Filed pursuant to Rule 424(b)(4)
Registration No. 333-183254
Prospectus
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 initial public offering price is $26.00 per share of Class A common stock.
In connection with this offering, we will have two classes of authorized common stock: Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class
B common stock will be identical, except with respect to voting and conversion rights. The holders of Class A common stock and Class B common stock will each be entitled to one vote per share for all matters submitted to a vote of stockholders
other than with respect to the election of directors. With respect to the election of directors, the holders of Class B common stock will be entitled to ten votes per share, and the holders of Class A common stock will be entitled to one vote
per share. Each share of Class B common stock held by Pfizer or one of its subsidiaries will be convertible into one share of Class A common stock at any time but will not be convertible if held by any other holder.
Investing in our Class A common stock involves a high degree of risk. See
Risk factors
beginning on
page 16.
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Per share
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Total
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Initial public offering price
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$
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26.00
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$
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2,238,600,000
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Underwriting discounts and commissions
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$
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0.962
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$
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82,828,200
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Proceeds to the debt-for-equity exchange parties, before expenses
(1)
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$
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25.038
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$
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2,155,771,800
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(1)
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We and Pfizer have agreed to reimburse the underwriters for certain FINRA-related expenses. See Underwriting.
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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 February 6, 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.
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J.P. Morgan
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BofA Merrill Lynch
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Morgan Stanley
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Barclays
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Citigroup
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Credit Suisse
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Deutsche Bank Securities
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Goldman, Sachs & Co.
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Guggenheim Securities
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Jefferies
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BNP PARIBAS
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HSBC
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Loop Capital Markets
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RBC Capital Markets
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The Williams Capital Group, L.P.
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UBS Investment Bank
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Lebenthal Capital Markets
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Piper Jaffray
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Ramirez & Co., Inc.
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January 31, 2013
Table of contents
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.
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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 transactionsThe Separation; and (b) references to Pfizer refer to Pfizer Inc., a Delaware corporation, and its
subsidiaries other than Zoetis and Zoetiss subsidiaries. Accordingly, unless the context requires otherwise, statements relating to our history in this prospectus describe the history of Pfizers 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 industrys 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.
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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 Managements 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 industrys 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
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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 Managements discussion and analysis of financial condition and results of operationsAnalysis 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 Managements discussion and analysis of financial
condition and results of operationsAdjusted 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
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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:
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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.
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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.
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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
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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.
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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.
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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.
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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:
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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.
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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.
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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.
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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.
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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:
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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.
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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.
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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.
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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.
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Leader in product developmentnew 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.
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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.
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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
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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.
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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.
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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:
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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.
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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.
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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.
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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 Pfizers 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.
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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
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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.
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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.
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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 transactionsRelationship with Pfizer. We refer to the separation transactions, as
described in The Separation and Distribution transactionsThe 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.
The indebtedness of Pfizer
held by the debt-for-equity exchange parties has an aggregate principal amount of at least $2.5 billion. 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 that may be sold pursuant to the underwriters option to purchase additional shares. Upon
7
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 UnderwritingThe 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 indebtednessSenior 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 indebtednessCredit 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
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 Pfizers 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:
|
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emerging restrictions and bans on the use of antibacterials in food-producing animals;
|
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|
perceived adverse effects on human health linked to the consumption of food derived from animals that utilize our products;
|
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increased regulation or decreased governmental support relating to the raising, processing or consumption of food-producing animals;
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|
an outbreak of infectious disease carried by animals;
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adverse weather conditions and the availability of natural resources;
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|
adverse global economic conditions;
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|
failure of our R&D, acquisition and licensing efforts to generate new products;
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|
|
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;
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operation as a standalone public company without many of the resources previously available to us as a business unit of Pfizer;
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|
control of a majority of the voting power of our common stock by Pfizer and, as a result, Pfizers ability to determine the outcome of our future
corporate actions, including the election of our directors; and
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|
actual or potential conflicts of interest as a result of the fact that several of our directors will simultaneously serve as employees of Pfizer.
