John O'Connor - Investor Relations Officer Juan Ramón Alaix - President, Chief Executive Officer & Director Paul S. Herendeen - Chief Financial Officer & Executive Vice President

Erin E. Wilson - Bank of America Merrill Lynch Kevin K.

Ellich - Piper Jaffray & Co (Broker) Louise Chen - Guggenheim Securities LLC Alex Arfaei - BMO Capital Markets (United States) John C. Kreger - William Blair & Co.

LLC David R. Risinger - Morgan Stanley & Co.

LLC Christopher T. Schott - JPMorgan Securities LLC Volodymyr Nikolenko - Evercore ISI Jami Rubin - Goldman Sachs & Co.

Douglas D. Tsao - Barclays Capital, Inc.

Thank you, operator. Good morning and welcome to the Zoetis third quarter 2015 earnings call.

I'm joined today by Juan Ramón Alaix, our Chief Executive Officer, and Paul Herendeen, our Chief Financial Officer. Before we begin, I'll remind you that the slides presented on this call are available on the Investor Relations section of our website and that our remarks today will include forward-looking statements and actual results could differ materially from those projections.

For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statement in today's press release and our SEC filings including, but not limited to, our 2014 Annual Report on Form 10-K and our Reports on Form 10-Q. Our remarks today will also include references to certain financial measures which were not prepared in accordance with Generally Accepted Accounting Principles, or US GAAP.

A reconciliation of these non-GAAP financial measures to the most directly comparable US GAAP measures is included in the financial tables that accompany our earnings press release and in the company's 8-K filing dated today, November 3, 2015. We also cite operational results which exclude the impact of foreign exchange.

With that, I will turn the call over to Juan Ramón.

Thank you, John. And good morning, everyone.

Today I will discuss our performance for the third quarter and make comments about the acquisition of PHARMAQ, which we announced last night. Paul will then update you on our guidance for 2015, 2016 and 2017.

All of the growth rates I'm discussing today are operational, excluding the impact of foreign exchange currency. I am very pleased to report that this quarter we continued to deliver strong revenue and adjusted net income growth based on our diverse portfolio of high-quality products, excellence in execution and our continued discipline on cost and expenses.

Despite some global economic challenges, the animal health industry remains resilient based on the strong fundamental drivers for improved protein production and healthier pets. Our growth strategies and resources are aligned against these drivers to expand our market leadership in the industry.

The acquisition of PHARMAQ, a market-leading company in aquatic health, is an example of this growth strategy and will bring us another platform to strengthen our Livestock business. This quarter's growth was largely due to the performance of our Livestock business in the U.S., the integration of Abbott Animal Health products into our business and the growth of recent product launches, led by APOQUEL.

During the third quarter, we generated operational growth of 9% revenue and 31% in adjusted net income, delivering adjusted diluted EPS of $0.50 per share. And thanks to our efficiency improvement, reported adjusted net income grew 22% despite a negative impact of foreign currency, which resulted in flat revenue growth.

As we break down our third quarter revenue via species, Companion Animal grew 18% due to the additional sales from Abbott Animal Health and the continued performance of key brands, such as APOQUEL in the dermatology space, REVOLUTION in parasiticides, as well as CERENIA, PROHEART and CONVENIA. I'm very positive about the progress we have made on the integration of Abbott Animal Health and we expect to exceed the targets we set from this acquisition in terms of revenues and cost synergies.

In Livestock we grew 5%, driven by strong growth in cattle, which was tempered by relatively flat sales in swine and poultry. Cattle grew 8%.

We were able to capitalize on favorable market conditions in the U.S. and Brazil with our key brands and some recent product launches.

This growth was partially offset by the impact of our business reduction in Venezuela and lower sales in France. As you may recall, we had increased customers' orders in France last year that came ahead of the introduction of a new anti-infective legislation.

Swine products grew 1%. We delivered exceptional growth in China as a result of our strong portfolio and improving market conditions, which was offset by lower sales in Europe and Venezuela.

Poultry sales were flat based on the growth in Latin America, including Brazil, which was offset by lower sales in other emerging markets and the U.S. The diversity of our portfolio across species, geographies and therapeutic areas continues to help us maximize opportunities in animal health, while mitigating the risk that can arise in certain markets.

Now let me talk for a minute about our business in two markets whose economies has been getting a lot of attention and where we continue to produce strong results despite overall economic volatility. In Brazil, the animal health industry is very resilient and not being impacted by the current economic decline there.

Consumers are reducing their spending in other areas, while maintaining their consumption of animal proteins. In some cases, we may see them switching from more expensive to less expensive meat, but since we are well-positioned in other species, we have been able to sustain a strong Livestock business.

We are also at a very positive point in the cattle cycle in Brazil, with tight supplies of animal and high prices for meat. This place a premium on animal health and creates incentives for our customers to build their herds.

In China, we are also seeing exceptional revenue growth for our business, despite some recent reports of a slowdown in their economy. Demand for proteins, especially pork, has shown stronger growth.

And we are seeing higher prices for meat in the market. The long-term trend of smaller farms consolidating into larger operations will also add to our growth, as the swine population becomes increasingly medicalized and production become more efficient.

While the economic challenge in China may impact other sectors, it wouldn't have a significant impact on the animal health industry and China continues to focus on improving the quality and stability of its food chain. Through the first nine months of the year, we have continued to deliver on our value proposition by growing adjusted net income faster than revenue.

Our operational growth in revenue and adjusted net income were 9% and 22% year-to-date. And despite the impact of foreign currency, we have delivered 1 and 15% growth.

