,643   
   
 
1/1/2012-
12/31/2014
 
  
                      10,414      $ 261,183   

Richard A. Passov

    2/27/2003        70,000                29.33        2/26/2013           
    2/26/2004        80,000                37.15        2/25/2014           
    2/24/2005        79,000                26.20        2/23/2015           
    2/23/2006        97,000                26.20        2/22/2016           
    2/22/2007        63,000                25.87        2/21/2017           
    2/28/2008            36,946            22.55        2/28/2013           
    2/26/2009            40,423            12.70        2/26/2014           
    2/25/2010              32,939          17.69        2/25/2015        9,110      $ 228,484       
    2/24/2011              34,171          18.90        2/24/2016        8,294      $ 208,022       
    2/24/2011              28,288          18.90        2/24/2018           
    2/23/2012              36,408          21.03        2/23/2017        7,268      $ 182,279       
    2/23/2012              30,864          21.03        2/23/2019           
   
 
1/1/2010-
12/31/2012
 
  
                      8,148      $ 204,352   
   
 
1/1/2011-
12/31/2013
 
  
                      7,742      $ 194,169   
   
 
1/1/2012-
12/31/2014
 
  
                      7,069      $ 177,291   

 

142


Table of Contents
          Option/SAR Awards (2)     Stock Awards(3)  

Name (a)

  Grant Date/
Perf Share
Period (1)
    Number of
Securities
Underlying
Unexercised
Options (#)

Exercisable
(b)
    Number of
Securities
Underlying
Unexercised
Options (#)

Unexercisable
(c)
  Number of
Securities
Underlying
Unexercised
SARs
(#) Vested
(d)
    Number of
Securities
Underlying
Unexercised
SARs (#)

Unvested (e)
    Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#) (f)
  Option
Exercise
Price
($) (g)
    Option
Expiration
Date (h)
    Number
of
Shares
or Units
of Stock
That
Have
Not
Vested
(#) (i)
    Market
Value of
Shares or
Units of
Stock That
Have Not
Vested

($) (j)
    Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(#) (k)
    Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested

($) (l)
 

Kristin C. Peck

    2/9/2004        7,000                38.32        2/8/2014           
    2/24/2005        5,000                26.20        2/23/2015           
    2/23/2006        8,500                26.20        2/22/2016           
    2/22/2007        14,500                25.87        2/21/2017           
    2/28/2008            15,768            22.55        2/28/2013           
    2/26/2009            24,493            12.70        2/26/2014           
    12/31/2009            26,767            18.19        12/31/2014           
    2/25/2010              28,857          17.69        2/25/2015        7,981      $ 200,162       
    2/24/2011              34,171          18.90        2/24/2016        8,294      $ 208,022       
    2/24/2011              28,288          18.90        2/24/2018           
    2/23/2012              51,578          21.03        2/23/2017        10,296      $ 258,217       
    2/23/2012              43,724          21.03        2/23/2019           
   
 
1/1/2010-
12/31/2012
 
  
                      7,138      $ 179,021   
   
 
1/1/2011-
12/31/2013
 
  
                      7,742      $ 194,169   
   
 
1/1/2012-
12/31/2014
 
  
                      10,014      $ 251,151   

Clinton A. Lewis, Jr.

    2/27/2003        33,700                29.33        2/26/2013           
    2/26/2004        27,000                37.15        2/25/2014           
    2/24/2005        15,000                26.20        2/23/2015           
    2/23/2006        33,000                26.20        2/22/2016           
    2/22/2007        28,000                25.87        2/21/2017           
    2/28/2008            9,208            22.55        2/28/2013           
    2/26/2009            11,940            12.70        2/26/2014           
    12/31/2009            10,707            18.19        12/31/2014           
    2/25/2010              11,655          17.69        2/25/2015        3,223      $ 80,844       
    2/24/2011              11,682          18.90        2/24/2016        2,836      $ 71,123       
    2/24/2011              9,671          18.90        2/24/2018           
    2/23/2012              15,777          21.03        2/23/2017        3,149      $ 78,981       
    2/23/2012              13,374          21.03        2/23/2019           
    12/31/2012                      11,962      $ 300,007       
   
 
1/1/2010-
12/31/2012
 
  
                      2,883      $ 72,306   
   
 
1/1/2011-
12/31/2013
 
  
                      2,647      $ 66,387   
   
 
1/1/2012-
12/31/2014
 
  
                      3,063      $ 76,820   

Catherine A. Knupp

    2/27/2003        26,000                29.33        2/26/2013           
    2/26/2004        27,500                37.15        2/25/2014           
    2/24/2005        21,700                26.20        2/23/2015           
    2/23/2006        30,000                26.20        2/22/2016           
    2/22/2007        20,000                25.87        2/21/2017           
    2/28/2008            7,021            22.55        2/28/2013           
    2/26/2009            9,204            12.70        2/26/2014           
    12/31/2009            16,060            18.19        12/31/2014           
    2/25/2010              10,417          17.69        2/25/2015        2,881      $ 72,263       
    2/24/2011              11,682          18.90        2/24/2016        2,836      $ 71,123       
    2/24/2011              9,671          18.90        2/24/2018           
    2/23/2012              15,170          21.03        2/23/2017        3,028      $ 75,939       
    2/23/2012              12,860          21.03        2/23/2019           
    12/31/2012                      11,962      $ 300,007       
   
 
1/1/2010-
12/31/2012
 
  
                      2,577      $ 64,631   
   
 
1/1/2011-
12/31/2013
 
  
                      2,647      $ 66,387   
   
 
1/1/2012-
12/31/2014
 
  
                      2,945      $ 73,861   

 

143


Table of Contents

 

(1) For better understanding of this table, we have included an additional column showing the grant date of stock options, stock appreciation rights and restricted stock units and the associated performance period for the performance share awards.
(2) Stock options become exercisable in accordance with the vesting schedule below:

 

Grant Date

   Vesting

2/27/2003

   1/3 per year in years 3, 4 and 5

4/30/2003

   Full vesting after 3 years

2/9/2004

   Full vesting after 3 years

2/26/2004

   1/3 per year in years 3, 4 and 5

2/24/2005

   Full vesting after 3 years

2/23/2006

   Full vesting after 3 years

2/22/2007

   Full vesting after 3 years

2/28/2008

   Full vesting after 3 years

Stock Appreciation Rights (SARs) vest in accordance with the schedule below:

2/28/2008

   Full Vesting after 3 years and become payable after 5 years

2/26/2009

   Full Vesting after 3 years and become payable after 5 years

12/31/2009

   Full Vesting after 3 years and become payable after 5 years

2/25/2010

   Full Vesting after 3 years and become payable after 5 years

2/24/2011

   Full Vesting after 3 years and become payable after 5 years and 7 years

2/23/2012

   Full Vesting after 3 years and become payable after 5 years and 7 years

Restricted Stock Units vest in accordance with the schedule below:

 

Grant Date

   Vesting

2/25/2010

   3 year cliff vesting

2/24/2011

   3 year cliff vesting

2/23/2012

   3 year cliff vesting

12/31/2012

   3 year cliff vesting

 

(3) The values provided are based on Pfizer’s closing stock price of $25.08 on December 31, 2012.

The following “2012 option exercises and stock vested table” provides additional information about the value realized by the NEOs on option award exercises and the vesting of stock/unit awards during the year ended December 31, 2012.

2012 option exercises and stock vested table

 

    Option
awards
  Restricted stock/
restricted
stock units(1)
    Performance shares
2009-2011 paid
February 2012(2)
 

Name

  Number
of shares
acquired
on
exercise
(#)
  Value
realized
on
exercise
($)
  Number
of shares
acquired
on
vesting
(#)
    Number
of shares
withheld
to cover
taxes

(#)
    Value
realized on
vesting

($)
    Number
of shares
acquired
on
vesting
(#)
    Number
of shares
withheld
to cover
taxes

(#)
    Value realized
on vesting

($)
 

Juan Ramón Alaix

        24,090        8,726      $ 552,599        12,959 (3)      -      $ 274,472   

Richard A. Passov

        25,811        9,380      $ 546,702        13,587        4,922      $ 287,773   

Kristin C. Peck

        16,162        5,832      $ 372,578        8,233        2,983      $ 174,375   

Clinton A. Lewis, Jr.

       
7,199
  
    2,573      $ 164,601       
4,013
  
   
1,395
  
  $ 84,995   

Catherine A. Knupp

        7,812        2,507      $ 183,634        3,093        953      $ 65,510   

 

(1) The shares and amounts shown in this column reflect the vesting of the RSUs granted on December 31, 2009.
(2) The performance shares in this table have been determined according to the 2009-2011 performance periods and were paid in February 2012. The performance share payouts for the 2010-2012 performance period will not be available until 2013.
(3) These shares were deferred per Mr. Alaix’s election.

 

144


Table of Contents

The following “2012 pension benefits table” shows the estimated present value of accumulated benefits payable to each of our NEOs under the Pfizer Consolidated Pension Plan, or the Pfizer Retirement Plan, which for 2012 retained the pension formula under the Pfizer Retirement Annuity Plan, or the PRAP, and the related non-funded Pfizer Supplemental Retirement Plan, or the Supplemental Retirement Plan.

2012 pension benefits table

 

Name

  

Plan name

   Number of
years of
credited
service

(#)
     Present
value of
accumulated
benefit(1)
($)
     Payments
during last
fiscal year

($)
 

Juan Ramón Alaix(2)

   Pfizer Retirement Plan      14         643,637         0   
  

Supplemental Retirement Plan

        2,360,662         0   

Richard A. Passov

   Pfizer Retirement Plan      15         537,484         0   
  

Supplemental Retirement Plan

        2,042,894         0   

Kristin C. Peck

   Pfizer Retirement Plan      8         177,805         0   
   Supplemental Retirement Plan         435,483         0   

Clinton A. Lewis, Jr.

   Pfizer Retirement Plan      24         594,918         0   
   Supplemental Retirement Plan         843,042         0   

Catherine A. Knupp

   Pfizer Retirement Plan      11         373,173         0   
   Supplemental Retirement Plan         364,963         0   

 

(1) The present value of these benefits is based on the December 31, 2011 assumptions as shown below, used in determining Pfizer’s annual pension expense for fiscal 2012 and target annual cash incentive amounts for 2012.
(2) Amounts shown here for Mr. Alaix will be offset by retirement benefits accrued under the Plan de Pensiones de los Empleados de Pharmacia Spain, S.A. during his service with Pfizer in Spain (formerly Pharmacia Spain) from July 1998 until August 2003. A portion of this accrued benefit was transferred to an individual account in accordance with Spanish pension regulations and the remainder of the benefit is payable under an insurance contract in the form of an annuity calculated at age 65.

The Pfizer retirement plan

The Pfizer Retirement Plan is a funded, tax-qualified, non-contributory defined benefit pension plan that covers certain employees, including our NEOs, hired prior to January 1, 2011.

Pfizer Retirement Plan (PRAP formula) and Supplemental Retirement Plan. Benefits under the Pfizer Retirement Plan (PRAP formula) are based on the employee’s years of service and highest average earnings for a five calendar-year period and are payable after retirement in the form of an annuity or a lump sum.

Benefits under the Pfizer Retirement Plan are calculated as an annuity equal to the greater of:

 

 

1.4% of the employee’s highest final average earnings for a five-year calendar period multiplied by years of service; or

 

 

1.75% of such earnings less 1.5% of the primary Social Security benefit multiplied by years of service.

Years of service under these formulas cannot exceed 35.

Compensation covered by the Pfizer Retirement Plan and the related Supplemental Retirement Plan for the NEOs for 2012 equals the sum of the amounts set forth for 2012 in the “Salary” and “Non-equity incentive plan compensation” columns of the “2012 summary compensation table.” The values disclosed in the 2012 pension benefits table are based on the NEOs’ 2012 target annual incentive awards. Covered compensation for Mr. Passov also includes restricted stock awards granted on or prior to April 26, 2001. After the payment of the awards for the five-year period ended on December 31, 2004, no further performance-based share awards are included in the determination of pensions under the Pfizer Retirement Plan or the Supplemental Retirement Plan.

 

145


Table of Contents

Pfizer Retirement Plan – Dr. Knupp

Prior to January 1, 2012, Dr. Knupp earned pension benefits under the Warner-Lambert formula in the Pfizer Retirement Plan and the related Warner-Lambert nonqualified supplemental retirement plan. As of January 1, 2012, Dr. Knupp began earning pension benefits under the PRAP formula and ceased earning additional accruals under the Warner-Lambert formula. Dr. Knupp’s total retirement benefit will reflect the Warner-Lambert formula for service prior to 2012 and the PRAP formula for service after 2011.

Benefits under the Warner-Lambert formula are based on the employee’s years of service and pensionable earnings and are payable after retirement in the form of an annuity.

Benefits under the Warner-Lambert formula are calculated based on the following:

 

 

for each year of plan participation, a participant earns two types of retirement credits: Earnings-Related Credits and Service-Related Credits; the benefit under the Warner-Lambert formula is the sum of these two credits;

 

 

Earnings-Related Credits are equal to 1.5% of Annual Earnings;

 

 

Service-Related Credits are equal to $96 x years of service;

 

 

there was an update as of December 31, 2011, which can increase a participant’s accrued benefit at December 31, 2011;

 

 

the update formula is 1.2% of Average Earnings up to the Covered Compensation Level plus 1.5% of Average Earnings in excess of the Covered Compensation Level, times years of service as of December 31, 2011; and

 

 

years of service under these formulas is not capped.

General. Contributions to the Pfizer Retirement Plan are made entirely by Pfizer and are paid into a trust fund from which benefits are paid.

The amount of annual earnings that may be considered in calculating benefits under the Pfizer Retirement Plan is limited by the Code. For 2012, the annual limitation was $250,000. The Code also limits the amount of pension that can be paid under the Pfizer Retirement Plan to a 2012 annual maximum of $200,000, payable at age 65 in accordance with the Code requirements. Under the Supplemental Retirement Plan, Pfizer provides, out of its general assets, amounts substantially equal to the difference between the amount that may be paid under the Pfizer Retirement Plan and the amount that would be paid in the absence of these Code limits. The Supplemental Retirement Plan is non-funded.

 

146


Table of Contents

The present value of accumulated benefits has been computed based on the assumptions as of December 31, 2011 in the following table, which were used in developing Pfizer’s financial statement disclosures:

Pension plan assumptions(1)

 

Assumptions as of

  

12/31/2011

Discount Rate

   5.10% for qualified pension plans, 5.00% for non-qualified pension plans

Lump Sum Interest Rate

   1.90% for annuity payments expected to be made during first 5 years; 4.30% for payments made between 5 and 20 years; and 5.10% for payments made after 20 years prior.

Percent Electing Lump Sum

   80%/70%(2) - Pfizer

Mortality Table for Lumps Sums

   For Pfizer, unisex mortality table specified by IRS Revenue Ruling 2007-67, based on RP 2000 table, with projected mortality improvements (7-15 years).

Mortality Table for Annuities

   Separate annuitant and non-annuitant rates for the 2012 plan year, as set forth in regulation 1.412(l)(7)-1

 

(1) These assumptions are also used to determine the change in pension value in the 2012 Summary Compensation Table.
(2) 80% relates to the Pfizer Retirement Plan and 70% relates to the Supplemental Retirement Plan. Only applies to the extent the executive is eligible to receive a lump sum.

Early retirement provisions. Under the Pfizer Retirement Plan and Supplemental Retirement Plan, the normal retirement age is 65. Under the Pfizer Retirement Plan (PRAP formula), if a participant terminates employment with an age and years of service combination equal to or greater than 90, the employee is entitled to receive either an annuity or a lump sum that is unreduced under the terms of the Pfizer Retirement Plan or the Supplemental Retirement Plan for early payment. If an employee retires on or after age 55 with 10 or more years of service, that participant may elect to receive either an early retirement annuity payment reduced by 4% per year (prorated for partial years) for each year between benefit commencement and age 65, or such amount in a lump sum payment. If an employee does not satisfy any of the above criteria and has three years of vesting service under the Retirement Plan, that participant may elect to receive an annuity starting on or after age 55, which is reduced by 6% per year for each year (prorated for partial years) prior to age 65; a lump sum payment is not available.

For Dr. Knupp, under the Warner-Lambert formula the normal retirement age is 65. If she terminates employment after age 55 with 5 or more years of service, she may elect to receive an early retirement annuity payment where the benefit Earning-Related Credits accrued will be reduced by 3% per year from age 60 to 62, or 6% for each year from age 55 to age 60; there is no reduction if payments start at or after age 62.

The following “2012 non-qualified deferred compensation table” summarizes activity during 2012 and account balances in the various Pfizer non-qualified savings and deferral plans for our NEOs as of December 31, 2012 (except as otherwise provided below). The following plans and programs permit the executives to defer amounts previously earned on a pre-tax basis: Pfizer’s Non-Funded Deferred Compensation and Supplemental Savings Plan, or the PSSP; Pfizer’s Deferred Compensation Plan for GPP, PSAs, and STI Shift Awards. RSUs are also subject to mandatory deferral if the executive is subject to, or is likely to be subject to, Section 162(m) of the Code. The PSSP is a non-qualified supplemental savings plan that provides for the deferral of compensation that otherwise could have been deferred under the related tax-qualified 401(k) plans but for the application of certain Code limitations and for company matching contributions based on the executive’s contributions. Other than the matching contributions (and the earnings thereon) in the PSSP, the account balances in these plans are generally attributable to deferrals of previously earned compensation and the earnings on those amounts.

 

147


Table of Contents

2012 non-qualified deferred compensation table(1)

 

Name

  Plan(2)   Executive
contributions
in 2012 ($)
    Company
contributions
in 2012 ($)
    Aggregate
earnings
in 2012 ($)
    Aggregate
withdrawals/
distributions
($)
  Aggregate
balance at
12/31/12
($)
 

Juan Ramón Alaix

  PSSP     123,141        34,634        127,945          1,157,566   
  Deferred GPP     168,000          33,595          1,186,349   
  Deferred PSA     274,472          332,733          1,941,881   
  Deferred STI
Shift
        19,434          665,215   
   

 

 

   

 

 

   

 

 

   

 

 

 

 

 
  Total:     565,613        34,634        513,707          4,951,011   
   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Richard A. Passov

  PSSP     143,759        32,346        139,386          2,583,728   
  Deferred GPP     268,000          6,319          274,319   
  Deferred PSA         333,666          1,965,472   
   

 

 

   

 

 

   

 

 

   

 

 

 

 

 
  Total:     411,759        32,346        479,371          4,823,519   
   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Kristin C. Peck

  PSSP     38,775        29,081        50,752          356,049   
  Deferred GPP          
  Deferred PSA          
   

 

 

   

 

 

   

 

 

   

 

 

 

 

 
  Total:     38,775        29,081        50,752          356,049   
   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Clinton A. Lewis, Jr.

  PSSP          
  Deferred GPP          
  Deferred PSA         23,083          135,974   
   

 

 

   

 

 

   

 

 

   

 

 

 

 

 
  Total:         23,083          135,974   
   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Catherine A. Knupp

  PSSP     41,139        14,285        53,910          516,254   
  Deferred GPP          
  Deferred PSA          
   

 

 

   

 

 

   

 

 

   

 

 

 

 

 
  Total:     41,139        14,285        53,910          516,254   
   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

(1) Contribution amounts reflected in this table are reflected in the “2012 summary compensation table.” Aggregate earnings are not reflected in the “2012 summary compensation table.”
(2) The PSSP contributions were based on the executive’s deferral election and the salary shown in the “2012 summary compensation table,” as well as annual incentive awards paid in 2012, previously reported. PSSP amounts shown reflect actual contributions and aggregate earnings through December 31, 2012.

Pfizer savings plans

Pfizer provides the Pfizer Savings Plan, or the Savings Plan, to U.S.-based employees of Pfizer and the PSSP to employees who meet the eligibility requirements, including our NEOs. Contribution amounts are reflected in the “2012 summary compensation table.” Earnings have not been included. These plans are described below.

The Savings Plan is a tax-qualified retirement savings plan. Participating employees may contribute up to 20% of “regular earnings” on a before-tax basis, Roth 401(k) basis and after-tax basis, into their Savings Plan accounts. “Regular earnings” for the Savings Plan include both salary and bonus or annual incentive awards. In addition, under the Savings Plan, Pfizer generally matches an amount equal to one dollar for each dollar contributed by participating employees on the first 3% of their regular earnings, and fifty cents for each additional dollar contributed on the next 3% of their regular earnings. Matching contributions generally are invested in Pfizer common stock. Plan participants have the ability to immediately diversify the matching contribution investments.

 

148


Table of Contents

Pursuant to tax law limitations, effective for 2012, the Pfizer Savings Plan limits the “additions” that can be made to a participating employee’s account to $49,000 per year. “Additions” include Pfizer matching contributions, before-tax contributions, Roth 401(k) contributions and after-tax contributions.

The Code limits the amounts that may be allocated to tax-qualified savings plans and the amount of compensation that can be taken into account in computing benefits under the Savings Plan. The 2012 maximum before-tax and Roth 401(k) contribution limit was $17,000 per year (or $22,000 per year for eligible participants age 50 and over). In addition, no more than $250,000 of annual compensation may be taken into account in computing benefits under the Savings Plan.

The PSSP is intended to pay, out of the general assets of Pfizer, an amount substantially equal to the difference between the amount that would have been allocated to an employee’s account as before-tax contributions, Pfizer matching contributions and the amount actually allocated under the Savings Plan in the absence of the limits described in the preceding paragraph. Under the PSSP, participants can elect to defer up to 20% of eligible wages on a before-tax basis. Generally, under the PSSP, participants can elect to receive payments as a lump sum or in one to twenty annual installments following termination from service. Participants who do not make an election receive lump sum payments. In certain circumstances, Pfizer has established and funded trusts to secure its obligations to make payments under the PSSP.

Amounts deferred, if any, under the PSSP by the NEOs for 2012 are included in the “Salary” and “Non-equity incentive plan compensation” columns of the “2012 summary compensation table.” In the “2012 non-qualified deferred compensation table,” PSSP values are shown for each NEO. Executive contributions reflect the percent of salary and bonus the executive has elected to defer under the PSSP. The Pfizer matching contributions are shown in the “Company contributions” column of the table. For the NEOs, Pfizer’s matching contributions under the Savings Plan and the PSSP are shown in the “All other compensation” column of the “2012 summary compensation table.” The “Aggregate Earnings” column in the table above represents the amount by which the PSSP balance changed in the past fiscal year, net of employee and employer contributions.

Estimated benefits upon termination

The following table shows the estimated benefits payable upon a hypothetical termination of employment under Pfizer’s SLC Separation Plan and the Sale of Business Plan under various termination scenarios as of December 31, 2012. Severance benefits under the severance plans are subject to the execution of a release agreement.

Estimated benefits upon various termination scenarios

 

                Termination Without Cause     Sale of Business
Severance (4)
    Termination on Change
in Control
    Death or
Disability
 
           

Name

  Severance(1)
(A) ($)
    Other(2)
(B) ($)
    Long-Term
Award
Payouts(3)
(C) ($)
    Total
(A+B+C)
($)
    (D)($)     Long-Term
Award
Payouts(5)
(E) ($)
    Total
(B+D+E)
($)
    Long-Term
Award
Payouts(6)
($)
 

Juan Ramón Alaix

    1,094,800        17,136        3,019,640        4,131,576        2,189,600        3,924,919        6,131,655        3,924,919   

Richard A. Passov

    873,200        23,355        2,326,540        3,223,095        1,746,400        3,170,450        4,940,205        3,170,450   

Kristin C. Peck

    949,820        20,205        2,201,915        3,171,940        1,899,600        3,236,131        5,155,936        3,236,131   

Clinton A. Lewis, Jr.

    539,200        23,034        875,961        1,438,195        1,078,400        1,507,751        2,609,185        1,507,751   

Catherine A. Knupp

    539,200        21,185        841,677        1,402,062        1,078,400        1,464,233        2,563,818        1,464,233   

 

(1) These amounts represent severance payable under the SLC Separation Plan, equal to one year’s pay (defined as base salary and target bonus).
(2) These amounts represent the cost of 12 months of active employee medical and life insurance coverage. In addition, executives would be entitled to education and outplacement assistance.
(3) These amounts represent the value of long-term incentive awards which vest on termination of employment without cause using Pfizer’s closing stock price of $25.08 on December 31, 2012.

 

149


Table of Contents
(4) These amounts represent severance equal to 2 times the NEO’s annualized base salary plus target bonus, payable under the Sale of Business Severance Plan.
(5) These amounts represent the value of long-term incentive awards which vest following a change in control using Pfizer’s closing stock price of $25.08 on December 31, 2012.
(6) These amounts represent the value of long-term incentive awards which vest on termination of employment due to death or disability using Pfizer’s closing stock price of $25.08 on December 31, 2012.

Payments made upon disability. Under the Pfizer flexible benefits program, eligible employees are provided with company-paid long-term disability coverage of 50% of total pay, and may buy an increased level of coverage of up to 70% of total pay, subject to a $500,000 annual benefit limit. Beginning January 1, 2012, health and life insurance benefits are provided for 24 months and Pfizer Retirement Plan benefits do not continue to accrue to those who begin to receive long-term disability benefits.

Under the 2004 Stock Plan, in the event of disability, PSAs are paid out at target; RSUs are paid in full; SARs/TSRUs vest and are settled on the fifth or seventh anniversary of the date of grant; and outstanding stock options continue to vest and become exercisable for the full option term, provided the executive remains permanently and totally disabled.

Payments made upon death. Under the Pfizer flexible benefits program, eligible employees, have the ability to purchase life insurance benefits of eight times pay (subject to evidence of insurability requirements) up to a maximum of $4.0 million. Pfizer provides an amount equal to base pay with a maximum cap of $2.0 million paid by Pfizer. The deceased executive’s pension and deferred compensation are also payable in accordance with the plans and the executive’s election.

Under the 2004 Stock Plan, in the event of death, PSAs are paid out at target; RSUs are paid in full; SARs/TSRUs vest and are immediately settled; and outstanding stock options are exercisable for the remainder of the option term if the participant is eligible for retirement; if not, the stock options remain exercisable for up to two years.

Payments made upon retirement. Under the 2004 Stock Plan, if a participant retires (after attaining age 55 with at least 10 years of service) after the first anniversary of the grant date, RSUs are prorated based on service subsequent to the grant date; SARs/TSRUs continue to vest and are settled on the fifth or seventh anniversary of the grant date; and outstanding stock options are exercisable for the full term of the option. PSAs are prorated at the end of the performance period if the participant is employed through December 31 of the year of grant. If the retirement takes place prior to the first anniversary of the grant date, these long-term awards are forfeited. Based on age and years of service, Mr. Alaix is the only NEO eligible for retirement treatment and would receive approximately $2,579,000 under his long-term awards as of December 31, 2012 in the event of his retirement.

See “—Employment and retirement benefits” for further information on health care, retirement and savings plan benefits under Pfizer’s plans.

Payments made upon change in control. Under the 2004 Stock Plan, if a participant’s employment is terminated within 24 months of a change in control, PSAs are paid out at target; RSUs are paid in full; unvested SARs/TSRUs vest and are immediately settled; vested SARs/TSRUs are settled on the fifth or seventh anniversary of the date of grant; and outstanding stock options are exercisable for the remainder of the option term.

 

150


Table of Contents

Director compensation

Following this offering, we intend to provide competitive compensation to our non-employee directors that will enable us to attract and retain high quality directors, provide them with compensation at a level that is consistent with our compensation objectives and encourage their ownership of our stock to further align their interests with those of our stockholders. Our directors who are our or Pfizer’s full-time employees will receive no additional compensation for service as a member of our board of directors. Following this offering, our non-employee directors’ compensation will consist of the following:

 

   

an annual cash retainer for each non-employee director of $100,000;

 

   

an annual cash retainer for the Chair of each committee of the Board of $25,000; and

 

   

an equity retainer to each non-employee director upon his or her first election as such and annually thereafter with a value of $140,000 on the date of grant (i.e., respectively, the date of his or her first election and the date of the annual meeting of our stockholders), based upon the closing price of our common stock on that date.

At the time of this offering, we intend to grant, subject to approval of our board or an authorized committee thereof, the initial equity retainer of deferred stock units under the Equity Plan to each of the three non-employee directors with a value of $140,000 for each grant. Each non-employee director would have a right to receive the shares of Class A common stock underlying the deferred stock units only upon termination of service as our director. If the initial public offering price is equal to $23.50 per share (the midpoint of the price range set forth on the cover of this prospectus), each non-employee director would receive 5,957 deferred units.

Additional cash retainers will be payable to a Lead Director of the Board or non-executive Chair of the Board, if an individual is in the future elected or appointed to fill either such role.

In addition, we have adopted share ownership guidelines applicable to non-employee directors, requiring the directors to hold Zoetis shares with a value of three times their annual cash retainer of $100,000. Each employee director will have five years from (a) the date upon which the guidelines were established, or (b) if later, the date of his or her first election as a director, to achieve the share ownership requirement.

 

151


Table of Contents

Principal and selling stockholder

The following table sets forth certain information regarding beneficial ownership of our common stock as of January 28, 2013, and as adjusted to reflect the sale of the shares of Class A common stock in this offering, for:

 

 

each person known to us to be the beneficial owner of more than 5% of our common stock;

 

 

each named executive officer;

 

 

each of our directors and director nominees; and

 

 

all of our executive officers and directors as a group.

For U.S. securities law purposes, Pfizer, in its capacity as selling stockholder, is offering all the shares of our Class A common stock it owns. Instead of selling shares of our Class A common stock directly to the underwriters for cash, Pfizer will first exchange the shares of our Class A common stock to be sold in this offering with certain of the underwriters, which we refer to, in such role, as the “debt-for-equity exchange parties,” for outstanding indebtedness of Pfizer held by the debt-for-equity exchange parties. The debt-for-equity exchange parties will then sell the shares to the underwriters for cash. This debt-for-equity exchange will occur on the settlement date of this offering immediately prior to the settlement of the debt-for-equity exchange parties’ sale of the shares to the underwriters. If the underwriters exercise their option to purchase additional shares of Class A common stock from the debt-for-equity exchange parties, Pfizer will convert shares of Class B common stock into shares of Class A common stock and exchange such shares of Class A common stock with the debt-for-equity exchange parties. The debt-for-equity exchange parties will then sell such shares of Class A common stock to the underwriters for cash. This debt-for-equity exchange will occur on the settlement date of such option exercise immediately prior to the settlement of the debt-for-equity exchange parties’ sale of such shares to the underwriters. See “Underwriting—The debt-for-equity exchange.” Prior to completion of this offering, we will be a wholly-owned subsidiary of Pfizer.

Unless otherwise noted below, the address of each beneficial owner listed on the table is c/o Pfizer, 5 Giralda Farms, Madison, New Jersey 07940. We have determined beneficial ownership in accordance with the rules of the SEC. We believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares of common stock that they beneficially own. The table does not reflect any shares of Class A common stock that our directors and executive officers may purchase in this offering, including through the directed share program, as described under “Underwriting—Directed share program.”

 

    Common stock beneficially owned prior
to the completion of this offering
    Common stock beneficially owned
following the completion of this offering
 
    Class A
common  stock
    Class B
common stock
    Class A
common  stock
    Class B
common stock
 

Name of beneficial owner

  Number
of shares
    Percentage
of class
    Number
of shares
    Percentage
of class
    Number
of shares
    Percentage
of class
    Number
of shares
    Percentage
of class
 

5% Beneficial Owner:

               

Pfizer Inc.

    86,100,000        100%        413,900,000        100%        —          0%        413,900,000        100%   

Directors and Executive Officers:

               

Juan Ramón Alaix

    —          —          —          —          —          —          —          —     

Richard A. Passov

    —          —          —          —          —          —          —          —     

Catherine A. Knupp

    —          —          —          —          —          —          —          —     

Clinton A. Lewis, Jr.

    —          —          —          —          —          —          —          —     

Kristin C. Peck

    —          —          —          —          —          —          —          —     

Frank A. D’Amelio

    —          —          —          —          —          —          —          —     

Geno J. Germano

    —          —          —          —          —          —          —          —     

Douglas E. Giordano

    —          —          —          —          —          —          —          —     

Charles H. Hill

    —          —          —          —          —          —          —          —     

Amy W. Schulman

    —          —          —          —          —          —          —          —     

Michael B. McCallister

    —          —          —          —          —          —          —          —     

Gregory Norden

    —          —          —          —          —          —          —          —     

William C. Steere, Jr.

    —          —          —          —          —          —          —          —     

Directors and executive officers as a group (19 persons)

    —          —          —          —          —          —          —          —     

 

152


Table of Contents

Certain relationships and related party transactions

Relationship with Pfizer

In January 2013, Pfizer transferred to us subsidiaries holding substantially all of the assets and liabilities of its animal health business. In exchange, we issued or agreed to transfer to Pfizer: (i) all of the issued and outstanding shares of our Class A common stock; (ii) all of the issued and outstanding shares of our Class B common stock; (iii) the Pfizer-owned notes; and (iv) an amount of cash equal to substantially all of the net proceeds we received in the senior notes offering, which amount will be paid immediately prior to the completion of this offering. Prior to the completion of this offering, all of our outstanding shares of common stock will be owned by Pfizer. Immediately following the completion of this offering, Pfizer will own 100% of our outstanding Class B common stock and no shares of our Class A common stock, giving Pfizer 82.8% of the economic interest and combined voting power in shares of our outstanding common stock other than with respect to the election of directors and 98.0% of the combined voting power of our outstanding common stock with respect to the election of directors (or 80.2% and 97.6%, respectively, if the underwriters exercise their option to purchase additional shares in full). See “Risk factors—Risks related to our relationship with Pfizer” and “The Separation and Distribution transactions.”

In connection with this offering and the Separation, we and Pfizer intend to enter into, or have entered into, certain agreements that will provide a framework for our ongoing relationship with Pfizer. Of the agreements summarized below, the material agreements are filed as exhibits to the registration statement of which this prospectus is a part, and the summaries of these agreements set forth the terms of the agreements that we believe are material. These summaries are qualified in their entirety by reference to the full text of such agreements.

Global separation agreement

We intend to enter into a global separation agreement with Pfizer immediately prior to the completion of this offering that will govern the relationship between Pfizer and us following this offering.

Allocation of assets and liabilities. Notwithstanding the transfer of assets and assumption of liabilities that occurred prior to the completion of the senior notes offering, the global separation agreement generally allocates assets and liabilities to us and Pfizer according to the business to which such assets or liabilities relate. In general, Pfizer has conveyed, leased or licensed to us ownership of all assets that are used exclusively or held for use exclusively in Pfizer’s animal health business and we have assumed all of Pfizer’s historical and future liabilities to the extent relating to, arising out of or resulting from, the operation of the animal health business (whether before, on or after the consummation of this offering), including:

 

   

warranty obligations created as part of the animal health business;

 

   

product liability claims with respect to any animal health product;

 

   

environmental liabilities relating to the animal health business and environmental liabilities at the real property that we acquired from Pfizer;

 

   

liabilities related to animal health businesses or operations that were discontinued or divested by Pfizer;

 

   

litigation liabilities; and

 

   

our debt obligations, including under the senior notes offering.

We and Pfizer have agreed that our cash balance on the date of the completion of this offering will be at least $300 million. To the extent that our cash balance on the date of the completion of this offering is less than $300 million, Pfizer will pay us an amount in cash equal to the shortfall.

Indemnification. Generally, each party will indemnify, defend and hold harmless the other party and its subsidiaries (and each of their affiliates) and their respective officers, employees and agents from and against any and all losses relating to, arising out of or resulting from: (i) liabilities assumed by the indemnifying party and

 

153


Table of Contents

(ii) any breach by the indemnifying party or its subsidiaries of the global separation agreement and the other agreements described in this section (unless such agreement provides for separate indemnification). The global separation agreement also specifies procedures with respect to claims subject to indemnification.

Delayed transfers and further assurances. To the extent transfers of assets and assumptions of liabilities related to our business have not been completed because of a necessary consent or governmental approval or because a condition precedent to any such transfer was not satisfied or any related relevant fact was not realized, the parties will cooperate to effect such transfers or assumptions for agreed upon consideration as promptly as practicable.

Each of the parties will agree to cooperate with the other party and use commercially reasonable best efforts to take or to cause to be taken all actions, and to do, or to cause to be done, all things reasonably necessary, proper or advisable under applicable law, regulations and agreements to consummate and make effective the transactions contemplated by the global separation agreement and the other agreements described in this section.

Mutual releases. Generally, each of Pfizer and us will release the other party from any and all liabilities. The liabilities released include liabilities arising under any contract or agreement, existing or arising from any acts or events occurring or failing to occur or any conditions existing before the completion of this offering.

Insurance. Our directors and officers will obtain coverage under a directors’ and officers’ insurance program to be established by us at our expense, but otherwise we will continue to enjoy coverage under Pfizer’s existing insurance program following the completion of this offering. After the date on which Pfizer and its affiliates hold 50% or less of our then outstanding common stock, pursuant to either the Distribution or any other disposition, we will arrange for our own insurance policies and will not benefit from any of Pfizer’s or its affiliates’ insurance policies that may provide any such coverage.

The agreement will also set forth procedures for the administration of insured claims and will allocate the right to claim coverage and control over the prosecution and defense of claims.

Covenants. We will agree to certain covenants, including covenants regarding:

 

 

disclosure of information about our financial controls to Pfizer for so long as Pfizer is required to consolidate our results of operations and financial position or to account for its investment in us under the equity method of accounting;

 

 

delivery of quarterly and annual financial information to Pfizer for so long as Pfizer is required to consolidate our results of operations and financial position or to account for its investment in us under the equity method of accounting;

 

 

restrictions on incurring any debt obligations without Pfizer’s prior written consent, following the consummation of this offering and through the date of the final transfer pursuant to the Distribution, if effected, or of any other disposition that results in Pfizer and its affiliates holding 50% or less of our then outstanding common stock; and

 

 

restrictions on issuance of our capital stock without Pfizer’s prior written consent through the date of the final transfer pursuant to the Distribution, if effected, or of any other disposition that results in Pfizer and its affiliates holding 50% or less of our then outstanding common stock.

Pfizer will be entitled to nominate directors for election to our board. The number of such Pfizer designees will depend on the level of beneficial ownership by Pfizer and its subsidiaries of the total voting power of all classes of our then outstanding capital stock entitled to vote generally with respect to the election of directors.

Term. Following the completion of this offering, the global separation agreement will continue unless terminated by us and Pfizer, although certain rights and obligations may terminate upon a reduction in Pfizer’s ownership of our outstanding common stock.