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9
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 UnderwritingConflicts 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
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)
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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)
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|
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.
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11
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.
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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 UnderwritingConflicts of interest.
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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:
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assume the underwriters option to purchase additional shares will not be exercised; and
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|
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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 or shortly following this offering:
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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 1,700 of our employees, including each of our named executive officers. These equity grants at the time of this offering will be comprised of an aggregate of 795,310 restricted stock units and
options to purchase an aggregate of 2,935,302 shares of Class A common stock, with an exercise price equal to the initial public offering price per share. See ManagementCompensation discussion and analysisProposed Zoetis 2013
equity and incentive plan; and
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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. Each of the three non-employee director grantees will receive 5,384 deferred units. See ManagementCompensation discussion and analysisDirector compensation.
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Unless otherwise indicated, the information presented in this prospectus gives effect to the transactions described under
The Separation and Distribution transactionsThe Separation.
12
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, Pfizers global external supply
group and Pfizers 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 Managements
discussion and analysis of financial condition and results of operations and our combined financial statements and notes thereto included elsewhere in this prospectus.
13
Statement of operations data:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
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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 acquisitionrelated 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 sharebasic(c)
|
|
$
|
0.81
|
|
|
$
|
0.38
|
|
|
|
NA
|
|
|
|
NA
|
|
|
|
NA
|
|
|
|
NA
|
|
|
|
NA
|
|
Earnings per common sharefully 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 Pfizers 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 Pfizers 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 Pfizers subsidiaries holding substantially all of the assets and liabilities of Pfizers 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.
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14
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 Managements discussion and
analysis of financial condition and results of operationsAdjusted 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
Managements discussion and analysis of financial condition and results of operationsAdjusted 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
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
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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.
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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
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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
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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 Pfizers 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 Pfizers 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 Pfizers 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.
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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 managements 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 managements 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.
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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:
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the failure of us or any of our vendors or suppliers to comply with applicable regulations and quality assurance guidelines;
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equipment malfunctions;
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shortages of materials;
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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
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the outbreak of any highly contagious diseases near our production sites.
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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 products 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.
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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 managements 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
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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 BusinessEnvironmental, 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.
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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:
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volatility in the international financial markets;
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compliance with governmental controls;
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difficulties enforcing contractual and intellectual property rights;
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compliance with a wide variety of laws and regulations, such as the Foreign Corrupt Practices Act and similar non-U.S. laws and regulations;
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compliance with foreign labor laws;
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burdens to comply with multiple and potentially conflicting foreign laws and regulations, including those relating to environmental, health and safety
requirements;
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changes in laws, regulations, government controls or enforcement practices with respect to our business and the businesses of our customers;
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political and social instability, including crime, civil disturbance, terrorist activities and armed conflicts;
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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;
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changes in tax laws and tariffs;
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costs and difficulties in staffing, managing and monitoring international operations; and
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longer payment cycles and increased exposure to counterparty risk.
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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
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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-partys 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:
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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
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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.
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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 countrys 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.
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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.
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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 PCIs 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
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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:
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making it more difficult for us to satisfy our obligations with respect to our debt;
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limiting our ability to obtain additional financing to fund future working capital, capital expenditures, business development or other general
corporate requirements, including dividends;
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increasing our vulnerability to general adverse economic and industry conditions;
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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;
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limiting our flexibility in planning for and reacting to changes in the animal health industry;
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placing us at a competitive disadvantage to other, less leveraged competitors;
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impacting our effective tax rate; and
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increasing our cost of borrowing.
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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.
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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:
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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;
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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 Pfizers other businesses;
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creating an independent equity structure that will facilitate our ability to effect future acquisitions utilizing our common stock; and
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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.
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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.