As I have said many times, our industry-leading sales force, high-quality manufacturing and focus on new product innovation and enhancement remain key elements of our competitive advantage. Now let me turn to some other updates.

Last night we announced our agreement to purchase PHARMAQ, the global leader in vaccines and innovation for aquatic health. The acquisition is a great strategic fit that brings to Zoetis an animal health leader with similar competitive advantage, an industry-leading portfolio, strong customer relationships and world-class innovation and manufacturing.

PHARMAQ strengthens our Livestock business by providing a market-leading portfolio and a strong late-stage pipeline. Fish is the world's largest category of animal protein and they are leaders in the fast-growing animal health market, farm fish.

The acquisition strengthens our core business in three key ways. PHARMAQ expands our customer base into the farm fish segment, it adds to our diverse portfolio a leading vaccine for farm fish and innovative parasiticide as well.

PHARMAQ is the market leader in vaccine for farm fish, a market growing 10% annually. And finally, it expands our R&D program in aquatic health, with a strong late-stage pipeline expected to deliver new solutions to the market in the near-term.

Zoetis has an excellent track record of identifying and integrating their businesses, and this one meets all our criteria in terms of strategic fit and value. With this acquisition expected to close on or about November 10, I'm very excited to welcome the PHARMAQ team to Zoetis.

Our companies share a passion for supporting customers and keeping animals healthy and productive, and that gives us a strong foundation to build on. We also continue to see steady progress in the new product innovation and lifecycle developments coming from our internal R&D team.

In September, we received a positive opinion from the European Medicines Agency for initial marketing authorization of SIMPARICA, a once-monthly chewable medication for the treatment of fleas, ticks and mange mite infestations in dogs beginning at eight weeks of age. We await for the news in Europe and the U.S.

on potential approvals of SIMPARICA. I will keep you informed of future developments.

In another step to maintain our global R&D leadership and to grow in critical emerging markets, just last week we strengthened our commitment to China. We announced the opening of a new research and development center near Beijing and the opening of a new global manufacturing facility near Suzhou, which replace our original plant that has been there since 1995.

These investments are a strong foundation for future growth in China and the broader Asian market. Now, let me turn to another topic that I mentioned last quarter, ERP implementation and APOQUEL supply.

The vast majority of the ERP implementation issues in the U.S. are being resolved and customers should be seeing the level of service improving.

In the third quarter, we had continued with successful implementation in another 27 markets, which cover Europe, Asia, Latin America and the Middle East, and we remain on track to complete the global ERP program by the end of Q1 2016. As for APOQUEL, we have been able to resolve manufacturing issues related to our active pharmaceutical ingredient, or API.

We are also in the process of bringing on a second source for API supply in the near future. We continue ramping up production of finished goods in the fourth quarter of 2015.

Although we now expect slightly lower sales of $125 million in full year 2015 than previously anticipated, we expect to be in a stronger supply position as we head into 2016. With the strong demand we have seen, even though we have not yet fully launched this product to our customers, we are increasing our view of peak sales for the product to more than $300 million.

We look forward broadening customer access to APOQUEL in markets like the U.S. and launching in additional markets around the world in 2016.

In summary, we delivered excellent third quarter operational results with diverse sources of revenue growth across our portfolio. We continue to implement changes to reduce complexity and cost in our business and to strengthen our ability to execute on the market opportunities before us and we remain well positioned for profitable growth based on our core capabilities, our diverse portfolio and continuing investment in the areas that matter for our customers: high quality customer service, relevant innovation and reliable supply.

I will now ask Paul to provide some comments on the quarter. Paul?

Thank you, Juan Ramón. The financial highlights of the quarter are, once again, strong operational revenue growth of 9% coming from a variety of sources and cost discipline that together were the major factors in driving significant operational growth in adjusted net income, as Juan Ramón said, up 31% from Q3 of 2014.

Now, I'll sound like a broken record, but I want to emphasize that we manage our business for the long-term and, when we measure how we're doing, we look at years, not quarters. A lot of noise can creep into any one quarter in isolation.

For example, we have seasonal elements to our business that impact our customers' buying patterns and those patterns are not necessarily consistent year-to-year. The high productivity that we enjoy from our R&D engine sees revenue growth, but not necessarily in a linear fashion.

My point is that 9% operational growth of revenue and 31% operational growth in adjusted net income for Q3 as compared with Q3 of 2014 is good, but the year-to-date operational revenue growth of 9% and the adjusted net income growth of 22% and our revised guidance for the full years 2015, 2016 and 2017 are better indicators of our performance and prospects. And they look pretty good, right?

While we believe that the best way to evaluate our performance is on an operational basis, our guidance and your financial models are focused on expectations for our reported results. I bring this up because we've been able to maintain and now improve our 2015 guidance for adjusted net income per share in the face of unrelenting FX headwinds.

And we're proud of that. Before I provide some comments around our guidance, let me call your attention to a few items of note in our quarterly results.

Once again, our Q3 and year-to-date results reflect the multiple ways that we can and do deliver revenue growth. Of the 9% operational growth in revenue in the quarter, 3% came from the acquisition out of the Abbott Animal Health products, 2% was driven by increased sales of APOQUEL, 3% came from the impact of increased selling prices and about 1% came from other new product introductions.

We had unit growth in our other in line products other than APOQUEL of about 1%, but that growth was offset by reduced sales in Venezuela. Now, there's a real balance in how we generate revenue growth and continuing evidence that we can tap all of these sources to drive growth at or faster than the projected mid-single digit growth rates of the markets in which we compete.