 

154


Table of Contents

Transitional services agreements

We intend to enter into a transitional services agreement with Pfizer immediately prior to the completion of this offering that will grant us the right to continue to use certain of Pfizer’s services and resources related to our corporate functions, such as business technology, facilities, finance, human resources, public affairs and procurement. We refer to these services and resources, collectively, as the “Pfizer services.”

We will pay Pfizer mutually agreed-upon fees for the Pfizer services, which will be based on Pfizer’s costs of providing the Pfizer services. During the two years following the completion of this offering, the markup for these services will be 0% and, for the remainder of the term of the agreement, Pfizer may introduce a markup of 7%. We will be able to request good faith negotiations of the applicable fees if we believe that the fees materially overcompensate Pfizer for any of the Pfizer services and Pfizer has reciprocal rights if it believes the fees materially undercompensate Pfizer. Third party costs will be passed through to us at Pfizer’s or its affiliates’ cost. Prior to the Distribution, if effected, Pfizer will have the unilateral right to resolve disputes under the transitional services agreement.

Under the agreement we will be able to use the Pfizer services for a fixed term established on a service-by-service basis. However, we generally will have the right to terminate a service earlier if we give notice to Pfizer. Partial reduction in the provision of any service requires Pfizer’s consent. In addition, either party will be able to terminate the agreement due to a material breach of the other party, subject to limited cure periods.

In addition, we may, from time to time prior to or following the completion of this offering, agree to provide to Pfizer certain limited reverse transitional services with respect to the continued use of certain assets or resources that Pfizer will convey to us prior to the completion of this offering. To the extent such services are provided, Pfizer would pay us a mutually agreed-upon fee for these services, which fee would be based on our costs of providing the service to Pfizer.

Tax matters agreement

Allocation of taxes. We intend to enter into a tax matters agreement with Pfizer immediately prior to the completion of this offering that will govern the parties’ respective rights, responsibilities and obligations with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and other matters regarding taxes. In general, under the agreement:

 

 

Pfizer will be responsible for any U.S. federal, state, local or foreign income taxes and any U.S. state or local non-income taxes (and any related interest, penalties or audit adjustments and including those taxes attributable to our business) reportable on a consolidated, combined or unitary return that includes Pfizer or any of its subsidiaries (and us and/or any of our subsidiaries) for any periods or portions thereof ending on or prior to December 31, 2012. We will be responsible for the portion of any such taxes for periods or portions thereof beginning on or after January 1, 2013, as would be applicable to us if we filed the relevant tax returns on a standalone basis.

 

 

We will be responsible for any U.S. federal, state, local or foreign income taxes and any U.S. state or local non-income taxes (and any related interest, penalties or audit adjustments) that are reportable on returns that include only us and/or any of our subsidiaries, for all tax periods whether before or after the completion of this offering.

 

 

Pfizer will be responsible for certain specified foreign taxes directly resulting from certain aspects of the Separation.

We will not generally be entitled to receive payment from Pfizer in respect of any of our tax attributes or tax benefits or any reduction of taxes of Pfizer. Neither party’s obligations under the agreement will be limited in amount or subject to any cap. The agreement will also assign responsibilities for administrative matters, such as the filing of returns, payment of taxes due, retention of records and conduct of audits, examinations or similar proceedings. In addition, the agreement provides for cooperation and information sharing with respect to tax matters.

 

155


Table of Contents

Pfizer will be primarily responsible for preparing and filing any tax return with respect to the Pfizer affiliated group for U.S. federal income tax purposes and with respect to any consolidated, combined, unitary or similar group for U.S. state or local or foreign income tax purposes or U.S. state or local non-income tax purposes that includes Pfizer or any of its subsidiaries, including those that also include us and/or any of our subsidiaries. We will generally be responsible for preparing and filing any tax returns that include only us and/or any of our subsidiaries.

The party responsible for preparing and filing a given tax return will generally have exclusive authority to control tax contests related to any such tax return. We will generally have exclusive authority to control tax contests with respect to tax returns that include only us and/or any of our subsidiaries.

Preservation of the tax-free status of certain aspects of the Separation. We and Pfizer intend the Separation, the debt-for-debt-exchange, the debt-for-equity exchange, the transfer of cash proceeds of the senior notes offering to Pfizer and the potential Distribution to qualify as a reorganization pursuant to which no gain or loss is recognized by Pfizer or its shareholders for federal income tax purposes under Sections 355, 368(a)(1)(D) and related provisions of the Code. In addition, we and Pfizer intend for the Separation, the debt-for-debt-exchange, the debt-for-equity exchange, the potential Distribution and certain related transactions to qualify for tax-free treatment under U.S. federal, state and local tax law and/or foreign tax law.

Pfizer has received a private letter ruling from the IRS to the effect that, among other things, the Separation, the senior notes offering, the debt-for-equity exchange, the transfer of cash proceeds of the senior notes offering to Pfizer and the potential Distribution will qualify as a transaction that is tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. In addition, Pfizer has received and will receive opinions from its outside tax advisors regarding the tax-free status of these transactions and certain related transactions. In connection with the ruling and the opinions, we and Pfizer have made and will make certain representations regarding the past and future conduct of our respective businesses and certain other matters.

We will also agree to certain covenants that contain restrictions intended to preserve the tax-free status of the Separation, the senior notes offering, the debt-for-equity exchange, the transfer of cash proceeds of the senior notes offering to Pfizer, the potential Distribution and certain related transactions. Such covenants will generally restrict our ability to pre-pay, pay down, redeem, retire or otherwise acquire, however effected, including pursuant to the terms thereof, the 2023 notes prior to stated maturity of the 2023 notes or to take or permit to be taken any action at any time, including, without limitation, any modification to the terms of the 2023 notes that could jeopardize, directly or indirectly, the qualification, in whole or part, of any of the Pfizer-owned notes as “securities” within the meaning of Section 361(a) of the Code. However, pursuant to the tax matters agreement, we will be permitted to redeem the 2023 notes pursuant to the change of control redemption provision contained in the indenture governing the notes. See “Description of certain indebtedness—Senior notes offering.” We may take certain actions prohibited by these covenants only if Pfizer receives a private letter ruling from the IRS or we obtain and provide to Pfizer an opinion from a U.S. tax counsel or accountant of recognized national standing, in either case acceptable to Pfizer in its sole and absolute discretion, to the effect that such action would not jeopardize the tax-free status of these transactions. We will be barred from taking any action, or failing to take any action, where such action or failure to act adversely affects or could reasonably be expected to adversely affect the tax-free status of these transactions, for all time periods. In addition, during the time period ending two years after the date of the potential Distribution these covenants will include specific restrictions on our:

 

 

issuance or sale of stock or other securities (including securities convertible into our stock but excluding certain compensatory arrangements);

 

 

sales of assets outside the ordinary course of business; and

 

 

entering into any other corporate transaction which would cause us to undergo a 40% or greater change in our stock ownership.

We will generally agree to indemnify Pfizer and its affiliates against any and all tax-related liabilities incurred by them relating to the Separation, the debt-for-debt-exchange, the debt-for-equity exchange, the transfer of cash

 

156


Table of Contents

proceeds of the senior notes offering to Pfizer, the potential Distribution and/or certain related transactions to the extent caused by an acquisition of our stock or assets or by any other action undertaken by us. This indemnification provision will apply even if Pfizer has permitted us to take an action that would otherwise have been prohibited under the tax-related covenants described above.

Research and development collaboration and license agreement

We intend to enter into an R&D collaboration and license agreement with Pfizer immediately prior to the completion of this offering. Under the agreement, certain of our employees will be able to review a Pfizer database to identify compounds that may be of interest to us in the animal health field, and upon identifying any such compounds, we will be able to request permission (known as “intent to access”) to conduct certain limited research activities. If Pfizer grants intent to access, the scope of permitted research activities will be specified on a case-by-case basis by Pfizer and may include screening the Pfizer compound library. To conduct further research and development on the class of compounds identified during intent to access, we must request permission (known as “approval in principle”) from a joint steering committee described below and any approval will be subject to any restrictions specified by the joint steering committee. Certain compounds that we began researching prior to the completion of this offering will be granted approval in principle as of the completion of this offering.

Upon granting approval in principle, Pfizer will grant us an option to enter into a license agreement, which will be exercisable no later than five years after the approval in principle is granted. Prior to exercising the option, our license from Pfizer under the agreement will be non-exclusive, except with respect to patents and know-how that we develop, for which our license will be exclusive (except as to Pfizer and its affiliates). Accordingly, in the case of non-exclusive licenses, Pfizer could itself, or could enable a third party to, conduct research on compounds that are the same or similar to those that we are researching. If we exercise the option and enter into the license agreement for a particular compound, our license to research, develop and commercialize products with such compounds for the animal health field will be exclusive, subject to any restrictions imposed by Pfizer and the joint steering committee. Except for certain compounds we began researching prior to the completion of this offering, pursuant to any such license agreement, we will pay Pfizer an upfront payment, a milestone payment upon obtaining regulatory approval in a major market country and royalties on net sales. Our obligation to pay royalties will expire on a product-by-product and country-by-country basis upon the later of: (i) the expiration of the related patents and data exclusivity or (ii) ten years after the first commercial sale of such product.

During the term of the agreement, we will be required to reimburse Pfizer’s and its affiliates’ costs in connection with the agreement. Certain of such costs will be paid in the form of an annual access fee and others will be invoiced on a quarterly basis.

The joint steering committee will be comprised of an equal number of representatives from each party and will act by consensus. If consensus cannot be reached, the matter will be referred to each party’s alliance manager to propose potential solutions. If the alliance managers fail to propose such a solution, the matter will be referred to senior executives of each party. If the senior executives do not resolve the matter, Pfizer will have final decision making authority.

Pfizer will own all intellectual property invented or generated under the agreement (subject to any third party rights) and will have sole discretion regarding filing, prosecuting and maintaining such intellectual property, subject to our rights, in certain instances, to request that Pfizer file or continue to maintain patents at our cost. Pfizer will have sole discretion regarding enforcement of any intellectual property licensed to us under the agreement.

We will have confidentiality and other obligations related to the security of intellectual property and other confidential information and materials. If Pfizer reasonably believes that we violated these provisions, Pfizer will be able to deny our access to such intellectual property and other confidential information and materials.

The term of the agreement will be seven years, subject to extension by mutual agreement. The agreement will terminate with respect to particular compounds if intent to access or approval in principle is denied or we fail to

 

157


Table of Contents

exercise our license option. Pfizer will also be able to terminate our rights under the agreement or any related license agreement (as applicable) with respect to any compound for which approval in principle has been granted (including compounds for which we have exercised the option and entered into a license agreement) if Pfizer pays us an agreed upon amount which is intended to reflect the fair market value of the compound under our license. This right will expire on a compound-by-compound basis when we submit a regulatory approval application for each compound in a major market country and will not apply to compounds for which approval in principle was granted prior to the completion of this offering.

In the event of either party’s uncured material breach, the other party will be able to terminate the agreement. If the material breach concerns any security measures or confidentiality or use restrictions and such breach is the result of bad faith, gross negligence or willful misconduct, such breach will be deemed to not be curable and, in addition to the agreement terminating, Pfizer will be able to terminate any license agreements that we have entered into after exercising our option (except to the extent any license agreement relates to a commercial product).

The agreement will terminate automatically if we enter into an agreement resulting in our change of control, we assign or another party assumes this agreement without Pfizer’s consent or we are otherwise acquired by a third party, or if either party becomes insolvent or certain other events related to our bankruptcy or indebtedness occur. If we acquire a certain interest in, or assets of, a human health company, Pfizer will be able to terminate the agreement, and if Pfizer acquires or is acquired by an animal health business of a certain size, either party will be able to terminate the agreement. Following expiration and termination for specific reasons, we will be granted a non-exclusive license to any intellectual property that we developed under the agreement to conduct research in the animal health field, subject to certain exclusions (which exclusions will include the compounds that we researched and developed under the agreement and other compounds designated by Pfizer on a case-by-case basis). Except as set forth above, license agreements entered into pursuant to the R&D collaboration and license agreement will not terminate if the R&D collaboration and license agreement terminates.

Employee matters agreement

We intend to enter into an employee matters agreement with Pfizer immediately prior to the completion of this offering. The employee matters agreement will govern Pfizer’s, our and the parties’ respective subsidiaries’ and affiliates’ rights, responsibilities and obligations after this offering with respect to the following matters in connection with the animal health business:

 

 

employees and former employees (and their respective dependents and beneficiaries) who are or were associated with Pfizer, us or the parties’ respective subsidiaries or affiliates;

 

 

the allocation of assets and liabilities generally relating to employees, employment or service-related matters and employee benefit plans; and

 

 

other human resources, employment and employee benefits matters.

Employment. We intend to offer employment, prior to the completion of this offering, to employees who are providing services to our business and who are not otherwise transferring to our entities by operation of law. To the extent that severance obligations are triggered by such transfers, we anticipate that Pfizer will administer the severance pay obligations in accordance with the terms and conditions of the applicable Pfizer severance pay plan or policy. Our employees who were providing services to our business and are on long-term disability on the applicable employee transfer date will remain employees of Pfizer to the extent permissible under applicable law, collective bargaining agreements, trade union agreements or work council agreements.

Benefit plans generally. Prior to the completion of this offering, except to the extent provided in respect of certain jurisdictions, we will become a participating employer in the Pfizer benefit plans (including legacy King Pharmaceuticals, Inc. benefit plans where applicable). We will cease to be a participating employer in the Pfizer

 

158


Table of Contents

plans and will adopt our own benefit plans on a date following the completion of this offering, which will be determined by the parties, which we refer to as the “Plan Transition Date,” and which may vary by benefit plan and by country. An appropriate allocation of our costs incurred under Pfizer benefit plans prior to the Plan Transition Date shall be charged back to Pfizer. Pfizer will retain the right to amend or terminate the plans for our employees.

Credited service. We anticipate causing our employee benefit plans to credit service with Pfizer prior to the Plan Transition Date for all purposes, except as otherwise specified in the employee matters agreement.

Defined benefit and retiree medical plans. Our employees ceased to participate in the Pfizer U.S. qualified defined benefit pension plan and the U.S. retiree medical plan effective December 31, 2012, and liabilities allocable to our employees under such plans will be retained by Pfizer. Our employees under the U.S. qualified defined benefit pension plan will be 100% vested in their accrued benefits as of December 31, 2012. Pfizer will continue crediting employees’ service with us generally through December 31, 2017 (or termination of employment from us, if earlier) for certain early retirement benefits with respect to the defined benefit pension plan, and for plan eligibility with respect to the retiree medical plan. Outside of the United States, we intend that Pfizer will transfer its defined benefit plans pension assets and liabilities allocable to the employees transferring to us in the certain countries as described in any applicable local separation agreement. In certain countries, it is anticipated that liabilities with respect to past service with Pfizer will be retained by Pfizer.

Nonqualified defined benefit pension plans. We ceased to be a participating employer in the Pfizer U.S. nonqualified defined benefit pension plans on December 31, 2012 and Pfizer will continue crediting employees’ service with us through December 31, 2017 (or termination of employment from us if earlier) for certain early retirement benefits. Our employees under the U.S. nonqualified defined benefit pension plan will be 100% vested in their accrued benefits as of December 31, 2012. It is anticipated that Pfizer will retain the liabilities allocable to our employees under the U.S. nonqualified pension plans.

Defined contribution plans. The employee matters agreement provides for the transfer from the U.S. Pfizer qualified defined contribution plan to a U.S. Zoetis qualified defined contribution plan on the Plan Transition Date, with assets and liabilities allocable to the participants transferring to us. Our employees under the Pfizer

qualified defined contribution benefit plan will be 100% vested in their account balances as of the Plan Transition Date. Outside of the United States, we generally intend that Pfizer will transfer to our defined contribution plans assets and liabilities allocable to the employees transferring to us in the certain countries as described in any applicable local separation agreement.

Deferred compensation plans. With respect to the supplemental savings plan in the U.S., we intend that Pfizer will transfer liabilities allocable to the employees transferring to us as described in the employee matters agreement. Liabilities allocable to our employees under other Pfizer nonqualified plans will be retained by Pfizer.

Health and welfare plans. We generally expect to establish or continue (or assume the obligation of contributing to) health and welfare plans or arrangements in every country where we have employees. We anticipate that health and welfare liabilities allocable to our employees prior to the Plan Transition Date will be retained by Pfizer and the allocated cost for these plans will be charged to us.

Master manufacturing and supply agreements

We have entered into two master manufacturing and supply agreements with Pfizer. Under one of these agreements, Pfizer will manufacture and supply us with animal health products, which we refer to as the “Pfizer-supplied products.” Under this agreement, our manufacturing and supply chain leadership will have oversight responsibility over product quality and other key aspects of the manufacturing process with respect to the Pfizer-supplied products. For a list of the Pfizer sites that will manufacture and supply us with the Pfizer-supplied products pursuant to this agreement and a list of manufacturing sites that will be transferred to us as part of the

 

159


Table of Contents

Separation, see “Business—Manufacturing and supply chain.” Under the other agreement, we will manufacture and supply Pfizer with human health products, which we refer to as the “Zoetis-supplied products.” Only our Kalamazoo manufacturing site will manufacture Zoetis-supplied products. Following the termination of the lease agreements related to our Guarulhos manufacturing site and subject to the receipt of various regulatory approvals in Brazil, we expect that the Guarulhos site may also manufacture Zoetis-supplied products pursuant to this agreement. See “—Brazil lease agreements.” We do not expect that any of our other sites will manufacture products for Pfizer.

Under the agreement related to the Pfizer-supplied products, our supply price is Pfizer’s costs plus a percentage markup. Subject to limited exceptions, during the two years following the completion of this offering, the markup will be 0% and, for the remainder of the term of the agreement, the markup will be 15%. The cost of each Pfizer-supplied product is subject to annual review, and there is a year-end true-up mechanism with respect to differences between budgeted and actual amounts. The agreement related to the Zoetis-supplied products contains reciprocal payment provisions pursuant to which Pfizer will make payments related to the Zoetis-supplied products.

These agreements will expire five years following the completion of this offering, with limited exceptions. In addition, these agreements require that Pfizer or us, as the case may be, use commercially reasonable efforts to develop the capabilities and facilities to manufacture the applicable products on its own behalf or to establish alternative sources of supply reasonably prior to expiration of the applicable agreement. The party purchasing products under the agreement may terminate the agreement with respect to any manufacturing site upon at least six months’ prior notice. Also, either party may terminate for customary reasons, including for material breach of the other party (subject to a 90-day cure period) or for a force majeure event affecting the other party that continues for at least 30 days.

Environmental matters agreement

We intend to enter into an environmental matters agreement with Pfizer immediately prior to the completion of this offering. The agreement will set forth standards for each party’s performance of remedial actions for liabilities allocated to each party under the global separation agreement, address our substitution for Pfizer with respect to animal health assets and remedial actions allocated to us (including substitution related to, for example, permits, financial assurances and consent orders), allow our conditional use of Pfizer’s consultants and contractors to assist in the conduct of remedial actions and address the exchange of related information between the parties.

The agreement will also set forth standards of conduct for remedial activities at the co-located facilities: Guarulhos, Brazil; Catania, Italy; Hsinchu, Taiwan; and Kalamazoo, Michigan in the United States. In addition, the agreement will set forth site-specific terms to govern conduct at several of these co-located facilities. The agreement will last perpetually; however, the agreement will terminate automatically if the global separation agreement terminates.

Screening services agreement

We intend to enter into an agreement with Pfizer immediately prior to the completion of this offering, pursuant to which we will provide certain high throughput screening services to Pfizer’s R&D organization. Pfizer will pay us agreed-upon fees for these services.

Intellectual property license agreements

Immediately prior the completion of this offering, we intend to enter into license agreements with Pfizer, pursuant to which: (i) Pfizer and certain of its affiliates will license to us and certain of our affiliates the right to use certain intellectual property rights in the animal health field; and (ii) we will license to Pfizer and certain of its affiliates certain rights to intellectual property in all fields outside of the animal health field.

 

160


Table of Contents

Patent and know-how license agreement (Pfizer as licensor). Immediately prior to the completion of this offering, we intend to enter into a patent and know-how license agreement with Pfizer. Pursuant to the agreement, Pfizer will grant us a royalty-free, fully paid-up, sublicensable (subject to certain restrictions), worldwide, exclusive license to certain patents and know-how to research, develop and commercialize certain commercial, development-stage, and early stage products in the field of animal health. We will not have rights to use most of these patents and know-how with any compounds other than those for which we are expressly licensed.

Pfizer will also grant us a royalty-free, fully paid-up, sublicensable (subject to certain restrictions) non-exclusive, worldwide license to certain other Pfizer patents and know-how to research, develop and commercialize certain other products in the animal health field. Under the agreement, we also will be granted a royalty-free, fully paid-up, sublicensable (subject to certain restrictions) non-exclusive, worldwide license for the animal health field to certain know-how that is not compound-related or product-related.

Pfizer will also grant us a sublicense of certain third party intellectual property for use in the animal health field, the terms of which will be royalty-free and fully paid-up as between us and Pfizer, but will otherwise vary based on each third party agreement. With respect to certain of such third party intellectual property, Pfizer will have a right of first negotiation with us for an exclusive license to improvements to such third party intellectual property and related patents that we own.

Pfizer controls filing, prosecuting and maintaining patents licensed to us, except that at our cost we are able to file patent applications covering certain know-how licensed to us and certain know-how invented by us. We will grant Pfizer a royalty-free, fully paid-up, sublicensable, exclusive license for the human health field to any such patent applications and patents that issue from these patent applications that we own. We will be required to pay certain costs associated with filing and maintaining the patents exclusively licensed to us, or our license will convert to a non-exclusive license.

Pfizer will have the right to forego, and cease paying for, prosecution and maintenance of the licensed patents and it may delegate responsibility to prosecute and maintain exclusively licensed patents to us or assign such patents to us. If Pfizer assigns such patents to us, we will grant Pfizer a royalty-free license to the assigned patents in all fields of use, but this license will exclude (and we will retain) all rights that Pfizer exclusively licensed to us under the agreement before assigning the patents to us.

Pfizer will have the right to enforce against third party infringements all patents licensed to us and patents that it may later assign to us if the infringement is within the scope of Pfizer’s license to such assigned patents, unless Pfizer does not pay for certain prosecution and maintenance costs and the patents are exclusively licensed or assigned to us, in which case, we will have rights to enforce such patents against third party infringements within the scope of our exclusive rights. We also will have the right to enforce new patents that we file and own.

The agreement will expire, with respect to licensed patents, upon expiration of the last to expire patent right that Pfizer owns, with respect to third party intellectual property, upon expiration or termination of the agreement pursuant to which such third party intellectual property is licensed to Pfizer and with respect to know-how that Pfizer owns, upon the thirtieth anniversary of the agreement. Upon expiration of the agreement in its entirety, our licenses to know-how owned by Pfizer convert to fully paid-up, perpetual licenses. We will be able to terminate the agreement in whole or in part upon prior written notice to Pfizer. In the event of either party’s uncured material breach, the other party will be able to terminate the agreement. The agreement will also provide that insolvency of either party and the occurrence of certain other events related to each party’s bankruptcy or indebtedness will also result in automatic termination. In addition, in circumstances where Pfizer has an interest in the licensed intellectual property in connection with its human health development programs, our rights to use the licensed intellectual property are restricted and/or in limited instances, subject to Pfizer’s right to terminate such license at will. Pfizer also will have the ability to terminate any third party agreements under which it is sublicensing rights to us.

 

161


Table of Contents

Patent and know-how license agreement (Zoetis as licensor). Immediately prior to the completion of this offering, we intend to enter into a patent and know-how license agreement with Pfizer. Pursuant to the agreement, we will grant Pfizer a royalty-free, fully paid-up, sublicensable (subject to certain restrictions), exclusive license to all patents and know-how that we own or have been licensed from third parties as of this offering (excluding any patents and know-how licensed from third parties to which our rights are limited to animal health) for Pfizer to research, develop, and commercialize any products throughout the world in all fields except the animal health field. Under the agreement, we will also grant Pfizer a royalty-free, fully paid-up, perpetual, sublicensable (subject to certain restrictions), non-exclusive license to certain patents filed within a certain period of time following this offering that cover know-how that we own. Pfizer will be permitted to use such patents in connection with its research, development, and commercialization of products outside the animal health field.

Upon notice from Pfizer, we will be required to file patent applications covering know-how licensed to Pfizer or continue to prosecute and maintain patents that have already been filed. In each case, Pfizer reimburses us for related costs, which vary depending on whether patents are filed at the time of Pfizer’s notice.

We will have the sole right to enforce patents that are licensed to Pfizer under this agreement in the animal health field. Pfizer will have rights to enforce the licensed patents in all other fields (including the human health field) only if it reimburses us for certain costs related to prosecution and maintenance of such patents. If Pfizer decides that it will not reimburse us for such costs, we will have the right to enforce in such fields.

The agreement will expire, with respect to licensed patents that we own, upon the expiration of the last to expire patent right, with respect to third party intellectual property, upon the expiration or termination of the agreement pursuant to which such third party intellectual property is licensed to us and with respect to know-how that we own, upon the thirtieth anniversary of the agreement. Upon expiration of the agreement in its entirety, Pfizer’s licenses to any know-how owned by us will convert to fully paid-up, perpetual licenses. Pfizer will be able to terminate the agreement in whole or in part upon prior notice to us. In the event of either party’s uncured material breach, the other party will be able to terminate the agreement. The agreement will also provide that the insolvency of either party and the occurrence of certain other events related to bankruptcy or indebtedness will also result in automatic termination. Upon termination of the agreement, all licenses terminate.

Trademark and copyright license agreements. Immediately prior to the completion of this offering, we intend to enter into a trademark and copyright license agreement with Pfizer, pursuant to which Pfizer will grant us rights with respect to certain trademarks and copyrighted works. Specifically, Pfizer will grant us an exclusive, worldwide, royalty-free, perpetual and fully paid-up license to use certain scheduled trademarks in the same manner that we used such trademarks as a business unit of Pfizer and in connection with any modifications or line extensions of products with which such trademarks were used as a business unit of Pfizer. We will be able to sublicense such trademarks to third parties with Pfizer’s prior written consent, which Pfizer will not be able to unreasonably withhold, but such consent will not be required for sublicenses granted to our customers and distributors in the ordinary course of business. We will not have the right to register domain names that incorporate the trademarks or use the trademarks in the address of any social media or use the trademarks in any trade name, corporate name or “doing business as” name.

Pfizer will also grant us a non-exclusive, worldwide, royalty-free, perpetual and fully paid-up license to use, copy and distribute to ourselves and our affiliates copyrights in certain policies and guidelines, and any related derivative works, that are necessary for us to continue to conduct certain aspects of our business in the same manner as they were conducted when we were a business unit of Pfizer.

The agreement will terminate on a trademark-by-trademark or copyrighted work-by-copyrighted work basis upon our written notice to Pfizer that we have ceased bona fide commercial use of such trademark or copyrighted work and it will terminate as to one of our affiliates if such affiliates ceases being an affiliate of us.

We will grant a similar license to Pfizer to use the Aureomycin trademark and variants thereof in connection with Pfizer’s human health business.

 

162


Table of Contents

Registration rights agreement

We intend to enter into a registration rights agreement with Pfizer immediately prior to the completion of this offering, pursuant to which we will agree that, upon the request of Pfizer, we will use our reasonable best efforts to effect the registration under applicable federal and state securities laws of any shares of our common stock retained by Pfizer following this offering.

Demand registration. Pfizer will be able to request registration under the Securities Act of all or any portion of our shares covered by the agreement and we will be obligated, subject to limited exceptions, to register such shares as requested by Pfizer. Pfizer will be able to request that we complete two demand registrations and four underwritten offerings in a twelve month period subject to limitations on minimum offering size. Pfizer will be able to designate the terms of each offering effected pursuant to a demand registration, which may take any form, including a shelf registration.

Piggy-back registration. If we at any time intend to file on our behalf or on behalf of any of our other security holders a registration statement in connection with a public offering of any of our securities on a form and in a manner that would permit the registration for offer and sale of our common stock held by Pfizer, Pfizer will have the right to include its shares of our common stock in that offering.

Registration expenses. We will be generally responsible for all registration expenses in connection with the performance of our obligations under the registration rights provisions in the registration rights agreement. Pfizer is responsible for its own internal fees and expenses, any applicable underwriting discounts or commissions and any stock transfer taxes.

Indemnification. Generally, the agreement will contain indemnification and contribution provisions by us for the benefit of Pfizer and, in limited situations, by Pfizer for the benefit of us with respect to the information provided by Pfizer included in any registration statement, prospectus or related document.

Transfer. If Pfizer transfers shares covered by the agreement, it will be able to transfer the benefits of the registration rights agreement to transferees of 5% of the shares of our common stock outstanding immediately following the completion of this offering, provided that each transferee agrees to be bound by the terms of the registration rights agreement.

Term. The registration rights will remain in effect with respect to any shares covered by the agreement until:

 

 

such shares have been sold pursuant to an effective registration statement under the Securities Act;

 

 

such shares have been sold to the public pursuant to Rule 144 under the Securities Act;

 

 

such shares may be sold to the public pursuant to Rule 144 under the Securities Act without being subject to the volume restrictions in such rule; or

 

 

such shares have been sold in a transaction in which the transferee is not entitled to the benefits of the registration rights agreement.

Brazil lease agreements

In September 2012, Pfizer’s subsidiary, Laboratórios Pfizer Ltda. (“Laboratórios”), as lessee, and our subsidiary, PAH Brasil Participações Ltda (“PAH Brasil”), as lessor, entered into: (i) the Private Instrument of Non Residential Lease Agreement and Others, which establishes and regulates the use of the real property at our Guarulhos, Brazil facility (the “Real Property Lease”) and (ii) the Private Instrument of Lease Agreement Movable Assets and Others, which establishes the terms of the use of the fixed assets at the same site (the “Fixed Asset Lease” and, together with the Real Property Lease, the “Brazil Leases”). As a result of a merger of PAH Brasil into Fort Dodge Saúde Animal Ltda. (“Fort Dodge Brazil”) with Fort Dodge Brazil surviving, the Brazil Leases were assigned to Fort Dodge Brazil.

 

163


Table of Contents

Rent, rent adjustment and penalty. The monthly rent under the Brazil Leases corresponds to the amount of depreciation of the fixed assets and real property covered by the leases. During the first month that the leases were in effect, the rent under the Fixed Asset Lease was R$752,459 (approximately $0.4 million) and the rent under the Real Property Lease was R$479,977 (approximately $0.2 million). In subsequent periods, the parties will adjust these amounts to reflect the anticipated monthly depreciation amount and previously paid amounts may be adjusted if the amounts paid differ from actual depreciation. Late payments under Brazil Leases are subject to an adjustment plus a penalty equal to 2% and interest on arrears of 1% per month. A breach of either of the Brazil Leases that is not cured within 30 days from receipt of notice thereof is subject to a penalty equal to three monthly rent payments under the applicable lease. In addition to the rent, Laboratórios will pay expenses related to water consumption, sewerage and electricity as well as all taxes levied on the property.

Covenants and obligations. Laboratórios is required to maintain the fixed assets and real property in the same condition as they were received, except for normal wear and tear and any improvements thereon, and is responsible for the repair of any damage. Improvements on the existing fixed assets and investments in new fixed assets are permitted under the Fixed Asset Lease, provided Fort Dodge Brazil is given notice thereof and consents to Laboratórios’ proposal. Costs for such improvements are paid or reimbursed by Fort Dodge Brazil unless the fixed asset is used solely to manufacture human health products, in which case the cost shall be the responsibility of Laboratórios and, in the event a new asset is purchased, exclusive ownership shall be retained by Laboratórios. The Real Property Lease also permits improvements on the property to be implemented by Laboratórios as long as Fort Dodge Brazil provides its written consent. Laboratórios is entitled to reimbursement for any related costs as long as Fort Dodge Brazil consented to the implementation of the improvements.

Term and termination. The Brazil Leases will last for a period of five years commencing in September 2012. The Real Property Lease provides for automatic renewals for successive periods of one year at Laboratórios’s discretion, unless notice of non-renewal is provided by Laboratórios. The Fixed Asset Lease can be extended for additional terms of five years by executing an amendment to such lease.

The Brazil Leases terminate at any time if agreed upon by the parties. The Brazil Leases also terminate upon satisfaction of certain regulatory conditions that will permit the animal health manufacturing operations of Laboratórios to be transferred to Fort Dodge Brazil and the human pharmaceutical manufacturing operations to be transferred to another facility or party. The Fixed Asset Lease automatically terminates upon the termination of the Real Property Lease or the master manufacturing and supply agreement that provides for Zoetis-supplied products. The Real Property Lease automatically terminates upon the termination of the Fixed Asset Lease or the expropriation of the property and cannot be terminated by Fort Dodge Brazil prior to termination of the master manufacturing and supply agreement that provides for Zoetis-supplied products. In the event the property is partially or completely destroyed, Laboratórios has the option to terminate the Real Property Lease.

Mumbai, India interim lease agreement

We intend to enter into an interim lease agreement with respect to our R&D facility in Mumbai, India. We will pay Pfizer a mutually agreed-upon rent for the facility and we anticipate the lease would expire upon the completion of the transfer of the Mumbai, India facility from Pfizer.

Local market distribution agreements

In many markets throughout the world, the regulatory process of transferring marketing authorizations and product registrations for animal health products to Zoetis legal entities will not be completed for several months following the completion of this offering. In many of those markets, we have or will enter into distribution agreements with Pfizer legal entities to enable continued sales of the impacted products in such markets until the regulatory process is completed.

 

164


Table of Contents

Policy concerning related person transactions

Prior to the consummation of this offering, our board of directors will adopt a written policy, which we refer to as the “related person transaction approval policy,” for the review of any transaction, arrangement or relationship in which we are a participant, if the amount involved exceeds $120,000 and one of our executive officers, directors, director nominees or beneficial holders of more than 5% of our total equity (or their immediate family members), each of whom we refer to as a “related person,” has a direct or indirect material interest. This policy was not in effect when we entered into the transactions described above.

Each of the agreements between us and Pfizer and its subsidiaries that have been entered into prior to the completion of this offering, and any transactions contemplated thereby, will be deemed to be approved and not subject to the terms of such policy. If a related person proposes to enter into such a transaction, arrangement or relationship, which we refer to as a “related person transaction,” the related person must report the proposed related person transaction to the chair of our Audit Committee for so long as the controlled company exception applies and the Corporate Governance Committee thereafter (for purposes of this section only, we refer to each of these committees as the “Committee”). The policy calls for the proposed related person transaction to be reviewed and, if deemed appropriate, approved by the Committee. In approving or rejecting such proposed transactions, the Committee will be required to consider relevant facts and circumstances. The Committee will approve only those transactions that, in light of known circumstances, are deemed to be in our best interests. In the event that any member of the Committee is not a disinterested person with respect to the related person transaction under review, that member will be excluded from the review and approval or rejection of such related person transaction; provided, however, that such Committee member may be counted in determining the presence of a quorum at the meeting of the Committee at which such transaction is considered. If we become aware of an existing related person transaction which has not been approved under the policy, the matter will be referred to the Committee. The Committee will evaluate all options available, including ratification, revision or termination of such transaction. In the event that management determines that it is impractical or undesirable to wait until a meeting of the Committee to consummate a related person transaction, the chair of the Committee may approve such transaction in accordance with the related person transaction approval policy. Any such approval must be reported to the Committee at its next regularly scheduled meeting.

A copy of our related person transaction approval policy will be available on our website upon consummation of this offering.

 

165


Table of Contents

Description of certain indebtedness

Senior notes offering

On January 28, 2013, we issued $3,650,000,000 aggregate principal amount of our senior notes in a private placement. The senior notes are comprised of $400,000,000 aggregate principal amount of our 1.150% Senior Notes due 2016, $750,000,000 aggregate principal amount of our 1.875% Senior Notes due 2018, $1,350,000,000 aggregate principal amount of our 3.250% Senior Notes due 2023 and $1,150,000,000 aggregate principal amount of our 4.700% Senior Notes due 2043. We refer to this private placement as the “senior notes offering.”

We sold $2.65 billion aggregate principal amount of our senior notes through the initial purchasers in the senior notes offering and Pfizer transferred $1.0 billion aggregate principal amount of our senior notes, which we issued to Pfizer prior to the completion of the senior notes offering, to certain of the initial purchasers, who sold such senior notes through the initial purchasers in the senior notes offering. We will pay an amount of cash equal to substantially all of the net proceeds that we received in the senior notes offering to Pfizer prior to the completion of this offering. We refer to the $1.0 billion aggregate principal amount of our senior notes that we issued to Pfizer as the “Pfizer-owned notes.”

Instead of selling the Pfizer-owned notes directly to the initial purchasers for cash, Pfizer first exchanged the Pfizer-owned notes with certain of the initial purchasers, which we refer to, in such role, as the debt-for-debt exchange parties, for outstanding indebtedness of Pfizer held by the debt-for-debt exchange parties. The debt-for-debt exchange parties then sold the Pfizer-owned notes to the initial purchasers for cash. This debt-for-debt exchange occurred on the settlement date of the senior notes offering immediately prior to the settlement of the debt-for-debt exchange parties’ sale of the Pfizer-owned notes to the initial purchasers. We refer to this exchange as the “debt-for-debt exchange.”

Upon completion of the debt-for-debt exchange, the Pfizer indebtedness exchanged in such debt-for-debt exchange was retired. We do not guarantee or have any other obligations in respect of the Pfizer indebtedness.

The senior notes are governed by an indenture and supplemental indenture between us and Deutsche Bank Trust Company Americas, as trustee, which we refer to collectively as the “indenture.” The indenture contains certain covenants, including limitations on our and certain of our subsidiaries’ ability to incur liens or engage in sale leaseback transactions. The indenture also contains restrictions on our ability to consolidate, merge or sell substantially all of our assets. In addition, the indenture contains other customary terms, including certain events of default, upon the occurrence of which, the senior notes may be declared immediately due and payable.

Pursuant to the indenture, we are able to redeem the senior notes of any series, in whole or in part, at any time by paying a “make whole” premium, plus accrued and unpaid interest to, but excluding, the date of redemption. Pursuant to our tax matters agreement with Pfizer, we will not be permitted to redeem the 2023 notes pursuant to this optional redemption provision, except under limited circumstances. See “Certain relationships and related party transactions—Relationship with Pfizer—Tax matters agreement.” Upon the occurrence of a change of control of us and a downgrade of the senior notes below an investment grade rating by each of Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services, we are, in certain circumstances, required to make an offer to purchase each of the senior notes at a price equal to 101% of the aggregate principal amount of the senior notes together with accrued and unpaid interest to, but excluding, the date of repurchase.