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Pfizers 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:
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any determination with respect to our business direction and policies, including the appointment and removal of officers and directors;
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any determinations with respect to mergers, business combinations or disposition of assets;
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our financing and dividend policy;
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compensation and benefit programs and other human resources policy decisions;
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termination of, changes to or determinations under our agreements with Pfizer relating to the Separation;
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changes to any other agreements that may adversely affect us;
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the payment of dividends on our common stock; and
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determinations with respect to our tax returns.
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Because Pfizers 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 Pfizers 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 Pfizers 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 Pfizers 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
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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
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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:
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the requirement that a majority of the board of directors consist of independent directors;
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the requirement that our corporate governance committee be composed entirely of independent directors with a written charter addressing the
committees purpose and responsibilities;
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the requirement that our compensation committee be composed entirely of independent directors with a written charter addressing the committees
purpose and responsibilities; and
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the requirement for an annual performance evaluation of our corporate governance and compensation committees.
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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 Pfizers 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 Pfizers 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 Pfizers scale, capital base and financial strength may also prompt suppliers
to reprice, modify or terminate their relationships with us. In addition, Pfizers 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.
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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.
DAmelio (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 individuals 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:
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engaging in the same or similar business activities or lines of business as we do;
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|
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 transactionsRelationship with
PfizerTax matters agreement.
35
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 Pfizers 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 Pfizers 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 Pfizers 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 Pfizers 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 Pfizers 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 arms 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
arms 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 Pfizers 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
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 Pfizers 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 Pfizers compound library and database for a period of seven years and will have, subject to Pfizers
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 Pfizers 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 Pfizers 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
transactionsRelationship with PfizerResearch 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.
Pfizers 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
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 Pfizers 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 transactionsRelationship with PfizerIntellectual 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;
|
|
|
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
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 pro forma net tangible book value of your shares. As a result, you will incur immediate dilution of $27.60 per share, representing the difference between the
initial public offering price of $26.00 per share 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
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:
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a board of directors that is divided into three classes with staggered terms;
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a dual class equity structure;
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|
rules regarding how our stockholders may present proposals or nominate directors for election at stockholder meetings;
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|
|
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
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 Pfizers 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
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, Pfizers 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 managements 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
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 SummaryThe underwriting and the debt-for-equity
exchange, UnderwritingThe debt-for-equity exchange and UnderwritingConflicts of interest.
43
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
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. Pro forma net tangible book deficit per share represents:
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total pro forma assets less intangible assets;
|
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|
reduced by our total pro forma liabilities; and
|
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|
divided by the number of shares of our common stock outstanding.
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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 immediately prior to this offering. This represents an immediate dilution of $27.60 per share to investors purchasing shares of our Class A
common stock in this offering. The following table illustrates this dilution per share:
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|
|
|
|
|
|
|
Initial public offering price per share
|
|
|
|
|
|
$
|
26.00
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|
Pro forma net tangible book deficit per share as of September 30, 2012 after giving effect to the Transactions
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|
$
|
(1.60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to new investors in this offering
|
|
|
|
|
|
$
|
27.60
|
|
|
|
|
|
|
|
|
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45
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, Managements discussion and analysis of financial condition and results of operations and our combined financial statements and notes thereto included
elsewhere in this prospectus.
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|
|
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|
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|
|
|
|
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.
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(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.
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46
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, Pfizers global external supply group and Pfizers 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
You should read the selected historical combined financial data set forth below in conjunction with the
sections entitled Managements 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 Pfizers acquisition of King Pharmaceuticals, Inc., commencing on the acquisition date of
January 31, 2011. Starting in 2009, includes FDAH operations, acquired as part of Pfizers 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 Pfizers 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 Managements discussion and
analysis of financial condition and results of operationsAdjusted 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
Managements discussion and analysis of financial condition and results of operationsAdjusted 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
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
Managements 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 managements 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:
|
|
|
Pfizers 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
transactionsRelationship 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 Pfizers 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
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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)/deductionsnet
|
|
|
(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 sharebasic
|
|
|
N/A
|
|
|
|
|
|
|
|
(d
|
)
|
|
$
|
0.81
|
|
Earnings per common sharefully 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 8
C
.