A few highlights. U.S.

business was very strong, posting 19% growth in Q3 over Q3 of 2014. The Companion Animal business was up 27% and Livestock was up 13%.

Within Companion Animal, the big drivers were the addition of the acquired Abbott Animal Health products, increased sales of APOQUEL as we continued to ramp up the supply of the product and strength across other key brands, including REVOLUTION, CERENIA, PROHEART and CONVENIA. In Livestock, strong sales of cattle products, for example, DRAXXIN and CEFTIOFUR led the way, while we had more modest gains in swine and a slight decline in poultry.

Buying patterns, particularly in the Livestock segment, can fluctuate due to weather patterns and herd movements. Q3 of 2015 saw seasonal demand for Livestock products pick up earlier in the year than we observed in 2014.

The outlook for the second half of 2015 remains solid, but with revenue skewed more towards Q3 than we saw in 2014. Turning to the International segment, which grew 2% operationally for the quarter, let me highlight five countries; three that contributed to growth, Japan, China and Brazil, and two countries, France and Venezuela, where we saw declines compared with the year-ago quarter.

First, Japan. The significant increase in Japan, up 56%, is mainly due to the comparison with a weak Q3 of 2014 when we bought back inventory in connection with the termination of a distributor agreement in Japan.

Revenue in China increased 24% operationally, as higher pork prices created favorable conditions for pork producers and supported strong demand for our vaccine products. Revenue in Brazil was up 12% operationally, fueled by price growth, new product launches and successful promotional efforts by our Brazilian colleagues in what is, despite the broader economic climate, a favorable environment for cattle producers.

Growth in Japan, China, Brazil and other markets were offset mainly by declines in France, which was down 27% operationally, and Venezuela. In France, Q3 2014 revenues were substantially higher than normal as customers bought products ahead of changes to France's regulation of anti-infective sales.

In Venezuela, as we reported back in May, we are reducing our efforts in the country in light of the uncertain economic situation there. Before I move on, I want to put an exclamation point on Juan Ramón's comments around Brazil and China.

There's been a lot of talk recently about the challenging economic environments in Brazil and China and the impact of those economies on global companies, like ours. I won't repeat everything Juan Ramón said, but I do want to add a finance guy's perspective.

The challenges in Brazil and China are real, but just how challenging they are depends on the segments in which you compete and other fundamental factors. Our business and our company tend to be less impacted by general economic conditions and Zoetis' prospects in China, Brazil and related markets remain good.

Our operational growth in China of 24% in Q3 was actually faster than was posted for the first half of the year. And in Brazil, our operational growth in the quarter of 12% was the same as our operational growth through the first half of the year.

I bring this up because there will continue to be hand-wringing about the impact of these economies on global businesses, and appropriately so. However, our belief is our industry and our company are far less exposed to weakness in these economies than other companies and industries, and our historical results and our results so far in 2014 support that belief.

Quick update on our operational efficiency initiative. We're making excellent progress implementing the structural and organizational changes that will drive the cost reductions we outlined to you in May.

We remain on track to deliver our target of at least $300 million of cost reductions entering calendar 2017. I want to repeat that we have been and continue to be thoughtful in how we achieve those cost savings with a focus on efficiency and the preservation of the core strengths of our business model: our direct sales forces, our productive R&D engine and our supply chain.

In terms of one-time costs, you'll recall that I talk about these costs in three buckets: our standup and other one-time costs, the costs associated to our efficiency initiative and the costs associated with our supply network strategy. In the quarter, we incurred $28 million of stand-up and other one-time costs.

The stand-up costs associated with our separation from Pfizer are largely behind us and should be complete in 2016. We recorded $21 million of one-time costs associated with the efficiency initiative in the quarter.

Much of the cost of the initiative were recorded in Q2 of 2015. And finally, we recorded $3 million of costs associated with the supply network strategy.

We continue to be in the early days of this initiative. We have provided a slide summarizing our current estimates of the total cash cost associated with each bucket.

Now here's the payoff pitch. Updates to our guidance for 2015, 2016 and 2017, the good news here is that there is a lot of good news.

Let's start with 2015. We narrowed and revised our guidance range for revenue.

Let's not lose sight of the negative impact of FX rates that reduced the range by some $25 million since our last update. We reduced the top end of the range by $25 million, but held the low end of the range.

Next, we have reduced the expectation for adjusted cost of sales as a percent of revenue by some 50 basis points to 100 basis points to now being approximately 35%. Of this improvement, some comes from the favorable impact of FX rates, so those benefits may be judicious, (24:44) but some of the improvement is structural in that it represents improvements in the management of the supply chain.

For SG&A, we narrowed the range towards the upper boundary. For R&D, we decreased the range by $30 million to a range of $350 million to $370 million, reflecting a more rapid realization of some of the savings from the efficiency initiative.

I want to point out that even though we are spending less in R&D, we continue to commit the necessary resources to support our rationalized product portfolio and to develop new innovative products to fuel our long-term growth. Finally, we revised our guidance for our tax rate on adjusted income down by about 100 basis points to approximately 28%.

Part of this favorability is structural, coming from refinements and simplification of our operating model as well as several discrete items that occurred during the quarter. All of these things together enable us to raise and narrow our range for full year 2015 adjusted net income per share to $1.70 to $1.74, with the entire range of our revised guidance above the high end of our previous guidance.

As I said, good news. Looking out to 2016.

The negative impact of FX rates would have lowered our prior revenue guidance by some $105 million. However, a combination of factors has enabled us to increase 2016 revenue guidance by $75 million to $100 million.