Credit facility

In December 2012, we entered into a revolving credit agreement with a syndicate of banks providing for a five-year $1.0 billion senior unsecured revolving credit facility, which we refer to as the “credit facility.” The credit facility will not be available for borrowings until the date on which certain conditions, including the completion

 

166


Table of Contents

of this offering and the receipt of certain investment grade ratings, are satisfied, which we refer to as the “credit facility effective date.” We expect that these conditions will be met concurrently with the completion of this offering. Subject to certain conditions, we will have the right to increase the credit facility to up to $1.5 billion. The credit facility is not guaranteed by our subsidiaries.

The credit facility bears interest, at our option, equal to either: (a) a base rate determined by reference to the higher of (i) the prime rate of JPMorgan Chase Bank, N.A., (ii) the federal funds rate plus 0.50% and (iii) a Eurodollar rate for a one month interest period plus 1.00%, plus, in each case, an applicable margin; or (b) a Eurodollar rate determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an applicable margin. Additionally, we will pay a facility fee on the commitments under the credit facility, regardless of whether borrowings are outstanding under the credit facility. The applicable margins and the facility fee are determined based on public ratings of our senior unsecured non-credit enhanced long-term debt. Interest on borrowings and the facility fee are generally payable quarterly in arrears; however, for loans bearing interest based on a Eurodollar rate with a term shorter than three months, interest is payable at the end of such term.

We may voluntarily prepay loans and/or reduce the commitment under the credit facility, in whole or in part, without penalty or premium, subject to certain minimum amounts and increments and the payment of customary breakage costs. No mandatory prepayment is required under the credit facility.

The credit facility contains a financial covenant requiring us to not exceed a maximum total leverage ratio and, unless on the credit facility effective date certain investment grade ratings specified in the revolving credit agreement are received, to maintain a minimum interest coverage ratio. In addition, the credit facility contains customary affirmative and negative covenants that, among other things, limit or restrict our and our subsidiaries’ ability, subject to certain exceptions, to incur liens, merge, consolidate or sell, transfer or lease assets, transact with subsidiaries and incur priority indebtedness. The credit facility also contains customary events of default.

Commercial paper program

We expect to enter into a commercial paper program with a capacity of up to $1.0 billion prior to or concurrently with the completion of this offering. While we do not anticipate that any commercial paper will be issued under the commercial paper program at the time of this offering, we may incur indebtedness under this program in the future.

 

167


Table of Contents

Description of capital stock

In connection with this offering, we will amend and restate our certificate of incorporation and by-laws. Copies of the forms of our amended and restated certificate of incorporation and by-laws are filed as exhibits to the registration statement of which this prospectus forms a part. The provisions of our certificate of incorporation and by-laws and relevant sections of the Delaware General Corporation Law, or the DGCL, are summarized below. The following summary is qualified in its entirety by the provisions of our amended and restated certificate of incorporation and by-laws and is subject to the applicable provisions of the DGCL.

General

Upon completion of this offering, our authorized capital stock will consist of 6,000,000,000 shares of common stock, consisting of 5,000,000,000 shares of Class A common stock, par value $0.01 per share, and 1,000,000,000 shares of Class B common stock, par value $0.01 per share, and 1,000,000,000 shares of preferred stock, par value $0.01 per share. Upon the completion of this offering, we will have 86,100,000 shares of Class A common stock outstanding, 413,900,000 shares of Class B common stock outstanding and no shares of preferred stock outstanding.

Common stock

Our certificate of incorporation provides that, except with respect to voting rights and conversion rights applicable to the Class B common stock, the Class A common stock and Class B common stock will have identical rights, powers, preferences and privileges.

Voting rights

On all matters submitted to a vote of stockholders other than election of directors, holders of Class A common stock and Class B common stock will each be entitled to one vote per share. With respect to election of directors, holders of Class A common stock will be entitled to one vote per share while holders of Class B common stock will be entitled to ten votes per share.

No common stockholder will be entitled to exercise any right of cumulative voting.

Conversion rights

Each share of Class B common stock held by Pfizer or a subsidiary of Pfizer will be convertible at any time at the option of the holder, into one share of Class A common stock, but will not be convertible if held by any other holder. Subject to the paragraph below, each share of Class B common stock held by any holder other than Pfizer will not be convertible at any time into any shares of Class A common stock. Shares of our Class A common stock are not convertible into any other shares of our capital stock.

Our board of directors may in the future propose to convert Class B common stock to Class A common stock on a share-for-share basis, subject to approval by our stockholders. If the proposal is approved by our board of directors and presented to our stockholders, a vote by (i) a majority of the shares of Class A common stock and Class B common stock, voting together as a single class, and (ii) a majority of the shares of the Class B common stock, voting as a separate class, is and will be required for the proposal to be approved. There will be no binding commitment by the board to, and it is possible that our board of directors may not elect to, consider the issue or resolve to present any such proposal to our stockholders at any stockholders’ meeting. Moreover, if presented, our stockholders may not approve any such conversion.

Dividends

Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of our Class A common stock and Class B common stock are entitled to receive dividends out of assets legally available at the times and in the amounts that our board of directors may determine from time to time.

 

168


Table of Contents

Other rights

Upon the liquidation, dissolution or winding up of our company, the holders of our common stock will be entitled to receive their ratable share of our net assets available after payment of all debts and other liabilities, subject to the prior rights of any outstanding preferred stock. If we enter into a reorganization or into any merger, share exchange, consolidation or combination with one or more other entities (whether or not our company is the surviving entity), each holder of Class A common stock shall receive the same kind and amount of consideration received by a holder of Class B common stock, and each holder of Class B common stock shall receive the same kind and amount of consideration received by a holder of Class A common stock, upon such reorganization, merger, share exchange, consolidation or other combination. Holders of our common stock will have no preemptive, subscription or redemption rights. The outstanding shares of our common stock are fully paid and non-assessable.

Amendment of certificate of incorporation

For so long as any shares of Class A common stock are outstanding, we will not, without the affirmative vote of the holders of a majority of the voting power of the outstanding shares of Class A common stock, amend, alter or repeal any provision of our certificate of incorporation so as to affect adversely the relative rights, preferences, qualifications, limitations or restrictions of the Class A common stock as compared to those of the Class B common stock.

For so long as any shares of Class B common stock are outstanding, we will not, without the affirmative vote of the holders of a majority of the voting power of the outstanding shares of Class B common stock, amend, alter or repeal any provision of our certificate of incorporation so as to affect adversely the relative rights, preferences, qualifications, limitations or restrictions of the Class B common stock as compared to those of the Class A common stock.

For the foregoing purposes, any alteration or change with respect to, and any provision for, the voluntary, mandatory or other conversion or exchange of the Class B common stock into or for Class A common stock on a one-for-one basis will be deemed not to adversely affect the rights of the Class A common stock.

Preferred stock

Our board of directors will have the authority, without any further vote or action by the stockholders, to issue preferred stock in one or more series and to fix the preferences, limitations and rights of the shares of each series, including:

 

 

dividend rates;

 

 

conversion rights;

 

 

voting rights;

 

 

terms of redemption and liquidation preferences; and

 

 

the number of shares constituting each series.

Anti-takeover effects of provisions of our certificate of incorporation and by-laws, and of delaware law

The rights of our stockholders and related matters are governed by the DGCL, our certificate of incorporation and by-laws, certain provisions of which may discourage or make more difficult a takeover attempt that a stockholder might consider in his or her best interest by means of a tender offer or proxy contest or removal of our incumbent officers or directors. These provisions may also adversely affect prevailing market prices for our common stock. However, we believe that the benefits of increased protection give us the potential ability to negotiate with the proponent of an unsolicited proposal to acquire or restructure us and outweigh the disadvantage of discouraging those proposals because negotiation of the proposals could result in an improvement of their terms.

 

169


Table of Contents

Classified board of directors

Our certificate of incorporation will provide that our board of directors will be classified with approximately one-third of the directors elected each year. The number of directors will be fixed from time to time by a majority of the total number of directors that we would have at the time such number is fixed if there were no vacancies. The directors will be divided into three classes, designated class I, class II and class III. Each class will consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire board. Mr. Germano, Mr. Giordano and Mr. Norden will serve as class I directors whose terms expire at the 2014 annual meeting of stockholders. Mr. Hill, Ms. Schulman and Mr. Steere will serve as class II directors whose terms expire at the 2015 annual meeting of stockholders. Mr. Alaix, Mr. D’Amelio and Mr. McCallister will serve as class III directors whose terms expire at the 2016 annual meeting of stockholders or, in each case, upon such director’s earlier death, resignation or removal. At each annual meeting of stockholders beginning in 2014, successors to the class of directors whose term expires at that annual meeting will be elected for a three-year term and until their successors are duly elected and qualified. In addition, if the number of directors is changed, any increase or decrease will be apportioned by the board of directors among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class or from the removal from office, death, disability, resignation or disqualification of a director or other cause will hold office for a term that will coincide with the remaining term of that class, but in no case will a decrease in the number of directors have the effect of removing or shortening the term of any incumbent director.

Dual-class structure

As discussed above, our Class B common stock will have ten votes per share with respect to election of directors, while our Class A common stock, which is the class of stock we are selling in this offering and which will be the only class of our stock which is publicly traded immediately after this offering, will have only one vote per share with respect to such matters. On all matters submitted to a vote of stockholders other than election of directors, holders of Class A common stock and Class B common stock will each be entitled to one vote per share. Immediately following the completion of this offering, Pfizer will own 100% of our outstanding Class B common stock and no shares of our Class A common stock, giving Pfizer 82.8% of the economic interest and combined voting power in shares of our outstanding common stock other than with respect to the election of directors and 98.0% of the combined voting power of our outstanding common stock with respect to the election of directors (or 80.2% and 97.6%, respectively, if the underwriters exercise their option to purchase additional shares in full). Because of our dual-class structure, Pfizer will be able to control the election of our directors even if it and its affiliates come to own significantly less than 50% of the shares of our outstanding common stock. This concentrated control could discourage others from initiating any potential takeover or other change of control transaction that other stockholders may view as beneficial.

Stockholder action by written consent; special meetings

Our certificate of incorporation will permit stockholders to take action by written consent in lieu of an annual or special meeting until the first date on which Pfizer ceases to beneficially own a majority of the total voting power of the outstanding shares of all classes of capital stock entitled to vote (on matters other than the election of directors) if such consent or consents, in writing, setting forth the action so taken, is signed by the holders of outstanding capital stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Thereafter, stockholders will only be able to take action at an annual or special meeting called in accordance with our by-laws.

Our by-laws will provide that special meetings of stockholders may only be called by:

 

 

the chairman of the board, or

 

 

by the chairman of the board or by our corporate secretary at the request in writing of a majority of the board of directors.

 

170


Table of Contents

Advance notice requirements for stockholder proposals related to director nominations

Our by-laws will contain advance notice procedures with regard to stockholder proposals related to the nomination of candidates for election as directors. These procedures will provide that notice of stockholder proposals related to stockholder nominations for the election of directors must be received by our corporate secretary, in the case of an annual meeting, not less than 90 days nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within 25 days before or after that anniversary date, notice by the stockholder in order to be timely must be received not later than the close of business on the tenth day following the day on which notice of the date of the annual meeting was mailed or public disclosure of the date of the annual meeting was made, whichever occurs first. If no annual meeting was held in the previous year, then a stockholder’s notice, in order to be considered timely, must be received by our corporate secretary not later than the later of the close of business on the 90th day prior to such annual meeting or the tenth day following the day on which notice of the date of the annual meeting was mailed or public disclosure of such date was made. Stockholder nominations for the election of directors at a special meeting at which directors are elected must be received by our corporate secretary no later than the close of business on the tenth day following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever occurs first.

A stockholder’s notice to our corporate secretary must be in proper written form and must set forth some information related to the stockholder giving the notice and to the beneficial owner, if any, on whose behalf the nomination is being made, including:

 

 

the name and address of that stockholder and any beneficial owner, if any, and of any holder of record of the stockholder’s shares as they appear on our books;

 

 

the class and number of shares of each class of our capital stock which are owned beneficially and of record by that stockholder or by the beneficial owner, if any, as of the date of the stockholder’s notice, and a representation that the stockholder will notify us in writing of the class and number of such shares owned of record and beneficially by each such person as of the record date for the meeting not later than five business days following the later of the record date or the date notice of the record date is first publicly disclosed and the name of each nominee holder of shares of our stock owned but not of record by such person or any affiliates or associates of such person, and the number of shares of stock held by such nominee holder;

 

 

a description of any transaction, agreement, arrangement or understanding with respect to such nomination between or among the stockholder and any beneficial owner and any of its affiliates or associates, and any others (including their names) acting in concert with any of the foregoing, and a representation that the stockholder will notify us in writing of any such agreement, arrangement or understanding in effect as of the record date for the meeting not later than five business days following the later of the record date or the date notice of the record date is first publicly disclosed;

 

 

a description of any transaction, agreement, arrangement or understanding (including any derivatives, swaps, warrants, short positions, profit interests, options, hedging transactions, borrowed or loaned shares or other transactions) that has been entered into as of the date of the stockholder’s notice by, or on behalf of, the stockholder or any beneficial owner or any of its affiliates or associates, and a representation that the stockholder will notify us in writing of any such agreement, arrangement or understanding in effect as of the record date for the meeting not later than five business days following the later of the record date or the date notice of the record date is first publicly disclosed;

 

 

a representation that the stockholder is a holder of record or beneficial owner of shares of our stock entitled to vote at that meeting and that the stockholder intends to appear in person or by proxy at the meeting to bring that nomination before the meeting;

 

 

a representation whether the stockholder intends to deliver a proxy statement and/or form of proxy to holders of at least the percentage of outstanding shares of our stock required to elect the nominee and/or otherwise to solicit proxies from stockholders in support of the nomination; and

 

171


Table of Contents
 

any other information relating to the stockholder or beneficial owner, if any, that would be required to be disclosed in a proxy statement or other filings required to be made in connection with the solicitations of proxies for election of directors pursuant to the Exchange Act, and the rules and regulations promulgated thereunder.

Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected. We may require any proposed nominee to furnish such other information as we may reasonably require to determine the eligibility of such proposed nominee to serve as an independent director of Zoetis or that could be material to a reasonable stockholder’s understanding of the independence, or lack thereof, of such nominee.

As to each person whom the stockholder proposes to nominate for election as a director, the stockholder’s notice must set forth:

 

 

the name, age, business and residence address, and the principal occupation and employment of the person;

 

 

the class and number of shares of each class of our capital stock which are owned beneficially or of record by the person;

 

 

a statement whether such nominee, if elected, intends to tender, promptly following such person’s failure to receive the required vote for election or reelection at the next meeting at which such person would face election or reelection, an irrevocable resignation effective upon acceptance of such resignation by the board of directors;

 

 

a completed and signed questionnaire, representation and agreement with respect to the background and qualification of such person and the background of any other person or entity on whose behalf the nomination is made; and

 

 

any other information relating to the nominee that would be required to be disclosed in a proxy statement or other filings required to be made in connection with the solicitations of proxies for election of directors pursuant to the Exchange Act, and the rules and regulations promulgated thereunder.

The stockholder providing the notice is required to update and supplement such notice as of the record date of the meeting.

Supermajority voting

From and after the first date on which Pfizer ceases to beneficially own a majority of the total voting power of the outstanding shares of all classes of our capital stock entitled to vote (on matters other than the election of directors), the vote of the holders of not less than 80% of the votes entitled to be cast is required to amend our by-laws and the provisions relating to conflicts of interest and our classified board in our certificate of incorporation. The foregoing provisions may discourage attempts by others to acquire control of us without negotiation with our board of directors. This enhances our board of directors’ ability to attempt to promote the interests of all of our stockholders. However, to the extent that these provisions make us a less attractive takeover candidate, they may not always be in our best interests or in the best interests of our stockholders.

Anti-takeover legislation

As a Delaware corporation, we will be subject to the restrictions under Section 203 of the DGCL regarding corporate takeovers. In general, Section 203 prohibits a publicly-held Delaware corporation from engaging, under certain circumstances, in a business combination with an interested stockholder for a period of three years following the date the person became an interested stockholder, unless:

 

 

prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;

 

172


Table of Contents
 

upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time such transaction commenced, excluding, for purposes of determining the number of shares outstanding, (1) shares owned by persons who are directors and also officers of the corporation and (2) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or

 

 

on or subsequent to the date of the transaction, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not wholly-owned by the interested stockholder.

In this context, a business combination includes a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. An interested stockholder is a person who, together with affiliates and associates, owns or, within three years prior to the determination of interested stockholder status owned, 15% or more of a corporation’s outstanding voting stock.

A Delaware corporation may “opt out” of Section 203 with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or by-laws resulting from amendments approved by holders of at least a majority of the corporation’s outstanding voting shares. We will not elect to “opt out” of Section 203. However, Pfizer and its affiliates have been approved as an interested stockholder and therefore are not subject to Section 203. For so long as Pfizer owns a majority of the voting shares entitled to be cast in elections of directors, and therefore has the ability to designate a majority of our board of directors, directors designated by Pfizer to serve on our board of directors would have the ability to pre-approve other parties, including potential transferees of Pfizer’s shares of our company, so that Section 203 would not apply to such other parties.

Undesignated preferred stock

The authority possessed by our board of directors to issue preferred stock with voting or other rights or preferences could be potentially used to discourage attempts by third parties to obtain control of us through a merger, tender offer, proxy contest or otherwise by making such attempts more difficult or more costly. The provision in our certificate of incorporation authorizing such preferred stock may have the effect of deferring hostile takeovers or delaying changes of control of our management.

Forum selection clause

Our certificate of incorporation will provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any actual or purported derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any or our directors or officers to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, or (iv) any other action asserting a claim governed by the internal affairs doctrine. Our certificate of incorporation further provides that any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions described above.

Certificate of incorporation provision relating to corporate opportunities and interested directors

In order to address potential conflicts of interest between us and Pfizer, our certificate of incorporation will contain provisions regulating and defining the conduct of our affairs as they may involve Pfizer and its officers and directors, and our powers, rights, duties and liabilities and those of our officers, directors and stockholders in connection with our relationship with Pfizer. In general, these provisions recognize that we and Pfizer may

 

173


Table of Contents

engage in the same or similar business activities and lines of business, have an interest in the same areas of corporate opportunities and that we and Pfizer will continue to have contractual and business relations with each other, including officers and directors of Pfizer serving as our directors.

Our certificate of incorporation will provide that, subject to any contractual provision to the contrary, Pfizer will have no duty to refrain from:

 

 

engaging in the same or similar business activities or lines of business as us;

 

 

doing business with any of our customers; or

 

 

employing or otherwise engaging any of our officers or employees.

Under our certificate of incorporation, neither Pfizer nor any officer or director of Pfizer, except as described in the following paragraph, will be liable to us or our stockholders for breach of any fiduciary duty by reason of any such activities. Our certificate of incorporation will provide that Pfizer is not under any duty to present any corporate opportunity to us which may be a corporate opportunity for Pfizer and us, and Pfizer will not be liable to us or our stockholders for breach of any fiduciary duty as our stockholder by reason of the fact that Pfizer pursues or acquires that corporate opportunity for itself, directs that corporate opportunity to another person or does not present that corporate opportunity to us.

When one of our directors or officers who is also a director or officer of Pfizer learns of a potential transaction or matter that may be a corporate opportunity for both us and Pfizer, the certificate of incorporation will provide that the director or officer:

 

 

will have fully satisfied his or her fiduciary duties to us and our stockholders with respect to that corporate opportunity;

 

 

will not be liable to us or our stockholders for breach of fiduciary duty by reason of Pfizer’s actions with respect to that corporate opportunity;

 

 

will be deemed to have acted in good faith and in a manner he or she believed to be in, and not opposed to, our best interests for purposes of our certificate of incorporation; and

 

 

will be deemed not to have breached his or her duty of loyalty to us or our stockholders and not to have derived an improper personal benefit therefrom for purposes of our certificate of incorporation, if he or she acts in good faith in a manner consistent with the following policy:

 

   

a corporate opportunity offered to any of our officers who is also a director, but not an officer, of Pfizer will belong to us, unless that opportunity is expressly offered to that person solely in his or her capacity as a director of Pfizer, in which case that opportunity will belong to Pfizer;

 

   

a corporate opportunity offered to any of our directors who is not one of our officers and who is also a director or an officer of Pfizer will belong to us only if that opportunity is expressly offered to that person solely in his or her capacity as our director, and otherwise will belong to Pfizer; and

 

   

a corporate opportunity offered to any of our officers who is also an officer of Pfizer will belong to Pfizer, unless that opportunity is expressly offered to that person solely in his or her capacity as our officer, in which case that opportunity will belong to us.

For purposes of the certificate of incorporation, “corporate opportunities” will include business opportunities that we are financially able to undertake, that are, from their nature, in our line of business, are of practical advantage to us and are ones in which we have an interest or a reasonable expectancy, and in which, by embracing the opportunities, the self-interest of Pfizer or its officers or directors will be brought into conflict with our self-interest. After such time that Pfizer ceases to own 20% of votes entitled to be cast on matters other than elections of directors by the holders of the then outstanding shares of our common stock, the provisions of the certificate of incorporation described in this paragraph will become inoperative. Thereafter, the approval or allocation of

 

174


Table of Contents

corporate opportunities would depend on the facts and circumstances of the particular situation analyzed under the corporate opportunity doctrine. The Delaware courts have found that a director or officer may not take a business opportunity for his own if: (1) the corporation is financially able to exploit the opportunity; (2) the opportunity is within the corporation’s line of business; (3) the corporation has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the director or officer will thereby be placed in a position inimicable to his duties to the corporation. On the other hand, a director or officer may take a corporate opportunity if: (1) the opportunity is presented to the director or officer in his individual and not his corporate capacity; (2) the opportunity is not essential to the corporation; (3) the corporation holds no interest or expectancy in the opportunity; and (4) the director or officer has not wrongfully employed the resources of the corporation in pursuing or exploiting the opportunity. A director or officer may also “present” an opportunity to the board of directors of a corporation to determine whether such opportunity belongs to the corporation and thereby be protected from inference of usurpation of corporate opportunity.

The certificate of incorporation will also provide that no contract, agreement, arrangement or transaction between us and Pfizer will be void or voidable solely for the reason that Pfizer is a party to such agreement and Pfizer and its directors and officers:

 

 

will have fully satisfied and fulfilled its fiduciary duties to us and our stockholders with respect to the contract, agreement, arrangement or transaction;

 

 

will not be liable to us or our stockholders for breach of fiduciary duty by reason of entering into, performance or consummation of any such contract, agreement, arrangements or transaction;

 

 

will be deemed to have acted in good faith and in a manner it reasonably believed to be in, and not opposed to, the best interests of us for purposes of the certificate of incorporation; and

 

 

will be deemed not to have breached its duty of loyalty to us and our stockholders and not to have derived an improper personal benefit therefrom for purposes of the certificate of incorporation; if:

 

   

the material facts as to the contract, agreement, arrangement or transaction are disclosed or are known to our board of directors or the committee of our board that authorizes the contract, agreement, arrangement or transaction and our board of directors or that committee in good faith authorizes the contract, agreement, arrangement or transaction by the affirmative vote of a majority of the disinterested directors;

 

   

the material facts as to the contract, agreement, arrangement or transaction are disclosed or are known to the holders of our shares entitled to vote on such contract, agreement, arrangement or transaction and the contract, agreement, arrangement or transaction is specifically approved in good faith by vote of the holders of a majority of the votes entitled to be cast by the holders of our common stock then outstanding not owned by Pfizer or a related entity; or

 

   

the contract, agreement, arrangement or transaction, judged according to the circumstances at the time of the commitment, is fair to us.

Any person purchasing or otherwise acquiring any interest in any shares of our capital stock will be deemed to have consented to these provisions of the certificate of incorporation.

Limitation of liability of directors

Our certificate of incorporation will provide that none of our directors will be liable to us or our stockholders for monetary damages for any breach of fiduciary duty as a director, except to the extent otherwise required by the DGCL. The effect of this provision is to eliminate our rights, and our stockholders’ rights, to recover monetary damages against a director for breach of a fiduciary duty of care as a director. This provision does not limit or eliminate our right, or the right of any stockholder, to seek non-monetary relief, such as an injunction or rescission in the event of a breach of a director’s duty of care. In addition, our certificate of incorporation will provide that if the DGCL is amended to authorize the further elimination or limitation of the liability of a

 

175


Table of Contents

director, then the liability of the directors will be eliminated or limited to the fullest extent permitted by the DGCL, as so amended. These provisions will not alter the liability of directors under federal or state securities laws. Our certificate of incorporation will also include provisions for the indemnification of our directors and officers to the fullest extent authorized or permitted by law. Further, we intend to enter into indemnification agreements with our directors and executive officers which would require us, among other things, to indemnify them against certain liabilities which may arise by reason of their status or service as a director or officer and to advance to them expenses, subject to reimbursement to us if it is determined that they are not entitled to indemnification. We also intend to maintain director and officer liability insurance, if available on reasonable terms.

Listing

Our Class A common stock has been approved for listing on the NYSE under the symbol “ZTS.”

Transfer agent and registrar

The transfer agent and registrar for our common stock is Computershare Trust Company, N.A.

 

176


Table of Contents

Shares eligible for future sale

We cannot predict with certainty the effect, if any, that market sales of shares of our common stock or the availability of shares of our common stock for sale will have on the market price prevailing from time to time. We also cannot predict with certainty whether or when the Distribution will occur or if Pfizer will otherwise sell its remaining shares of our common stock. The sale of substantial amounts of our common stock in the public market or the perception that such sales could occur could adversely affect the prevailing market price of the Class A common stock and our ability to raise equity capital in the future.

Upon completion of this offering, we will have 86,100,000 shares of Class A common stock and 413,900,000 shares of Class B common stock outstanding. As a result of the lock-up agreements, other contractual restrictions on resale and the provisions of Rule 144, described below, our common stock will be available for sale in the public market as follows: (i) 86,100,000 shares of Class A common stock to be sold in this offering will be freely tradable without restriction or further registration under the Securities Act (other than restrictions pursuant to lock-up agreements entered into by participants in the directed share program) and (ii) 413,900,000 shares of Class B common stock will be available for sale at various times after 180 days after the date of this prospectus (subject, in some cases, to volume limitations).

Sale of restricted shares

All of the shares of Class A common stock sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except that any shares purchased by or owned by our “affiliates,” as that term is defined in Rule 144 under the Securities Act, may generally only be sold publicly in compliance with the limitations of Rule 144 described below. As defined in Rule 144, an affiliate of an issuer is a person that directly or indirectly, through one or more intermediaries, controls, or is controlled by or is under common control with, such issuer. Immediately following the completion of this offering, Pfizer will own 100% of our outstanding Class B common stock and no shares of our Class A common stock, giving Pfizer 82.8% of the economic interest and combined voting power in shares of our outstanding common stock other than with respect to the election of directors and 98.0% of the combined voting power of our outstanding common stock with respect to the election of directors (or 80.2% and 97.6%, respectively, if the underwriters exercise their option to purchase additional shares in full). Shares held by Pfizer will be “restricted securities” as that term is used in Rule 144. Subject to contractual restrictions, including the lock-up agreements described below, Pfizer will be entitled to sell these shares in the public market only if the sale of such shares is registered with the SEC or if the sale of such shares qualifies for an exemption from registration under Rule 144 or any other applicable exemption under the Securities Act. At such time as these restricted shares become unrestricted and available for sale, the sale of these restricted shares, whether pursuant to Rule 144 or otherwise, may have a negative effect on the price of our common stock.

S-8 registration statement

We intend to file a registration statement on Form S-8 to register the issuance of an aggregate of 25,000,000 shares of our common stock reserved for issuance under the Zoetis 2013 Equity and Incentive Plan. Such registration statement will become effective upon filing with the SEC, and shares of our common stock covered by such registration statement will be eligible for resale in the public market immediately after the effective date of such registration statement, subject to the lock-up agreements described in this prospectus.

Rule 144

In general, under Rule 144 as currently in effect, beginning 90 days after the date of this offering, a person who is not one of our affiliates who has beneficially owned shares of our common stock for at least six months may sell shares without restriction, provided the current public information requirements of Rule 144 continue to be satisfied. In addition, any person who is not one of our affiliates at any time during the three months immediately preceding a proposed sale, and who has beneficially owned shares of our common stock for at least one year,

 

177


Table of Contents

would be entitled to sell an unlimited number of shares without restriction. Our affiliates who have beneficially owned shares of our common stock for at least six months are entitled to sell within any three-month period a number of shares that does not exceed the greater of:

 

 

1% of the number of shares of our Class A common stock then outstanding, which will equal approximately 861,000 shares immediately after this offering; and

 

 

the average weekly trading volume of our Class A common stock on the NYSE during the four calendar weeks immediately preceding the filing of a notice on Form 144 with respect to the sale.

Sales of restricted shares under Rule 144 are also subject to requirements regarding the manner of sale, notice, and the availability of current public information about us. Rule 144 also provides that affiliates relying on Rule 144 to sell shares of our Class A common stock that are not restricted shares must nonetheless comply with the same restrictions applicable to restricted shares, other than the holding period requirement.

Lock-up agreements

We, our officers and directors and Pfizer have agreed with the underwriters that, without the prior written consent of J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC, we and they will not, subject to certain exceptions and extensions, during the period ending 180 days after the date of this prospectus, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, or enter into any swap or other agreement that transfers to another, in whole or in part, any of the economic consequences of ownership of shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock or publicly disclose the intention to make any such offer, sale, pledge or disposition. J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC may, in their sole discretion and at any time without notice, release all or any portion of the shares of our common stock subject to the lock-up. See “Underwriting.”

Registration rights

Pursuant to the registration rights agreement, Pfizer will be able to require us to effect the registration under the Securities Act of shares of our common stock that it will own after this offering. See “Certain relationships and related party transactions—Relationship with Pfizer—Registration rights agreement.”

 

178


Table of Contents

Material United States federal income and estate tax

consequences to non-U.S. holders

The following is a summary of material United States federal income and estate tax consequences of the purchase, ownership and disposition of Class A common stock as of the date hereof. Except where noted, this summary deals only with Class A common stock that is held as a capital asset by a non-U.S. holder.

A “non-U.S. holder” means a person (other than a partnership or any other entity treated as a partnership for United States federal income tax purposes) that is not for United States federal income tax purposes any of the following:

 

 

an individual citizen or resident of the United States;

 

 

a corporation (or any other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;

 

 

an estate the income of which is subject to United States federal income taxation regardless of its source; or

 

 

a trust if it (1) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable United States Treasury regulations (“Treasury Regulations”) to be treated as a United States person.

This summary is based upon provisions of the Code and regulations, rulings and judicial decisions as of the date hereof. Those authorities may be changed, perhaps retroactively, so as to result in United States federal income and estate tax consequences different from those summarized below. This summary does not address all aspects of United States federal income and estate taxes and does not deal with tax considerations resulting from the Distribution or with foreign, state, local or other tax considerations that may be relevant to non-U.S. holders in light of their personal circumstances. In addition, it does not represent a detailed description of the United States federal income tax consequences applicable to holders that are subject to special treatment under the United States federal income tax laws (including a holder that is a United States expatriate, “controlled foreign corporation,” “passive foreign investment company” or a partnership or other pass-through entity for United States federal income tax purposes). We cannot provide assurance that a change in law will not alter significantly the tax considerations that we describe in this summary.

If a partnership holds Class A common stock, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. Non-U.S. holders that are partners of a partnership holding Class A common stock should consult their tax advisors.

Non-U.S. holders considering the purchase of Class A common stock should consult their own tax advisors concerning the particular United States federal income and estate tax consequences of the ownership of the Class A common stock, as well as the consequences arising under the laws of any other taxing jurisdiction.

Dividends

Distributions paid on Class A common stock will be taxable as dividends to the extent paid out of current or accumulated earnings and profits, as determined under United States federal income tax principles. Dividends paid to a non-U.S. holder of Class A common stock generally will be subject to withholding of United States federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. However, dividends that are effectively connected with the conduct of a trade or business by the non-U.S. holder within the United States (and, if required by an applicable income tax treaty, are attributable to a United States permanent establishment) are not subject to withholding tax, provided certain certification and disclosure requirements are satisfied. Instead, such dividends are subject to United States federal income tax on a net income basis in the same manner as if the non-U.S. holder were a United States person as defined under the

 

179


Table of Contents

Code. Any such effectively connected dividends received by a foreign corporation may be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.

A non-U.S. holder of Class A common stock who wishes to claim the benefit of an applicable treaty rate and avoid backup withholding, as discussed below, for dividends will be required (a) to complete IRS Form W-8BEN (or other applicable form) and certify under penalty of perjury that such holder is not a United States person as defined under the Code and is eligible for treaty benefits or (b) if Class A common stock is held through certain foreign intermediaries, to satisfy the relevant certification requirements of applicable Treasury Regulations. Special certification and other requirements apply to certain non-U.S. holders that are pass-through entities rather than corporations or individuals.

A non-U.S. holder of Class A common stock eligible for a reduced rate of United States withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS.

Gain on disposition of common stock

Any gain realized on the disposition of Class A common stock by a non-U.S. holder generally will not be subject to United States federal income tax unless:

 

 

the gain is effectively connected with a trade or business of the non-U.S. holder in the United States (and, if required by an applicable income tax treaty, is attributable to a United States permanent establishment of the non-U.S. holder);

 

 

the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of that disposition, and certain other conditions are met; or

 

 

we are or have been a “United States real property holding corporation” for United States federal income tax purposes at any time during the shorter of the five-year period ending on the date of the disposition or such non-U.S. holder’s holding period for Class A common stock and such non-U.S. holder held (at any time during the shorter of the five-year period ending on the date of the disposition or such non-U.S. holder’s holding period) more than 5% of Class A common stock.

An individual non-U.S. holder described in the first bullet point immediately above will be subject to tax on the net gain derived from the sale under regular graduated United States federal income tax rates. An individual non-U.S. holder described in the second bullet point immediately above will be subject to a flat 30% tax on the gain derived from the sale, which may be offset by United States source capital losses, even though the individual is not considered a resident of the United States. If a non-U.S. holder that is a foreign corporation falls under the first bullet point immediately above, it will be subject to tax on its net gain in the same manner as if it were a United States person as defined under the Code and, in addition, may be subject to a branch profits tax equal to 30% of its effectively connected earnings and profits or at such lower rate as may be specified by an applicable income tax treaty.

We believe we have not been and are not currently a “United States real property holding corporation” for United States federal income tax purposes; however, no assurance can be given that we will not become one in the future. If, however, we are or become a “United States real property holding corporation,” so long as Class A common stock continues to be regularly traded on an established securities market, only a non-U.S. holder who holds, or held (at any time during the shorter of the five-year period ending on the date of disposition or the non-U.S. holder’s holding period) more than 5% of Class A common stock will be subject to United States federal income tax on the disposition of Class A common stock. Non-U.S. holders should consult their own tax advisors about the consequences that could result if we are, or become, a “United States real property holding corporation.”

 

180


Table of Contents

United States federal estate tax

Common stock held by an individual non-U.S. holder at the time of death will be included in such holder’s gross estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.

Information reporting and backup withholding

We must report annually to the IRS and to each non-U.S. holder the amount of dividends paid to such holder and the tax withheld with respect to such dividends, regardless of whether withholding was required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the non-U.S. holder resides under the provisions of an applicable income tax treaty.

A non-U.S. holder will be subject to backup withholding for dividends paid to such holder unless such holder certifies under penalty of perjury that it is a non-U.S. holder (and the payor does not have actual knowledge or reason to know that such holder is a United States person as defined under the Code), or such holder otherwise establishes an exemption.

Information reporting and, depending on the circumstances, backup withholding will apply to the proceeds of a sale of Class A common stock within the United States or conducted through certain United States-related financial intermediaries, unless the beneficial owner certifies under penalty of perjury that it is a non-U.S. holder (and the payor does not have actual knowledge or reason to know that the beneficial owner is a United States person as defined under the Code), or such owner otherwise establishes an exemption.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a non-U.S. holder’s United States federal income tax liability provided the required information is furnished to the IRS.

Additional withholding requirements

Recently enacted legislation will require, after December 31, 2013, withholding at a rate of 30% on dividends in respect of, and, after December 31, 2016, gross proceeds from the sale of, our Class A common stock held by or through certain foreign financial institutions (including investment funds), unless such institution enters into an agreement with the Treasury to report, on an annual basis, information with respect to accounts in the institution held by certain U.S. persons and by certain non-U.S. entities that are wholly or partially owned by U.S. persons and to withhold on certain payments. An intergovernmental agreement between the United States and an applicable foreign country, or future Treasury regulations, may modify these requirements. Accordingly, the entity through which our Class A common stock is held will affect the determination of whether such withholding is required. Similarly, dividends in respect of, and gross proceeds from the sale of, our Class A common stock held by an investor that is a non-financial non-U.S. entity that does not qualify under certain exemptions will be subject to withholding at a rate of 30%, unless such entity either (i) certifies to us that such entity does not have any “substantial United States owners” or (ii) provides certain information regarding the entity’s “substantial United States owners,” which we will in turn provide to the Secretary of the Treasury. Non-U.S. holders are encouraged to consult their tax advisors regarding the possible implications of the legislation on their investment in our Class A common stock.

 

181


Table of Contents

Underwriting

The debt-for-equity exchange parties are offering the shares of Class A common stock described in this prospectus through a number of underwriters. J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC are acting as joint book running managers of the offering and as representatives of the underwriters. We, Pfizer and the debt-for-equity exchange parties have entered into an underwriting agreement with the underwriters. Subject to the terms and conditions of the underwriting agreement, the debt-for-equity exchange parties have agreed to sell to the underwriters, and each underwriter has severally agreed to purchase, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus, the number of shares of Class A common stock listed next to its name in the following table:

 

Name

   Number of shares  

J.P. Morgan Securities LLC

  

Merrill Lynch, Pierce, Fenner & Smith
                 Incorporated

  

Morgan Stanley & Co. LLC

  

Barclays Capital Inc.

  

Citigroup Global Markets Inc.

  

Credit Suisse Securities (USA) LLC

  

Deutsche Bank Securities Inc.

  

Goldman, Sachs & Co.

  

Guggenheim Securities, LLC

  

Jefferies & Company, Inc.

  

BNP Paribas Securities Corp.

  

HSBC Securities (USA) Inc.

  

Loop Capital Markets LLC

  

RBC Capital Markets, LLC

  

The Williams Capital Group, L.P.

  

UBS Securities LLC

  

Lebenthal & Co., LLC

  

Piper Jaffray & Co.

  

Samuel A. Ramirez & Company, Inc.