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
ZOETIS INC.
(T
HE
A
NIMAL
H
EALTH
B
USINESS
U
NIT
OF
P
FIZER
I
NC
.)
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 deductionsnet
|
|
|
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 sharebasic
|
|
|
N/A
|
|
|
|
|
|
|
|
(d
|
)
|
|
$
|
0.38
|
|
|
|
Earnings per common sharefully 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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
N
OTES
TO
U
NAUDITED
P
RO
F
ORMA
C
ONDENSED
C
OMBINED
F
INANCIAL
S
TATEMENTS
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 Pfizers 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
(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
(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 Pfizers 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
(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 Pfizers subsidiaries holding substantially all of the assets and liabilities of Pfizers 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
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 Pfizers
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
transactionsRelationship with PfizerBrazil lease agreements were entered into.
|
|
|
In October 2012, the master manufacturing and supply agreements described in Certain relationships and related party
transactionsRelationship with PfizerMaster 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 transactionsRelationship 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 Pfizers 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 Pfizers
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
|
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 transactionsRelationship 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
Pfizers 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
Managements discussion and analysis of
financial condition and results of operations
Introduction
Our managements 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:
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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.
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Factors affecting our performance
. This section, beginning on page 61, provides information regarding certain factors that may affect our
financial performance.
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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.
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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.
|
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Analysis of the combined statements of operations
. This section, beginning on page 67, consists of the following for all periods presented:
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Revenues.
This section, beginning on page 68, provides an analysis of our revenues in total, by operating segment and by sector.
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Costs and expenses
. This section, beginning on page 74, provides a discussion about the drivers of our costs and expenses.
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Provision for taxes on income.
This section, beginning on page 79, provides a discussion of items impacting our effective tax rates.
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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.
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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.
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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.
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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.
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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.
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New accounting standards
. This section, beginning on page 91, discusses accounting standards that we have recently adopted.
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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.
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60
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Contingencies.
This section, beginning on page 94, discusses contingencies related to legal and tax matters.
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Qualitative and quantitative disclosures about market risk.
This section, beginning on page 95, discusses financial risk management,
specifically with respect to foreign currency risk.
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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 industrys
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
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:
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human population growth and increasing standards of living, particularly in many emerging markets;
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consequently increasing demand for improved nutrition, particularly animal protein;
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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
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increased focus on food safety.
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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:
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economic development and related increases in disposable income, particularly in many emerging markets;
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increasing pet ownership; and
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companion animals living longer, increasing medical treatment of companion animals and advances in companion animal medicines and vaccines.
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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
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
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 Pfizers 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:
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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;
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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;
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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;
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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;
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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
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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.
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For additional discussion of our growth strategies, see
BusinessOur 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
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 BusinessOur 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)/deductions
net
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
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 transactionsRelationship 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
ManagementCompensation 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.
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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
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66
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the cattle and swine businesses. See Notes to Combined Financial Statements
Note 4A. Acquisitions, Divestitures and Certain Investments: Acquisition of King Animal Health
.
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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
.
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Our combined financial statements for the year ended December 31, 2011 reflect eleven months of
KAHs U.S. operations and ten months of KAHs international operations and for the nine months ended October 2, 2011 our unaudited condensed combined financial statements reflect eight months of KAHs U.S. operations and seven
months of KAHs international operations. Our combined financial statements for the year ended December 31, 2009 reflect approximately two-and-a-half months of FDAHs U.S. operations and approximately one-and-a-half months of
FDAHs 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
.
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Nine Months
Ended
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%
Change
|
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Year Ended
December 31,
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%
Change
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(MILLIONS OF DOLLARS)
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|
September
30,
2012
(a)
|
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|
October
2,
2011
(a)
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12/11
|
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2011
(a)
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2010
(a)
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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)/deductionsnet
(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
*
|
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)/DeductionsNet.