Supporting the increase are the acquisition of PHARMAQ, increased expectations for the acquired Abbott products and APOQUEL and the addition of new products, including IL-31 and SIMPARICA. The new revenue guidance range for 2016 implies operational growth versus 2015 in the range of 3% to 5%.

As a reminder, this growth rate is suppressed by the impact of the ongoing SKU rationalization and our decision to reduce our activities in Venezuela. The increase to the range of SG&A costs is a result of several factors, including cost that's moved as a function of our now higher revenue outlook, second is the inclusion of SG&A cost for PHARMAQ and finally cost to support the launches of IL-31 and SIMPARICA.

I want to point out, launch costs for Animal Health Products tend to be more modest and of shorter duration as compared with launch costs in human health. We reduced our outlook for R&D costs consistent with my comments around 2015, but then we added in costs associated with Aquatic Health R&D, which is embedded in PHARMAQ.

The other significant change is the reduced expected tax rate on adjusted income from 30% to 28%, this reflects some structural benefits coming from actions to further refine and simplify our global operating model, which are expected to continue into future years. The net result of all the changes we are making to our outlook for 2016 is that we are revising upward our guidance for 2016 adjusted net income to the range of $925 million to $975 million, with implied operational growth moving from 12% to 19% to the range of 14% to 20%.

The range for 2016 adjusted EPS moves up to $1.84 to $1.94. And especially in light of the FX headwinds, this is good stuff.

Finally, and I'll spend less time on it, 2017 guidance. In a nutshell, the negative impact of changed FX rates on the previously provided revenue range is a reduction of about $115 million.

But we are increasing 2017 revenue guidance by $175 million. The increase is driven by the acquisition of PHARMAQ, increased expectations for the acquired Abbott products and APOQUEL and the inclusion of the new products, IL-31 and SIMPARICA.

Where previously we had guided to operational revenue growth in 2017 versus 2016 in the range of 3% to 7%, we are now guiding to the range of 4% to 9%. And this is truly organic growth as the acquisitions for both the Abbott products and PHARMAQ are fully reflected in our 2016 guidance.

I call your attention to the tables that contain all the details of our guidance in 2017 and the changes from prior guidance and I'll just skip to the end. We're increasing our guidance for 2017 adjusted net income by $30 million to the range of $1.125 billion to $1.195 billion, implying growth on an operational basis in 2017 versus 2016 of 18% to 26%.

And our guidance for adjusted EPS has been increased by $0.06 per share to the range of $2.24 to $2.38 per share. Again, strong and reflective of the team here taking all steps to drive profitable growth.

Please note that for 2016 and 2017 we've assumed a constant diluted share count of approximately 502 million shares, as we expect our share repurchase program to at least offset the dilutive impact of our share-based comp plans. Speaking of our share repurchase program, in the third quarter we purchased 1.1 million shares for about $50 million, an average price of $46.92 per share.

Through the third quarter and year-to-date in 2015, we repurchased 3.2 million shares for an aggregate $148.1 million, an average price of $46.45 per share. Before we move to Q&A, I want to take the opportunity to talk about the strength of our industry and our company in turbulent times.

I have to say we've been a little frustrated watching our share price drift lower while at the same time knowing that we are delivering across a range of activities that we believe are building the value of our company. We ended 2014 with a share price of roughly $43, not a lot different from our closing price last night.

But here's a short list of the things that we've accomplished since the beginning of the year. In January, we closed the acquisition of the Abbott Animal Health business.

In February, we put a strong full-year 2014 on the board, delivering operational revenue growth of 7%, adjusted net income growth of 13%. In May, we unveiled our operational efficiency program and provided you with a road map in the form of longer-term guidance as to how we intend to increase profit levels and improve our adjusted operating margin to the mid 30%s.

And we reported a strong Q1 of 2015 with operational revenue growth of 6% and adjusted net income growth of 14%. In August, we put a strong Q2 on the board, year-to-date operational revenue growth of 8% and adjusted net income growth of 17% and we announced that we received a conditional license on the innovative monoclonal antibody for Canine Atopic Dermatitis, which you call IL-31.

Today we post a strong Q3 of 2015, with year-to-date operational growth of revenue of 9% and adjusted net income growth of 22%. And we announced the acquisition of PHARMAQ, providing us with a market-leading presence in aquatic health, the fastest-growing segment of the animal health industry.

That's a heck of a year and we're only through Q3. Our industry has continued to prove its many positive attributes.

And coming up on three years since our IPO, we believe the team here has proven the strength of Zoetis' business model and our capability to deliver to you value. That concludes my prepared remarks, and so let's open the line for questions.

Keith?

Great. Thanks for taking my questions.

How would you characterize the underlying demand trends across the U.S. livestock market?

How should we think about the quarterly progression here given the buying patterns you alluded to in the press release? And if you could comment on poultry dynamics as well.

And then part two of my question would be, as far as the acquisition goes, can you speak to underlying profitability of the business and potential synergies and cost savings associated with the PHARMAQ deal and your capacity for future business development initiatives? Thanks.

Thank you, Erin. And let me answer the first question on the demand in the U.S.

Definitely, there are different drivers depending on the different types of animal proteins, cattle, pork, swine. I would say that the cattle, it's still facing maybe some limited production, although the demand has been reduced slightly.

Because of the limited production, it seems most of the producers are rebuilding their herd and sending less animals to the slaughterhouses. At the same time, in some markets we have seen that the demand for beef has been changing slightly, but we remain very positive in terms of the cattle business in the U.S.