  
  

 

 

 

Total

     86,100,000   
  

 

 

 

The underwriters are committed to purchase all the shares of Class A common stock offered if they purchase any shares. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may also be increased or the offering may be terminated.

The underwriters propose to offer the shares of Class A common stock directly to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $         per share. Any such dealers may resell shares to certain other brokers or dealers at a discount of up to $         per share from the initial public offering price. After the initial public offering of the shares, the offering price and other selling terms may be changed by the underwriters. Sales of shares made outside of the United States may be made by affiliates of the underwriters.

Pursuant to the underwriting agreement, the underwriters have an option to buy up to 12,915,000 additional shares of Class A common stock from the debt-for-equity exchange parties to cover sales of shares by the underwriters which exceed the number of shares specified in the table above. If the underwriters exercise the option to purchase additional shares as described above, the debt-for-equity exchange parties will acquire these additional shares from Pfizer in exchange for debt obligations of Pfizer held by the debt-for-equity exchange parties and sell the additional shares to the underwriters. J.P. Morgan Securities LLC, Merrill Lynch, Pierce,

 

182


Table of Contents

Fenner & Smith Incorporated and Morgan Stanley & Co. LLC, on behalf of the underwriters, have 30 days from the date of this prospectus to exercise this option. If any shares are purchased with this option, the underwriters will purchase shares in approximately the same proportion as shown in the table above. If any additional shares of Class A common stock are purchased, the underwriters will offer the additional shares on the same terms as those on which the shares are being offered.

The underwriting discounts and commissions are equal to the public offering price per share of Class A common stock less the amount paid by the underwriters to the debt-for-equity exchange parties per share of Class A common stock. The underwriting discounts and commissions are $             per share. The following table shows the per share and total underwriting discounts and commissions assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares.

 

     Per share      Total  
     Without
option
exercise
     With full
option
exercise
     Without
option
exercise
     With full
option
exercise
 

Underwriting discounts and commissions paid by the debt-for-equity exchange parties(1)

   $                    $                    $                    $                

 

(1) The debt-for-equity exchange parties will acquire the total number of shares being sold in this offering, including any shares sold pursuant to the underwriters’ option to purchase additional shares, in the debt-for-equity exchange. For purposes of determining the amount of Pfizer indebtedness that Pfizer will receive from the debt-for-equity exchange parties in exchange for such shares, Pfizer expects that the debt obligations will be valued at the fair market value on the date of this prospectus, and the aggregate fair market value of the debt obligations to be exchanged will equal the aggregate initial public offering price of such shares less the aggregate underwriting discounts and commissions for such shares, each as shown on the cover page of this prospectus. Pfizer may be deemed to have paid such underwriting discounts and commissions for U.S. securities law purposes.

We estimate that the total expenses of this offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding the underwriting discounts and commissions, will be approximately $11.2 million, which Pfizer will pay. We and Pfizer have agreed to reimburse the underwriters for expenses relating to clearance of this offering with FINRA.

A prospectus in electronic format may be made available on the web sites maintained by one or more underwriters, or selling group members, if any, participating in the offering. The underwriters may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives to underwriters and selling group members that may make Internet distributions on the same basis as other allocations.

We have agreed that we will not (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, or file with the SEC a registration statement under the Securities Act relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing (other than filings on Form S-8 relating to our stock plans), or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the common stock or such other securities (regardless of whether any of these transactions described in clause (i) or (ii) above are to be settled by the delivery of shares of common stock or such other securities, in cash or otherwise), in each case without the prior written consent of J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC for a period of 180 days after the date of this prospectus, other than the shares of our Class A common stock to be sold hereunder or upon the exercise of options granted under our stock plans. Notwithstanding the foregoing, if (1) during the last 17 days of the 180-day restricted period, we issue an earnings release or material news or a material event relating to our company occurs; or (2) prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period, the restrictions described above shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.

 

183


Table of Contents

Pfizer, our directors and our executive officers have entered into lock-up agreements with the underwriters prior to the commencement of this offering pursuant to which each of these persons or entities, with limited exceptions, for a period of 180 days after the date of this prospectus, may not, without the prior written consent of J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock or publicly disclose the intention to make any such offer, sale, pledge or disposition (including, without limitation, common stock or such other securities which may be deemed to be beneficially owned by such directors and executive officers in accordance with the rules and regulations of the SEC and securities which may be issued upon exercise of a stock option or warrant) or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the common stock or such other securities (regardless of whether any of these transactions described in clause (i) or (ii) above are to be settled by the delivery of shares of common stock or such other securities, in cash or otherwise) or (iii) make any demand for or exercise any right with respect to the registration of any shares of our common stock or any security convertible into or exercisable or exchangeable for our common stock. Notwithstanding the foregoing, if (1) during the last 17 days of the 180-day restricted period, we issue an earnings release or material news or a material event relating to our company occurs; or (2) prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period, the restrictions described above shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.

We, Pfizer and the debt-for-equity exchange parties have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act.

Our Class A common stock has been approved for listing on the NYSE under the symbol “ZTS.”

In connection with this offering, the underwriters may engage in stabilizing transactions, which involves making bids for, purchasing and selling shares of Class A common stock in the open market for the purpose of preventing or retarding a decline in the market price of the Class A common stock while this offering is in progress. These stabilizing transactions may include making short sales of the Class A common stock, which involves the sale by the underwriters of a greater number of shares of Class A common stock than they are required to purchase in this offering, and purchasing shares of Class A common stock on the open market to cover positions created by short sales. Short sales may be “covered” shorts, which are short positions in an amount not greater than the underwriters’ option to purchase additional shares referred to above, or may be “naked” shorts, which are short positions in excess of that amount. The underwriters may close out any covered short position either by exercising their option to purchase additional shares from the debt-for-equity exchange parties, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market compared to the price at which the underwriters may purchase shares through their option to purchase additional shares. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the Class A common stock in the open market that could adversely affect investors who purchase in this offering. To the extent that the underwriters create a naked short position, they will purchase shares in the open market to cover the position.

The underwriters have advised us that, pursuant to Regulation M of the Securities Act, they may also engage in other activities that stabilize, maintain or otherwise affect the price of the Class A common stock, including the imposition of penalty bids. This means that if the representatives of the underwriters purchase Class A common stock in the open market in stabilizing transactions or to cover short sales, the representatives can require the underwriters that sold those shares as part of this offering to repay the underwriting discount received by them.

These activities may have the effect of raising or maintaining the market price of the Class A common stock or preventing or retarding a decline in the market price of the Class A common stock, and, as a result, the price of

 

184


Table of Contents

the Class A common stock may be higher than the price that otherwise might exist in the open market. If the underwriters commence these activities, they may discontinue them at any time. The underwriters may carry out these transactions on the NYSE, in the over the counter market or otherwise.

Prior to this offering, there has been no public market for our Class A common stock. The initial public offering price will be determined by negotiations between us, Pfizer, the debt-for-equity exchange parties and the representatives of the underwriters. In determining the initial public offering price, we and the representatives of the underwriters expect to consider a number of factors including:

 

 

the information set forth in this prospectus and otherwise available to the representatives;

 

 

our prospects and the history and prospects for the industry in which we compete;

 

 

an assessment of our management;

 

 

our prospects for future earnings;

 

 

the general condition of the securities markets at the time of this offering;

 

 

the recent market prices of, and demand for, publicly traded common stock of generally comparable companies; and

 

 

other factors deemed relevant by the underwriters and us.

Neither we nor the underwriters can assure investors that an active trading market will develop for our common shares, or that the shares will trade in the public market at or above the initial public offering price.

Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.

Certain of the underwriters and their affiliates have provided in the past to Pfizer and its affiliates, including us, and may provide from time to time in the future certain commercial banking, financial advisory, investment banking and other services for Pfizer, us and such affiliates in the ordinary course of their business, for which they have received and may continue to receive customary fees and commissions. In addition, from time to time, certain of the underwriters and their affiliates may effect transactions for their own account or the account of customers, and hold on behalf of themselves or their customers, long or short positions in our debt or equity securities or loans, and may do so in the future. Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments. In addition, J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC will be the debt-for-equity exchange parties in the debt-for-equity exchange described below.

Directed share program

At our request, the underwriters have reserved 1.5% of the shares of Class A common stock offered by this prospectus for sale, at the initial public offering price, to our directors, certain of our employees and Pfizer’s

 

185


Table of Contents

directors. If purchased by these persons, these shares will be subject to a 180-day lock-up restriction. The number of shares of common stock available for sale to the general public will be reduced to the extent these individuals purchase such reserved shares. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus.

The debt-for-equity exchange

It is expected that Pfizer, the debt-for-equity exchange parties and, for limited purposes, we, will enter into a debt-for-equity exchange agreement. Under the debt-for-equity exchange agreement, subject to certain conditions, the debt-for-equity exchange parties, as principals for their own account, will exchange debt obligations of Pfizer held by the debt-for-equity exchange parties for the shares of our Class A common stock to be sold in this offering. The debt-for-equity exchange parties will then sell the shares to the underwriters for cash. This debt-for-equity exchange will occur on the settlement date of this offering immediately prior to the settlement of the debt-for-equity exchange parties’ sale of the shares to the underwriters. If the underwriters exercise their option to purchase additional shares of Class A common stock from the debt-for-equity exchange parties, Pfizer will convert shares of Class B common stock into shares of Class A common stock and exchange such shares of Class A common stock with the debt-for-equity exchange parties. The debt-for-equity exchange parties will then sell such shares of Class A common stock to the underwriters for cash. This debt-for-equity exchange will occur on the settlement date of such option exercise immediately prior to the settlement of the debt-for-equity exchange parties’ sale of such shares to the underwriters.

We expect that the debt-for-equity exchange parties will hold indebtedness of Pfizer having an aggregate principal amount of at least $2,475,375,000 based on a maximum assumed initial public offering price of $25.00 per share, which is the high point of the price range set forth on the cover of this prospectus. The amount of indebtedness of Pfizer held by the debt-for-equity exchange parties is expected to be sufficient to acquire all of the shares of our Class A common stock to be sold in this offering, inclusive of the shares of our Class A common stock that may be sold pursuant to the underwriters’ option to purchase additional shares. In the debt-for-equity exchange, the debt-for-equity exchange parties will acquire the total number of shares being sold in this offering. For purposes of determining the amount of Pfizer indebtedness that Pfizer will receive from the debt-for-equity exchange parties in exchange for such shares, Pfizer expects that the debt obligations will be valued at the fair market value on the date of this prospectus, and the aggregate fair market value of the debt obligations to be exchanged will equal the aggregate initial public offering price less the aggregate underwriting discounts and commissions for such shares, each as shown on the cover page of this prospectus. If the underwriters exercise their option to purchase additional shares as described above, the debt-for-equity exchange parties will also acquire the additional shares in exchange for debt obligations of Pfizer held by the debt-for-equity exchange parties. For purposes of determining the amount of Pfizer indebtedness that Pfizer will receive from the debt-for-equity exchange parties in exchange for the additional shares, the debt obligations will be valued at the fair market value on the date of this prospectus, and the aggregate fair market value of the debt obligations to be exchanged will equal the aggregate initial public offering price less the aggregate underwriting discounts and commissions for such shares, each as shown on the cover page of this prospectus multiplied by the number of the additional shares acquired, less underwriting discounts and commissions. The debt-for-equity exchange parties will acquire and sell the shares as principals for their own account, rather than on Pfizer’s behalf. If Pfizer and the debt-for-equity exchange parties enter into the debt-for-equity exchange agreement, as described above, the debt-for-equity exchange parties will become the owner of our shares of Class A common stock they acquire in the debt-for-equity exchange, regardless of whether this offering is completed. The debt-for-equity exchange parties, and not Pfizer, will receive the net proceeds from the sale of the shares in this offering.

For purposes of the U.S. securities laws, each of Pfizer and the debt-for-equity exchange parties will be deemed to be an underwriter of the shares of our Class A common stock sold in this offering; however, references to the underwriters in this prospectus refer only to the underwriters listed in the first paragraph of this “Underwriting” section.

 

186


Table of Contents

None of Pfizer, the debt-for-equity exchange parties or us have an obligation to participate in the debt-for-equity exchange. Regardless of whether the debt-for-equity exchange does or does not occur, the debt-for-equity exchange parties will pay their own expenses in connection with the shares acquired by them in the debt-for-equity exchange.

Conflicts of interest

The offering is being conducted in accordance with the applicable provisions of Rule 5121 of the FINRA Conduct Rules because certain of the underwriters will have a “conflict of interest” pursuant to Rule 5121(f)(5)(C)(ii) by virtue of their role as debt-for-equity exchange parties, since all of the net proceeds of this offering will be received by the debt-for-equity exchange parties. As such, any underwriter that has a conflict of interest pursuant to Rule 5121 will not confirm sales to accounts in which it exercises discretionary authority without the prior written consent of the customer. Rule 5121 requires that a “qualified independent underwriter” as defined in Rule 5121 must participate in the preparations of the prospectus and perform its usual standard of diligence with respect to the registration statement and this prospectus. Accordingly, Goldman, Sachs & Co. is assuming the responsibilities of acting as the qualified independent underwriter in the offering. Goldman, Sachs & Co. is receiving $25,000 as consideration for acting as qualified independent underwriter in connection with the offering.

Selling restrictions

Brazil

For purposes of Brazilian law, this offer of shares is addressed to you personally, upon your request and for your sole benefit, and is not to be transmitted to anyone else, to be relied upon elsewhere or for any other purpose either quoted or referred to in any other public or private document, or to be filed with anyone without our prior, express and written consent.

Therefore, as this prospectus does not constitute or form part of any public offering to sell or solicitation of a public offering to buy any shares or assets, the offering and THE SHARES OFFERED HEREBY HAVE NOT BEEN, AND WILL NOT BE, AND MAY NOT BE OFFERED FOR SALE OR SOLD IN BRAZIL EXCEPT IN CIRCUMSTANCES WHICH DO NOT CONSTITUTE A PUBLIC OFFERING OR DISTRIBUTION UNDER BRAZILIAN LAWS AND REGULATIONS. DOCUMENTS RELATING TO THE SHARES, AS WELL AS THE INFORMATION CONTAINED THEREIN, MAY NOT BE SUPPLIED TO THE PUBLIC, AS A PUBLIC OFFERING IN BRAZIL OR BE USED IN CONNECTION WITH ANY OFFER FOR SUBSCRIPTION OR SALE OF THE SHARES TO THE PUBLIC IN BRAZIL.

European Economic Area

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), from and including the date on which the European Union Prospectus Directive (the “EU Prospectus Directive”) was implemented in that Relevant Member State (the “Relevant Implementation Date”) an offer of securities described in this prospectus may not be made to the public in that Relevant Member State prior to the publication of a prospectus in relation to the shares which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the EU Prospectus Directive, except that, with effect from and including the Relevant Implementation Date, an offer of securities described in this prospectus may be made to the public in that Relevant Member State at any time:

 

 

to any legal entity which is a qualified investor as defined under the EU Prospectus Directive;

 

 

to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150 natural or legal persons (other than qualified investors as defined in the EU Prospectus Directive); or

 

187


Table of Contents

in any other circumstances falling within Article 3(2) of the EU Prospectus Directive, provided that no such offer of securities described in this prospectus shall result in a requirement for the publication by us of a prospectus pursuant to Article 3 of the EU Prospectus Directive. For the purposes of this provision, the expression an “offer of securities to the public” in relation to any securities in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the securities to be offered so as to enable an investor to decide to purchase or subscribe for the securities, as the same may be varied in that Member State by any measure implementing the EU Prospectus Directive in that Member State. The expression “EU Prospectus Directive” means Directive 2003/71/EC (and any amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State) and includes any relevant implementing measure in each Relevant Member State, and the expression “2010 PD Amending Directive” means Directive 2010/73/EU.

Mexico

No actions, applications nor filings have been undertaken in Mexico, whether before the National Banking and Securities Commission (“Comision Nacional Bancaria y de Valores “or “CNBV”) nor the Mexican Stock Exchange (“Bolsa Mexicana de Valores” or “BMV”), in order to make a public offering in said territory, with or without price, through mass media and to indeterminate subjects to subscribe, acquire, sell or otherwise assign the shares, in any form or manner.

This document is not intended to be distributed through mass media to indeterminate subjects, nor to serve as an application for the registration of the shares before any securities registry or exchange in Mexico, nor as a prospectus for their public offering in said jurisdiction. No financial authority nor securities exchange in Mexico have reviewed or assessed the particulars of the shares or their offering, and in no case will they assert the goodness of the shares, the solvency of the issuer, nor the exactitude or veracity of the information contained herein, and will not validate acts.

You are solely responsible if you have procured this copy of this document yourself or came by it through your own means out of your own accord, regardless of the source. If you have received one such copy from either the issuer or the underwriter the shares are being offered to you under the private offering exceptions in the Securities Market Law (“SML”), for which you must be in one of the following situations:

 

  I. You are either an institutional investor within the meaning of Article 2 XVII of the SML and regarded as such pursuant to the laws of Mexico, or a qualified investor because pursuant to Article 2 XVI, of said statute you have the income, assets or qualitative characteristics provided for under Article 1 XIII of the General Provisions Applicable to Issuers of Securities and other Participants in the Securities Market, which require that you have maintained, in average over the past year, investments in securities (within the meaning of the SML) for an amount equal or greater than 1,500,000 Investment Units (Unidades de Inversion, UDIs), or in each of the last 2 years had a gross annual income equal to or greater than 500,000 such Investment Units;

 

  II. You are a member of a group of less than 100 individually identified people to whom the shares are being offered directly and personally, or

 

  III. You are an employee of the issuer and a beneficiary of a generally-applicable employee benefit plan or program of said issuer.

You may be further required to expressly reiterate that you fall into either of said exceptions, that you further understand that the private offering of shares has less documentary and information requirements than public offerings do, and to waive the right to claim on any lacking thereof.

Switzerland

The shares may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (“SIX”) or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss

 

188


Table of Contents

Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the shares or the offering may be publicly distributed or otherwise made publicly available in Switzerland.

Neither this document nor any other offering or marketing material relating to the offering, us or the shares have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of shares will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA (“FINMA”), and the offer of shares has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes (“CISA”). The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of shares.

United Arab Emirates

This prospectus relates to an Exempt Offer in accordance with the Offered Securities Rules of the Dubai Financial Services Authority (“DFSA”). This prospectus is intended for distribution only to persons of a type specified in the Offered Securities Rules of the DFSA. It must not be delivered to, or relied on by, any other person. The DFSA has no responsibility for reviewing or verifying any documents in connection with Exempt Offers. The DFSA has not approved this prospectus nor taken steps to verify the information set forth herein and has no responsibility for the prospectus. The shares to which this prospectus relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the shares offered should conduct their own due diligence on the shares. If you do not understand the contents of this prospectus you should consult an authorized financial advisor.

United Kingdom

This document is only being distributed to and is only directed at (i) persons who are outside the United Kingdom or (ii) to investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”) or (iii) high net worth entities, and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as “relevant persons”). The securities are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such securities will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents.

 

189


Table of Contents

Legal matters

Certain legal matters, including the legality of the shares being offered herein, will be passed upon by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York, and certain legal matters will be passed upon for the underwriters by Davis Polk & Wardwell LLP, New York, New York.

Experts

The combined financial statements of Zoetis as of December 31, 2011 and 2010, and for each of the years in the three-year period ended December 31, 2011 have been included herein in reliance upon the reports of KPMG LLP, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.

With respect to the unaudited interim financial information for the nine month periods ended October 2, 2011 and September 30, 2012 included herein, KPMG LLP has reported that they applied limited procedures in accordance with professional standards for reviews of such information. However, their separate reports, included herein, state that they did not audit and they do not express an opinion on that interim financial information. Accordingly, the degree of reliance on their reports on such information should be restricted in light of the limited nature of the review procedures applied. The accountants are not subject to the liability provisions of Section 11 of the Securities Act of 1933 (the “1933 Act”) for their reports on the unaudited interim financial information because those reports are not “reports” or a “part” of the registration statement prepared or certified by the accountants within the meaning of Sections 7 and 11 of the 1933 Act.

Where you can find more information

We have filed a registration statement on Form S-1 with the SEC regarding this offering. This prospectus, which is part of the registration statement, does not contain all of the information included in the registration statement, and you should refer to the registration statement and its exhibits to read that information. References in this prospectus to any of our contracts or other documents are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contract or document. Following the completion of this offering, we will be subject to the information reporting requirements of the Exchange Act and we will file reports, proxy statements and other information with the SEC.

You may read and copy the registration statement and the related exhibits, and the reports, proxy statements and other information we will file with the SEC, at the SEC’s public reference room maintained by the SEC at Room 1580, 100 F Street N.E., Washington, D.C. 20549. You can also request copies of those documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room. The SEC also maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file with the SEC. The site’s Internet address is www.sec.gov.

 

190


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

INDEX TO FINANCIAL STATEMENTS

 

     Page  

Audited Combined Financial Statements of Zoetis Inc. (the animal health business unit of Pfizer Inc.):

  

Report of Independent Registered Public Accounting Firm

     F-2   

Combined Statements of Operations for the Years Ended December 31, 2011, 2010 and 2009

     F-3   

Combined Statements of Comprehensive Income/(Loss) for the Years Ended December  31, 2011, 2010 and 2009

     F-4   

Combined Balance Sheets as of December 31, 2011 and 2010

     F-5   

Combined Statements of Equity for the Years Ended December 31, 2011, 2010 and 2009

     F-6   

Combined Statements of Cash Flows for the Years Ended December 31, 2011, 2010 and 2009

     F-7   

Notes to Combined Financial Statements

     F-8   

Unaudited Condensed Combined Financial Statements of Zoetis Inc. (the animal health business unit of Pfizer Inc.):

  

Review Report of Independent Registered Public Accounting Firm

     F-51   

Unaudited Condensed Combined Statements of Operations for the Nine Months Ended September 30, 2012 and October 2, 2011

     F-52   

Unaudited Condensed Combined Statements of Comprehensive Income for the Nine Months Ended September 30, 2012 and October 2, 2011

     F-53   

Unaudited Condensed Combined Balance Sheets as of September 30, 2012 and December 31, 2011

     F-54   

Unaudited Condensed Combined Statements of Equity for the Nine Months Ended September 30, 2012 and October 2, 2011

     F-55   

Unaudited Condensed Combined Statements of Cash Flows for the Nine Months Ended September 30, 2012 and October 2, 2011

     F-56   

Notes to Unaudited Condensed Combined Financial Statements

     F-57   

 

F-1


Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors

Pfizer Inc.:

We have audited the accompanying combined balance sheets of Zoetis Inc., (the animal health business unit of Pfizer Inc., (the “Company”)) as of December 31, 2011 and 2010, and the related combined statements of operations, comprehensive income/(loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2011. These combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these combined financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

New York, New York

August 10, 2012

 

F-2


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

COMBINED STATEMENTS OF OPERATIONS

 

      Year Ended December 31,   
(MILLIONS OF DOLLARS)    2011(a)      2010(a)     2009(a)   

Revenues

   $ 4,233       $ 3,582      $ 2,760    

Costs and expenses:

       

Cost of sales(b)

     1,652         1,444        1,078    

Selling, general and administrative expenses(b)

     1,453         1,382        1,066    

Research and development expenses(b)

     427         411        368    

Amortization of intangible assets

     69         58        33    

Restructuring charges and certain acquisition-related costs

     154         202        340    

Other (income)/deductions––net

     84         (93     23    
                           

Income/(loss) before provision/(benefit) for taxes on income

     394         178        (148)   

Provision/(benefit) for taxes on income/(loss)

     146         67        (47)   
                           

Net income/(loss) before allocation to noncontrolling interests

     248         111        (101)   

Less: Net income/(loss) attributable to noncontrolling interests

     3         1        (1)   
                           

Net income/(loss) attributable to Zoetis

   $ 245       $ 110      $ (100)   
   

 

(a) 

Includes revenues and expenses from acquisitions from the acquisition date, see Note 2. Basis of Presentation.

(b) 

Exclusive of amortization of intangible assets, except as disclosed in Note 3J. Significant Accounting Policies: Amortization of Intangible Assets, Depreciation and Certain Long-Lived Assets.

See Notes to Combined Financial Statements, which are an integral part of these statements.

 

F-3


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

COMBINED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

 

      Year Ended December 31,   
(MILLIONS OF DOLLARS)    2011      2010     2009   

Net income/(loss) before allocation to noncontrolling interests

   $ 248       $ 111      $ (101)   

Other comprehensive income/(loss), net of taxes:

       

Foreign currency translation adjustments, net(a)

     4         (121     210    

Benefit plans: Actuarial gains/(losses), net(a)

     5         (8     (2)   
                           

Total other comprehensive income/(loss), net of taxes

     9         (129     208    
                           

Comprehensive income/(loss) before allocation to noncontrolling interests

     257         (18     107    

Less: Comprehensive income/(loss) attributable to noncontrolling interests

     3         1        (1)   
                           

Comprehensive income/(loss) attributable to Zoetis

   $ 254       $ (19   $ 108    
   

 

(a) 

Presented net of reclassification adjustments and tax impacts, which are not significant in any period presented.

See Notes to Combined Financial Statements, which are an integral part of these statements.

 

F-4


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

COMBINED BALANCE SHEETS

 

      As of December 31,   
(MILLIONS OF DOLLARS)    2011     2010   

Assets

    

Cash and cash equivalents

   $ 79      $ 63    

Accounts receivable, less allowance for doubtful accounts: 2011––$29 and 2010––$26

     871        773    

Inventories

     1,063        995    

Current deferred tax assets

     96        97    

Other current assets

     202        188    
                  

Total current assets

     2,311        2,116    

Property, plant and equipment, less accumulated depreciation

     1,243        1,148    

Identifiable intangible assets, less accumulated amortization

     928        924    

Goodwill

     989        934    

Noncurrent deferred tax assets

     143        70    

Other noncurrent assets

     97        92    
                  

Total assets

   $ 5,711      $ 5,284    
                  

Liabilities and Equity

    

Current portion of allocated long-term debt

   $      $ 38    

Accounts payable

     214        206    

Income taxes payable

     18        24    

Accrued compensation and related items

     150        144    

Other current liabilities

     461        396    
                  

Total current liabilities

     843        808    

Allocated long-term debt

     575        673    

Noncurrent deferred tax liabilities

     311        218    

Other taxes payable

     122        100    

Other noncurrent liabilities

     124        141    
                  

Total liabilities

     1,975        1,940    

Commitments and Contingencies

    

Business unit equity

     3,785        3,418    

Accumulated other comprehensive loss

     (65     (74)   
                  

Total Zoetis equity

     3,720        3,344    

Equity attributable to noncontrolling interests

     16        —    
                  

Total equity

     3,736        3,344    
                  

Total liabilities and equity

   $ 5,711      $ 5,284    

 

 

See Notes to Combined Financial Statements, which are an integral part of these statements.

 

F-5


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

COMBINED STATEMENTS OF EQUITY

 

      Zoetis    

Equity

Attributable to

Noncontrolling

Interests

   

Total 

Equity 

 
(MILLIONS OF DOLLARS)   

Business

Unit
Equity

   

Accumulated

Other Comp.

Income/
(Loss)

   

Total

Business

Unit
Equity

     

Balance, December 31, 2008

   $ 2,525      $ (153   $ 2,372      $      $ 2,372    

Comprehensive income/(loss)

     (100     208        108        (1     107    

Share-based compensation expense

     15               15               15    

Acquisition of Fort Dodge Animal Health

                          4          

Dividends declared and paid

     (101            (101            (101)   

Net transfers––Pfizer(a)

     1,177               1,177               1,177    

 

 

Balance, December 31, 2009

     3,516        55        3,571        3        3,574    

Comprehensive income/(loss)

     110        (129     (19     1        (18)   

Share-based compensation expense

     16               16               16    

Dividends declared and paid

     (206            (206     (1     (207)   

Net transfers between Pfizer and noncontrolling interests

     1               1        (1     —    

Purchase of subsidiary shares from noncontrolling interests

     (1            (1     (2     (3)   

Net transfers—Pfizer

     (18            (18            (18)   

 

 

Balance, December 31, 2010

     3,418        (74     3,344               3,344    

Comprehensive income

     245        9        254        3        257    

Share-based compensation expense

     19               19               19    

Investment in Jilin Pfizer Guoyuan Animal Health

                          16        16    

Dividends declared and paid

     (416            (416            (416)   

Net transfers between Pfizer and noncontrolling interests

     3               3        (3     —    

Net transfers—Pfizer(a)

     516               516               516    

 

 

Balance, December 31, 2011

   $ 3,785      $ (65   $ 3,720      $ 16      $ 3,736    

 

 

 

(a) 

For 2009, see Note 4B. Acquisitions, Divestitures and Certain Investments: Acquisition of Fort Dodge Animal Health and for 2011, see Note 4A. Acquisitions, Divestitures and Certain Investments: Acquisition of King Animal Health.

See Notes to Combined Financial Statements, which are an integral part of these statements.

 

F-6


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

COMBINED STATEMENTS OF CASH FLOWS

 

      Year Ended December 31,  
(MILLIONS OF DOLLARS)    2011     2010     2009   

Operating activities

      

Net income/(loss) before allocation to noncontrolling interests

   $ 248      $ 111      $ (101)   

Adjustments to reconcile net income/(loss) before noncontrolling interests to net cash provided by operating activities:

      

Depreciation and amortization expense

     205        185        124    

Share-based compensation expense

     19        16        15    

Asset write-offs and impairments

     78        16        29    

Net gains on sales of assets

     (1     (101     (2)   

Deferred taxes

     65        (68     (334)   

Other non-cash adjustments

            (5     10    

Other changes in assets and liabilities, net of acquisitions and divestitures:

      

Accounts receivable

     (85     30        112    

Inventories

     40        117        (16)   

Other assets

     11        (19     29    

Accounts payable

     (16     25        38    

Other liabilities

     (15     5        172    

Other tax accounts, net

     (52     (58     22    

 

 

Net cash provided by operating activities

     497        254        98    

 

 

Investing activities

      

Purchases of property, plant and equipment

     (135     (124     (135)   

Net proceeds from sales of assets

     34        203        572    

Acquisitions, net of cash acquired

     (345     (81     (2,254)   

Other investing activities

     (3     (7     (4)   

 

 

Net cash used in investing activities

     (449     (9     (1,821)   

 

 

Financing activities

      

Allocated proceeds from issuances of long-term debt

                   719    

Allocated principal payments on long-term debt

     (143            —    

Cash dividends paid(a)

     (416     (207     (101)   

Purchase of subsidiary shares from noncontrolling interests

            (3     —    

Net financing activities with Pfizer

     529        (67     1,205    

 

 

Net cash provided by/(used in) financing activities

     (30     (277     1,823    

 

 

Effect of exchange-rate changes on cash and cash equivalents

     (2     (4     (7)   

 

 

Net increase/(decrease) in cash and cash equivalents

     16        (36     93    

Cash and cash equivalents, as of beginning of year

     63        99          

 

 

Cash and cash equivalents, as of end of year

   $ 79      $ 63      $ 99    
   

Supplemental cash flow information

      

Cash paid during the period for:

      

Income taxes, net

   $ 142      $ 209      $ 264    

Interest

   $ 37      $ 37      $ —    

 

 
(a) 

Payments to other non-Zoetis entities.

See Notes to Combined Financial Statements, which are an integral part of these statements.

 

F-7


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

1.   Business Description

The accompanying combined financial statements include the accounts of all operations that comprise the animal health operations of Pfizer Inc. (collectively, Zoetis, the company, we, us and our). We are a global leader in the discovery, development, manufacture and commercialization of animal health medicines and vaccines, with a focus on both livestock and companion animals.

We organize and operate our business in four geographic regions: the United States (U.S.); Europe/Africa/Middle East (EuAfME); Canada/Latin America (CLAR); and Asia/Pacific (APAC).

We market our products in more than 120 countries, including developed markets and emerging markets. Our revenues are mostly generated in the U.S. and EuAfME. We have a diversified business, marketing products across eight core species: cattle, swine, poultry, fish and sheep (collectively, livestock) and dogs, cats and horses (collectively, companion animals) and within five major product categories (vaccines, parasiticides, anti-infectives, medicinal feed additives and other pharmaceuticals).

Pfizer formed Zoetis to ultimately acquire, own, and operate the animal health operations of Pfizer Inc., (Pfizer), which are set forth in these combined financial statements. See also Note 2. Basis of Presentation. As part of the potential separation of the animal health operations from Pfizer, Pfizer expects to transfer substantially all of its animal health business to Zoetis.

2.   Basis of Presentation

The combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and present the combined balance sheets of Zoetis as of December 31, 2011 and 2010 and the related combined statements of operations, comprehensive income/(loss), equity and cash flows of Zoetis for each of the years in the three-year period ended December 31, 2011. For operations outside the U.S., the combined financial information is included as of and for the fiscal year ended November 30 for each year presented. All significant intercompany balances and transactions between the legal entities that comprise Zoetis have been eliminated. Balances due to or due from Pfizer have been presented as a component of business unit equity. For those subsidiaries included in these combined financial statements where our ownership is less than 100%, the minority interests have been shown in equity as Equity attributable to noncontrolling interests.

On January 31, 2011 (the acquisition date), Pfizer completed the tender offer for the outstanding shares of common stock of King Pharmaceuticals, Inc. (King), including the King Animal Health business (KAH), and acquired approximately 92.5% of King’s outstanding shares. On February 28, 2011, Pfizer acquired all of the remaining shares of King. Commencing from the acquisition date, our combined financial statements include the assets, liabilities, operations and cash flows associated with KAH. As a result, and in accordance with our domestic and international reporting periods, our combined financial statements for the year ended December 31, 2011 reflect approximately eleven months of the U.S. operations of KAH and approximately ten months of the international operations of KAH. For additional information, see Note 4A. Acquisitions, Divestitures and Certain Investments: Acquisition of King Animal Health.

On October 15, 2009 (the acquisition date), Pfizer acquired all of the outstanding equity of Wyeth, including the Fort Dodge Animal Health business (FDAH). Commencing from the acquisition date, our combined financial statements include the assets, liabilities, operations and cash flows associated with FDAH. As a result, and in accordance with our domestic and international reporting periods, our combined financial statements for the year ended December 31, 2009 reflect approximately two-and-a-half months of the U.S. operations of FDAH and

 

F-8


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

approximately one-and-a-half months of the international operations of FDAH. For additional information, see Note 4B. Acquisitions, Divestitures and Certain Investments: Acquisition of Fort Dodge Animal Health.

The combined financial statements have been derived from the consolidated financial statements and accounting records of Pfizer and include allocations for direct costs and indirect costs attributable to the operations of the animal health business of Pfizer. These combined financial statements do not purport to reflect what the results of operations, comprehensive income/(loss), financial position, equity or cash flows would have been had we operated as a standalone public company during the periods presented.

 

   

The combined statements of operations include allocations from certain support functions (Enabling Functions) that are provided on a centralized basis within Pfizer, such as expenses for business technology, facilities, legal, finance, human resources, and, to a lesser extent, business development, public affairs and procurement, among others. Pfizer does not routinely allocate these costs to any of its business units. These allocations are based on either a specific identification basis or, when specific identification is not practicable, proportional allocation methods (e.g., using third-party sales, headcount, etc.), depending on the nature of the services.

We allocated the costs associated with business technology mostly using proportional allocation methods; for facilities and human resources, predominately using proportional allocation methods; and for legal and finance, mostly using specific identification. In all cases, for support function costs where proportional allocation methods were used, we determined whether the costs are primarily influenced by headcount (such as a significant majority of facilities and human resources costs) or by the size of the business (such as most business technology costs) and we also determined whether the associated scope of those services provided are global, regional or local. Based on those analyses, we then allocated the costs based on our share of worldwide revenues, domestic revenues, international revenues, regional revenues, country revenues, worldwide headcount, country headcount or site headcount, as appropriate.

As a result, costs associated with business technology and legal that were not specifically identified were mostly allocated based on revenue drivers and, to a lesser extent, based on headcount drivers; costs associated with finance that were not specifically identified were all allocated based on revenue drivers; and costs associated with facilities and human resources that were not specifically identified were predominately allocated based on headcount drivers.

 

   

The combined statements of operations include allocations of certain manufacturing and supply costs incurred by manufacturing plants that are shared with other Pfizer business units, Pfizer’s global external supply group and Pfizer’s global logistics and support group (collectively, PGS). These costs may include manufacturing variances and changes in the standard costs of inventory, among others. Pfizer does not routinely allocate these costs to any of its business units. These allocations are based on either a specific identification basis or, when specific identification is not practicable, proportional allocation methods, such as animal health identified manufacturing costs, depending on the nature of the costs.

 

   

The combined statements of operations also include allocations from the Enabling Functions and PGS for restructuring charges, integration costs, additional depreciation associated with asset restructuring and implementation costs. Pfizer does not routinely allocate these costs to any of its business units. For additional information about allocations of restructuring charges and other costs associated with acquisitions and cost-reduction/productivity initiatives, see Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives.

 

   

The combined statements of operations include an allocation of transaction costs related to acquired businesses. Pfizer does not routinely allocate these costs to any of its business units. For additional information about allocations of transaction costs, see Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives.

 

F-9


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

   

The combined statements of operations include an allocation of share-based compensation expense and certain other compensation expense items, such as certain fringe benefit expenses, maintained on a centralized basis within Pfizer. Pfizer does not routinely allocate these costs to any of its business units. For additional information about allocations of share-based payments, see Note 14. Share-Based Payments.

 

   

The combined balance sheets reflect all of the assets and liabilities of Pfizer that are either specifically identifiable or are directly attributable to Zoetis and its operations. For benefit plans, the combined balance sheets only include the assets and liabilities of benefit plans dedicated to animal health employees. For debt, see below.

 

   

The combined financial statements include an allocation of long-term debt from Pfizer that was issued to partially finance the acquisition of Wyeth (including FDAH). The debt and associated interest-related expenses, including the effect of hedging activities, have been allocated on a pro-rata basis using the deemed acquisition cost of FDAH as a percentage of the total acquisition cost of Wyeth. No other allocations of debt have been made as none is specifically related to our operations.

Management believes that the allocations are a reasonable reflection of the services received or the costs incurred on behalf of Zoetis and its operations and that the combined statements of operations reflect all of the costs of the animal health business of Pfizer. The allocated expenses from Pfizer include the following:

 

   

Enabling Functions operating expenses––Approximately $335 million in 2011, $345 million in 2010 and $291 million in 2009 ($3 million, $6 million and $0 million in Cost of sales; $268 million, $260 million and $219 million in Selling, general and administrative expenses; and $64 million, $79 million and $72 million in Research and development expenses).