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)/DeductionsNet.
|
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
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
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
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
|
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
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
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
|
|
the non-recurrence of a $12 million inventory write-off in 2011 related to suspended sales of 3-Nitro;
|
|
|
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
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
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
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
Pfizers 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)/deductionsnet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)/deductionsnet
|
|
$
|
(14)
|
|
|
$
|
16
|
|
|
|
*
|
|
|
$
|
84
|
|
|
($
|
93
|
)
|
|
$
|
23
|
|
|
|
*
|
|
|
|
*
|
|
Certain
amounts may reflect rounding adjustments.
*
|
Calculation not meaningful.
|
78
Nine months ended September 30, 2012 vs. nine months ended October 2, 2011
The change in other (income)/deductionsnet 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)/DeductionsNet
.
|
2011 vs. 2010
The change in other (income)/deductionsnet 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)/DeductionsNet
.
|
2010 vs. 2009
The change in other (income)/deductionsnet 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)/DeductionsNet
.
|
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
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
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
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 employeesa 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
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 adjustmentsnet of tax
|
|
|
26
|
|
|
|
46
|
|
|
|
55
|
|
|
|
103
|
|
|
|
27
|
|
Acquisition-related costsnet of tax
|
|
|
23
|
|
|
|
57
|
|
|
|
78
|
|
|
|
145
|
|
|
|
168
|
|
Certain significant itemsnet 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
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 adjustmentsnet 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 depreciationasset 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 costsnet of tax
|
|
|
23
|
|
|
|
57
|
|
|
|
78
|
|
|
|
145
|
|
|
|
168
|
|
|
|
Certain significant items
(
e
)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
(f
)
|
|
|
32
|
|
|
|
24
|
|
|
|
40
|
|
|
|
2
|
|
|
|
93
|
|
Implementation costs and additional depreciationasset
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 itemsnet of tax
|
|
|
(13
|
)
|
|
|
42
|
|
|
|
125
|
|
|
|
(83
|
)
|
|
|
94
|
|
|
|
Total purchase accounting adjustments, acquisition-related costs, and certain significant itemsnet 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 sale
s; $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)/deductionsnet;
$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
|
$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)/deductionsnet
; $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)/deductionsnet
. For the nine months ended September 30, 2012 and October 2, 2011, see Notes to Unaudited Condensed
Combined Financial Statements
Note 4. Other (Income)/DeductionsNet.
For the years ended December 31, 2011, 2010 and 2009, see Notes to Combined Financial Statements
Note 6. Other (Income)/DeductionsNet.
|
(i)
|
Included in
Other (income)/deductionsnet
. See Notes to Combined Financial Statements
Note 6. Other (Income)/DeductionsNet
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)/DeductionsNet
. 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 jurisdictions 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
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)/DeductionsNet
.
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
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
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
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 Pfizers 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 indebtednessCredit
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
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
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 reviewslong-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)/DeductionsNet
and Unaudited
Condensed Combined Financial Statements
Note 4. Other (Income)/DeductionsNet
.
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
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
reviewslong-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:
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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.
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a projection or forecast that demonstrates losses or reduced profits associated with an asset. This could result, for example, from the introduction of
a competitors 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.
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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 goodwillimpairment 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)/deductionsnet
:
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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.
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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.
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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 Pfizers 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.
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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.
Goodwillimpairment 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.
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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
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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 Pfizers 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.
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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.
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2011 revenues for top animal health businesses, in millions
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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:
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human population growth and increasing standards of living, particularly in many emerging markets;
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consequently increasing demand for improved nutrition, particularly animal protein;
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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
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increased focus on food safety.
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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
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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 formszoonotic 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.
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Factors influencing growth in demand for companion animal medicines and vaccines include:
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economic development and related increases in disposable income, particularly in many emerging markets;
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increasing pet ownership; and
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companion animals living longer, increasing medical treatment of companion animals and advances in companion animal medicines and vaccines.