In terms of poultry, the demand continues very strong. And I think we expect also that not a significant impact in terms of the avian flu affecting the meat part of the poultry segment, although this is affecting the egg production.

And in swine, in 2015 we have seen a significant increase in the supply because of the PDV is not affecting and the farmer have been able to increase significantly the number of animals. And this also has been making a pressure in terms of prices.

But for the animal health industry, it has been positive because there are more animals and more animals to be treated and protected. In terms of PHARMAQ, I think really Paul can provide the details on this acquisition.

Sure. And I think your question, Erin, was around how do you think about this business in the go-forward?

And firstly I want to point out a couple of things. Is this is a business that shares a lot of the characteristics of our business.

These are long-duration assets participating in solid growth markets that are supported by a productive R&D engine. It's very similar to our business.

There are cost synergies associated with our acquisition here, however, this is not a cost synergy deal. PHARMAQ have solid operations on the sales and marketing side, as well as in the R&D side and of course in the manufacturing arena.

And so from a cost perspective, this is not like a classic cost synergy deal; this is a transaction that puts us squarely in a space that's going to grow quickly, that comes to us with a well-developed pipeline featuring near-term opportunities to continue the attractive growth that they deliver. And I'll get the start date wrong, but I believe that they've been growing at a compound rate of about, through 2014, of about 17% in that business.

And so thinking about this business, this is more about supplementing our Livestock business, getting us into a space of where we're not presently represented. And we love this deal, we love the value of this deal and we think you will too once it starts to play out over the course of the next couple years.

I think there was a third question there was kind of capacity for more deals to say, look, we've had a great year so far in 2015. When you look at the Abbott transaction as a classic good deal for us that came up a couple of times in our prepared remarks, we're doing better both in terms of driving revenue synergies and cost synergies on that deal.

I wish there were 10 of those out there to be done every year, there just aren't. But when they come up, we would certainly look to pursue additional transactions like that.

Larger more strategic transactions, like a PHARMAQ, there are a handful of opportunities out there. Do we have the capacity to do it?

Well, we haven't even closed this one yet. So we'll get this one closed up and then we'll start or continue the process of looking for what that next opportunity is.

M&A will continue to be an element of our strategy.

But we want to make sure that we remain very disciplined in terms of assessing opportunities for M&A and also we want to make sure that we maintain our ratios in terms of debt, which are a range between 2.5 to 3.5. That is something that we'll be also considering.

One important element that we mentioned many times is that our market share also is creating some limitations in terms of large acquisitions in terms of antitrust. But we'll continue assessing opportunities as they come and always applying a criteria that will support any kind of acquisition.

Okay. Next question, please?

Good morning. Thanks for taking the question.

Juan Ramón, wondering if you could talk about the strength that you saw in some of the developing markets, like Brazil and China. I think we saw 12% operational growth and 24% in China.

And then I guess just going back to the acquisition, Paul, could you talk a little bit about the profitability of PHARMAQ and I guess the justification for the valuation or how you guys think about valuation for deals like this? Thanks.

Thank you, Kevin, for the question. Let me start with China.

China remains a market with a significant growth potential. And we mentioned that several times that the consumption there is increasing very fast because of the increase of middle class, but also very important for our industry, they are changing also the way they are raising animals.

So in the past in China, there was significant part of animals, I'm talking about pigs, that they were small productions or even backyard production. We have seen that it's a significant shift from this kind of production to more sophisticated production and this is what is generating a significant opportunity for animal health industry that can provide the quality of a product that can increase the productivity in these farms.

We have been also investing in China since many years. We have in China the infrastructure to maximize any new products that we are bringing to the market.

We have been launching new products in China, some of them as a result of a JV that we formed a couple of years ago. And we are very pleased with the all the things that are going on in China.

As I said, we don't see that this economic slowdown is affecting the animal health industry. In Brazil, the situation is different.

Brazil remains a very strong market in terms of production of animal proteins for export. Brazil is one of the key markets in terms of export and they also have the benefit now of low cost in the country and also lower prices because of the real has been reducing against the dollar.

So these elements are creating a very good momentum in Brazil. We have seen also Brazil that the cattle industry, it's increasing the herds.

Prices of meat are also very positive. The only comment in Brazil is that we have not seen any reduction in terms of internal consumption; what we have seen is switching from more expensive meat to less expensive.

If the situation remains in the future in terms of economic crisis, we need to assess if their internal consumption will be affected. But so far, we have not seen any kind of reduction of meat consumption in Brazil, so the prospects for this country remain very positive.

Paul will talk about the acquisition.

Yeah, Kevin, thanks for the question. And I think you have to think about the PHARMAQ acquisition as being comprised of two pieces, one is that base business that's been growing very quickly and, by the way, has been supporting solid investment in R&D.

And that leads me to the second piece of the value, which is the pipeline opportunities that come with the company and those are both near term and they're longer term. I said earlier I think in response to Erin's question, you've got to look at this business as being one that's very similar to ours in that it enjoys that long duration, long durability of the revenue streams, and that includes taking into consideration the near-term pipeline opportunities.

If you look at this deal on a near-term basis and say, gee, accretion and it's neutral in the first year and then it's accretive thereafter. This is a deal that goes on and enjoys that long period of sustainable growth of profit and cash flow as added into our business and so that's how we value it.

We value it on a fundamental basis, not necessarily – if you're going to look at it, a sales multiple is not appropriate here.

Let me add a couple of comments on PHARMAQ that, in my opinion, are important. I think first, the farmed fish market is the fastest-growing market in the animal health industry.

PHARMAQ has been delivering very strong growth in the last 10 years. We mentioned that a CAGR of 17%.