 

   

PGS manufacturing costs—Approximately $34 million in 2011, $42 million in 2010 and $37 million in 2009 (in Cost of sales).

 

   

Restructuring charges and certain acquisition-related costs—Approximately $70 million in 2011, $104 million in 2010 and $121 million in 2009 (in Restructuring charges and certain acquisition-related costs).

 

   

Other costs associated with cost reduction/productivity initiatives—Additional depreciation associated with asset restructuring—Approximately $20 million in 2011, $17 million in 2010 and $43 million in 2009 ($0 million, $0 million and $39 million in Cost of sales; $1 million, $17 million and $4 million in Selling, general and administrative expenses; and $19 million, $0 million and $0 million in Research and development expenses).

 

   

Other costs associated with cost reduction/productivity initiatives—Implementation costs—Approximately $14 million in 2009 ($8 million in Cost of sales and $6 million in Selling, general and administrative expenses).

 

   

Share-based compensation expense—Approximately $25 million in 2011, $22 million in 2010 and $22 million in 2009 ($5 million, $3 million and $4 million in Cost of sales; $16 million, $15 million and $13 million in Selling, general and administrative expenses; and $4 million, $4 million and $5 million in Research and development expenses).

 

   

Transaction costs—Approximately $2 million in 2011, $1 million in 2010 and $23 million in 2009 (in Restructuring charges and certain acquisition-related costs).

 

   

Compensation-related expenses—Approximately $6 million in 2011, $17 million in 2010 and $43 million in 2009 ($2 million, $5 million and $11 million in Cost of sales; $3 million, $7 million and $21 million in Selling, general and administrative expenses; and $1 million, $5 million and $11 million in Research and development expenses).

 

   

Interest expense—Approximately $36 million in 2011, $37 million in 2010 and $26 million in 2009 (in Other (income)/deductions—net).

 

F-10


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

The income tax provision/(benefit) in the combined statements of operations has been calculated as if Zoetis filed a separate tax return.

We participate in Pfizer’s centralized cash management system and generally all excess cash is transferred to Pfizer on a daily basis. Cash disbursements for operations and/or investing activities are funded as needed by Pfizer. We also participate in Pfizer’s centralized hedging and offsetting programs. As such, in the combined statements of operations, we include the impact of Pfizer’s derivative financial instruments used for offsetting changes in foreign currency rates net of the related exchange gains and losses for the portion that is deemed to be associated with the animal health operations. Such gains and losses were not material to the combined financial statements for all periods presented.

All balances and transactions among Zoetis and Pfizer and its subsidiaries, which can include dividends as well as intercompany activities, are shown in business unit equity in the combined balance sheets, for all periods presented. As the books and records of Zoetis are not kept on a separate company basis, the determination of the average net balance due to or from Pfizer is not practicable. See also Note 17. Related Party Transactions.

3.   Significant Accounting Policies

A. New Accounting Standards

As of January 1, 2011, we adopted the provisions of the new amendment to the guidelines that address the accounting for multiple-deliverable arrangements to enable companies to account for certain products or services separately rather than as a combined unit. The adoption did not have a significant impact on our combined financial statements.

B. Estimates and Assumptions

In preparing the combined financial statements, we use certain estimates and assumptions that affect reported amounts and disclosures, including amounts recorded in connection with acquisitions. These estimates and underlying assumptions can impact all elements of our combined financial statements. For example, in the combined statements of operations, in addition to estimates used in determining the allocations of costs and expenses from Pfizer, estimates are used when accounting for deductions from revenues (such as rebates, sales allowances, product returns and discounts), determining cost of sales, allocating cost in the form of depreciation and amortization and estimating restructuring charges and the impact of contingencies. On the combined balance sheets, estimates are used in determining the valuation and recoverability of assets, such as accounts receivables, inventories, fixed assets, goodwill and other identifiable intangible assets, and estimates are used in determining the reported amounts of liabilities, such as taxes payable, benefit obligations, the impact of contingencies, deductions from revenues and restructuring reserves, all of which also impact the combined statements of operations.

Our estimates are often based on complex judgments, probabilities and assumptions that we believe to be reasonable but that can be inherently uncertain and unpredictable. If our estimates and assumptions are not representative of actual outcomes, our results could be materially impacted.

As future events and their effects cannot be determined with precision, our estimates and assumptions may prove to be incomplete or inaccurate, or unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions. We are subject to risks and uncertainties that may cause actual results to differ from estimated amounts, such as changes in competition, litigation, legislation and regulations. We regularly

 

F-11


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

evaluate our estimates and assumptions using historical experience and expectations about the future. We adjust our estimates and assumptions when facts and circumstances indicate the need for change. Those changes generally will be reflected in our combined financial statements on a prospective basis unless they are required to be treated retrospectively under relevant accounting standards. It is possible that others, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.

C. Acquisitions

Our combined financial statements include the operations of acquired businesses from the date of acquisition. We account for acquired businesses using the acquisition method of accounting, which requires, among other things, that most assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date and that the fair value of acquired in-process research and development (IPR&D) be recorded on the balance sheet. Transaction costs are expensed as incurred. Any excess of the consideration transferred over the assigned values of the net assets acquired is recorded as goodwill. When we acquire net assets that do not constitute a business as defined in U.S. GAAP, no goodwill is recognized.

Amounts recorded for acquisitions can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions.

D. Fair Value

Certain assets and liabilities are required to be measured at fair value, either upon initial recognition or for subsequent accounting or reporting. For example, we use fair value extensively in the initial recognition of net assets acquired in a business combination. Fair value is estimated using an exit price approach, which requires, among other things, that we determine the price that would be received to sell an asset or paid to transfer a liability in an orderly market. The determination of an exit price is considered from the perspective of market participants, considering the highest and best use of assets and, for liabilities, assuming that the risk of non-performance will be the same before and after the transfer.

When estimating fair value, depending on the nature and complexity of the asset or liability, we may use one or all of the following approaches:

 

   

Income approach, which is based on the present value of a future stream of net cash flows.

 

   

Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities.

 

   

Cost approach, which is based on the cost to acquire or construct comparable assets less an allowance for functional and/or economic obsolescence.

These fair value methodologies depend on the following types of inputs:

 

   

Quoted prices for identical assets or liabilities in active markets (Level 1 inputs).

 

   

Quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are not active or are directly or indirectly observable (Level 2 inputs).

 

   

Unobservable inputs that reflect estimates and assumptions (Level 3 inputs).

A single estimate of fair value can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions.

 

F-12


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

E. Foreign Currency Translation

For most of our international operations, local currencies have been determined to be the functional currencies. We translate functional currency assets and liabilities to their U.S. dollar equivalents at exchange rates in effect at the balance sheet date and we translate functional currency income and expense amounts to their U.S. dollar equivalents at average exchange rates for the period. The U.S. dollar effects that arise from changing translation rates are recorded in Other comprehensive income/(loss), net of taxes. The effects of converting non-functional currency assets and liabilities into the functional currency are recorded in Other (income)/deductions––net. For operations in highly inflationary economies, we translate monetary items at rates in effect at the balance sheet date, with translation adjustments recorded in Other (income)/deductions––net, and we translate non-monetary items at historical rates.

F. Revenues, Deductions from Revenues and the Allowance for Doubtful Accounts

We record revenues from product sales when the goods are shipped and title and risk of loss passes to the customer. At the time of sale, we also record estimates for a variety of deductions from revenues, such as rebates, sales allowances, product returns and discounts. Sales deductions are estimated and recorded at the time that related revenues are recorded except for sales incentives, which are estimated and recorded at the time the related revenues are recorded or when the incentive is offered, whichever is later. As applicable, our estimates are generally based on contractual terms or historical experience, adjusted as necessary to reflect our expectations about the future. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from Revenues.

As of December 31, 2011 and 2010, accruals for sales deductions included in Other current liabilities are approximately $122 million and $107 million, respectively.

We also record estimates for bad debts. We periodically assess the adequacy of the allowance for doubtful accounts by evaluating the collectability of outstanding receivables based on such factors such as past due history, historical and expected collection patterns, the financial condition of our customers, the robust nature of our credit and collection practices and the economic environment.

As of December 31, 2011 and 2010, accruals for the allowance for doubtful accounts included in Accounts receivable, less allowance for doubtful accounts are approximately $29 million and $26 million, respectively.

Amounts recorded for sales deductions and bad debts can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions.

G. Cost of Sales and Inventories

Inventories are carried at the lower of cost or market. The cost of finished goods, work-in-process and raw materials is determined using average actual cost. We regularly review our inventories for impairment, and adjustments are recorded when necessary.

H. Selling, General and Administrative Expenses

Selling, general and administrative costs are expensed as incurred. Among other things, these expenses include the internal and external costs of marketing, advertising, and shipping and handling as well as certain costs related to business technology, facilities, legal, finance, human resources, business development, public affairs and procurement, among others.

 

F-13


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

Advertising expenses relating to production costs are expensed as incurred, and the costs of space in publications are expensed when the related advertising occurs. Advertising and promotion expenses totaled approximately $134 million in 2011, $132 million in 2010 and $87 million in 2009.

Shipping and handling costs, including warehousing expenses, totaled approximately $66 million in 2011, $46 million in 2010 and $29 million in 2009.

I. Research and Development Expenses

Research and development (R&D) costs are expensed as incurred. Research is the effort associated with the discovery of new knowledge that will be useful in developing a new product or in significantly improving an existing product. Development is the implementation of the research findings. Before a compound receives regulatory approval, we record upfront and milestone payments made by us to third parties under licensing arrangements as expense. Upfront payments are recorded when incurred, and milestone payments are recorded when the specific milestone has been achieved. Once a compound receives regulatory approval in a major market, we record any milestone payments in Identifiable intangible assets, less accumulated amortization and, unless the assets are determined to have an indefinite life, we amortize them on a straight-line basis over the remaining agreement term or the expected product life cycle, whichever is shorter.

J. Amortization of Intangible Assets, Depreciation and Certain Long-Lived Assets

Long-lived assets include:

 

   

Goodwill—Goodwill represents the excess of the consideration transferred for an acquired business over the assigned values of its net assets. Goodwill is not amortized.

 

   

Identifiable intangible assets, less accumulated amortization—These acquired assets are recorded at our cost. Identifiable intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives. Identifiable intangible assets with indefinite lives that are associated with marketed products are not amortized until a useful life can be determined. Identifiable intangible assets associated with IPR&D projects are not amortized until regulatory approval is obtained. The useful life of an amortizing asset generally is determined by identifying the period in which substantially all of the cash flows are expected to be generated.

 

   

Property, plant and equipment, less accumulated depreciation––These assets are recorded at our cost and are increased by the cost of any significant improvements after purchase. Property, plant and equipment assets, other than land and construction-in-progress, are depreciated on a straight-line basis over the estimated useful life of the individual assets. Depreciation begins when the asset is ready for its intended use. For tax purposes, accelerated depreciation methods are used as allowed by tax laws.

Amortization expense related to finite-lived identifiable intangible assets that contribute to our ability to sell, manufacture, research, market and distribute products, compounds and intellectual property are included in Amortization of intangible assets as they benefit multiple business functions. Amortization expense related to intangible assets that are associated with a single function and depreciation of property, plant and equipment are included in Cost of sales, Selling, general and administrative expenses and Research and development expenses, as appropriate.

 

F-14


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

We review all of our long-lived assets for impairment indicators throughout the year and we perform detailed testing whenever impairment indicators are present. In addition, we perform detailed impairment testing for goodwill and indefinite-lived assets at least annually. When necessary, we record charges for impairments. Specifically:

 

   

For finite-lived identifiable intangible assets, such as developed technology rights, and for other long-lived assets, such as property, plant and equipment, whenever impairment indicators are present, we calculate the undiscounted value of the projected cash flows associated with the asset, or asset group, and compare this estimated amount to the carrying amount. If the carrying amount is found to be greater, we record an impairment loss for the excess of book value over fair value. In addition, in all cases of an impairment review, we re-evaluate the remaining useful lives of the assets and modify them, as appropriate.

 

   

For indefinite-lived identifiable intangible assets, such as brands and IPR&D assets, annually, and whenever impairment indicators are present, we determine the fair value of the asset and record an impairment loss, if any, for the excess of book value over fair value. In addition, in all cases of an impairment review other than for IPR&D assets, we re-evaluate whether continuing to characterize the asset as indefinite-lived is appropriate.

 

   

For goodwill, annually and whenever impairment indicators are present, we determine the fair value of each reporting unit and compare the fair value to its estimated book value. If the carrying amount is found to be greater, we then determine the implied fair value of goodwill by subtracting the fair value of all the identifiable net assets other than goodwill from the fair value of the reporting unit and record an impairment loss for the excess, if any, of book value of goodwill over the implied fair value.

Impairment reviews can involve a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions.

K. Restructuring Charges and Certain Acquisition-Related Costs

We may incur restructuring charges in connection with acquisitions when we implement plans to restructure and integrate the acquired operations or in connection with cost-reduction and productivity initiatives. Included in Restructuring charges and certain acquisition-related costs are all restructuring charges and certain costs associated with acquiring and integrating an acquired business. Transaction costs and integration costs are expensed as incurred. Termination costs are a significant component of restructuring charges and are generally recorded when the actions are probable and estimable.

As of December 31, 2011 and 2010, accruals for direct restructuring liabilities included in Other current liabilities are approximately $53 million and $59 million, respectively, and included in Other noncurrent liabilities are approximately $28 million and $42 million, respectively.

Amounts recorded for restructuring charges and other associated costs can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions.

L. Cash Equivalents

Cash equivalents include items almost as liquid as cash, such as certificates of deposit and time deposits with maturity periods of three months or less when purchased.

 

F-15


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

M. Deferred Tax Assets and Liabilities and Income Tax Contingencies

Deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates and laws. We provide a valuation allowance when we believe that our deferred tax assets are not recoverable based on an assessment of estimated future taxable income that incorporates ongoing, prudent and feasible tax planning strategies.

We account for income tax contingencies using a benefit recognition model. If we consider that a tax position is more likely than not to be sustained upon audit, based solely on the technical merits of the position, we recognize the benefit. We measure the benefit by determining the amount that is greater than 50% likely of being realized upon settlement, presuming that the tax position is examined by the appropriate taxing authority that has full knowledge of all relevant information. Under the benefit recognition model, if the initial assessment fails to result in the recognition of a tax benefit, we regularly monitor our position and subsequently recognize the tax benefit: (i) if there are changes in tax law, analogous case law or there is new information that sufficiently raise the likelihood of prevailing on the technical merits of the position to more likely than not; (ii) if the statute of limitations expires; or (iii) if there is a completion of an audit resulting in a favorable settlement of that tax year with the appropriate agency. We regularly re-evaluate our tax positions based on the results of audits of federal, state and foreign income tax filings, statute of limitations expirations, changes in tax law or receipt of new information that would either increase or decrease the technical merits of a position relative to the “more-likely-than-not” standard. Liabilities associated with uncertain tax positions are classified as current only when we expect to pay cash within the next 12 months. Interest and penalties, if any, are recorded in Provision/(benefit) for taxes on income/(loss) and are classified on our combined balance sheet with the related tax liability.

Amounts recorded for valuation allowances and income tax contingencies can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions.

N. Benefit Plans

Generally, most of our employees are eligible to participate in Pfizer’s pension plans. The combined statements of operations include all of the benefit plan expenses attributable to the animal health operations of Pfizer, including expenses associated with pension plans, postretirement plans and defined contribution plans. The expenses include allocations of direct expenses as well as expenses that have been deemed attributable to the animal health operations. The combined balance sheets include the benefit plan assets and liabilities of only those plans that are dedicated to animal health employees.

For the dedicated plans, we recognize the overfunded or underfunded status of defined benefit plans as an asset or liability on the combined balance sheets and the obligations generally are measured at the actuarial present value of all benefits attributable to employee service rendered, as provided by the applicable benefit formula. Pension obligations may include assumptions such as long-term rate of return on plan assets, expected employee turnover, participant mortality, and future compensation levels. Plan assets are measured at fair value. Net periodic benefit costs are recognized, as required, into Cost of sales, Selling, general and administrative expenses and Research and development expenses, as appropriate.

Amounts recorded for benefit plans can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions.

 

F-16


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

O. Asset Retirement Obligations

We record accruals for the legal obligations associated with the retirement of tangible long-lived assets, including obligations under the doctrine of promissory estoppel and those that are conditioned upon the occurrence of future events. These obligations generally result from the acquisition, construction, development and/or normal operation of long-lived assets. We recognize the fair value of these obligations in the period in which they are incurred by increasing the carrying amount of the related asset. Over time, we recognize expense for the accretion of the liability and for the amortization of the asset.

As of December 31, 2011 and 2010, accruals for direct asset retirement obligations included in Other current liabilities are $1 million and $1 million, respectively, and included in Other noncurrent liabilities are approximately $13 million and $9 million, respectively.

Amounts recorded for asset retirement obligations can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions.

P. Legal and Environmental Contingencies

We are subject to numerous contingencies arising in the ordinary course of business, such as product liability and other product-related litigation, commercial litigation, patent litigation, environmental claims and proceedings, government investigations and guarantees and indemnifications. We record accruals for these contingencies to the extent that we conclude that a loss is both probable and reasonably estimable. If some amount within a range of loss appears to be a better estimate than any other amount within the range, we accrue that amount. Alternatively, when no amount within a range of loss appears to be a better estimate than any other amount, we accrue the lowest amount in the range. We record anticipated recoveries under existing insurance contracts when recovery is assured.

Amounts recorded for contingencies can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions.

Q. Share-Based Payments

Our compensation programs include grants under Pfizer’s share-based payment plans. All grants under share-based payment programs are accounted for at fair value and such amounts generally are amortized on a straight-line basis over the vesting term to Cost of sales, Selling, general and administrative expenses, and Research and development expenses, as appropriate.

Amounts recorded for share-based compensation can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions.

R. Business Unit Equity

Total business unit equity represents Pfizer’s equity investment in the company and the net amounts due to or due from Pfizer. Recorded amounts reflect capital contributions and/or dividends as well as the results of operations and other comprehensive income/(loss).

 

F-17


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

4.   Acquisitions, Divestitures and Certain Investments

A. Acquisition of King Animal Health

Description of the Transaction and Fair Value of Consideration Transferred

On January 31, 2011 (the acquisition date), Pfizer completed its tender offer for the outstanding shares of common stock of King, including KAH, at a purchase price of $14.25 per share in cash and acquired approximately 92.5% of the outstanding shares. On February 28, 2011, Pfizer acquired all of the remaining shares of King for $14.25 per share in cash. As a result, the total fair value of consideration transferred by Pfizer for King was approximately $3.6 billion in cash ($3.2 billion, net of cash acquired), of which we estimate that approximately $345 million relates to KAH.

Recording of Assets Acquired and Liabilities Assumed

The assets acquired and liabilities assumed from King for KAH follow:

 

(MILLIONS OF DOLLARS)   

Amounts recognized
as of the acquisition date

 

Working capital deficit, excluding inventories(a)

                     $(11)   

Inventories

     104    

Property, plant and equipment

     94    

Identifiable intangible assets

     130    

Net tax accounts

     (10)   

All other noncurrent assets and liabilities, net

     (7)   

 

 

Total identifiable net assets

     300    

Goodwill(b)

     45    

 

 

Net assets acquired/total consideration transferred

                     $345    

 

 

 

(a) 

Includes accounts receivable, other current assets, accounts payable and other current liabilities.

(b) 

Goodwill recognized as of the acquisition date was attributable to all four of our geographic area operating segments. See Note 12A. Goodwill and Other Intangible Assets: Goodwill for additional information.

As of the acquisition date, the fair value of accounts receivable approximated the book value acquired. The gross contractual amount receivable was $52 million, virtually all of which was expected to be collected.

As part of the acquisition, we assumed liabilities for environmental, legal and tax matters, as well as guarantees and indemnifications that KAH incurred in the ordinary course of business. As of the acquisition date, we recorded approximately $11 million for environmental matters (including $4 million for asset retirement obligations), $9 million related to legal contingencies and $18 million related to uncertain tax positions.

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the acquisition of KAH includes the following:

 

   

the expected synergies and other benefits that we believe will result from combining the operations of KAH with the operations of Zoetis;

 

   

any intangible assets that do not qualify for separate recognition, as well as future, as yet unidentified projects and products; and

 

   

the value of the going-concern element of KAH’s existing businesses (the higher rate of return on the assembled collection of net assets than if we had acquired all of the net assets separately).

 

F-18


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

Goodwill is not amortized and is not deductible for tax purposes (see Note 12A. Goodwill and Other Intangible Assets: Goodwill for additional information).

Actual and Pro Forma Impact of Acquisition

In 2011, from the acquisition date of January 31, 2011, KAH contributed $329 million in revenues. We are unable to provide the results of operations attributable to KAH as those operations were substantially integrated by mid-2011.

Assuming that the acquisition of KAH had occurred on January 1, 2010 (rather than the actual acquisition date of January 31, 2011), the unaudited pro forma combined revenues of Zoetis and KAH would have been $4,275 million in 2011 and $3,958 million in 2010. The unaudited pro forma combined revenues are based on the historical financial information of Zoetis and KAH, reflecting Zoetis and KAH revenues for a 12-month period and do not purport to project the future revenues of the combined company. We are unable to provide the unaudited pro forma net income/(loss) attributable to Zoetis for 2011 or 2010 as it is impracticable to determine the full year results of KAH, a former division of King, on a U.S. GAAP basis.

B. Acquisition of Fort Dodge Animal Health

Description of the Transaction and Fair Value of Consideration Transferred

On October 15, 2009 (the acquisition date), Pfizer acquired all of the outstanding equity of Wyeth, including FDAH, in a cash-and-stock transaction, valued at the acquisition date at approximately $68.2 billion, of which we estimate that approximately $2.3 billion relates to FDAH. In connection with the regulatory approval process, we were required to divest certain animal health assets (see Note 4D. Acquisitions, Divestitures and Certain Investments: Divestitures).

Recording of Assets Acquired and Liabilities Assumed

The assets acquired and liabilities assumed from Wyeth for FDAH follow:

 

(MILLIONS OF DOLLARS)   

Amounts recognized 

as of the acquisition date 

 

Working capital, excluding inventories(a)

                         $    191    

Inventories

     344    

Assets held for sale

     652    

Property, plant and equipment

     394    

Identifiable intangible assets (including $25 million of IPR&D assets)

     444    

Net tax accounts

     (424)   

All other noncurrent assets and liabilities, net

     (14)   

 

 

Total identifiable net assets

     1,587    

Goodwill(b)

     738    

 

 

Net assets acquired

     2,325    

Less: Amounts attributable to noncontrolling interests

       

 

 

Total consideration transferred

     $    2,321    

 

 

 

(a) 

Includes cash and cash equivalents, accounts receivable, other current assets, accounts payable and other current liabilities.

(b) 

Goodwill recognized as of the acquisition date was attributable to all four of our geographic area operating segments. See Note 12A. Goodwill and Other Intangible Assets: Goodwill for additional information.

 

F-19


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

As of the acquisition date, the fair value of accounts receivable approximated the book value acquired. The gross contractual amount receivable was $281 million, of which $20 million was not expected to be collected.

As part of the acquisition, we assumed liabilities for environmental, legal and tax matters, as well as guarantees and indemnifications that FDAH incurred in the ordinary course of business.

 

   

Environmental Matters—All liabilities for environmental matters were measured at fair value and approximated $18 million as of the acquisition date (including $4 million of asset retirement obligations).

 

   

Legal Matters—Due to the uncertainty of the variables and assumptions involved in assessing the possible outcomes of events related to legal contingencies, an estimate of fair value was not determinable. As such, these contingencies were measured using management’s best estimate of probable losses and approximated $14 million as of the acquisition date.

 

   

Tax Matters—Liabilities for tax matters are not required to be measured at fair value. As such, these contingencies were measured under a benefit recognition model. Net liabilities for income taxes approximated $424 million as of the acquisition date, which included $51 million for uncertain tax positions.

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the acquisition of FDAH includes the following:

 

   

the expected synergies and other benefits that we believe will result from combining the operations of FDAH with the operations of Zoetis;

 

   

any intangible assets that do not qualify for separate recognition, as well as future, as yet unidentified projects and products; and

 

   

the value of the going-concern element of FDAH’s existing businesses (the higher rate of return on the assembled collection of net assets than if we had acquired all of the net assets separately).

Goodwill is not amortized and is not deductible for tax purposes (see Note 12A. Goodwill and Other Intangible Assets: Goodwill for additional information).

Actual and Pro Forma Impact of the Acquisition

In 2009, from the acquisition date of October 15, 2009, FDAH contributed $78 million in revenues and incurred a net loss of $145 million. The loss includes purchase accounting adjustments related to the fair value adjustments for acquisition-date inventory that has been sold ($19 million pre-tax), amortization of identifiable intangible assets and depreciation of fair value adjustments on property, plant and equipment ($9 million pre-tax), and restructuring charges and additional depreciation associated with asset restructuring ($164 million pre-tax).

Assuming that the acquisition of FDAH had occurred on January 1, 2009 (rather than the actual acquisition date of October 15, 2009), without adjusting for assets divested subsequent to acquisition date, the unaudited proforma combined revenues of Zoetis and FDAH would have been $3,628 million. The unaudited pro forma combined revenues are based on the historical financial information of Zoetis and FDAH, reflecting Zoetis and FDAH revenues for a 12-month period and do not purport to project the future revenues of the combined company. We are unable to provide the unaudited pro forma net income/(loss) attributable to Zoetis for 2009 as it is impracticable to determine the full year results of FDAH, a former division of Wyeth, on a U.S. GAAP basis.

 

F-20


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

C. Other Acquisitions

In December 2010, Pfizer acquired Synbiotics Corporation (Synbiotics), a privately-owned company that was a leader in the development, manufacture and marketing of immunodiagnostic tests for companion and food production animals. The total consideration for this acquisition was approximately $20 million plus $4 million in assumed debt. In connection with this acquisition, we recorded approximately $9 million in Identifiable intangible assets, consisting of $8 million of developed technology rights and $1 million of in-process research and development, and approximately $10 million in Goodwill.

In May 2010, Pfizer acquired Microtek International, Inc. (Microtek), a company focused on delivering aquatic vaccines and diagnostics used in fish farming. The total consideration for this acquisition was approximately $6 million, which consisted of an upfront payment of $4 million and contingent consideration with an estimated acquisition-date fair value of about $2 million. In connection with this acquisition, we recorded approximately $4 million in Identifiable intangible assets, consisting of approximately $2 million in developed technology rights, and $2 million of in-process research and development.

In December 2009 (fiscal 2010), Pfizer acquired Vetnex Animal Health Ltd. (Vetnex), a privately-owned company focusing on poultry, livestock and companion animal healthcare in India. The total consideration for this acquisition was approximately $57 million plus $8 million in assumed debt. In connection with this acquisition, we recorded approximately $47 million in Identifiable intangible assets, consisting of approximately $38 million of developed technology rights and $9 million of in-process research and development, and approximately $19 million in Goodwill.

In August 2009, Pfizer acquired a business from Qvax Pty Ltd. (Qvax), a privately-owned company focusing on cattle vaccines. The total consideration for this acquisition was approximately $5 million. In connection with this acquisition, we recorded approximately $4 million in Identifiable intangible assets, consisting of approximately $3 million of developed technology rights and $1 million of in-process research and development, and approximately $1 million in Goodwill.

D. Divestitures

In connection with the regulatory approval process of the Pfizer acquisition of Wyeth on October 15, 2009 (the acquisition date), we were required to divest certain animal health assets:

 

   

In 2009, immediately following the acquisition date, we sold certain animal health products in the U.S., Canada, and to a lesser extent, Australia and South Africa, including intellectual property rights exclusive to North America as well as some manufacturing facilities and finished goods inventory. The transaction as it related to Europe closed in 2010. The product portfolio was composed of both livestock and companion animal products, virtually all of which were acquired from legacy Wyeth. The proceeds from the sale were approximately $580 million, net of transaction costs, and we recognized a $2 million gain as most of the assets sold had been recorded at fair value on the acquisition date. In 2010, we recognized a $15 million gain in Other (income)/deductions—net as a result of the resolution of the contingent consideration as prescribed in the agreement.

 

   

In early 2010, we sold certain animal health products in Australia, including intellectual property rights exclusive to Australia as well as a biological manufacturing facility and finished goods inventory. The product portfolio was composed of livestock products, all acquired from legacy Wyeth. The proceeds from the sale were approximately $10 million, net of transaction costs, and we recognized a $19 million loss on the sale in Other (income)/deductions––net, related to the inventory included in the transaction.

 

F-21


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

   

In mid-2010, we sold certain animal health products in Europe, including intellectual property rights exclusive to Europe as well as a manufacturing facility and finished goods inventory. The product portfolio was composed of both livestock and companion animal products from both legacy Wyeth and legacy Pfizer. The proceeds from the sale were approximately $145 million, net of transaction costs, and we recognized a $71 million gain in Other (income)/deductions––net on the sale related to the legacy Pfizer assets. In connection with this divestiture, we entered into transitional manufacturing service agreements with the buyer, which included certain purchasing and investment commitments related to the divested manufacturing facility. The incremental charges associated with these commitments were included in Cost of sales ($20 million in 2011 and $5 million in 2010) and Other (income)/deductions—net ($7 million in 2011).

 

   

In mid-2010, we sold certain animal health products in China. The product portfolio was composed of livestock vaccines from legacy Pfizer. The proceeds from the sale were approximately $38 million, net of transaction costs, and we recognized a $37 million gain in Other (income)/deductions––net on the sale.

In addition, there were smaller asset sales of products acquired from legacy Wyeth in Mexico (2010) and Korea (2011), for combined proceeds of about $2 million, with no gain or loss included in the financial statements.

All of the divestiture transactions required transitional supply and service agreements, including technology transfers, where necessary and appropriate, as well as other customary ancillary agreements.

It is possible that additional divestitures of animal health assets may be required based on the ongoing regulatory reviews in other jurisdictions, but they are not expected to be significant to our business.

E. Certain Investments

Formation of Jilin Pfizer Guoyuan Animal Health Co., Ltd.

In October 2011, Pfizer and Jilin Guoyuan Animal Health Company, Ltd. created a new company, Jilin Pfizer Guoyuan Animal Health Co., Ltd. (Jilin), which will focus on swine vaccine development and commercialization in China. In exchange for payments of approximately $14 million, we acquired a 45% equity interest in Jilin. We have determined that Jilin is a variable interest entity and that Zoetis is the primary beneficiary of Jilin since Zoetis (i) has the power to direct the activities of Jilin that most significantly impact Jilin’s economic performance, (ii) has the right to appoint the majority of the board of directors and (iii) has the obligation to absorb losses of Jilin that could potentially be significant to Jilin and the right to receive benefits from Jilin that could potentially be significant to Jilin. As such, since the formation of Jilin, we have included all of the operating results, assets, liabilities and cash flows of Jilin in our combined financial statements. The 55% interest held by Jilin Guoyuan Animal Health Company is reflected in our combined balance sheet as a noncontrolling interest. In connection with this investment, we recorded approximately $3 million in Identifiable intangible assets, consisting of a manufacturing license and an industrial land-use right in China, and approximately $10 million in Goodwill.

5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives

The combined statements of operations include significant costs associated with Pfizer’s cost-reduction initiatives (several programs initiated since 2005) and the acquisitions of FDAH on October 15, 2009 and KAH on January 31, 2011. The expenses include direct costs and charges as well as an allocation of indirect costs and

 

F-22


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

charges that have been deemed attributable to the operations of the company. The combined balance sheets reflect the accrued restructuring charges directly attributable to the animal health operations. For example:

 

   

In connection with cost-reduction/productivity initiatives, we typically incur costs and charges associated with site closings and other facility rationalization actions, workforce reductions and the expansion of shared services, including the development of global systems; and

 

   

In connection with acquisition activity, we typically incur costs and charges associated with executing the transactions, integrating the acquired operations, which may include expenditures for consulting and the integration of systems and processes, and restructuring the combined company, which may include charges related to employees, assets and activities that will not continue in the combined company.

All operating functions can be impacted by these actions, including sales and marketing, manufacturing and research and development, as well as support functions such as business technology, shared services and corporate operations.

The components of costs incurred in connection with acquisitions and cost-reduction/productivity initiatives follow:

 

     Year Ended December 31,  
(MILLIONS OF DOLLARS)   2011      2010      2009  

Restructuring Charges and Certain Acquisition-Related Costs:

       

Integration costs(a)

  $ 30       $ 43       $ 31   

Restructuring charges:(b)

       

Employee termination costs

    53         15         160   

Asset impairment charges

            5         11   

Exit costs

    1         35         17   

 

 

Total Direct

    84         98         219   

 

 

Transaction costs(c)

    2         1         23   

Integration costs(a)

    41         49         15   

Restructuring charges:(b)

       

Employee termination costs

    20         25         47   

Asset impairment charges

    7         13         21   

Exit costs

            16         15   

 

 

Total Allocated

    70         104         121   

 

 

Total Restructuring charges and certain acquisition-related costs

    154         202         340   

Other Costs Associated with Cost-Reduction/Productivity Initiatives:

       

Additional depreciation associated with asset restructuring––direct(d)

    9                   

Additional depreciation associated with asset restructuring––allocated(d)

    20         17         43   

Implementation costs––direct(e)

    3                 9   

Implementation costs––allocated(e)

                    14   

 

 

Total costs associated with acquisitions and cost-reduction/productivity initiatives

  $ 186       $ 219       $ 406   

 

 

 

(a) 

Integration costs represent external, incremental costs directly related to integrating acquired businesses and primarily include expenditures for consulting and the integration of systems and processes.

(b) 

Restructuring charges are primarily related to the integration of KAH in 2011 and FDAH in 2009.

 

F-23


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

  The direct restructuring charges are associated with the following:

 

   

2011 Direct—U.S. ($2 million), EuAfME ($33 million), CLAR ($2 million), APAC ($2 million income) and manufacturing/research/corporate ($19 million).

 

   

2010 Direct—U.S. ($14 million income), EuAfME ($24 million), CLAR ($4 million), APAC ($10 million) and manufacturing/research/corporate ($31 million).

 

   

2009 Direct—U.S. ($77 million), EuAfME ($65 million), CLAR ($6 million), APAC ($13 million) and manufacturing/research/corporate ($27 million).

 

(c) 

Transaction costs represent external costs directly related to acquiring businesses and primarily include expenditures for banking, legal, accounting and other similar services, including in 2009, an allocation of fees related to Pfizer debt used to partially fund the acquisition of Wyeth.

(d) 

Additional depreciation associated with asset restructuring represents the impact of changes in the estimated lives of assets involved in restructuring actions. In 2011, included in Cost of sales ($6 million), Selling, general and administrative expenses ($4 million) and Research and development expenses ($19 million). In 2010, included in Selling, general and administrative expenses ($17 million). In 2009, included in Cost of sales ($39 million) and Selling, general and administrative expenses ($4 million).

(e) 

Implementation costs, represent external, incremental costs directly related to implementing cost-reduction/productivity initiatives, and primarily include expenditures related to system and process standardization and the expansion of shared services. In 2011, included in Selling, general and administrative expenses ($2 million) and Research and development expenses ($1 million). In 2009, included in Cost of sales ($14 million), Selling, general and administrative expenses ($7 million) and Research and development expenses ($2 million).

The components and activity of our direct restructuring charges identified with Zoetis follow:

 

(MILLIONS OF DOLLARS)   

Employee

Termination

Costs

   

Asset

Impairment

Charges

    Exit
Costs
    Accrual   

Balance, December 31, 2008

   $ 26      $      $      $ 26    

Provision

     160        11        17        188    

Utilization and other(a)

     (6     (11     (12     (29)   
                                  

Balance, December 31, 2009

     180               5        185    

Provision

     15        5        35        55    

Utilization and other(a)

     (105     (5     (29     (139)   
                                  

Balance, December 31, 2010(b)

     90               11        101    

Provision

     53               1        54    

Utilization and other(a)

     (73            (1     (74)   
                                  

Balance, December 31, 2011(b)

   $ 70      $      $ 11      $ 81    

 

 

 

(a) 

Includes adjustments for foreign currency translation.

(b) 

At December 31, 2011 and 2010, included in Other current liabilities ($53 million and $59 million, respectively) and Other noncurrent liabilities ($28 million and $42 million, respectively).

 

F-24


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

6. Other (Income)/Deductions—Net

The components of Other (income)/deductions––net follow:

 

      Year Ended December 31,   
(MILLIONS OF DOLLARS)    2011     2010     2009   

Interest expense on allocated long-term debt(a)

   $ 36      $ 37      $ 26    

Royalty-related income(b)

     (26     (30     (5)   

Net gains on sales of certain assets(c)

            (104     (2)   

Identifiable intangible asset impairment charges(d)

     69                 

Other, net

     5        4        (1)   
                          

Other (income)/deductions—net

   $ 84      $ (93   $ 23    

 

 

 

(a) 

The interest expense on allocated long-term debt reflects an allocation of Pfizer’s weighted-average effective interest rate on the Wyeth/FDAH-related acquisition debt, issued in March and June of 2009, of 5.1% in 2011, 5.1% in 2010 and 4.1% in 2009. See also Note 9D. Financial Instruments: Allocated Long-Term Debt.

(b) 

The increase in royalty-related income in 2011 and 2010 relates to royalty agreements of FDAH, which was acquired in late 2009.

(c) 

Represents net gains on the sales of certain animal health assets divested in connection with Pfizer’s 2009 acquisition of Wyeth/FDAH. See also Note 4D. Acquisitions, Divestitures and Certain Investments: Divestitures.

(d) 

In 2011, the asset impairment charges include (i) approximately $30 million of finite-lived intangible assets related to parasiticides technology as a result of declining gross margins and increased competition; (ii) approximately $12 million of finite-lived intangible assets related to equine influenza and tetanus technology due to third-party supply issues; (iii) approximately $10 million of finite-lived intangible assets related to genetic testing services that did not find consumer acceptance; and (iv) approximately $17 million related to in-process research and development projects (acquired from Vetnex in 2010 and from FDAH in 2009), as a result of the termination of the development programs due to a re-assessment of economic viability. In 2009, the asset impairment charges include (i) approximately $3 million write-off related to an equine licensing arrangement, which was required to be surrendered in connection with Pfizer’s acquisition of Wyeth, and (ii) approximately $2 million write-off of finite-lived intangible assets related to a canine product that could not find consumer acceptance.

7. Tax Matters

A. Taxes on Income

During the periods presented in the combined financial statements, Zoetis did not generally file separate tax returns, as Zoetis was generally included in the tax grouping of other Pfizer entities within the respective entity’s tax jurisdiction. The income tax provision/(benefit) included in these combined financial statements has been calculated using the separate return basis, as if Zoetis filed a separate tax return.