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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:
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animal health generally has faster, less expensive and more predictable R&D processes as well as more sustainable R&D pipelines;
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animal health businesses often have more diversified product portfolios;
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animal health sales representatives have better access to customer decision makers and generally spend more time with a customer on a sales visit;
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animal health primarily has a self-pay nature; and
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animal health products have less generic competition and higher brand loyalty.
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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.
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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.
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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 businesss
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:
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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.
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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.
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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.
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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.
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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.
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Regulatory differences
. Regulatory standards differ across markets and impact the ability to introduce, market, manufacture and distribute
certain types of animal health products.
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We believe these regional differences are reflected in differing growth rates of
sales of animal health medicines and vaccines in various markets.
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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 industrys 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 Managements discussion and analysis of financial condition and results of
operationsAnalysis 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
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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 Managements discussion and analysis of financial condition and results of operationsAdjusted 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.
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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.
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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:
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economic differences, such as standards of living in developed markets as compared to emerging markets;
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cultural differences, such as dietary preferences for different animal proteins, pet ownership preferences and petcare standards;
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epidemiological differences, such as the prevalence of certain bacterial and viral strains and disease dynamics;
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treatment differences, such as utilization of different types of medicines and vaccines, in particular high technology products;
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environmental differences, such as seasonality, climate and the availability of arable land and fresh water; and
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regulatory differences, such as standards for product approval and manufacturing.
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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:
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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.
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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.
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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.
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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.
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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 Managements 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
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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:
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Year
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Event(s)
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1952
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Pfizer established the Agricultural Division to promote Terramycin
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1988
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Agricultural Division renamed Pfizer Animal Health
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1995
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Pfizer acquired SmithKline Beecham Animal Health, expanding our business into vaccines and companion animal markets
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1997
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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
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2003
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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
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2004
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Launched Draxxin, a premium anti-infective for livestock delivering a full course of therapy in one dose
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2006
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Launched Convenia, the first antibiotic for skin infections in dogs and cats that provides an entire course of therapy in one injection
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2007
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Pfizer acquired Embrex, Inc., expanding our business into poultry devices and vaccines
Launched Cerenia, the first antiemetic therapy developed specifically for
dogs
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2008
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Pfizer acquired Catapult Pty Ltd. and Bovigen LLC, expanding our business into animal genetics
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2009
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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
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2010
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Pfizer acquired Microtek International, Inc., expanding our business into aquaculture vaccines
Pfizer acquired Synbiotics Corporation, strengthening our position in veterinary
diagnostics
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2011
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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
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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.
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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 developmentnew 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.
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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 Managements
discussion and analysis of financial condition and results of operationsAnalysis 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
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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 Pfizers 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
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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 Pfizers 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.
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Our major product categories are:
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vaccines: biological preparations that prevent diseases of the respiratory, gastrointestinal and reproductive tracts or induce a specific immune
response;
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parasiticides: products that prevent or eliminate external and internal parasites such as fleas, ticks and worms;
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anti-infectives: products that prevent, kill or slow the growth of bacteria, fungi or protozoa;
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medicinal feed additives: products that provide medicines, nutrients and probiotics to livestock; and
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other pharmaceutical: complementary products, such as pain and sedation, oncology and antiemetic products.
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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:
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Draxxin, a novel antibiotic for livestock that delivers a full course of therapy in one dose, launched in 2003;
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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;
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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;
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Convenia, the first single-injection anti-infective for common bacterial skin infections in cats and dogs, launched in 2006; and
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Palladia, the first drug to be approved by the FDA for treating cancer in dogs, launched in 2009.
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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.