And, very important, PHARMAQ is focused on the area that is showing the fastest growth within aquatic health, which is vaccines. And definitely PHARMAQ is the leading company in terms of innovation in vaccines that will be a great opportunity for the future in terms of revenue growth.

So we are extremely happy with this acquisition and we are convinced that this company integrated into Zoetis and having the support of our infrastructure will also maximize the opportunities in the farmed fish.

Next question, please?

Hi. Thanks for taking my questions.

So first question I had here was just on the potential for cost cuts greater than $300 million. And then a second question is just on the PHARMAQ deal again here.

My understanding is that Permira had brought this company for meaningfully less two years ago. I'm just curious your thoughts here on your valuation for the company.

Thanks.

In terms of cost cuts, I think we are on track to deliver what we announced, the $300 million by 2017. And the teams are working very hard.

So we have made significant progress. And as you remember, there were some elements of this program related to SKU rationalization, also the reduction of some of the manufacturing plants and also the reduction or the change in some of the markets in where we were operating direct and we will be now operating through distributor.

But still, this market is representing a small part of our portfolio because 95% of the revenues are still generated through our direct interaction with customers. So the report here is that we are doing very well and we plan to meet or exceed the $300 million.

In terms of PHARMAQ, Paul will cover this question.

Yeah, sure. Permira bought the company back in 2013.

A couple of interesting tidbits. We would've loved to have owned this company back in 2013 and tried to own this company back in 2013 and we were not able to acquire it back in 2013.

And so what has happened since then, and I think you have to take your hat off to the team at PHARMAQ and Permira for backing that team to do what they needed to do to substantially build the value of that company over the last several years. What did they do?

They advanced the pipeline, which for us is a very important factor. And while they were doing that, they continued to deliver growth in their base business and build that company.

So that company is worth a heck of a lot more today than it was in 2013, number one. And number two, I would argue that it is worth more in our hands than it's worth in other people's hands because of our opportunities to drive geographic revenue for this part of our company that is not available to a stand-alone.

Next question, please?

Good morning. Thanks for taking the questions and congrats on the strong quarter.

Paul, sorry to keep going back to this, but I think it's an important question. How profitable is PHARMAQ and what is your expected profitability for this business given increased scale as part of Zoetis?

And also, gross margin was higher than we expected. How much of that was FX as opposed to product mix?

Thank you.

Yeah, with respect to the profitability of PHARMAQ, the business is profitable. It is supporting and has been supporting a substantial investment in R&D and continues to be a profitable business.

Not sure we want to get into providing the entire P&L for PHARMAQ and, say, oh, here's exactly what they're doing. But suffice it to say that we think that the company, as part of Zoetis, fits with our model of long-term revenue growth and driving that over an extended period of time.

And clearly we see a lot of value there. I don't want to provide a P&L for PHARMAQ for 2014.

I don't think it would tell you the whole story. The salient points again, and I'll keep coming back to this, is a base business that is growing very rapidly, a base business that has supported the investment of R&D and helped them develop a pipeline that we see a great deal of value in as we go forward.

With respect to gross margins, one thing you've got to take into consideration, I called it out in my remarks, is that FX has a favorable impact on our reported gross margin. And that was I believe roughly 100 basis points – someone will correct me if I get that wrong, but I believe it was about 100 basis points.

And that turns around if FX rates happen to go in the opposite direction, but, yeah, it's roughly 100 basis points. There are some structural things that we've done in the early stages of our supply network strategy to improve the efficiency of our supply chain and, therefore, improve margins through doing things more efficiently in the supply chain.

And those are permanent and structural and that over time – this is just the early stuff with respect to the supply network strategy. We've articulated in 2020 we expect to have another couple hundred basis points of gross margin from the broader supply network strategy, which really we're just at the early stages of.

Yeah, maybe not to go into the details of the P&L for PHARMAQ, Alex, but maybe some information that can be interesting there for you. First, I think this business, it's mostly a vaccine business.

So we are not talking here about maybe feed additives, but a vaccine business. The second is that this industry is highly consolidated.

So the cost to bring the products to the customers is not as expensive as in Companion Animal. So it's fewer customers and it's also providing operating ability that is related to the cost of commercialization of all the products of PHARMAQ.

So what I want to say is that it's a profitable company and definitely we see the opportunity to make this company even more profitable in the future. Next question, please?

Hi. Thanks very much.

Switching gears to SIMPARICA, are you still comfortable that product gets on the market in the U.S. next year?

And does your guidance assume a 2016 launch? And then maybe a just quick follow-up.

You mentioned France had some tough comparisons, with antibiotic regulations kicking in a year ago. Are there any other regions where you're watching closely for perhaps more restrictive regs around production antibiotics?

Thanks.

So let me start with SIMPARICA, John. We expect the U.S.

launch in SIMPARICA next year. We'll always depend on FDA approval, but we are preparing for this launch in the U.S.

and also the launch in the European market. In terms of France, France we reported that last year there was a change of legislation.

So the change in the legislation was mainly eliminating rebates on sales of antibiotic and then customers bought in anticipation of this new legislation. Definitely we are monitoring any kind of changes in terms of restriction on the use of antibiotics.

There are movements, mainly in Western Europe, and we are tracking all that and this has been incorporated in our guidance for 2015, 2016 and 2017. Still, we consider that today there are no alternatives to treat animals that are sick other than antibiotics.

And in many cases, the only way to achieve the productivity that customers need, we also need to prevent diseases with antibiotics. What we have seen in many markets, including the U.S., mainly a reduction of antibiotics which are medically important for human.