The components of Income/(loss) before provision/(benefit) for taxes on income follow:

 

      Year Ended December 31,  
(MILLIONS OF DOLLARS)    2011     2010     2009   

United States

   $ (239   $ (349   $ (542)   

International

     633        527        394    

 

 

Income/(loss) before provision/(benefit) for taxes on income(a), (b)

   $ 394      $ 178      $ (148)   

 

 
(a) 

2011 vs. 2010—The decrease in the domestic loss was primarily due to lower integration and restructuring costs and cost reductions due to both acquisition related synergies and initiatives undertaken during the year, partially offset by the non-recurrence of gains related to FDAH divestitures. The increase in the international income was due to cost reductions which were the result of both acquisition related synergies and initiatives undertaken during the year.

(b) 

2010 vs. 2009—The decrease in the domestic loss in 2010 was primarily due to divestiture gains recorded in connection with the acquisition of FDAH and cost reductions which were the result of both acquisition related synergies and initiatives undertaken during the year. The increase in the international income in 2010 was also due to cost reductions which were the result of both acquisition related synergies and initiatives undertaken during the year.

 

F-25


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

The components of Provision/(benefit) for taxes on income/(loss) based on the location of the taxing authorities, follow:

 

      Year Ended December 31,  
(MILLIONS OF DOLLARS)    2011     2010     2009   
                   

United States:

      

Current income taxes:

      

Federal

   $ (3   $ (22   $ 9   

State and local

     (1     (3     1   

Deferred income taxes:

      

Federal

     (19     (11     (183

State and local

     (3     (8     (34
      

Total U.S. tax benefit(a), (b)

     (26     (44     (207
                          

International:

      

Current income taxes

     85        160        277   

Deferred income taxes

     87        (49     (117
      

Total international tax provision

     172        111        160   
                          

Provision/(benefit) for taxes on income/(loss)(c), (d)

   $ 146      $ 67      $ (47

 

 

 

(a)

In 2011, the U.S. deferred income tax benefit is primarily due to a decrease in deferred tax liabilities related to fair value adjustments recorded in connection with our acquisitions of FDAH and KAH and an increase in deferred tax assets for the U.S. research tax credit, partially offset by approximately $9 million, as a result of providing U.S. deferred income taxes on certain current-year funds earned outside of the U.S. that will not be permanently reinvested overseas (See Note 7B. Tax Matters: Deferred Taxes). In addition, the U.S. current income tax benefit is primarily due to the tax benefit recorded in connection with the settlement of certain audits with the U.S. Internal Revenue Service (See Note 7C. Tax Matters: Tax Contingencies).

(b) 

In 2010, the U.S. current income tax benefit is primarily due to the tax benefit recorded in connection with our $25.5 million settlement with the U.S. Internal Revenue Service and the reversal of $7.9 million of accruals related to interest on these unrecognized tax benefits (see Note 7A. Tax Matters: Taxes on Income). The U.S. deferred income tax benefit is primarily due to a decrease in deferred tax liabilities related to fair value adjustments recorded in connection with our acquisition of FDAH and the establishment of deferred tax assets for the U.S. research tax credit carryforward, partially offset by approximately $21.3 million related to the write-off of deferred tax assets to record the impact of the U.S. healthcare legislation concerning the tax treatment of Medicare Part D subsidy for retiree prescription drug coverage and deferred income tax expense of approximately $39 million as a result of providing U.S. deferred income taxes on certain current-year funds earned outside of the U.S. that will not be permanently reinvested overseas (see Note 7B. Tax Matters: Deferred Taxes).

(c) 

In 2009, the deferred tax benefit is primarily due to the establishment of deferred tax assets for net operating losses and tax credit carryforwards and to a lesser extent due to a reduction in deferred tax liabilities related to fair value adjustments recorded in connection with our acquisition of FDAH, partially offset by deferred income tax expense of approximately $31 million as a result of providing U.S. deferred income taxes on certain current-year funds earned outside of the U.S. that will not be permanently reinvested overseas (see Note 7B. Tax Matters: Deferred Taxes).

(d) 

In 2011, federal, state and international net tax liabilities assumed or established on the date of the acquisition primarily of KAH are excluded. In 2010 and 2009, federal, state and international net tax liabilities assumed or established on the date of the acquisition primarily of FDAH are excluded (see Note 4A. Acquisitions, Divestitures and Certain Investments: Acquisition of King Animal Health and Note 4B. Acquisitions, Divestitures and Certain Investments: Acquisition of Fort Dodge Animal Health).

Settlements and Other Items Impacting Provision/(Benefit) for Taxes on Income/(Loss)

The Provision/(benefit) for taxes on income/(loss) was impacted by the following:

 

   

2011—A tax benefit of approximately $9.5 million, inclusive of interest, related to an audit settlement with the U.S. Internal Revenue Service with respect to the audits of the Wyeth tax returns for the years 2002 through 2005.

 

F-26


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

   

2010—A tax benefit of approximately $25.5 million recorded in the fourth quarter, related to an audit settlement with the U.S. Internal Revenue Service regarding issues Pfizer had appealed with respect to the audits of the Pfizer Inc. tax returns for the years 2002 through 2005, as well as the Pharmacia audit for the year 2003 through the date of merger with Pfizer (April 16, 2003) and the reversal of approximately $7.9 million of accruals related to interest on these unrecognized tax benefits; and

 

   

2010—The write-off of approximately $21.3 million of deferred tax assets related to the Medicare Part D subsidy for retiree prescription drug coverage, resulting from the provisions of the U.S. healthcare legislation enacted in March 2010 concerning the tax treatment of that subsidy effective for tax years beginning after December 31, 2012.

 

   

2009—We incurred certain costs of approximately $18 million associated with the FDAH acquisition that are not deductible for tax purposes (non-deductible items).

See also Note 7C. Tax Matters: Tax Contingencies.

Tax Rate Reconciliation

The reconciliation of the U.S. statutory income tax rate to our effective tax rate for income/(loss) follows:

 

      Year Ended December 31,  
     2011     2010     2009       

 

 

U.S. statutory income tax rate

     35.0     35.0     (35.0)%   

State and local taxes, net of federal benefits(a)

     (0.2     (2.3     (12.5)       

Taxation of non-U.S. operations(b)(c)

     2.7        8.2        9.7        

Settlements of certain tax positions(d)

     (2.4     (18.7     —        

U.S. healthcare legislation(e)

     0.3        12.0        —        

U.S. research tax credit and manufacturing deduction(f)

     (2.3     (3.1     (1.6)       

Non-deductible items(g)

     2.1        4.2        9.4        

All other—net

     1.9        2.3        (1.8)       

 

 

Effective tax rate for income/(loss)

     37.1     37.6     (31.8)%   

 

 

 

(a) 

The rate impact of this component is influenced by the specific level of U.S. earnings in a specific year. In 2009 and 2010, we established deferred tax assets for state net operating losses and credit carryforwards. See above in this Note 7A. Tax Matters: Taxes on Income.

(b) 

For taxation of non-U.S. operations, this rate impact reflects the income tax rates and relative earnings in the locations where we do business outside of the United States, together with the cost of repatriation decisions, as well as changes in uncertain tax positions not included in the reconciling item called “Settlements of certain tax positions”: (i) the jurisdictional location of earnings is a component of our effective tax rate each year as tax rates outside of the U.S. are generally lower than the U.S. statutory income tax rate. The rate impact of the jurisdictional location of earnings is influenced by the specific location of non-U.S. earnings and the level of such earnings as compared to our total earnings. This rate impact is then offset or more than offset by the cost of repatriation decisions and other U.S. tax implications of our foreign operations, which may significantly impact the taxation of non-U.S. operations; and (ii) the impact of changes in uncertain tax positions not included in the reconciling item called “Settlements of certain tax positions” is a component of our effective tax rate each year that can result in either an increase or decrease to our effective tax rate. The jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs, can vary as a result of the repatriation decisions and as a result of operating fluctuations in the normal course of business, the impact of non-deductible items and the extent and location of other income and expense items, such as restructuring charges, asset impairments and gains and losses on asset divestitures.

(c) 

The rate impact of taxation of non-U.S. operations was an increase to our effective tax rate in all periods presented due to (i) the cost of repatriation decisions and other U.S. tax implications that more than offsets the impact of the generally lower tax rates outside the U.S.; (ii) the tax impact of non-deductible items in those jurisdictions; and (iii) the tax impact of changes in uncertain tax positions related to our non-U.S. operations (see also the reconciliation of our gross unrecognized tax benefits in Note 7C. Tax Matters: Tax Contingencies, for current and prior period increases to uncertain tax positions).

(d) 

For a discussion about settlements of certain tax positions, see Note 7A. Tax Matters: Taxes on Income.

 

F-27


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

(e) 

For a discussion about the impact of U.S. healthcare legislation, see “Settlements and Other Items Impacting Provision/(Benefit) for Taxes on Income/(Loss)” above in this Note 7A. Tax Matters: Taxes on Income.

(f) 

For a discussion about the U.S. research tax credit and manufacturing deduction, see the components of Provision/(benefit) for taxes on income/(loss) above in this Note 7A. Tax Matters: Taxes on Income. As of December 31, 2011, the U.S. Research Tax Credit has expired.

(g) 

For a discussion about non-deductible items, see “Settlements and Other Items Impacting Provision/(Benefit) for Taxes on Income/(Loss)” above in this Note 7A. Tax Matters: Taxes on Income.

We have manufacturing operations in Singapore, where we benefit from manufacturing incentive tax rates effective through 2031 on income from those operations.

B. Deferred Taxes

Deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between financial reporting and tax bases of assets and liabilities using enacted tax laws and rates.

The components of our deferred tax assets and liabilities, shown before jurisdictional netting, follow:

 

      2011 Deferred Tax     2010 Deferred Tax  
(MILLIONS OF DOLLARS)    Assets     (Liabilities)     Assets     (Liabilities)  

 

 

Prepaid/deferred items

   $ 80      $ (4   $ 57      $ (2

Inventories

     46        (5     31        (1

Intangibles

     5        (273     8        (253

Property, plant and equipment

     1        (122            (115

Employee benefits

     34               38          

Restructuring and other charges

     51        (1     53        (1

Net operating loss/credit carryforwards

     212               221          

Unremitted earnings

            (93            (84

Miscellaneous

     3        (1              

 

 

Subtotal

     432        (499     408        (456

Valuation allowance

     (5            (4       

 

 

Total deferred taxes

     427        (499     404        (456

 

 

Net deferred tax liability(a), (b)

     $ (72     $ (52

 

 

 

(a) 

2011 vs. 2010—The net deferred tax liability position in 2011 reflects an increase in noncurrent deferred tax liabilities related to intangibles established in connection with our acquisition of King and an increase in noncurrent deferred tax liabilities on unremitted earnings, partially offset by the reduction in noncurrent deferred tax liabilities related to the amortization of identifiable intangibles.

(b) 

In 2011, included in Current deferred tax assets ($96 million), Noncurrent deferred tax assets ($143 million) and Noncurrent deferred tax liabilities ($311 million). In 2010, included in Current deferred tax assets ($97 million), Noncurrent deferred tax assets ($70 million), Other current liabilities ($1 million) and Noncurrent deferred tax liabilities ($218 million).

We have carryforwards, primarily related to foreign tax credits, research and development tax credits and net operating losses, which are available to reduce future U.S. federal and state, as well as international income taxes payable with either an indefinite life or expiring at various times from 2012 to 2031. Certain of our U.S. net operating losses are subject to limitations under Internal Revenue Code Section 382.

Valuation allowances are provided when we believe that our deferred tax assets are not recoverable based on an assessment of estimated future taxable income that incorporates ongoing, prudent and feasible tax planning strategies.

As of December 31, 2011, we have not made a U.S. tax provision on approximately $1.9 billion of unremitted earnings of our international subsidiaries. As of December 31, 2011, as these earnings are intended to be permanently reinvested overseas, the determination of a hypothetical unrecognized deferred tax liability is not practicable.

 

F-28


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

C. Tax Contingencies

We are subject to income tax in many jurisdictions, and a certain degree of estimation is required in recording the assets and liabilities related to income taxes. All of our tax positions are subject to audit by the local taxing authorities in each tax jurisdiction. These tax audits can involve complex issues, interpretations and judgments and the resolution of matters may span multiple years, particularly if subject to negotiation or litigation. For a description of our accounting policies associated with accounting for income tax contingencies, see Note 3M. Significant Accounting Policies: Deferred Tax Assets and Liabilities and Income Tax Contingencies. For a description of the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions.

Uncertain Tax Positions

As tax law is complex and often subject to varied interpretations, it is uncertain whether some of our tax positions will be sustained upon audit. As of December 31, 2011 and 2010, we had approximately $82 million and $66 million, respectively, in net liabilities associated with uncertain tax positions, excluding associated interest:

 

   

Tax assets associated with uncertain tax positions primarily represent our estimate of the potential tax benefits in one tax jurisdiction that could result from the payment of income taxes in another tax jurisdiction. These potential benefits generally result from cooperative efforts among taxing authorities, as required by tax treaties to minimize double taxation, commonly referred to as the competent authority process. The recoverability of these assets, which we believe to be more likely than not, is dependent upon the actual payment of taxes in one tax jurisdiction and, in some cases, the successful petition for recovery in another tax jurisdiction. As of December 31, 2011 and 2010, we had approximately $32 million and $27 million, respectively, in assets associated with uncertain tax positions recorded in Other noncurrent assets.

 

   

Tax liabilities associated with uncertain tax positions represent unrecognized tax benefits, which arise when the estimated benefit recorded in our financial statements differs from the amounts taken or expected to be taken in a tax return because of the uncertainties described above. These unrecognized tax benefits relate primarily to issues common among multinational corporations. Substantially all of these unrecognized tax benefits, if recognized, would impact our effective income tax rate.

The reconciliation of the beginning and ending amounts of gross unrecognized tax benefits follows:

 

(MILLIONS OF DOLLARS)    2011     2010     2009   

Balance, January 1

   $ (93   $ (143   $ (86)   

Acquisitions(a)

     (19            (49)   

Increases based on tax positions taken during a prior period(b)

            (4     (3)   

Decreases based on tax positions taken during a prior period(b), (c)

     1        37          

Decreases based on cash payments for a prior period

     7        11        —    

Increases based on tax positions taken during the current period(b)

     (10     (10     (9)   

Decreases based on tax positions taken during the current period

            16        —    

Impact of foreign exchange

                   —    

Other, net

                   —    

 

 

Balance, December 31(d)

   $ (114   $ (93   $ (143)   

 

 

 

  (a) 

The amount in 2011 primarily relates to the acquisition of KAH and the amounts in 2009 primarily relates to the acquisition of FDAH.

  (b) 

Primarily included in Provision/(benefit) for taxes on income/(loss).

  (c) 

In 2011, 2010, and 2009, the decreases are primarily a result of effectively settling certain issues with the U.S. and foreign tax authorities. See discussions below.

  (d) 

In 2011, included in Noncurrent deferred tax assets ($(6) million) and Other taxes payable ($108 million). In 2010, included in Other taxes payable ($93 million).

 

F-29


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

   

Interest related to our unrecognized tax benefits is recorded in accordance with the laws of each jurisdiction and is recorded in Provision/(benefit) for taxes on income/(loss) in our combined statements of operations. In 2011, interest expense was de minimis and in 2010 and 2009, we recorded a net interest benefit of $5 million and net interest expense of $2 million, respectively. Gross accrued interest totaled $14 million and $7 million as of December 31, 2011 and 2010, respectively. Accrued penalties are not significant. In 2011, these amounts were included in Other taxes payable ($14 million). In 2010, these amounts were included in Other taxes payable ($7 million).

Status of Tax Audits and Potential Impact on Accruals for Uncertain Tax Positions

The United States is one of our major tax jurisdictions:

 

   

With respect to Pfizer, the tax years 2006-2010 are currently under audit and the tax year 2011 is open but not under audit. All other tax years in the U.S. for Pfizer Inc. are closed under the statute of limitations.

 

   

With respect to Wyeth, tax years 2006 through the Wyeth acquisition date (October 15, 2009) are currently under audit. All other tax years are closed.

 

   

With respect to King, King’s tax year 2008 and Alpharma, Inc.’s (an animal health related company acquired through the KAH acquisition) tax years 2005-2007 are currently under audit. Tax years 2009 through the date of acquisition (January 31, 2011) are open but not under audit. King’s tax years prior to 2008 have been settled with the IRS.

In addition to the open audit years in the U.S., we have open audit years in other major tax jurisdictions, such as Canada (1998-2011), Japan (2006-2011), Europe (2002-2011, primarily reflecting Ireland, the United Kingdom, France, Italy, Spain and Germany) and Puerto Rico (2007-2011).

Any settlements or statute of limitations expirations could result in a significant decrease in our uncertain tax positions. We estimate that it is reasonably possible that within the next twelve months, our gross unrecognized tax benefits, exclusive of interest, could decrease by as much as $0.3 million, as a result of settlements with taxing authorities or the expiration of the statute of limitations. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but our estimates of unrecognized tax benefits and potential tax benefits may not be representative of actual outcomes, and any variation from such estimates could materially affect our financial statements in the period of settlement or when the statutes of limitations expire, as we treat these events as discrete items in the period of resolution. Finalizing audits with the relevant taxing authorities can include formal administrative and legal proceedings, and, as a result, it is difficult to estimate the timing and range of possible change related to our uncertain tax positions, and such changes could be significant.

 

F-30


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

8. Accumulated Other Comprehensive Income/(Loss)

Changes, net of tax, in accumulated other comprehensive income/(loss) follow:

 

   
      Net Unrealized Gains/(Losses)       Benefit Plans         
(MILLIONS OF DOLLARS)   

Currency Translation

Adjustment

    

Actuarial

Gains/(Losses)

    

Accumulated

Other

Comprehensive

Income/(Loss)

 
   

Balance, December 31, 2008

         $(152)         $    (1)         $(153)   

Other comprehensive income

     210          (2)         208    
   

Balance, December 31, 2009

     58          (3)         55    

Other comprehensive loss

     (121)         (8)         (129)   
   

Balance, December 31, 2010

     (63)         (11)         (74)   

Other comprehensive income

                       
   

Balance, December 31, 2011

     $  (59)         $    (6)         $  (65)   
   
   

9. Financial Instruments

The combined balance sheets include the financial assets and liabilities that are directly attributable to the animal health operations of Pfizer, except that the combined balance sheets also include an allocation of long-term debt from Pfizer, see Note 2. Basis of Presentation.

A. Financial Assets and Liabilities

As of December 31, 2011 and 2010, financial assets and liabilities consist primarily of cash and cash equivalents, accounts receivable, accounts payable and an allocation of long-term debt.

The recorded amounts for cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term nature of these instruments. For an estimate of the fair value of our long-term debt, see Note 9D. Financial Instruments: Allocated Long-Term Debt.

B. Accounts Receivable

As of December 31, 2011 and 2010, Accounts receivable, less allowance for doubtful accounts, of $871 million and $773 million, respectively, includes approximately $48 million and $82 million of other receivables, such as trade notes receivable and royalty receivables, among others. The amount of other receivables in 2010 includes approximately $30 million related to receivables recorded in connection with the business required to be divested as part of the acquisition of Wyeth (see Note 4D. Acquisitions, Divestitures and Certain Investments: Divestitures).

C. Available Lines of Credit

We have available lines of credit with banks and other financial intermediaries. As of December 31, 2011, we had access to $22 million of lines of credit, of which $19 million expire within one year. Of these lines of credit, $22 million are unused. These lines are denominated in various foreign currencies to support general operating needs in their respective countries. None of these lines have been drawn as of December 31, 2011 and December 31, 2010.

 

F-31


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

D. Allocated Long-Term Debt

Long-term debt, including the current portion, as of December 31, 2011 and 2010 of $575 million and $711 million, respectively, represents an allocation of Pfizer debt that was issued to partially finance the acquisition of Wyeth (including FDAH) and that has been allocated on a pro-rata basis using the deemed acquisition cost of FDAH as a percentage of the total acquisition cost of Wyeth. The allocated long-term debt has a weighted-average interest rate of approximately 5.7% and 5.3% as of December 31, 2011 and 2010, respectively. On December 31, 2011, one of the allocated debt instruments was called by Pfizer.

The allocated long-term debt is carried at historical proceeds as adjusted for any gains or losses associated with changes in interest rates since Pfizer holds derivative financial instruments designated and qualifying as fair value hedging instruments for interest rate risk.

As of December 31, 2011 and 2010, the fair value of the allocated long-term debt is $690 million and $780 million, respectively. The fair value of the allocated long-term debt is determined using a third-party matrix-pricing model that uses significant inputs derived from or corroborated by observable market data and Pfizer’s credit rating. The fair value of the allocated long-term debt does not purport to reflect the fair value that might have been determined if Zoetis had operated as a standalone public company for the periods presented or if we had used Zoetis’s credit rating in the calculation.

The annual maturity of the allocated long-term debt outstanding as of December 31, 2011 follows:

 

(MILLIONS OF DOLLARS)    2012      2013      2014      2015      2016      After 2016      Total  

Maturities

   $       $ 72       $       $ 92       $ 77       $ 334       $ 575   

 

 

10. Inventories

The combined balance sheets include all of the inventory directly attributable to the animal health operations of Pfizer.

The components of inventory follow:

 

      As of
December 31,
 
(MILLIONS OF DOLLARS)    2011      2010  

Finished goods

   $ 608       $ 598   

Work-in-process

     284         241   

Raw materials and supplies

     171         156   

 

 

Inventories(a)

   $ 1,063       $ 995   

 

 

 

(a) 

The increase in total inventories is primarily due to the acquisition of KAH (see Note 4A. Acquisitions, Divestitures and Certain Investments: Acquisition of King Animal Health).

 

F-32


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

11. Property, Plant and Equipment

The combined balance sheets include the property, plant and equipment specifically identifiable with the animal health operations of Pfizer. The combined statements of operations include all of the depreciation and amortization charges deemed attributable to the animal health operations.

The components of property, plant and equipment follow:

 

(MILLIONS OF DOLLARS)

  

Useful Lives

(Years)

   As of December 31,   
      2011      2010   

Land

      $ 31       $ 25    

Buildings

   33 1/3-50      822         759    

Machinery and equipment

   8-20      1,021         904    

Furniture, fixtures and other

   3-12 1/2      124         130    

Construction-in-progress

        151         87    

 

 
        2,149         1,905    

Less: Accumulated depreciation

        906         757    

 

 

Property, plant and equipment(a)

      $ 1,243       $ 1,148    

 

 

 

(a) 

The increase in total property, plant and equipment is primarily due to the acquisition of KAH (see Note 4A. Acquisitions, Divestitures and Certain Investments: Acquisition of King Animal Health), capital additions and the impact of foreign exchange, partially offset by depreciation and disposals.

12. Goodwill and Other Intangible Assets

The combined balance sheets include all of the goodwill and other intangible assets directly attributable to the animal health operations of Pfizer. The combined statements of operations include all of the amortization expense and impairment charges associated with these intangible assets.

A. Goodwill

The components and changes in the carrying amount of goodwill follow:

 

(MILLIONS OF DOLLARS)    U.S.       EuAfME       CLAR       APAC       Total   

Goodwill, gross carrying amount

   $ 738        $ 231        $ 240        $ 240        $ 1,449    

Cumulative Impairments(a)

     (273)         (85)         (89)         (89)         (536)   
                                              

Balance, December 31, 2009

     465          146          151          151          913    

Additions(b)

     15                                  29    

Other(c)

     (4)         (2)         (1)         (1)         (8)   
                                              

Balance, December 31, 2010

     476          148          155          155          934    

Additions(d)

     28                                  55    
                                              

Balance, December 31, 2011

   $ 504        $ 157        $ 164        $ 164        $ 989    
   

 

(a) 

As a result of adopting an accounting standard in fiscal 2002 related to the accounting for goodwill after initial recognition, we recorded a goodwill impairment charge of approximately $536 million as the cumulative effect of an accounting change. After recording this impairment charge in fiscal 2002, there was no goodwill associated with any of our operating segments.

(b) 

Reflects the acquisitions of Synbiotics and Vetnex (see Note 4C. Acquisitions, Divestitures and Certain Investments: Other Acquisitions).

(c) 

Primarily reflects adjustments for foreign currency translation.

(d) 

Primarily reflects the acquisition of KAH and the formation of Jilin (see Note 4A. Acquisitions, Divestitures and Certain Investments: Acquisition of King Animal Health and Note 4E. Acquisitions, Divestitures and Certain Investments: Certain Investments).

 

F-33


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

B. Other Intangible Assets

The components of identifiable intangible assets follow:

 

      As of December 31,  
     2011      2010  
(MILLIONS OF DOLLARS)   

Gross

Carrying

Amount

    

Accumulated

Amortization

   

Identifiable

Intangible

Assets, Less

Accumulated

Amortization

    

Gross

Carrying

Amount

    

Accumulated

Amortization

   

Identifiable

Intangible

Assets, Less

Accumulated

Amortization

 

Finite-lived intangible assets:

               

Developed technology rights

   $ 755       $ (128   $ 627       $ 661         $  (80     $581   

Brands

     216         (77     139         216         (65     151   

Trademarks and tradenames

     54         (30     24         55         (24     31   

Other                                                   

     129         (118     11         134         (116     18   
                                                     

Total finite-lived intangible assets    

     1,154         (353     801         1,066         (285     781   
                                                     

Indefinite-lived intangible assets:

               

Brands

     39                39         39                39   

Trademarks and tradenames

     67                67         67                67   

In-process research and development

     21                21         37                37   
                                                     

Total indefinite-lived intangible assets

     127                127         143                143   
                                                     

Identifiable intangible assets(a)

   $ 1,281       $ (353   $ 928       $ 1,209         $(285     $924   
   

 

(a) 

The net increase reflects the assets acquired as part of the acquisition of KAH in January 2011 (see Note 4A. Acquisitions, Divestitures and Certain Investments: Acquisition of King Animal Health) and adjustments for foreign currency translation, offset by amortization and impairment charges (see Note 6. Other (Income)/Deductions—Net).

Developed Technology Rights

Developed technology rights represent the amortized cost associated with developed technology, which has been acquired from third parties and which can include the right to develop, use, market, sell and/or offer for sale the product, compounds and intellectual property that we have acquired with respect to products, compounds and/or processes that have been completed. These assets include technologies related to the care and treatment of cattle, swine, poultry, fish, sheep, dogs, cats and horses.

Brands

Brands represent the amortized or unamortized cost associated with product name recognition, as the products themselves do not receive patent protection. The more significant finite-lived brands are Excenel, Lutalyse and Spirovac and the more significant indefinite-lived brands are the Linco family products and Mastitis.

Trademarks and Tradenames

Trademarks and tradenames represent the amortized or unamortized cost associated with legal trademarks and tradenames. The more significant components of indefinite-lived trademarks and tradenames are indefinite-lived trademarks and tradenames acquired from SmithKlineBeecham. The more significant finite-lived trademarks and tradenames are finite-lived trademarks and tradenames for vaccines acquired from CSL.

 

F-34


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

In-Process Research and Development

IPR&D assets represent research and development assets that have not yet received regulatory approval in a major market. The majority of these IPR&D assets were acquired in connection with our acquisition of FDAH.

IPR&D assets are required to be classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development effort. Accordingly, during the development period after the date of acquisition, these assets will not be amortized until approval is obtained in a major market, typically either the U.S. or the EU, or in a series of other countries, subject to certain specified conditions and management judgment. At that time, we will determine the useful life of the asset, reclassify the asset out of in-process research and development and begin amortization. If the associated research and development effort is abandoned, the related IPR&D assets will be written-off, and we will record an impairment charge.

For IPR&D assets, there can be no certainty that these assets ultimately will yield a successful product.

C. Amortization

The weighted-average life of our total finite-lived intangible assets, developed technology rights, and finite-lived brands is approximately 14 years, 14 years and 16 years, respectively. Total amortization expense for finite-lived intangible assets was $70 million in 2011, $58 million in 2010 and $34 million in 2009.

The annual amortization expense expected for the years 2012 through 2016 is as follows:

 

(MILLIONS OF DOLLARS)    2012      2013      2014      2015      2016  

Amortization expense

   $ 66       $ 62       $ 62       $ 62       $ 62   
   

D. Impairments

For information about intangible asset impairments, see Note 6. Other (Income)/Deductions––Net.

13.   Benefit Plans

The combined statements of operations include all of the benefit plan expenses attributable to the animal health operations of Pfizer, including expenses associated with pension plans, postretirement plans and defined contribution plans. The expenses include allocations of direct expenses as well as expenses that have been deemed attributable to the animal health operations. The combined balance sheets include the benefit plan assets and liabilities of only those plans that are dedicated to animal health employees. All dedicated benefit plans are pension plans.

A. Pension Plans

Generally, most of our employees are eligible to participate in Pfizer’s pension plans. An employee’s benefits are determined based on a combination of years of service and average earnings, as defined in the specific plans. Participants vest in some of their benefits after five years of service.

Pension expense, associated with the U.S. and certain significant international locations, totaled approximately $64 million in 2011, $64 million in 2010 and $66 million in 2009.

 

F-35


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

Below, we have provided additional information about the expenses, assets and liabilities of the pension plans in the Netherlands, Germany, India, the Philippines and Korea as these plans are dedicated to animal health employees.

Information about these dedicated pension plans is provided in the tables below.

Net Periodic Benefit Costs and Other Costs––Dedicated Plans

The net periodic benefit cost associated with dedicated pension plans recognized in our combined statements of operations is approximately $3 million in 2011, $2 million 2010 and $0 million in 2009, virtually all of which relate to service cost and interest cost.

The other changes associated with dedicated pension plans recognized in our combined statements of comprehensive income/(loss) are approximately $5 million income in 2011, $8 million expense in 2010 and $2 million expense in 2009. These other changes are primarily due to changes in actuarial assumptions.

The amount in Accumulated other comprehensive loss expected to be amortized into 2012 net periodic benefit cost is $0.2 million attributable to the amortization of previously unrecognized actuarial losses.

Actuarial Assumptions––Dedicated Plans

The following table provides the weighted-average actuarial assumptions for the dedicated pension plans:

 

      As of December 31,  
(PERCENTAGES)    2011     2010     2009  

Weighted-average assumptions used to determine benefit obligations:

      

Discount rate

     5.8     5.1     6.0%   

Rate of compensation increase

     2.7        2.7        2.6      
                          

Weighted-average assumptions used to determine net benefit cost:

      

Discount rate

     5.1     6.0     9.0%   

Expected return on plan assets

     3.6        4.0        4.5      

Rate of compensation increase

     2.7        2.6        5.0      
   

The assumptions above are used to develop the benefit obligations at the end of the year and to develop the net periodic benefit cost for the following year. Therefore, the assumptions used to determine the net periodic benefit cost for each year are established at the end of each previous year, while the assumptions used to determine the benefit obligations are established at each year-end. The net periodic benefit cost and the benefit obligations are based on actuarial assumptions that are reviewed on an annual basis. The assumptions are revised based on an annual evaluation of long-term trends, as well as market conditions that may have an impact on the cost of providing retirement benefits.

Virtually all of Zoetis’s dedicated pension plan assets are associated with Zoetis’s dedicated pension plan in the Netherlands. The Netherlands plan is financed through an insurance contract for which the insurer is responsible for the investment of the plan assets. The insurance contract covers certain investment and mortality risks in relation to accrued benefits earned in the plan. The assets held in the insurance contract are predominantly fixed income securities. The expected return on assets is determined based on the yields available on those assets.

 

F-36


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

Actuarial and other assumptions for pension plans can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For a description of the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions.

Obligations and Funded Status––Dedicated Plans

An analysis of the changes in our benefit obligations, plan assets and funded status of our dedicated plans follows:

 

     As of and for the
Year Ended December 31,
 
(MILLIONS OF DOLLARS)           2011             2010  

 

 

 

 

   

 

 

 

Change in Benefit Obligation:

   

Projected benefit obligation, beginning

        $39            $34   

Changes in actuarial assumptions and other

    (5     9   

Adjustments for foreign currency translation

    2        (5

Other––net

    1        1   

 

 

 

 

   

 

 

 

Benefit obligation, ending

    37        39   

 

 

 

 

   

 

 

 

Change in Plan Assets:

   

Fair value of plan assets, beginning

    31        33   

Actual return on plan assets

    1        2   

Company contributions

    2        3   

Adjustments for foreign currency translation

    1        (5

Other––net

    (2     (2

 

 

 

 

   

 

 

 

Fair value of plan assets, ending

    33        31   

 

 

 

 

   

 

 

 

Funded status—Projected benefit obligation in excess of plan assets at end of year(a)

    $(4     $(8

 

 

 

(a) 

Included in Other noncurrent liabilities.

Actuarial gains/losses totaled approximately $6 million loss at December 31, 2011 and $11 million loss at December 31, 2010. The actuarial gains and losses primarily represent the cumulative difference between the actuarial assumptions and actual return on plan assets, changes in discount rates and changes in other assumptions used in measuring the benefit obligations. These actuarial gains and losses are recognized in Accumulated other comprehensive income/(loss) and are amortized into net periodic benefit costs over an average period of 17.8 years.

Information related to the funded status of selected plans follows:

 

      As of December 31,  
(MILLIONS OF DOLLARS)    2011      2010  

 

  

 

 

    

 

 

 

Pension plans with an accumulated benefit obligation in excess of plan assets:

     

Fair value of plan assets

     $—             $30   

Accumulated benefit obligation

     2         33   

Pension plans with a projected benefit obligation in excess of plan assets:

     

Fair value of plan assets

     33         31   

Projected benefit obligation

     37         39   

 

 

 

F-37


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

Plan AssetsDedicated Plans

The components of plan assets follow:

 

           As of December 31,  
(MILLIONS OF DOLLARS)             2011      2010  

Cash and cash equivalents

     $ 1       $   

Equity securities: Equity commingled funds

       4         6   

Debt securities: Government bonds

       26         23   

Other Investments

       2         2   
                       

Total(a)

     $ 33       $     31   

 

 
(a) 

Fair values are determined based on valuation inputs categorized as Level 1, 2 or 3 (see Note 3D. Significant Accounting Policies: Fair Value). All investment plan assets are valued using Level 2 inputs, except that the equity commingled funds are valued using Level 1 inputs.

A single estimate of fair value can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions.

Specifically, the following methods and assumptions were used to estimate the fair value of our pension assets:

 

   

Equity commingled funds––quoted market prices.

 

   

Government bonds and other investments quoted prices for similar assets in active markets or quoted prices for identical or similar assets in markets that are not active or are directly or indirectly observable.

The long-term target asset allocations and the percentage of the fair value of plans assets for dedicated benefit plans follow:

 

           As of December 31,  
         Target
allocation
percentage
   

Percentage of Plan Assets

 
(PERCENTAGES)         2011         2011         2010      

Cash and cash equivalents

       0-20     2.7     1.3%   

Equity securities

       0-20        13.3        20.2     

Debt securities

       65-80        78.2        74.8     

Other investments

       0-20        5.8        3.7     
                              

Total

       100.0     100.0     100.0%   

 

 

The insurer utilizes long-term asset allocation ranges in the management of our plans’ invested assets. Long-term return expectations are developed based on the insurer’s investment strategy, which takes into account historical experience, as well as the impact of portfolio diversification, active portfolio management, and the insurer’s view of current and future economic and financial market conditions. As market conditions and other factors change, the insurer may adjust the targets accordingly and actual asset allocations may vary from the target allocations.

The insurer’s long-term asset allocation ranges reflect its asset class return expectations and tolerance for investment risk within the context of the respective plans’ long-term benefit obligations. These ranges are supported by an analysis that incorporates historical and expected returns by asset class, as well as volatilities and

 

F-38


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

correlations across asset classes and our liability profile. This analysis, referred to as an asset-liability analysis, also provides an estimate of expected returns on plan assets, as well as a forecast of potential future asset and liability balances.

The insurer reviews investment performance with Zoetis on a quarterly basis in total, as well as by asset class, relative to one or more benchmarks.

Cash Flows—Dedicated Plans

Our plans are generally funded in amounts that are at least sufficient to meet the minimum requirements set forth in applicable employee benefit laws and local tax and other laws.

We expect to contribute $2 million to our dedicated pension plans in 2012. The expected benefit payment for each of the next ten years is approximately $1 million per year. These expected benefit payments reflect the future plan benefits projected to be paid from the plans or from the general assets of Zoetis entities in the Netherlands, Germany, India, the Philippines and Korea under the current actuarial assumptions used for the calculation of the projected benefit obligation and, therefore, actual benefit payments may differ from projected benefit payments.

B. Postretirement Plans

Many of our employees are eligible to participate in postretirement plans sponsored by Pfizer. Pfizer does not fund postretirement plans, but contributes to the plans as benefits are paid.

Postretirement benefit expense, associated with the U.S. and certain significant international locations, totaled approximately $17 million in 2011, $19 million in 2010 and $15 million in 2009.

C. Defined Contribution Plans

Our U.S. employees are eligible to participate in Pfizer’s defined contribution plans, whereby employees contribute a portion of their compensation, which is partially matched by Pfizer. Once the contributions have been paid, Pfizer has no further payment obligations.

Contribution expense, associated with the U.S. defined contribution plan, totaled approximately $18 million in 2011, $15 million in 2010 and $15 million in 2009.

14.  Share-Based Payments

Our compensation programs include grants under Pfizer’s share-based payment programs. The combined statements of operations include all of the share-based payment expenses directly attributable to the animal health operations of Pfizer. The expenses include allocations of direct expenses as well as expenses that have been deemed attributable to the animal health operations.

Compensation programs can include share-based payments under various Pfizer employee stock and incentive plans. The primary share-based compensation programs and their general terms and conditions are as follows:

 

   

Stock options, which when vested, entitle the holder to purchase a specified number of shares of Pfizer common stock at a price per share equal to the market price of Pfizer common stock on the date of grant.

 

F-39


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

   

Restricted Stock Units (RSUs), which when vested, entitle the holder to receive a specified number of shares of Pfizer common stock, including shares resulting from dividend equivalents paid on such RSUs.

 

   

Total Shareholder Return Units (TSRUs), which when vested, entitle the holder to receive, two years after the end of the three-year vesting term, a number of shares of Pfizer common stock with a value equal to the difference between the defined settlement price and the closing price of Pfizer common stock on the date of grant, plus accumulated dividend equivalents through the payment date, if and to the extent the total value is positive.