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Our product lines and products that represented approximately 1% or more of our revenues in 2011 include:
Livestock products
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Product line / product
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Description
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Primary species
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Vaccines
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Bovishield line
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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
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Cattle
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Improvac / Improvest
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Vaccination to reduce boar taint, as an alternative to surgical castration
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Swine
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RespiSure line
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Aid in preventing chronic pneumonia caused by
Mycoplasma hyopneumoniae
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Swine
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Rispoval line
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Aid in preventing three key viruses involved in cattle pneumoniaBRSV, PI3 and BVDas well as other respiratory diseases, depending on formulation
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Cattle
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Parasiticides
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Cydectin
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Injectable or pour-on endectocide to treat and control internal and external cattle parasites, including gastrointestinal roundworms, lungworms, cattle grubs, mites and
lice
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Cattle, sheep
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Dectomax
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Injectable or pour-on endectocide, characterized by extended duration of activity, for the treatment and control of internal and external parasite infections
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Cattle, swine
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Anti-infectives
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Aureomycin
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Provides livestock producers treatment and convenience against a wide range of respiratory, enteric and reproductive diseases
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Cattle, poultry, sheep, swine
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BMD
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Aid in preventing and controlling enteritis, thereby increasing rate of weight gain and improving feed efficiency
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Cattle, poultry, swine
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Ceftiofur line
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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
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Cattle, horses, sheep, swine
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Draxxin
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Single-dose low-volume antibiotic for the treatment and prevention of bovine and swine respiratory disease, infectious bovine kerato conjunctivitis and bovine foot rot
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Cattle, swine
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Lincomycin line
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|
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
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|
Swine, poultry
|
Spectramast
|
|
Aid in preventing and treating mastitis, delivered via intramammary administration. Same active ingredient as the ceftiofur line
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|
Cattle
|
Terramycin
|
|
Antibiotic for the treatment of susceptible infections
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|
Cattle, poultry, sheep, swine
|
Other
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|
|
|
|
Eazi-Breed CIDR
|
|
Progesterone-releasing device for the control of the estrus cycle
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|
Cattle, sheep
|
Embrex devices
|
|
Devices for enhancing hatchery operations efficiency through
in ovo
detection and vaccination
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|
Poultry
|
Lutalyse
|
|
For estrus control or in the induction of parturition or abortion
|
|
Cattle, swine
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Companion animal products
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|
|
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Product line / product
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|
Description
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|
Primary species
|
Vaccines
|
|
|
|
|
|
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|
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
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|
Dogs
|
|
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|
Parasiticides
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|
|
|
|
|
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|
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.
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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 Pfizers 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
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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 transactionsRelationship with PfizerGlobal 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:
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|
|
|
|
|
|
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 transactionsRelationship with PfizerBrazil lease agreements.
|
**
|
This site is operated by the Jilin Pfizer Guoyuan joint venture.
|
***
|
Prior to the Separation, Pfizers 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
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 transactionsRelationship with PfizerMaster 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:
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|
|
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 transactionsRelationship with PfizerBrazil lease agreements.
|
**
|
Prior to the Separation, Pfizers 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.
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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 producers total production costs and ineffective medicines and vaccines could result in the loss of animals, causing disproportionate harm to such producers 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;
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|
|
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.
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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 Pfizers 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 Pfizers 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
Pfizers 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 Pfizers compound library and database for a period of seven years and will have,
subject to Pfizers approval, the possibility to exclusively license compounds from Pfizer that we develop under the R&D collaboration and license agreement using portions of Pfizers 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,
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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 Agencys 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 CVMs 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 USDAs 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 EPAs 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. MAPAs 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
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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 APVMAs 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.
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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 transactionsRelationship with PfizerMaster 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)
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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 managements attention and may materially adversely affect our reputation, even if resolved in our favor.
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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.
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Name
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Age
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Position
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Juan Ramón Alaix
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61
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Chief Executive Officer, Director
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Richard A. Passov
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54
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Executive Vice President and Chief Financial Officer
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Sandra J. Beaty
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55
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Executive Vice President of Corporate Affairs
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Alejandro Bernal
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40
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Executive Vice President and Area President of the Europe, Africa and Middle East region
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Heidi C. Chen
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46
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Executive Vice President, General Counsel and Corporate Secretary
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Catherine A. Knupp
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52
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Executive Vice President and President of Research and Development
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Roxanne Lagano
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48
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Executive Vice President and Chief Human Resources Officer
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Joyce J. Lee
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40
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Executive Vice President and Area President of the Canada and Latin America region
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Clinton A. Lewis, Jr.