But again, we don't see these changing significantly our revenues in the U.S., mostly because they will be moving to other antibiotics that we also have in our portfolio. Next question, please?

Yes, thanks very much. Congrats on all the news flow.

My question relates to 2017 revenue and your guidance. Could you just remind us for some of the key new product launches, what you're incorporating into your 2017 guidance for those major new product introductions and then also whether you are excluding any new product launches from the 2017 guidance?

Thanks very much.

Yeah. Hi, David.

It's Paul. Thanks for the question.

This is both 2016 and 2017 and following on from the last question, SIMPARICA is included in our 2016 and 2017 guidance. And we're expecting the o-U.S.

launch of SIMPARICA and then anticipating the U.S. launch of SIMPARICA, so that's in both 2016 and 2017.

IL-31 is also in 2016 and 2017, but point out that we're currently operating under a conditional license and expecting to have a full license in the latter part of 2016. So the impact on 2016 is pretty modest.

And then you see it included in our 2017 under a full license, so it's in there as well. And with respect to the question of is there anything – well, just to be super clear.

And of course this now includes PHARMAQ as part of our guidance in 2016 and 2017 as well. We only add in products to our guidance when they achieve a high probability of regulatory and technical success and these are the only new products that we have included in 2016 and 2017.

Next question, please?

Great. Can you guys hear me now?

Yes.

Okay. Sorry about that.

Just had two questions. First, can you just elaborate on the priorities for business development following yesterday's deal?

I guess my question is, just how many more assets like PHARMAQ or Abbott are out there? Is it a large universe, or is that a fairly targeted group of companies or divisions of companies you can target?

And the second question was just on APOQUEL. I appreciate the comments earlier.

But when we think about 2016 growth for APOQUEL, is capacity a rate-limiting factor or is it really just how quickly you can build demand for next year? Thanks so much.

Let me start with the easiest answer, which is APOQUEL. In 2016, we don't expect to have any limitation in terms of capacity and it's just the time for introducing the product in more customers in those markets in where we have already introduced the product and also launching in new markets.

But we don't expect to have capacity issues. We have solved the API, we have a second source of API also in 2016 and now the manufacturing group is working to produce all the tablets that will be available to customers in 2016.

In terms of BD, opportunities like PHARMAQ are unique, so I don't think that we'll find so many opportunities like PHARMAQ in the market. But there may be some assets that can be attractive to us, not many, but it will be maybe in some countries maybe some companies that will be for sale in the future.

But, again, so we need to understand that because of our market share, we're facing some limitations in terms of antitrust that we need to incorporate in our evaluation. But we have been demonstrating that we are understanding the opportunities in the market, Abbott Animal Health, KL, PHARMAQ, and we'll continue assessing these opportunities in the future.

Yeah, I want to continue on, on that because after the press release last night, we started getting a lot of questions about BD strategy and are there other, I'll put air quotes around this, big deals out there. And we want to be clear.

If you'd asked us in June of 2014, say, gee, do you think you can do two right down the middle of the fairway business development deals in 2015? We would have had a fair degree of confidence that we could do that, but, as we all know, whether or not you can actually do those two deals is good material for a debate.

We're very fortunate in that 2015 we've had two very good and two very different type of deals present themselves. One, the classic tuck-in acquisition, where I mentioned before, but it's worth mentioning again, we acquired in the beginning of the year.

We are achieving greater than our targeted level of cost synergies and we're delivering revenue synergies, that's a great deal. I will do that deal 100 out of 100 times.

And then secondarily, PHARMAQ, which for us from a strategic perspective and a value perspective is one of those rare deals that comes around not all that often. If you think about the aquatic health industry, it's roughly a $400 million industry and here's a company that in the very near term you would expect to have a 25% or greater share of that rapidly-growing segment.

And it happens to be a business that we know a lot about. I mean if you think about us on a fundamental level, what do we do?

We are excellent at developing and promoting products to producers of animal protein for human consumption. This is right in the middle of the fairway.

But if you'd asked us a year ago or more than a year ago, gee, are you going to be able to do a deal like that? We would have been hopeful, but the opportunity needs to present itself.

Two important points. One is we will maintain the discipline to focus on business development opportunities where we can leverage our particular competitive strengths to build and drive value for our shareholders.

We think that there are other opportunities for us as we look out into 2016 and to 2017 and we will continue to pursue those opportunities, but I want to be clear, they're more likely to fall in the category of an Abbott-type deal than a PHARMAQ-type deal. That said, there's always opportunity.

I'll stop there. Next question, please?

Thank you. It's actually Vlad Nikolenko on behalf of Mark Schoenebaum.

Congratulations for the great quarter and smart acquisition of PHARMAQ yesterday. Actually a question more about the macro situation about what else is going on in biotech.

There have been a lot of chatter and noise in present from political front about potential regulation of drug prices in the human health. And Zoetis looks like being a victim of overall selloff in biotech.

So I just want to hear your perspective on animal front (1:01:30) of potential regulation or even just headline from political noise from human health on animal health and Zoetis' ability to continue increasing prices on something like 2% or 3% per year. And second question is more about long-term guidance, specifically tax rate.

So whether revised guidance, additional decrease in the long-term tax rate of 100 basis points to 200 basis points, if it's sustainable or if there is additional limit to decrease tax rate even further? Thank you.

Thank you, Vlad. I'll start with the first question on macro environment and then Paul will answer the tax rate.

So the first thing, we are not a human health company. And we try from the reading to explain how different is animal health to human health.