 

   

Performance Share Awards (PSAs), which when vested, entitle the holder to receive a number of shares of Pfizer common stock, within a range of shares from zero to a specified maximum, calculated using a non-discretionary formula that measures Pfizer’s performance relative to an industry peer group. Dividend equivalents accumulate on PSAs and are paid at the end of the vesting term in respect of any shares that are paid.

A. Impact on Net Income

The components of share-based compensation expense and the associated tax benefit follow:

 

      Year Ended December 31  
(MILLIONS OF DOLLARS)    2011     2010     2009   
                          

Stock option expense

   $ 8      $ 7      $   

RSU expense

     10        8          

TSRU/PSA expense

     1        1        —    
                          

Share-based compensation expense—direct

     19        16        15    

Share-based compensation expense—allocated

     6        6          
                          

Share-based compensation expense—total

     25        22        22    

Tax benefit for share-based compensation expense

     (6     (7     (7)   
                          

Share-based compensation expense, net of tax

   $ 19      $ 15      $ 15    

 

 

 

B. Stock Options

Stock options are accounted for using a fair-value-based method at the date of grant in the combined statements of operations. The values determined through this fair-value-based method generally are amortized on a straight-line basis over the vesting term into Cost of sales, Selling, general and administrative expenses, and Research and development expenses, as appropriate.

All eligible employees may receive Pfizer stock option grants. In virtually all instances, Pfizer stock options granted vest after three years of continuous service from the grant date and have a contractual term of 10 years. In most cases, Pfizer stock options must be held for at least one year from the grant date before any vesting may occur. In the event of a divestiture or restructuring, Pfizer stock options held by employees are immediately vested and are exercisable for a period from three months to their remaining term, depending on various conditions.

 

F-40


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

The fair-value-based method for valuing each Pfizer stock option grant on the grant date uses, for virtually all grants, the Black-Scholes-Merton option-pricing model, which incorporates a number of valuation assumptions noted in the following table, shown at their weighted-average values:

 

      Year Ended December 31,  
      2011     2010     2009  

Expected dividend yield(a)

     4.14     4.00     4.90

Risk-free interest rate(b)

     2.59     2.87     2.69

Expected stock price volatility(c)

     25.55     26.85     41.36

Expected term(d) (years)

     6.25        6.25        6.00   

 

 

 

(a) 

Determined using a constant dividend yield during the expected term of the Pfizer stock option.

(b) 

Determined using the interpolated yield on U.S. Treasury zero-coupon issues.

(c) 

Determined using implied volatility, after consideration of historical volatility for Pfizer stock.

(d) 

Determined using historical exercise and post-vesting termination patterns.

The Pfizer stock option activity for direct Zoetis employees under Pfizer plans follows:

 

     

Shares

(THOUSANDS)

   

Weighted-average

Exercise Price

Per Share

    

Weighted-average

Remaining

Contractual Term

(YEARS)

    

Aggregate

Intrinsic

Value( a )

(MILLIONS)

 
                                    

Outstanding, December 31, 2008

     14,791      $ 31.66         

Granted

     2,091        12.78         

Exercised

                    

Forfeited

     (12     21.93         

Canceled

     (1,188     40.70         
                                    

Outstanding, December 31, 2009

     15,682        28.47         

Granted

     2,723        17.61         

Exercised

                    

Forfeited

     (6     17.47         

Canceled

     (620     32.39         
                                    

Outstanding, December 31, 2010

     17,779        26.67         

Granted

     3,196        18.97         

Exercised

                    

Forfeited

     (11     18.90         

Canceled

     (1,347     41.60         
                                    

Outstanding, December 31, 2011

     19,617      $ 24.40         5.2       $ 38   

Vested and expected to vest(b), December 31, 2011

     19,215      $ 24.55         5.2       $ 36   

Exercisable, December 31, 2011

     11,558      $ 29.61         3.1       $   

 

 

 

(a) 

Market price of underlying Pfizer common stock less exercise price.

(b) 

The number of options expected to vest takes into account an estimate of expected forfeitures.

 

F-41


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

Data related to Pfizer stock option activity for direct Zoetis employees under Pfizer plans follows:

 

      Year Ended/As of December 31,  
(MILLIONS OF DOLLARS, EXCEPT PER STOCK OPTION AMOUNTS)        2011          2010          2009  

Weighted-average grant date fair value per stock option

   $ 3.15       $ 3.24       $ 3.30   

Aggregate intrinsic value on exercise

                       

Cash received upon exercise

                       

Tax benefits realized related to exercise

                       

Total compensation cost related to nonvested stock options
not yet recognized, pre-tax

   $ 9       $ 8       $ 6   

Weighted-average period in years over which stock option compensation cost
is expected to be recognized

     1.8         1.8         1.8   

 

 

C. Restricted Stock Units (RSUs)

RSUs are accounted for using a fair-value-based method that utilizes the closing price of Pfizer common stock on the date of grant. In virtually all instances, the units vest after three years of continuous service from the grant date and the values determined using the fair-value-based method are amortized on a straight-line basis over the vesting term into Cost of sales, Selling, general and administrative expenses, and Research and development expenses, as appropriate.

The RSU activity for direct Zoetis employees under Pfizer plans follows:

 

             Weighted-Average  
     Shares     Grant Date Fair Value  
      (THOUSANDS)     Per Share  

Nonvested, December 31, 2008

             1,085                      $24.57   

Granted

     505        13.32   

Vested

     (166     26.20   

Reinvested dividend equivalents

     64        19.34   

Forfeited

     (2     23.96   
                  

Nonvested, December 31, 2009

     1,486        20.53   

Granted

     599        17.53   

Vested

     (489     25.86   

Reinvested dividend equivalents

     61        17.92   

Forfeited

     (1     18.42   
                  

Nonvested, December 31, 2010

     1,656        17.79   

Granted

     699        18.83   

Vested

     (508     22.91   

Reinvested dividend equivalents

     75        18.44   

Forfeited

     (1     16.59   
                  

Nonvested, December 31, 2011

     1,921        $16.78   

 

 

 

F-42


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

Data related to all RSU activity for direct Zoetis employees under Pfizer plans follows:

 

            Year Ended
December 31,
 
(MILLIONS OF DOLLARS)          2011      2010      2009  

Total grant date fair-value-based amount of shares vested

      $ 12       $ 13       $ 4   

Total compensation cost related to nonvested RSU awards not yet recognized, pre-tax

      $ 12       $ 8       $ 7   

Weighted-average period over which RSU cost is expected to be recognized (years)

        1.9         1.9         1.6   

 

 

15.  Commitments and Contingencies

We and certain of our subsidiaries are subject to numerous contingencies arising in the ordinary course of business. For a discussion of our tax contingencies, see Note 7C. Tax Matters: Tax Contingencies.

A. Legal Proceedings

Our non-tax contingencies include, among others, the following:

 

   

Product liability and other product-related litigation, which can include injury, consumer, off-label promotion, antitrust and breach of contract claims.

 

   

Commercial and other litigation, which can include product-pricing claims and environmental claims and proceedings.

 

   

Patent litigation, which typically involves challenges to the coverage and/or validity of our patents or those of third parties on various products or processes.

 

   

Government investigations, which can involve regulation by national, state and local government agencies in the U.S. and in other countries.

Certain of these contingencies could result in losses, including damages, fines and/or civil penalties, and/or criminal charges, which could be substantial.

We believe that we have strong defenses in these types of matters, but litigation is inherently unpredictable and excessive verdicts do occur. We do not believe that any of these matters will have a material adverse effect on our financial position. However, we could incur judgments, enter into settlements or revise our expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on our results of operations or cash flows in the period in which the amounts are paid and/or accrued.

We have accrued for losses that are both probable and reasonably estimable. Substantially all of these contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss can be complex. Consequently, we are unable to estimate the range of reasonably possible loss in excess of amounts accrued. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but the assessment process relies heavily on estimates and assumptions that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions.

Amounts recorded for legal and environmental contingencies can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3B. Significant Accounting Policies: Estimates and Assumptions.

 

F-43


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

The principal matters to which we are a party are discussed below. In determining whether a pending matter is significant for financial reporting and disclosure purposes, we consider both quantitative and qualitative factors in order to assess materiality, such as, among other things, the amount of damages and the nature of any other relief sought in the proceeding, if such damages and other relief are specified; our view of the merits of the claims and of the strength of our defenses; whether the action purports to be a class action and our view of the likelihood that a class will be certified by the court; the jurisdiction in which the proceeding is pending; any experience that we or, to our knowledge, other companies have had in similar proceedings; whether disclosure of the action would be important to a reader of our financial statements, including whether disclosure might change a reader’s judgment about our financial statements in light of all of the information about the company that is available to the reader; the potential impact of the proceeding on our reputation; and the extent of public interest in the matter. In addition, with respect to patent matters, we consider, among other things, the financial significance of the product protected by the patent.

Roxarsone® (3-Nitro)

We are defendants in nine actions involving more than 137 plaintiffs that allege that the distribution of the medicinal feed additive Roxarsone allegedly caused various diseases in the plaintiffs, including cancers and neurological diseases. Other defendants, including various poultry companies, are also named in these lawsuits. Compensatory and punitive damages are sought in unspecified amounts.

In September 2006, the Circuit Court of Washington County returned a defense verdict in one of the lawsuits, Mary Green, et al. v. Alpharma, Inc. et al. In 2008, this verdict was appealed and affirmed by the Arkansas Supreme Court. Certain summary judgments favoring the poultry company co-defendants in Mary Green, et al. v. Alpharma, Inc. et al. were reversed by the Arkansas Supreme Court in 2008. These claims were retried in 2009 and that trial also resulted in a defense verdict, which was affirmed by the Arkansas Supreme Court in April 2011. The next lawsuit in the group of actions is set for trial in October 2012.

In June 2011, we announced that we would suspend sales in the U.S. of 3-Nitro (Roxarsone) in response to a request by the U.S. FDA and we subsequently stopped sales of 3-Nitro in several international markets.

PregSure®

We have received in total approximately 75 claims in Europe and New Zealand seeking damages related to calves claimed to have died of Bovine Neonatal Pancytopenia (BNP) on farms where PregSure BVD, a vaccine against Bovine Virus Diarrhea (BVD) was used. BNP is a rare syndrome that first emerged in cattle in Europe in 2006. Studies of BNP suggest a potential association between the administration of PregSure and the development of BNP, although no causal connection has been established. The cause of BNP is not known.

In 2010, we voluntarily stopped sales of PregSure BVD, a vaccine against Bovine Virus Diarrhea (BVD) in Europe, and recalled the product at wholesalers while investigations into possible causes of BNP continue. In 2011, after incidences of BNP were reported in New Zealand, we voluntarily withdrew the marketing authorization for PregSure throughout the world.

We have settled approximately 20 of these claims for amounts that are not material individually or in the aggregate. Investigations into possible causes of BNP continue and these settlements may not be representative of any future claims resolutions.

 

F-44


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

Advocin

On January 30, 2012, Bayer filed a complaint against Pfizer alleging infringement and inducement of infringement of Bayer patent US 5,756,506 covering, among other things, a process for treating bovine respiratory disease (BRD) by administering a single high dose of fluoroquinolone. The complaint was filed after Pfizer’s product Advocin® was approved as a single dose treatment of BRD, in addition to its previous approval as a multi-dose treatment. Bayer seeks a permanent injunction, damages and a recovery of attorney’s fees, and has demanded a jury trial. Discovery is ongoing, and the trial is currently scheduled for October 2012. We believe we have strong defenses against the claim.

Ulianopolis, Brazil

In February 2012, the Municipality of Ulianopolis (State of Para, Brazil) filed a complaint against Fort Dodge Saúde Animal Ltda (FDSAL) and five other large companies alleging that waste sent to a local waste incinerator for destruction, but that was not ultimately destroyed as the facility lost its operating permit, caused environmental impacts requiring cleanup.

The Municipality is seeking recovery of cleanup costs purportedly related to FDSAL’s share of all waste accumulated at the waste incineration facility awaiting destruction, and compensatory damages to be allocated among the six defendants. We believe we have strong arguments against the claim, including defense strategies against any claim of joint and several liability.

At the request of the Municipal prosecutor, in April 2012, the lawsuit was suspended for one year. Since that time, the prosecutor has initiated investigations into the Municipality’s actions in the matter as well as the efforts undertaken by the six defendants to remove and dispose of their individual waste from the local incineration facility.

B. Guarantees and Indemnifications

In the ordinary course of business and in connection with the sale of assets and businesses, we often indemnify our counterparties against certain liabilities that may arise in connection with the transaction or related to activities prior to the transaction. These indemnifications typically pertain to environmental, tax, employee and/or product-related matters and patent-infringement claims. If the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we would be required to reimburse the loss. These indemnifications are generally subject to threshold amounts, specified claim periods and other restrictions and limitations. Historically, we have not paid significant amounts under these provisions and, as of December 31, 2011, recorded amounts for the estimated fair value of these indemnifications are not significant.

C. Purchase Commitments

As of December 31, 2011, we have agreements totaling $202 million to purchase goods and services that are enforceable and legally binding and include amounts relating to contract manufacturing and information technology services. Included in this amount are approximately $5 million of potential milestone payments that are deemed reasonably likely to occur.

 

F-45


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

16.  Segment, Geographic and Revenue Information

A. Segment Information

The animal health medicines and vaccines industry is characterized by meaningful differences in customer needs across different regions. As a result of these differences, among other things, we manage our operations through four geographic regions. Each operating segment has responsibility for its commercial activities. Within each of these regional operating segments, we offer a diversified product portfolio, including vaccines, parasiticides, anti-infectives, medicinal feed additives and other pharmaceuticals, for both livestock and companion animal customers.

Operating Segments

 

   

The United States (U.S.)

 

   

Europe/Africa/Middle East (EuAfME)—Includes, among others, the United Kingdom, Germany, France, Italy, Spain, Northern Europe and Central Europe as well as Russia, Turkey and South Africa.

 

   

Canada/Latin America (CLAR)––Includes Canada, Brazil, Mexico, Central America and Other South America.

 

   

Asia/Pacific (APAC)––Includes Australia, Japan, New Zealand, South Korea, India, China/Hong Kong, Northeast Asia, Southeast Asia and South Asia.

Our chief operating decision maker uses the revenues and earnings of the four operating segments, among other factors, for performance evaluation and resource allocation.

Other Costs and Business Activities

Certain costs are not allocated to our operating segment results, such as costs associated with the following:

 

   

Research and Development (R&D), which is generally responsible for research projects.

 

   

Corporate, which is responsible for platform functions such as business technology, facilities, legal, finance, human resources, business development, public affairs and procurement, among others. These costs also include compensation costs and other miscellaneous operating expenses not charged to our operating segments, as well as interest income and expense.

 

   

Certain transactions and events such as (i) purchase accounting adjustments, where we incur expenses associated with the amortization of fair value adjustments to inventory, intangible assets and property, plant and equipment; (ii) acquisition-related activities, where we incur costs for restructuring and integration; and (iii) certain significant items, which include non-acquisition-related restructuring charges, certain asset impairment charges and costs associated with cost reduction/productivity initiatives.

Segment Assets

We manage our assets on a total company basis, not by operating segment. Therefore, our chief operating decision maker does not regularly review any asset information by operating segment and, accordingly, we do not report asset information by operating segment. As of December 31, 2011 and 2010, total assets were approximately $5.7 billion and $5.3 billion, respectively.

 

F-46


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

Selected Statement of Operations Information

Selected statement of operations information follows:

 

(MILLIONS OF DOLLARS)    Revenues(a)      Earnings(b)    

Depreciation

and Amortization(c)

 
   

Year ended December 31, 2011(d):

       

U.S.

   $  1,659       $  820      $  26   

EuAfME

     1,144         365        25   

CLAR

     788         275        25   

APAC

     642         196        15   
                           

Total reportable segments

     4,233         1,656        91   

Other business activities(e)

             (279     15   

Reconciling Items:

       

Corporate(f)

             (504     31   

Purchase accounting adjustments(g)

             (82     59   

Acquisition-related costs(h)

             (122     6   

Certain significant items(i)

             (172     3   

Other unallocated(j)

             (103       
                           
   $ 4,233       $ 394      $  205   
   

Year ended December 31, 2010:

       

U.S.

   $ 1,384       $ 656      $ 13   

EuAfME

     1,020         328        25   

CLAR

     664         203        19   

APAC

     514         146        14   
                           

Total reportable segments

     3,582         1,333        71   

Other business activities(e)

             (264     17   

Reconciling Items:

       

Corporate(f)

             (533     34   

Purchase accounting adjustments(g)

             (148     63   

Acquisition-related costs(h)

             (217       

Certain significant items(i)

             84          

Other unallocated(j)

             (77       
                           
   $ 3,582       $ 178      $  185   
   

Year ended December 31, 2009(d):

       

U.S.

   $ 1,105       $ 529      $  13   

EuAfME

     880         315        21   

CLAR

     451         153        15   

APAC

     324         89        7   
                           

Total reportable segments

     2,760         1,086        56   

Other business activities(e)

             (224     12   

Reconciling Items:

       

Corporate(f)

             (496     35   

Purchase accounting adjustments(g)

             (40     21   

Acquisition-related costs(h)

             (247       

Certain significant items(i)

             (157       

Other unallocated(j)

             (70       
                           
   $ 2,760       $ (148   $  124   
   

 

F-47


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

(a) 

Revenues denominated in euros were approximately $710 million in 2011, $680 million in 2010 and $594 million in 2009.

(b) 

Defined as income/(loss) before provision/(benefit) for taxes on income.

(c) 

Certain production facilities are shared. Depreciation and amortization is allocated to the reportable operating segments based on estimates of where the benefits of the related assets are realized.

(d) 

For 2011, includes KAH commencing from the acquisition date of January 31, 2011. For 2009, includes FDAH commencing from the acquisition date of October 15, 2009.

(e) 

Other business activities reflect the research and development costs managed by our Research and Development organization.

(f) 

Corporate includes, among other things, administration expenses, allocated interest expense, certain compensation and other costs not charged to our operating segments.

(g) 

Purchase accounting adjustments include certain charges related to the fair value adjustments to inventory, intangible assets and property, plant and equipment not charged to our operating segments.

(h) 

Acquisition-related costs can include costs associated with acquiring, integrating and restructuring newly acquired businesses, such as allocated transaction costs, integration costs, restructuring charges and additional depreciation associated with asset restructuring (see Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives for additional information).

(i) 

Certain significant items are substantive, unusual items that, either as a result of their nature or size, would not be expected to occur as part of our normal business on a regular basis. Such items primarily include restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition, the impact of certain asset impairments, inventory write-offs and divestiture-related gains and losses (see Note 4. Acquisitions, Divestitures and Certain Investments, Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives, and Note 6. Other (Income)/Deductions—Net, for additional information).

 

   

For 2011, certain significant items includes: (i) restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition of $62 million, (ii) certain asset impairment charges of $69 million; (iii) certain charges to write-off inventory of $12 million; (iv) charges related to transitional manufacturing purchase agreements associated with divestitures of $27 million; and (v) other costs of $2 million.

 

   

For 2010, certain significant items includes: (i) net gains on sales of businesses of $104 million, (ii) charges related to transitional manufacturing purchase agreements associated with divestitures of $4 million, (iii) certain charges to write-off inventory of $13 million; and (iv) restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition of $3 million.

 

   

For 2009, certain significant items includes: (i) restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition of $159 million; and (ii) net gains on sales of businesses of $2 million.

 

(j) 

Includes overhead expenses associated with our manufacturing operations.

B. Geographic Information

Revenues exceeded $100 million in each of eight countries outside the U.S. in 2011 and 2010, and five countries outside of the U.S. in 2009. The U.S. was the only country to contribute more than 10% of total revenues in each year.

Long-lived assets by geographic region follow:

 

      As of December 31,  
(MILLIONS OF DOLLARS)    2011      2010  

 

 

Property, plant and equipment, less accumulated depreciation:

     

U.S.

   $ 787       $ 722   

EuAfME

     229         223   

CLAR

     75         68   

APAC

     152         135   

 

 

Property, plant and equipment, less accumulated depreciation

   $ 1,243       $ 1,148   

 

 

 

F-48


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

C. Other Revenue Information

Significant Customers

We sell our livestock products primarily to veterinarians and livestock producers as well as third-party veterinary distributors, and retail outlets who generally sell the products to livestock producers. We sell our companion animal products primarily to veterinarians who then sell the products to pet owners. There was no single customer that accounted for 10% or more of our total revenues in 2011 or 2010.

Revenues by Species

Significant species revenues are as follows:

 

      Year Ended December 31,  
(MILLIONS OF DOLLARS)    2011      2010      2009  

 

 

Livestock:

        

Cattle

   $ 1,617       $ 1,464       $ 1,126   

Swine

     562         433         388   

Poultry

     501         265         125   

Other (Fish and Sheep)

     98         71         47   

 

 
     2,778         2,233         1,686   

 

 

Companion Animal:

        

Horses

     168         159         80   

Dogs and Cats

     1,287         1,190         994   

 

 
     1,455         1,349         1,074   

 

 

Total revenues(a), (b)

   $ 4,233       $ 3,582       $ 2,760   

 

 

 

(a) 

In accordance with our domestic and international year-ends, 2011 includes approximately eleven months of KAH’s U.S. operations and approximately ten months of KAH’s international operations.

(b) 

In accordance with our domestic and international year-ends, 2009 includes approximately two-and-a-half months of FDAH’s U.S. operations and approximately one-and-a-half months of FDAH’s international operations.

Revenues by Major Product Category

Significant revenues by major product category are as follows:

 

      Year Ended December 31,  
(MILLIONS OF DOLLARS)    2011      2010      2009  

 

 

Anti-infectives

   $ 1,311       $ 1,117       $ 983   

Vaccines

     1,077         1,014         677   

Parasiticides

     645         602         432   

Medicinal feed additives

     347         86         85   

Other pharmaceuticals

     724         653         484   

Other non-pharmaceuticals

     129         110         99   

 

 

Total revenues(a), (b)

   $ 4,233       $ 3,582       $ 2,760   

 

 

 

(a) 

In accordance with our domestic and international year-ends, 2011 includes approximately eleven months of KAH’s U.S. operations and approximately ten months of KAH’s international operations.

(b) 

In accordance with our domestic and international year-ends, 2009 includes approximately two-and-a-half months of FDAH’s U.S. operations and approximately one-and-a-half months of FDAH’s international operations.

 

F-49


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

 

17.   Related Party Transactions

These financial statements include related party transactions:

 

   

We did not have sales to Pfizer and its subsidiaries during any of the periods presented.

 

   

The costs of goods manufactured in manufacturing plants that are shared with other Pfizer business units were approximately $340 million in 2011, $350 million in 2010 and $470 million in 2009.

 

   

Historically, Pfizer has provided significant corporate, manufacturing and shared services functions and resources to us. Our combined financial statements reflect an allocation of these costs. For further information about the cost allocations for these services and resources, see Note 2. Basis of Presentation. Management believes that these allocations are a reasonable reflection of the services received. However, these allocations may not reflect the expenses that would have been incurred if we had operated as a standalone public company for the periods presented. The costs for these services as a standalone public company would depend on a number of factors, including how we chose to organize as a company, our employee sourcing decisions and strategic decisions in areas such as information technology systems and infrastructure.

Pfizer uses a centralized approach to cash management and financing its operations. During the periods covered by these financial statements, cash deposits were remitted to Pfizer on a regular basis and are reflected within equity in the financial statements. Similarly, Zoetis’s cash disbursements were funded through Pfizer’s cash accounts and are reflected within equity in combined financial statements.

18.   Commitments under Operating Leases

We have facilities, vehicles and office equipment under various non-cancellable operating leases with third parties. Total rent expense, net of sublease rental income was approximately $21 million in 2011 and $19 million in both 2010 and 2009.

Future minimum lease payments under non-cancellable operating leases as of December 31, 2011 follow:

 

(MILLIONS OF DOLLARS)    2012    2013    2014    2015    2016    After 2016    Total  

Minimum lease payments

   $16    $12    $9    $7    $4    $14    $ 62   

 

 

19.   Subsequent Events

On June 7, 2012, Pfizer announced its intention to file a registration statement in the United States for a potential public offering of a minority ownership stake in our company.

 

F-50


Table of Contents

Review Report of Independent Registered Public Accounting Firm

The Board of Directors

Pfizer Inc.:

We have reviewed the accompanying condensed combined balance sheet of Zoetis Inc. (the animal health business unit of Pfizer Inc. (the “Company”)) as of September 30, 2012 and the related condensed combined statements of operations, comprehensive income, equity, and cash flows for the nine-month periods ended September 30, 2012, and October 2, 2011. These condensed combined financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed combined financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the combined balance sheet of the Company as of December 31, 2011, and the related combined statements of operations, comprehensive income, equity, and cash flows for the year then ended (presented elsewhere in this prospectus); and in our report dated August 10, 2012, we expressed an unqualified opinion on those combined financial statements. In our opinion, the information set forth in the accompanying condensed combined balance sheet as of December 31, 2011, is fairly stated, in all material respects, in relation to the combined balance sheet from which it has been derived.

/s/ KPMG LLP

New York, New York

December 28, 2012

 

F-51


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

CONDENSED COMBINED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

      Nine Months Ended   
(MILLIONS OF DOLLARS)    September 30,
2012
   

October 2,

2011

 

Revenues

   $ 3,160      $ 3,106   

Costs and expenses:

    

Cost of sales(a)

     1,130        1,233   

Selling, general and administrative expenses(a)

     1,017        1,026   

Research and development expenses(a)

     288        308   

Amortization of intangible assets

     48        51   

Restructuring charges and certain acquisition-related costs

     55        108   

Other (income)/deductions––net

     (14     16   
                  

Income before provision for taxes on income

     636        364   

Provision for taxes on income

     190        126   
                  

Net income before allocation to noncontrolling interests

     446        238   

Less: Net income attributable to noncontrolling interests

     —          2   
                  

Net income attributable to Zoetis

   $ 446      $ 236   
   

 

(a) 

Exclusive of amortization of intangible assets, except as disclosed in Note 8. Goodwill and Other Intangible Assets.

See Notes to Unaudited Condensed Combined Financial Statements, which are an integral part of these statements.

 

F-52


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

CONDENSED COMBINED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

      Nine Months Ended   
(MILLIONS OF DOLLARS)    September 30,
2012
   

October 2,

2011

 

Net income before allocation to noncontrolling interests

   $ 446      $ 238   

Other comprehensive income/(loss), net of taxes:

    

Foreign currency translation adjustments, net(a)

     (106     126   

Benefit plans: Actuarial gains, net(a)

     2          

Total other comprehensive income/(loss), net of taxes

     (104     126   
                  

Comprehensive income before allocation to noncontrolling interests

     342        364   

Less: Comprehensive income attributable to noncontrolling interests

            2   
                  

Comprehensive income attributable to Zoetis

   $ 342      $ 362   
   

 

(a) 

Presented net of reclassification adjustments and tax impacts, which are not significant in any period presented.

See Notes to Unaudited Condensed Combined Financial Statements, which are an integral part of these statements.

 

F-53


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

CONDENSED COMBINED BALANCE SHEETS

(UNAUDITED)

 

      As of  
(MILLIONS OF DOLLARS)    September 30,
2012
   

December 31, 

2011 

 

Assets

    

Cash and cash equivalents

   $ 133      $ 79    

Accounts receivable, less allowance for doubtful accounts

     848        871    

Inventories

     1,272        1,063    

Current deferred tax assets

     72        96    

Other current assets

     230        202    
                  

Total current assets

     2,555        2,311    

Property, plant and equipment, less accumulated depreciation

     1,204        1,243    

Identifiable intangible assets, less accumulated amortization

     877        928    

Goodwill

     981        989    

Noncurrent deferred tax assets

     218        143    

Other noncurrent assets

     69        97    
                  

Total assets

   $ 5,904      $ 5,711    
   

Liabilities and Equity

    

Accounts payable

   $ 195      $ 214    

Income taxes payable

     42        18    

Accrued compensation and related items

     145        150    

Other current liabilities

     355        461    
                  

Total current liabilities

     737        843    

Allocated long-term debt

     580        575    

Noncurrent deferred tax liabilities

     299        311    

Other taxes payable

     88        122    

Other noncurrent liabilities

     91        124    
                  

Total liabilities

     1,795        1,975    

Commitments and Contingencies

    

Business unit equity

     4,263        3,785    

Accumulated other comprehensive loss

     (169     (65)   
                  

Total Zoetis equity

     4,094        3,720    

Equity attributable to noncontrolling interests

     15        16    
                  

Total equity

     4,109        3,736    
                  

Total liabilities and equity

   $ 5,904      $ 5,711    

 

 

See Notes to Unaudited Condensed Combined Financial Statements, which are an integral part of these statements.

 

F-54


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

CONDENSED COMBINED STATEMENTS OF EQUITY

(UNAUDITED)

 

      Zoetis                
(MILLIONS OF DOLLARS)    Business
Unit
Equity
    Accumulated
Other Comp.
Income/
(Loss)
    Total
Business
Unit
Equity
    Equity
Attributable to
Noncontrolling
Interests
   

Total 

Equity 

 

Balance, December 31, 2010

   $ 3,418      $ (74   $ 3,344      $      $ 3,344    

Nine Months Ended October 2, 2011

          

Comprehensive income

     236        126        362        2        364    

Share-based compensation expense

     15               15               15    

Dividends declared and paid

     (49            (49            (49)  

Net transfers between Pfizer and noncontrolling interests

     2               2        (2     —    

Net transfers—Pfizer

     194               194               194    

 

 

Balance, October 2, 2011

   $ 3,816      $ 52      $ 3,868      $      $ 3,868    

 

 

Balance, December 31, 2011

   $ 3,785      $ (65   $ 3,720      $ 16      $ 3,736    

Nine Months Ended September 30, 2012

          

Comprehensive income/(loss)

     446        (104     342               342    

Share-based compensation expense

     18               18               18    

Dividends declared and paid

     (63            (63            (63)   

Net transfers between Pfizer and noncontrolling interests

     1               1        (1     —    

Net transfers––Pfizer

     76               76               76    

 

 

Balance, September 30, 2012

   $ 4,263      $ (169   $ 4,094      $ 15      $ 4,109    

 

 

See Notes to Unaudited Condensed Combined Financial Statements, which are an integral part of these statements.

 

F-55


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

CONDENSED COMBINED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

      Nine Months Ended  
(MILLIONS OF DOLLARS)    September 30,
2012
    October 2,
2011
 

Operating Activities

    

Net income before allocation to noncontrolling interests

   $ 446      $ 238   

Adjustments to reconcile net income before noncontrolling interests to net cash provided by operating activities:

    

Depreciation and amortization expense

     156        151   

Share-based compensation expense

     18        15   

Asset write-offs and impairments

     9        12   

Net gains on sales of assets

     (1     (1

Deferred taxes

     (81     73   

Other non-cash adjustments

     (1     2   

Other changes in assets and liabilities, net of acquisitions and divestitures

     (402     (107

 

 

Net cash provided by operating activities

     144        383   

 

 

Investing Activities

    

Purchases of property, plant and equipment

     (81     (81

Acquisitions, net of cash acquired

            (345

Other investing activities

     (8     3   

 

 

Net cash used in investing activities

     (89     (423

 

 

Financing Activities

    

Allocated principal payments on long-term debt

            (38

Cash dividends paid(a)

     (63     (49

Net financing activities with Pfizer

     63        209   

 

 

Net cash provided by financing activities

            122   

 

 

Effect of exchange-rate changes on cash and cash equivalents

     (1     (1

 

 

Net increase in cash and cash equivalents

     54        81   

Cash and cash equivalents, as of beginning of period

     79        63   

 

 

Cash and cash equivalents, as of end of period

   $ 133      $ 144   
   

Supplemental cash flow information

    

Cash paid during the period for:

    

Income taxes, net

   $ 276      $ 39   

Interest

     31        38   

 

 
(a) 

Payments to other non-Zoetis entities.

See Notes to Unaudited Condensed Combined Financial Statements, which are an integral part of these statements.

 

F-56


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS

1. Basis of Presentation

We prepared the condensed combined financial statements following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (U.S. GAAP) can be condensed or omitted. Balance sheet amounts and operating results for subsidiaries operating outside the U.S. are as of and for the nine-month periods ended August 26, 2012, and August 28, 2011.

On August 13, 2012, we filed a registration statement in the United States for a potential public offering of a minority ownership stake in our company.

On January 31, 2011 (the acquisition date), Pfizer completed the tender offer for the outstanding shares of common stock of King Pharmaceuticals, Inc. (King), including the King Animal Health business (KAH), and acquired approximately 92.5% of King’s outstanding shares. On February 28, 2011, Pfizer acquired all of the remaining shares of King. Commencing from the acquisition date, our combined financial statements include the assets, liabilities, operations and cash flows associated with KAH. As a result, and in accordance with our domestic and international reporting periods, our unaudited condensed combined financial statements for the nine months ended October 2, 2011 reflect approximately eight months of the U.S. operations of KAH and approximately seven months of the international operations of KAH.

Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be representative of those for the full year.

We are responsible for the unaudited condensed combined financial statements included in this document. The unaudited condensed combined financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results.

The information included in this interim report should be read in conjunction with the combined financial statements and accompanying notes as of December 31, 2011 included elsewhere in this prospectus.

The combined financial statements have been derived from the consolidated financial statements and accounting records of Pfizer and include allocations for direct costs and indirect costs attributable to the operations of the animal health business of Pfizer. These combined financial statements do not purport to reflect what the results of operations, comprehensive income, financial position, equity or cash flows would have been had we operated as a standalone public company during the periods presented.

 

   

The combined statements of operations include allocations from certain support functions (Enabling Functions) that are provided on a centralized basis within Pfizer, such as expenses for business technology, facilities, legal, finance, human resources, business development, public affairs and procurement, among others. Pfizer does not routinely allocate these costs to any of its business units. These allocations are based on either a specific identification basis or, when specific identification is not practicable, proportional allocation methods (e.g., using third-party sales, headcount, etc.), depending on the nature of the services.

 

   

The combined statements of operations include allocations of certain manufacturing and supply costs incurred by manufacturing plants that are shared with other Pfizer business units, Pfizer’s global external supply group and Pfizer’s global logistics and support group (collectively, PGS). These costs may include manufacturing variances and changes in the standard costs of inventory, among others. Pfizer does not routinely allocate these costs to any of its business units. These allocations are based on either a specific

 

F-57


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS

 

 

identification basis or, when specific identification is not practicable, proportional allocation methods, such as animal health identified manufacturing costs, depending on the nature of the costs.

 

   

The condensed combined statements of operations also include allocations from the Enabling Functions and PGS for restructuring charges, integration costs, additional depreciation associated with asset restructuring and implementation costs. Pfizer does not routinely allocate these costs to any of its business units. For additional information about allocations of restructuring charges and other costs associated with acquisitions and cost-reduction/productivity initiatives, see Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives.

 

   

The condensed combined statements of operations include an allocation of shared-based compensation expense and certain other compensation expense items, such as certain fringe benefit expenses, maintained on a centralized basis within Pfizer. Pfizer does not routinely allocate these costs to any of its business units.

 

   

The condensed combined balance sheets reflect all of the assets and liabilities of Pfizer that are either specifically identifiable or directly attributable to Zoetis and its operations. For benefit plans, the combined balance sheets only include the assets and liabilities of benefit plans dedicated to animal health employees. For debt, see below.

 

   

The condensed combined financial statements include an allocation of long-term debt that was issued to partially finance the acquisition of Wyeth (including FDAH). The debt and associated interest-related expenses, including the effect of hedging activities, have been allocated on a pro-rata basis using the deemed acquisition cost of FDAH as a percentage of the total acquisition cost of Wyeth. No other allocations of debt have been made as none is specifically related to our operations.

Management believes that the allocations are a reasonable reflection of the services received or the costs incurred on behalf of Zoetis and its operations and that the condensed combined statements of operations reflect all of the costs of the animal health business of Pfizer. The allocated expenses from Pfizer Inc. include the following:

 

   

Enabling Functions operating expenses—Approximately $229 million in the nine months ended September 30, 2012 and $249 million in the nine months ended October 2, 2011 ($1 million and $2 million in Cost of sales; $185 million and $199 million in Selling, general and administrative expenses; and $43 million and $48 million in Research and development expenses).

 

   

PGS manufacturing costs—Approximately $14 million in the nine months ended September 30, 2012 and $35 million in the nine months ended October 2, 2011 (in Cost of sales).

 

   

Restructuring charges and certain acquisition-related costs—Approximately $47 million in the nine months ended September 30, 2012 and $51 million in the nine months ended October 2, 2011 (in Restructuring charges and certain acquisition-related costs).

 

   

Other costs associated with our acquisitions and cost reduction/productivity initiatives—Additional depreciation associated with asset restructuring—Approximately $10 million in the nine months ended September 30, 2012 (in Research and development expenses) and $12 million in the nine months ended October 2, 2011 ($11 million in Research and development expenses; and $1 million in Selling, general and administrative expenses).

 

   

Other costs associated with cost reduction/productivity initiatives—Implementation costs—Approximately $4 million in the nine months ended September 30, 2012 (in Selling, general and administrative expenses).

 

   

Share-based compensation expense—Approximately $22 million in the nine months ended September 30, 2012 and $20 million in the nine months ended October 2, 2011 ($5 million and $4 million in Cost of sales;

 

F-58


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS

 

 

$14 million and $13 million in Selling, general and administrative expenses; and $3 million and $3 million in Research and development expenses).

 

   

Transaction costs—Approximately $1 million in the nine months ended October 2, 2011 (in Restructuring charges and certain acquisition-related costs).

 

   

Compensation-related expenses—Approximately $16 million in the nine months ended September 30, 2012 and $7 million in the nine months ended October 2, 2011 ($5 million and $2 million in Cost of sales; $7 million and $3 million in Selling, general and administrative expenses; and $4 million and $2 million in Research and development expenses).

 

   

Interest expense—Approximately $23 million in the nine months ended September 30, 2012 and $27 million in the nine months ended October 2, 2011 (in Other (income)/deductions—net).

The income tax provision in the combined statements of operations has been calculated as if Zoetis filed a separate tax return.

We participate in Pfizer’s centralized cash management system and generally all excess cash is transferred to Pfizer on a daily basis. Cash disbursements for operations and/or investing activities are funded as needed by Pfizer. We also participate in Pfizer’s centralized hedging and offsetting programs. As such, in the condensed combined statements of operations, we include the impact of Pfizer’s derivative financial instruments used for offsetting changes in foreign currency rates net of the related exchange gains and losses for the portion that is deemed to be associated with the animal health operations. Such gains and losses were not material to the combined financial statements for all periods presented.

All balances and transactions among Zoetis and Pfizer and its subsidiaries, which can include dividends as well as intercompany activities, are shown as business unit equity in the combined balance sheets, for all periods presented. As the books and records of Zoetis were not kept on a separate company basis, the determination of the average net balance due to or from Pfizer is not practicable. See also Note 11. Related Party Transactions.

These combined financial statements do not purport to reflect what the results of operations, comprehensive income, financial position, or cash flows would have been had we operated as a standalone public company during the period.

2. Adoption of New Accounting Policies

As of January 1, 2012, we adopted an amendment to the guidelines on the measurement and disclosure of fair value that is consistent between U.S. GAAP and International Financial Reporting Standards. The adoption of this new standard did not have a significant impact on our combined financial statements.

3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives

We incurred significant costs in connection with Pfizer’s cost-reduction initiatives (several programs initiated since 2005) and the acquisitions of FDAH on October 15, 2009 and KAH on January 31, 2011.

For example:

 

   

in connection with our cost-reduction/productivity initiatives, we typically incur costs and charges associated with site closings and other facility rationalization actions, workforce reductions and the expansion of shared services, including the development of global systems; and

 

F-59


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS

 

 

   

in connection with our acquisition activity, we typically incur costs and charges associated with executing the transactions, integrating the acquired operations, which may include expenditures for consulting and the integration of systems and processes, and restructuring of the combined company, which may include charges related to employees, assets and activities that will not continue in the combined company.

All operating functions can be impacted by these actions, including sales and marketing, manufacturing and research and development, as well as functions such as business technology, shared services and corporate operations.

The components of costs incurred in connection with our acquisitions and cost-reduction/productivity initiatives follow:

 

      Nine Months Ended  
(MILLIONS OF DOLLARS)    September 30,
2012
    October 2,
2011
 

Restructuring Charges and Certain Acquisition-Related Costs:

    

Integration costs(a)

   $ 15      $ 17   

Restructuring charges:(b)

    

Employee termination costs

     (10     42   

Asset impairment charges

     2        (1

Exit costs

     1        (1

 

 

Total Direct

     8        57   

 

 

Transaction costs(c)

            1   

Integration costs(a)

     16        31   

Restructuring charges:(b)

    

Employee termination costs

     19        16   

Asset impairment charges

     8        2   

Exit costs

     4        1   

 

 

Total Allocated

     47        51   

 

 

Total Restructuring charges and certain acquisition-related costs

     55        108   

Other Costs Associated With Our Acquisitions and Cost-Reduction/Productivity Initiatives:

    

Additional depreciation associated with asset restructuring—direct(d)

     10        6   

Additional depreciation associated with asset restructuring—allocated(d)

     10        12   

Implementation costs—allocated(e)

     4        —     

 

 

Total costs associated with acquisitions and cost-reduction/productivity initiatives

   $ 79      $ 126   

 

 

 

(a) 

Integration costs represent external, incremental costs directly related to integrating acquired businesses and primarily include expenditures for consulting and the integration of systems and processes.

(b) 

Restructuring charges for the nine months ended September 30, 2012 are primarily related to cost-reduction/productivity initiatives. Restructuring charges for the nine months ended October 2, 2011 are primarily related to the integration of FDAH and KAH.

    The direct restructuring charges are associated with the following:

 

   

For the nine months ended September 30, 2012––U.S. ($3 million), EuAfME ($2 million), CLAR ($1 million), and manufacturing/research/corporate ($13 million income, resulting from the sale of a manufacturing plant).

 

   

For the nine months ended October 2, 2011––U.S. ($2 million), EuAfME ($21 million), CLAR ($1 million), and manufacturing/research/corporate ($16 million).

 

F-60


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS

 

(c) 

Transaction costs represent external costs directly related to acquiring businesses and primarily include expenditures for banking, legal, accounting and other similar services.

(d) 

Additional depreciation associated with asset restructuring represents the impact of changes in the estimated lives of assets involved in restructuring actions. In the nine months ended September 30, 2012, included in Cost of sales ($9 million), Selling, general and administrative expenses ($1 million) and Research and development expenses ($10 million). In the nine months ended October 2, 2011, included in Cost of Sales ($3 million), Selling, general and administrative expenses ($4 million), and Research and development expenses ($11 million).

(e) 

Implementation costs represent external, incremental costs directly related to implementing cost reduction/productivity initiatives, and primarily include expenditures related to system and process standardization and the expansion of shared services. In the nine months ended September 30, 2012, included in Selling, general and administrative expenses ($4 million).

The components and activity of our direct restructuring charges identified with Zoetis follow:

 

(MILLIONS OF DOLLARS)    Employee
Termination
Costs
    Asset
Impairment
Charges
    Exit
Costs
    Accrual   

Balance, December 31, 2011

   $ 70      $      $ 11      $ 81    

Provision(a)

     (10     2        1        (7)   

Utilization and other(b)

     (40     (2     (3     (45)   
                                  

Balance, September 30, 2012(c)

   $ 20      $      $ 9      $ 29    

 

 

 

(a) 

The provision for termination costs during the nine months ended September 30, 2012 includes a change in the liability for employee termination costs in the third quarter resulting from the sale of a manufacturing plant ($16 million income).

(b) 

Includes adjustments for foreign currency translation.

(c) 

Included in Other current liabilities ($18 million) and Other noncurrent liabilities ($11 million).

4. Other (Income)/Deductions—Net

The components of Other (income)/deductions—net follow:

 

      Nine Months Ended   
(MILLIONS OF DOLLARS)    September 30,
2012
   

October 2, 

2011 

 

Interest expense on allocated long-term debt

   $ 23      $ 27   

Royalty-related income

     (24     (19

Identifiable intangible asset impairment charges(a)

     5        9   

Certain legal matters, net(b)

     (19       

Other, net

     1        (1

 

 

Other (income)/deductions—net

   $ (14   $ 16   

 

 

 

(a) 

In 2012, the asset impairment charges include (i) approximately $2 million of finite-lived companion animal developed technology rights; (ii) approximately $1 million of finite-lived trademarks related to genetic testing services; and (iii) approximately $2 million of finite-lived patents related to poultry technology. The intangible asset impairment charges for 2012 reflect, among other things, loss of revenues as a result of negative market conditions and, with respect to the poultry technology, a re-assessment of economic viability. In 2011, the asset impairment charges reflect approximately $9 million related to in-process research and development projects acquired from Vetnex in 2010, as a result of the termination of the development programs due to a re-assessment of economic viability.

(b) 

Represents income from a favorable legal settlement related to an intellectual property matter ($14 million) and a change in estimate for an environmental-related reserve ($7 million income), partially offset by litigation-related charges ($2 million), all in the second quarter of 2012.

 

F-61


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS

 

5. Tax Matters

The income tax provision in the combined statements of operations and the associated tax accounts in the combined balance sheets have been calculated as if Zoetis filed a separate tax return.

A. Taxes on Income

Our effective tax rate was 29.9% for the nine months ended September 30, 2012, compared to 34.6% for the nine months ended October 2, 2011. The lower effective tax rate in the first nine months of 2012 compared to the first nine months of 2011 is primarily due to:

 

   

during the third quarter of 2012, Pfizer reached a settlement with the U.S. Internal Revenue Service (IRS) with respect to the audits of the Pfizer Inc. tax returns for the years 2006 through 2008. The settlement resulted in an income tax benefit to Zoetis of approximately $29.3 million for tax and interest.

 

 

   

the change in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and as a result of operating fluctuations in the normal course of business, the impact of non-deductible items and the extent and location of other income and expense items, such as restructuring charges, asset impairments and gains and losses on asset divestitures.

partially offset by:

 

   

the non-recurrence of approximately $9.5 million reduction in unrecognized tax benefits in 2011, which were recorded as a result of the favorable tax audit settlement pertaining to prior years (see discussion below); and

 

   

the expiration of the U.S. research and development credit.

During the nine months ended October 2, 2011, a settlement was reached with the U.S. Internal Revenue Service (IRS) with respect to the audits of the Wyeth tax returns for the years 2002 through 2005. The settlement resulted in an income tax benefit to Zoetis of approximately $9.5 million for tax and interest.

B. Tax Contingencies

We are subject to income tax in many jurisdictions, and a certain degree of estimation is required in recording the assets and liabilities related to income taxes. All of our tax positions are subject to audit by the local taxing authorities in each tax jurisdiction. These tax audits can involve complex issues, interpretations and judgments and the resolution of matters may span multiple years, particularly if subject to negotiation or litigation.

Status of Tax Audits and Potential Impact on Accruals for Uncertain Tax Positions

The United States is one of our major tax jurisdictions and we are regularly audited by the IRS:

 

   

With respect to Pfizer Inc., tax years 2009-2010 are currently under audit. Tax years 2011-2012 are not yet under audit. All other tax years in the U.S. for Pfizer Inc. are closed under the statute of limitations.

 

   

With respect to Wyeth, tax years 2006 through the Wyeth acquisition date (October 15, 2009) are currently under audit. All other tax years are closed.

 

   

With respect to King, tax years 2005-2007 for Alpharma Inc. (an animal health related company acquired through the KAH acquisition) are currently under audit. Tax years 2009 through the date of acquisition (January 31, 2011) are open but not under audit. All other tax years are closed.

 

F-62


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS

 

In addition to the open audit years in the U.S., we have open audit years in other major tax jurisdictions, such as Canada (2001-2012), Japan (2007-2012), Europe (2007-2012, primarily reflecting Ireland, the United Kingdom, France, Italy, Spain and Germany) and Puerto Rico (2007-2012).

6. Accumulated Other Comprehensive Income/(Loss)

Changes, net of tax, in accumulated other comprehensive loss follow:

                          
     

Net Unrealized Loss 

     Benefit Plans         
(MILLIONS OF DOLLARS)   

Currency Translation

Adjustment

    

Actuarial

Losses

     Accumulated
Other
Comprehensive
Loss
 
   

Balance, December 31, 2011

     $  (59)       $ (6)       $ (65)   

Other comprehensive expense

     (106)                (104)   

 

 

Balance, September 30, 2012

     $(165)       $ (4)       $ (169)   

 

 

7. Inventories

The components of inventory follow:

 

      As of  
(MILLIONS OF DOLLARS)    September 30,
2012
    

December 31, 

2011 

 

Finished goods

   $ 767       $ 608    

Work-in-process

     316         284    

Raw materials and supplies

     189         171    

 

 

Inventories

   $ 1,272       $ 1,063    

 

 

8. Goodwill and Other Intangible Assets

A. Goodwill

The components and changes in the carrying amount of goodwill follow:

 

(MILLIONS OF DOLLARS)    U.S.      EuAfME       CLAR       APAC       Total   

Balance, December 31, 2011

   $ 504        $ 157        $ 164        $ 164        $ 989    

Other(a)

     (4)         (1)         (1)         (2)         (8)   
                                              

Balance, September 30, 2012

   $ 500        $ 156        $ 163        $ 162        $ 981    

 

 
(a) 

Primarily reflects adjustments for foreign currency translation.

 

F-63


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS

 

B. Other Intangible Assets

The components of identifiable intangible assets follow:

 

      As of  
     September 30, 2012      December 31, 2011  
(MILLIONS OF DOLLARS)    Gross
Carrying
Amount
     Accumulated
Amortization
    Identifiable
Intangible
Assets, Less
Accumulated
Amortization
     Gross
Carrying
Amount
     Accumulated
Amortization
    Identifiable
Intangible
Assets, Less
Accumulated
Amortization
 

Finite-lived intangible assets:

               

Developed technology rights

   $ 755       $ (162   $ 593       $ 755       $ (128   $ 627   

Brands

     216         (85     131         216         (77     139   

Trademarks and tradenames

     53         (34     19         54         (30     24   

Other                                                   

     123         (115     8         129         (118     11   
                                                     

Total finite-lived intangible assets

     1,147         (396     751         1,154         (353     801   
                                                     

Indefinite-lived intangible assets:    

               

Brands

     39                39         39                39   

Trademarks and tradenames

     67                67         67                67   

In-process research and development

     20                20         21                21   
                                                     

Total indefinite-lived intangible assets

     126                126         127                127   
                                                     

Identifiable intangible assets(a)

   $ 1,273       $ (396   $ 877       $ 1,281       $ (353   $ 928   

 

 

 

(a) 

The net decrease reflects amortization, adjustments for foreign currency translation and impairment charges (see Note 4. Other Income/Deductions—Net), partially offset by asset acquisitions.

C. Amortization

Amortization expense related to acquired intangible assets that contribute to our ability to sell, manufacture, research, market and distribute products, compounds and intellectual property is included in Amortization of intangible assets as it benefits multiple business functions. Amortization expense related to acquired intangible assets that are associated with a single function is included in Cost of sales, Selling, general and administrative expenses and Research and development expenses, as appropriate. Total amortization expense for finite-lived intangible assets was $51 million in the nine months ended September 30, 2012 and $52 million in the nine months ended October 2, 2011.

9. Commitments and Contingencies

We and certain of our subsidiaries are subject to numerous contingencies arising in the ordinary course of business. For a discussion of our tax contingencies, see Note 5B. Tax Matters: Tax Contingencies.

A. Legal Proceedings

Our non-tax contingencies include, among others, the following:

 

   

Product liability and other product-related litigation, which can include injury, consumer, off-label promotion, antitrust and breach of contract claims.

 

   

Commercial and other litigation, which can include product-pricing claims and environmental claims and proceedings.

 

F-64


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS

 

 

   

Patent litigation, which typically involves challenges to the coverage and/or validity of our patents or those of third parties on various products or processes.

 

   

Government investigations, which can involve regulation by national, state and local government agencies in the U.S. and in other countries.

Certain of these contingencies could result in losses, including damages, fines and/or civil penalties, and/or criminal charges, which could be substantial.

We believe that we have strong defenses in these types of matters, but litigation is inherently unpredictable and excessive verdicts do occur. We do not believe that any of these matters will have a material adverse effect on our financial position. However, we could incur judgments, enter into settlements or revise our expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on our results of operations or cash flows in the period in which the amounts are paid and/or accrued.

We have accrued for losses that are both probable and reasonably estimable. Substantially all of these contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss can be complex. Consequently, we are unable to estimate the range of reasonably possible loss in excess of amounts accrued. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but the assessment process relies heavily on estimates and assumptions that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions.

The principal matters to which we are a party are discussed below. In determining whether a pending matter is significant for financial reporting and disclosure purposes, we consider both quantitative and qualitative factors in order to assess materiality, such as, among other things, the amount of damages and the nature of any other relief sought in the proceeding, if such damages and other relief are specified; our view of the merits of the claims and of the strength of our defenses; whether the action purports to be a class action and our view of the likelihood that a class will be certified by the court; the jurisdiction in which the proceeding is pending; any experience that we or, to our knowledge, other companies have had in similar proceedings; whether disclosure of the action would be important to a reader of our financial statements, including whether disclosure might change a reader’s judgment about our financial statements in light of all of the information about the company that is available to the reader; the potential impact of the proceeding on our reputation; and the extent of public interest in the matter. In addition, with respect to patent matters, we consider, among other things, the financial significance of the product protected by the patent.

Roxarsone ® (3-Nitro)

We are defendants in nine actions involving more than 137 plaintiffs that allege that the distribution of the medicinal feed additive Roxarsone allegedly caused various diseases in the plaintiffs, including cancers and neurological diseases. Other defendants, including various poultry companies, are also named in these lawsuits. Compensatory and punitive damages are sought in unspecified amounts.

In September 2006, the Circuit Court of Washington County returned a defense verdict in one of the lawsuits, Mary Green, et al. v. Alpharma, Inc. et al. In 2008, this verdict was appealed and affirmed by the Arkansas Supreme Court. Certain summary judgments favoring the poultry company co-defendants in Mary Green, et al. v. Alpharma, Inc. et al. were reversed by the Arkansas Supreme Court in 2008. These claims were retried in 2009 and that trial also resulted in a defense verdict, which was affirmed by the Arkansas Supreme Court in April

 

F-65


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS

 

2011. In October, we entered into an agreement to resolve these cases. The resolution is subject to the execution of full releases or dismissals with prejudice by all of the claimants or our waiver of these requirements. A trial previously scheduled for October 2012 has been postponed pending the outcome of the proposed settlement.

In June 2011, we announced that we would suspend sales in the U.S. of Roxarsone in response to a request by the U.S. FDA and subsequently stopped sales in several international markets.

Following our decision to suspend sales of Roxarsone in June 2011, Zhejiang Rongyao Chemical Co., Ltd., the supplier of certain materials used in the production of Roxarsone, filed a lawsuit in the U.S. District Court for the District of New Jersey alleging that we are liable for damages it suffered as a result of the decision to suspend sales.

In September 2012, we were named as defendants in a purported class action in the Circuit Court of Arkansas County, Arkansas. The lawsuit alleges that the distribution of medicinal feed additives, including Roxarsone, caused chickens to produce manure that contains an arsenical compound, which, when used as agricultural fertilizer by rice farmers, degrades into inorganic arsenic and allegedly caused contamination of rice produced by Arkansas farmers. Other defendants, including various poultry companies, are also named in these lawsuits. Compensatory damages, punitive damages, and attorney fees are sought in an unspecified amount.

PregSure®

We have received in total approximately 80 claims in Europe and New Zealand seeking damages related to calves claimed to have died of Bovine Neonatal Pancytopenia (BNP) on farms where PregSure BVD, a vaccine against Bovine Virus Diarrhea (BVD) was used. BNP is a rare syndrome that first emerged in cattle in Europe in 2006. Studies of BNP suggest a potential association between the administration of PregSure and the development of BNP, although no causal connection has been established. The cause of BNP is not known.

In 2010, we voluntarily stopped sales of PregSure BVD, a vaccine against BVD in Europe, and recalled the product at wholesalers while investigations into possible causes of BNP continue. In 2011, after incidences of BNP were reported in New Zealand, we voluntarily withdrew the marketing authorization for PregSure throughout the world.

We have settled approximately 20 of these claims for amounts that are not material individually or in the aggregate. Investigations into possible causes of BNP continue and these settlements may not be representative of any future claims resolutions.

Advocin

On January 30, 2012, Bayer filed a complaint against Pfizer alleging infringement and inducement of infringement of Bayer patent US 5,756,506 covering, among other things, a process for treating bovine respiratory disease (BRD) by administering a single high dose of fluoroquinolone. The complaint was filed after Pfizer’s product Advocin® was approved as a single dose treatment of BRD, in addition to its previous approval as a multi-dose treatment of BRD. Bayer seeks a permanent injunction, damages and a recovery of attorney’s fees, and has demanded a jury trial. Discovery is ongoing, and the trial is currently scheduled for April 2013. We believe we have strong defenses against the claim.

 

F-66


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS

 

Ulianopolis, Brazil

In February 2012, the Municipality of Ulianopolis (State of Para, Brazil) filed a complaint against Fort Dodge Saúde Animal Ltda (FDSAL) and five other large companies alleging that waste sent to a local waste incinerator for destruction, but that was not ultimately destroyed as the facility lost its operating permit, caused environmental impacts requiring cleanup.

The Municipality is seeking recovery of cleanup costs purportedly related to FDSAL’s share of all waste accumulated at the waste incineration facility awaiting destruction, and compensatory damages to be allocated among the six defendants. We believe we have strong arguments against the claim, including defense strategies against any claim of joint and several liability.

At the request of the Municipal prosecutor, in April 2012, the lawsuit was suspended for one year. Since that time, the prosecutor has initiated investigations into the Municipality’s actions in the matter as well as the efforts undertaken by the six defendants to remove and dispose of their individual waste from the local incineration facility.

B. Guarantees and Indemnifications

In the ordinary course of business and in connection with the sale of assets and businesses, we often indemnify our counterparties against certain liabilities that may arise in connection with the transaction or related to activities prior to the transaction. These indemnifications typically pertain to environmental, tax, employee and/or product-related matters and patent-infringement claims. If the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we would be required to reimburse the loss. These indemnifications are generally subject to threshold amounts, specified claim periods and other restrictions and limitations. Historically, we have not paid significant amounts under these provisions and, as of September 30, 2012, recorded amounts for the estimated fair value of these indemnifications are not significant.

 

F-67


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS

 

10.  Segment, Geographic and Revenue Information

A.  Segment Information

Segment Assets

We manage our assets on a total company basis, not by operating segment. Therefore, our chief operating decision maker does not regularly review any asset information by operating segment and, accordingly, we do not report asset information by operating segment. As of September 30, 2012, total assets were $5.9 billion.

Selected Statement of Operations Information

Selected statement of operations information follows:

 

(MILLIONS OF DOLLARS)    Revenues(a)      Earnings(b)     Depreciation 
and Amortization
(c) 
 

Nine months ended September 30, 2012

       

U.S.

   $ 1,294       $ 676      $ 26    

EuAfME

     799         283        21    

CLAR

     549         184        17    

APAC

     518         193        13    
                           

Total reportable segments

     3,160         1,336        77    

Other business activities(e)

             (191     12    

Reconciling Items:

       

Corporate(f)

             (346     18    

Purchase accounting adjustments(g)

             (39     39    

Acquisition-related costs(h)

             (34     10    

Certain significant items(i)

             (28     —    

Other unallocated(j)

             (62     —    
                           
   $ 3,160       $ 636      $ 156    

 

 

Nine months ended October 2, 2011(d)

       

U.S.

   $ 1,210       $ 600      $ 22    

EuAfME

     851         284        18    

CLAR

     565         191        15    

APAC

     480         159        10    
                           

Total reportable segments

     3,106         1,234        65    

Other business activities(e)

             (212     13    

Reconciling Items:

       

Corporate(f)

             (369     22    

Purchase accounting adjustments(g)

             (69     45    

Acquisition-related costs(h)

             (87       

Certain significant items(i)

             (58     —    

Other unallocated(j)

             (75     —    
                           
   $ 3,106       $ 364      $ 151    

 

 

 

(a) 

Revenues denominated in euros were $464 million in the nine months ended September 30, 2012 and $529 million in the nine months ended October 2, 2011.

(b) 

Defined as income before provision for taxes on income.

(c) 

Certain production facilities are shared. Depreciation and amortization is allocated to the reportable operating segments based on estimates of where the benefits of the related assets are realized.

 

F-68


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS

 

(d) 

For 2011, includes KAH commencing on the acquisition date of January 31, 2011.

(e) 

Other business activities reflect the research and development costs managed by our Research and Development organization.

(f) 

Corporate includes, among other things, administration expenses, allocated interest expense, certain compensation and other costs not charged to our operating segments.

(g) 

Purchase accounting adjustments include certain charges related to the fair value adjustments to inventory, intangible assets and property, plant and equipment not charged to our operating segments.

(h) 

Acquisition-related costs can include costs associated with acquiring, integrating and restructuring newly acquired businesses, such as allocated transaction costs, integration costs, restructuring charges and additional depreciation associated with asset restructuring (see Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives, for additional information).

(i) 

Certain significant items are substantive, unusual items that, either as a result of their nature or size, would not be expected to occur as part of our normal business on a regular basis. Such items primarily include restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition and the impact of divestiture-related gains and losses (see Note 3. Restructuring Charges and Other Costs Associated with Acquisition and Cost-Reduction/Productivity Initiatives, for additional information).

 

   

In the nine months ended September 30, 2012, certain significant items includes: (i) income related to a favorable legal settlement for an intellectual property matter of $14 million; (ii) $4 million income due to a change in estimate related to transitional manufacturing purchase agreements associated with divestitures; and (iii) restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition of $46 million.

   

In the nine months ended October 2, 2011, certain significant items includes: (i) restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition of $37 million; (ii) certain charges to write-off inventory of $12 million; and (iii) certain asset impairment charges of $9 million.

 

(j) 

Includes overhead expenses associated with our manufacturing operations.

B.  Other Revenue Information

Revenues by Species

Significant species revenues are as follows:

 

      Nine Months Ended  
(MILLIONS OF DOLLARS)    September 30,
2012
     October 2,
2011
 

Livestock:

     

    Cattle

   $ 1,136       $ 1,158   

    Swine

     425         412   

    Poultry

     375         378   

    Other (Fish and Sheep)

     79         69   

 

 
     2,015         2,017   

 

 

Companion Animal:

     

    Horses

     130         123   

    Dogs and Cats

     1,015         966   

 

 
     1,145         1,089   

 

 

Total revenues(a)

   $ 3,160       $ 3,106   

 

 

 

(a) 

In accordance with our domestic and international year-ends, 2011 includes approximately eight months of KAH’s U.S. operations and approximately seven months of KAH’s international operations.

 

F-69


Table of Contents

ZOETIS INC.

(THE ANIMAL HEALTH BUSINESS UNIT OF PFIZER INC.)

NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS

 

Revenues by Major Product Category

Significant revenues by major product category are as follows:

 

      Nine Months Ended  
(MILLIONS OF DOLLARS)   

September 30,

2012

    

October 2

2011

 

Anti-infectives

   $ 882       $ 924   

Vaccines

     812         801   

Parasiticides

     532         503   

Medicinal feed additives

     298         247   

Other pharmaceuticals

     529         537   

Other non-pharmaceuticals

     107         94   

 

 

Total revenues(a)

   $ 3,160       $ 3,106   

 

 

 

(a) 

In accordance with our domestic and international year-ends, 2011 includes approximately eight months of KAH’s U.S. operations and approximately seven months of KAH’s international operations.

11.  Related Party Transactions

These financial statements include related party transactions:

 

   

We did not have sales to Pfizer and its subsidiaries during any of the periods presented.

 

   

The costs of goods manufactured in manufacturing plants that are shared with other Pfizer business units were approximately $320 million in the nine months ended September 30, 2012 and $260 million in the nine months ended October 2, 2011.

 

   

Historically, Pfizer has provided significant corporate, manufacturing and shared services functions and resources to us. Our combined financial statements reflect an allocation of these costs. For further information about the cost allocations for these services and resources, see Note 1. Basis of Presentation. Management believes that these allocations are a reasonable reflection of the services received. However, these allocations may not reflect the expenses that would have been incurred if we had operated as a standalone company for the periods presented. The costs for these services as a standalone company would depend on a number of factors, including how we chose to organize as a company, our employee sourcing decisions and strategic decisions in areas such as information technology systems and infrastructure.

12.  Subsequent Event

In December 2012, we entered into a revolving credit agreement with a syndicate of banks providing for a five-year $1.0 billion senior unsecured revolving credit facility, which we refer to as the credit facility. The credit facility will not be effective and available for borrowings until certain conditions, including the completion of an initial public offering of a portion of our common stock and the receipt of certain investment grade ratings, are satisfied. The credit facility contains a financial covenant requiring us to not exceed a maximum total leverage ratio and, unless on the effective date of the credit facility certain investment grade ratings specified in the revolving credit agreement are received, to maintain a minimum interest coverage ratio. In addition, the credit facility contains other customary covenants. Subject to certain conditions, we will have the right to increase the credit facility to up to $1.5 billion.

 

F-70


Table of Contents

LOGO


Table of Contents

 

 

86,100,000 shares

 

LOGO

Class A common stock

 

 

Prospectus

 

 

J.P. Morgan

BofA Merrill Lynch

Morgan Stanley

Barclays

Citigroup

Credit Suisse

Deutsche Bank Securities

Goldman, Sachs & Co.

Guggenheim Securities

Jefferies

BNP PARIBAS

HSBC

Loop Capital Markets

RBC Capital Markets

The Williams Capital Group, L.P.

UBS Investment Bank

Lebenthal Capital Markets

Piper Jaffray

Ramirez & Co., Inc.

                    , 2013

Until                     , 2013 (25 days after the date of this prospectus), all dealers that buy, sell or trade shares of our Class A common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

 

 


Table of Contents

Part II

Information not required in prospectus

 

Item 13. Other expenses of issuance and distribution

The following table sets forth the various expenses, other than underwriting discounts and commissions, payable in connection with the offering contemplated by this registration statement. All of the fees set forth below are estimates except for the SEC registration fee, the FINRA fee and the stock exchange listing fee.

 

     Payable by Pfizer      Payable by the registrant  

SEC registration fee

     $337,641       $ —     

FINRA fee

     225,500         —     

Stock exchange listing fee

     250,000         —     

Printing expenses

     1,200,000         —     

Legal fees and expenses

     5,000,000         —     

Accounting fees and expenses

     4,000,000         —     

Transfer agent and registrar fees

     12,000         —     

Miscellaneous fees and expenses

     150,000         —     
  

 

 

    

 

 

 

Total

   $ 11,175,141       $ —     
  

 

 

    

 

 

 

 

Item 14. Indemnification of directors and officers

Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed actions, suits or proceedings in which such person is made a party by reason of such person being or having been a director, officer, employee or agent to the registrant. The Delaware General Corporation Law provides that Section 145 is not exclusive of other rights to which those seeking indemnification may be entitled under any by-laws, agreement, vote of stockholders or disinterested directors or otherwise. The registrant’s certificate of incorporation and by-laws provide for indemnification by the registrant of its directors, officers and employees to the fullest extent authorized or permitted by law.

Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation will not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (1) for any breach of the director’s duty of loyalty to the corporation or its stockholders; (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (3) for unlawful payments of dividends or unlawful stock repurchases, redemptions or other distributions; or (4) for any transaction from which the director derived an improper personal benefit. The registrant’s certificate of incorporation and by-laws provide for such limitation of liability to the fullest extent permitted by the Delaware General Corporation Law.

The registrant will on its own, or in conjunction with its controlling stockholder, maintain industry standard policies of insurance under which coverage is provided to its directors and officers against legal liability for loss which is not indemnified arising from claims made by reason of breach of duty or other wrongful act while acting in their capacity as directors and officers of the registrant. Further, the registrant intends to enter into indemnification agreements with its directors and executive officers which would require it, among other things, to indemnify them against certain liabilities which may arise by reason of their status or service as a director or officer and to advance to them expenses, subject to reimbursement to the registrant if it is determined that they are not entitled to indemnification.

 

II-1


Table of Contents

The proposed form of underwriting agreement filed as Exhibit 1.1 to this Registration Statement provides for indemnification of directors and certain officers of the registrant by the underwriters against certain liabilities.

 

Item 15. Recent sales of unregistered securities

We have not sold any securities, registered or otherwise, within the past three years, except for the shares issued to our sole stockholder, Pfizer.

 

Item 16. Exhibits and financial statements schedules

 

(a) Exhibits

 

Exhibit
number

  

Description

1.1    Form of Underwriting Agreement
1.2    Form of Debt-for-Equity Exchange Agreement
3.1    Form of Amended and Restated Certificate of Incorporation of the Registrant
3.2    Form of Amended and Restated By-laws of the Registrant*
4.1    Specimen Class A Common Stock Certificate
4.2    Indenture, dated as of January 28, 2013, between Zoetis Inc. and Deutsche Bank Trust Company Americas, as trustee
4.3    First Supplemental Indenture, dated as of January 28, 2013, between Zoetis Inc. and Deutsche Bank Trust Company Americas, as trustee
4.4    Form of 1.150% Senior Notes due 2016 (contained in Exhibit 4.3 hereto)
4.5    Form of 1.875% Senior Notes due 2018 (contained in Exhibit 4.3 hereto)
4.6    Form of 3.250% Senior Notes due 2023 (contained in Exhibit 4.3 hereto)
4.7    Form of 4.700% Senior Notes due 2043 (contained in Exhibit 4.3 hereto)
5.1    Opinion of Skadden, Arps, Slate, Meagher & Flom LLP*
10.1    Form of Global Separation Agreement*
10.2    Form of Transitional Services Agreement*
10.3    Form of Tax Matters Agreement*
10.4    Form of Research and Development Collaboration and License Agreement*
10.5    Form of Employee Matters Agreement*
10.6   

Pfizer Inc. 2004 Stock Plan, as Amended and Restated*

10.7    Pfizer Inc. Amended and Restated Nonfunded Supplemental Retirement Plan, together with all material Amendments*
10.8    Form of Patent and Know-How License Agreement (Zoetis as licensor)*
10.9    Form of Patent and Know-How License Agreement (Pfizer as licensor)*
10.10    Form of Trademark and Copyright License Agreement*
10.11    Private Instrument of Non Residential Lease Agreement and Others, dated September 28, 2012, by and between PAH Brasil Participações Ltda. and Laboratórios Pfizer Ltda.*

 

II-2


Table of Contents

Exhibit
number

  

Description

10.12    Private Instrument of Lease Agreement Movable Assets and Others, dated September 28, 2012, by and between PAH Brasil Participações Ltda. and Laboratórios Pfizer Ltda.*
10.13    Form of Environmental Matters Agreement*
10.14    Master Manufacturing and Supply Agreement, dated October 1, 2012, by and between Pfizer Inc. and Zoetis Inc. (Pfizer as manufacturer)*
10.15    Form of Registration Rights Agreement*
10.16   

Formof Zoetis Inc. 2013 Equity and Incentive Plan*

10.17   

Formof Pfizer Inc. Sale of Business Plan*

10.18    Revolving Credit Agreement, dated as of December 21, 2012, among Zoetis Inc., the lenders named therein and JPMorgan Chase Bank, N.A., as administrative agent*
10.19    Form of Indemnification Agreement for directors and officers*
10.20    Registration Rights Agreement, dated as of January 28, 2013, by and among Zoetis Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Capital Inc., J.P. Morgan Securities LLC and Deutsche Bank Securities Inc., as representatives of the several initial purchasers
15.1    Letter regarding unaudited interim financial information
21.1    Subsidiaries of the Registrant*
23.1    Consent of KPMG LLP
23.2    Consent of Skadden, Arps, Slate, Meagher & Flom LLP (contained in its opinion filed as Exhibit 5.1 hereto)*
24.1    Powers of Attorney (included on signature page to registration statement)*
99.1    Consent of Michael B. McCallister*
99.2    Consent of Gregory Norden*
99.3    Consent of William C. Steere, Jr.*

 

* Previously filed.

(b) Financial Statement Schedules. Schedules are omitted because they are not required or because the information is provided elsewhere in the financial statements.

 

Item 17. Undertakings

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to the directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

 

II-3


Table of Contents

The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

The undersigned registrant hereby undertakes that:

(i) for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(ii) for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

II-4


Table of Contents

Signatures

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 28th day of January 2013.

 

Zoetis Inc.

By:

 

/S/    JUAN RAMÓN ALAIX

 

Name: Juan Ramón Alaix

 

Title: Chief Executive Officer and Director

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

 

Name

  

Title

 

Date

/S/    JUAN RAMÓN ALAIX        

Juan Ramón Alaix

  

Chief Executive Officer and Director (Principal Executive Officer)

  January 28, 2013

*

Richard A. Passov

  

Executive Vice President and

Chief Financial Officer

(Principal Financial Officer and

Principal Accounting Officer)

 

January 28, 2013

*

Frank A. D’Amelio

  

Chairman and Director

 

January 28, 2013

*

Geno J. Germano

  

Director

 

January 28, 2013

*

Douglas E. Giordano

  

Director

 

January 28, 2013

*

Charles H. Hill

  

Director

 

January 28, 2013

*

Amy W. Schulman

  

Director

 

January 28, 2013

 

*By: 

   /S/    JUAN RAMÓN ALAIX             
  

Juan Ramón Alaix

Attorney-in-fact

  

 

II-5


Table of Contents

Exhibit index

 

Exhibit
number

  

Description

  1.1    Form of Underwriting Agreement
  1.2    Form of Debt-for-Equity Exchange Agreement
  3.1    Form of Amended and Restated Certificate of Incorporation of the Registrant
  3.2    Form of Amended and Restated By-laws of the Registrant*
  4.1    Specimen Class A Common Stock Certificate
  4.2    Indenture, dated as of January 28, 2013, between Zoetis Inc. and Deutsche Bank Trust Company Americas, as trustee
  4.3    First Supplemental Indenture, dated as of January 28, 2013, between Zoetis Inc. and Deutsche Bank Trust Company Americas, as trustee
  4.4    Form of 1.150% Senior Notes due 2016 (contained in Exhibit 4.3 hereto)
  4.5    Form of 1.875% Senior Notes due 2018 (contained in Exhibit 4.3 hereto)
  4.6    Form of 3.250% Senior Notes due 2023 (contained in Exhibit 4.3 hereto)
  4.7    Form of 4.700% Senior Notes due 2043 (contained in Exhibit 4.3 hereto)
  5.1    Opinion of Skadden, Arps, Slate, Meagher & Flom LLP*
10.1    Form of Global Separation Agreement*
10.2    Form of Transitional Services Agreement*
10.3    Form of Tax Matters Agreement*
10.4    Form of Research and Development Collaboration and License Agreement*
10.5    Form of Employee Matters Agreement*
10.6   

Pfizer Inc. 2004 Stock Plan, as Amended and Restated*

10.7   

Pfizer Inc. Amended and Restated Nonfunded Supplemental Retirement Plan, together with all material Amendments*

10.8    Form of Patent and Know-How License Agreement (Zoetis as licensor)*
10.9    Form of Patent and Know-How License Agreement (Pfizer as licensor)*
10.10    Form of Trademark and Copyright License Agreement*
10.11    Private Instrument of Non Residential Lease Agreement and Others, dated September 28, 2012, by and between PAH Brasil Participações Ltda. and Laboratórios Pfizer Ltda.*
10.12    Private Instrument of Lease Agreement Movable Assets and Others, dated September 28, 2012, by and between PAH Brasil Participações Ltda. and Laboratórios Pfizer Ltda.*
10.13    Form of Environmental Matters Agreement*
10.14    Master Manufacturing and Supply Agreement, dated October 1, 2012, by and between Pfizer Inc. and Zoetis Inc. (Pfizer as manufacturer)*
10.15   

Form of Registration Rights Agreement*

10.16   

Formof Zoetis Inc. 2013 Equity and Incentive Plan*

 

II-6


Table of Contents

Exhibit
number

  

Description

10.17   

Formof Pfizer Inc. Sale of Business Plan*

10.18    Revolving Credit Agreement, dated as of December 21, 2012, among Zoetis Inc., the lenders named therein and JPMorgan Chase Bank, N.A., as administrative agent*
10.19    Form of Indemnification Agreement for directors and officers*
10.20    Registration Rights Agreement, dated as of January 28, 2013, by and among Zoetis Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Capital Inc., J.P. Morgan Securities LLC and Deutsche Bank Securities Inc., as representatives of the several initial purchasers
15.1    Letter regarding unaudited interim financial information
21.1    Subsidiaries of the Registrant*
23.1    Consent of KPMG LLP
23.2    Consent of Skadden, Arps, Slate, Meagher & Flom LLP (contained in its opinion filed as Exhibit 5.1 hereto)*
24.1    Powers of Attorney (included on signature page to registration statement)*
99.1    Consent of Michael B. McCallister*
99.2    Consent of Gregory Norden*
99.3    Consent of William C. Steere, Jr.*

 

* Previously filed.

 

II-7