And the most important difference is that our business is a business-to-business model. We are not dealing with a third-party payer, so our prices are defined by just the pure market dynamics.

So we sell what our customers that are also paying are willing to pay for based on the value that we can demonstrate to them. So regulating prices in an industry which is just a market-driven industry will not make any sense, but it's something that we don't see happening.

And in terms of what is the macro environment, we describe that our industry is very resilient to economic dynamics. We saw that in 2008 and 2009.

We also saw that in 2012 at the time of the drought that our industry responded extremely well. So one of the characteristics of animal health are stability and sustainability and we think that it is one of the attributes that make our industry very attractive to investors.

I think on the tax rate question, I'll restate one of my phrases around our tax rate is, we have the opportunity to continue to lower our tax rate, but, as I said before, it's going to be evolutionary not revolutionary. We through the process of our efficiency initiative, which we kicked off in May, have taken steps to both define and simplify our global operating model.

And that's had some benefits to us in terms of our global effective tax rate and that's a tax rate on our adjusted net income, by the way, and adjusted pre-tax either way (1:04:32). And we expect that we can continue to do that, but, again, I don't want to provide anybody with the unrealistic hope that we can suddenly dramatically change our tax rate.

But I think that you can see in the progression of 2015, in our guidance for 2016 and 2017 that we are continuing to take those steps that we can take in order to try to drive that tax rate down. But, again, evolutionary, not revolutionary.

Next question, please?

Thank you. Just a couple of follow-up questions.

Most of my questions have been answered. Paul, you said in your remarks that you're surprised your stock price is so low.

What is your capacity for embarking on a very large share buyback program? I would think you'd want to put your money where your mouth is and if you think the stock is so cheap, why aren't you guys announcing a big buyback program?

And then secondly, Juan Ramón, I'm sorry if I missed this, I was in and out of the call, but you talked about making an aqua health acquisition for the past couple of years. What other areas, where are there holes in your overall business areas or business segments, where do you feel – is it geographical that you'd like to fill in or is it actually product-related?

What are the other businesses that you would like to be beef-up in? You were very clear about aqua health for the past couple of years.

So what other businesses are you seeking to add to your portfolio? Thanks very much.

Sure. Jami, thanks for the questions.

And I'll start with the share buyback. And here's a thing.

We have a share buyback program; I know it's modest. And we continue to buy back shares and have been buying them back since the beginning of the year.

And this is a balance between allocating capital to those activities that we think will build the most value over the long term. And for this year it's, again, I think so far a remarkable year.

Beginning of the year we allocated capital to the acquisition of the Abbott Animal Health assets. Great place to put our money.

Secondarily here, hopefully on or about November 10 we'll close on the PHARMAQ acquisition. These represent deployment of capital ways that we'll continue to build value for our shareholders over the long term.

While we're doing that, we continue to buy back shares. To the extent that we find ourselves in an environment where we have lots of cash flow and nowhere to deploy it in a way that we felt was value generative, yeah, we could increase the scale of our share buyback.

But right now, going out and levering up the company to buy back a bunch of shares is not something that we're going to do.

Jami, thank you for the question. And let me describe where we're at now.

So definitely before the acquisition of PHARMAQ, the only area that was significant for animal health and where we were not participating was aquaculture or this aquatic health. Now, with the acquisition of PHARMAQ, we have filled this gap.

So now we are number one in cattle, we are number two in companion animal. But I think we have been taking all the actions to have a stronger position in this category with a launch of APOQUEL, the acquisition of Abbott Animal Health and also our internal efforts in terms of R&D, to bring new parasiticide that was an area where we were underrepresented.

We are convinced that we have all what we need to compete in this space. We are number one in swine and we are number three in poultry.

And definitely in poultry we see opportunities if they come to consider some acquisitions of products or other assets. We incorporated a small acquisition in poultry this year, mainly on devices.

And we are also working internally to develop the portfolio and the pipeline that will bring us to a stronger position. In terms of geographies, we have a very strong position in all the of the markets.

And very important, in those markets where we don't have yet the position that we should have is not because we don't have the portfolio, it's only a question of registering the portfolio and bringing this portfolio to the market. So I see in terms of geographies more opportunistic than need.

And then moving to what will be other opportunities, definitely any area that will be complementary to our core business, which are medicines, that can enhance these core business and create additional revenues and profits will be part of our assessment. Next question, please?

Hi. Good morning and thanks for taking the questions.

Just maybe clarify on APOQUEL. So will you be at a state without any supply constraints by the end of this year, or will that sort of take place in phases over next year?

And just in terms of the second source of API, is that going to be a back-up source or is that going to be a source that is going to be regularly contributing towards production? Thank you very much.

Thank you, Doug. And in terms of APOQUEL supply, we expect to have a supply for meeting the demands of customers in the U.S.

and UK markets at the end of the year. Then we'll continue introducing the product in other markets.

And we don't think that supply will be an issue to deliver all customer demand in 2016. The second API source, it will be not just of a back-up, it will be a contributor.

And we have the opportunity to double the capacity of the existing capacity that we have. And this is also something that will protect future revenues of future demand for the product.

So we are very confident that the API will be enough to produce all the finished product that will be demanded by the customers in 2016.

So thank you very much for attending this call. And, again, we are very pleased to have the results of this third quarter.

But more important, my opinion, it's how confident are we in terms of our future, in terms of revenues and in terms also of adjusted EPS. We are very confident that we'll be delivering very strong results despite of the negative impact of exchange rate.

That has been compensated with the introduction of new products and also the performance of the rest of the portfolio. So with that, thank you very much for attending this call.