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46
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Executive Vice President and President of U.S. Operations
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Kristin C. Peck
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41
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Executive Vice President and Group President
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Stefan Weiskopf
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53
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Executive Vice President and Area President of the Asia Pacific region
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Frank A. DAmelio
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55
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Chairman and Director
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Geno J. Germano
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52
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Director
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Douglas E. Giordano
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50
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Director
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Charles H. Hill
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56
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Director
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Amy W. Schulman
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52
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Director
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Michael B. McCallister
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60
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Director Nominee
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Gregory Norden
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55
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Director Nominee
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William C. Steere, Jr.
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76
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Director Nominee
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Set forth below is information concerning our directors and executive officers as of the date of this prospectus.
Juan Ram
ó
n Alaix
has served as our Chief Executive Officer and director since July 2012 and as President of
Pfizers animal health business unit since 2006. Mr. Alaix joined Pfizer in 2003 and held various positions, including Regional President of Central/Southern Europe for Pfizers 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. Alaixs 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.
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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 Pfizers 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 Pfizers 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 Pfizers animal health business unit since 2009. Ms. Chen joined Pfizer in 1998 and held various legal
and compliance positions, including lead counsel for Pfizers 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 Pfizers Veterinary Medicine Research and Development since September 2005. Dr. Knupp joined Pfizer in July 2001 and held
various positions, including Vice President of Pfizers 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 Pfizers 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 Pfizers 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 Pfizers 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 Pfizers 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 Pfizers 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.
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Frank A. DAmelio
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. DAmelio joined Pfizer in September 2007 and held various positions, including Senior Vice President and Chief Financial Officer. From November 2006
to August 2007, Mr. DAmelio held the position of Senior Executive Vice President of Integration and Chief Administrative Officer at Alcatel-Lucent, S.A. Mr. DAmelio currently serves on the board of directors of Humana Inc. and is Chair
of the Humana Inc. Audit Committee. Mr. DAmelio also currently serves as a member of the National Advisory Board of JPMorgan Chase & Co.
Mr. DAmelios 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 Pfizers acquisition of Wyeth in October 2009.
Mr.
Germanos 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. Giordanos 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 Pfizers 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. Hills 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).
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Ms. Schulmans 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. McCallisters 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 Wyeths 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. Nordens 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. Steeres 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.
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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:
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the requirement that a majority of the board of directors consist of independent directors;
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the requirement that our corporate governance committee be composed entirely of independent directors with a written charter addressing the
committees purpose and responsibilities;
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the requirement that our compensation committee be composed entirely of independent directors with a written charter addressing the committees
purpose and responsibilities; and
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the requirement for an annual performance evaluation of our corporate governance and compensation committees.
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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. DAmelio 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
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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. DAmelio, 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 Pfizers
senior management in accordance with the philosophy adopted by the Compensation Committee of Pfizers Board of
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Directors, but was not specifically determined or reviewed by the Compensation Committee of Pfizers Board of Directors. As a member of Pfizers Executive Leadership Team,
Ms. Pecks cash compensation was reviewed and determined by Pfizers Compensation Committee, with the advice of the Committees independent consultant.
Philosophy, goals and principles of Pfizers executive compensation program
Pfizers executive compensation philosophy, which is set by the Compensation Committee of Pfizers Board of Directors, is to align each
executives compensation with Pfizers 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 Pfizers long-term success. A
significant portion of the total compensation opportunity for each of Pfizers executives (including our NEOs) is directly related to Pfizers stock price performance and to other performance factors that measure progress against the goals
of Pfizers strategic and operating plans, as well as Pfizers 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:
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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;
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aligning annual short-term incentive awards with annual operating and financial objectives; and
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rewarding absolute and relative performance in total shareholder return through long-term equity incentive awards.
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Pfizers 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. Pfizers Compensation Committee reviews these peer groups on an annual basis.
Pfizers 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. Pfizers Compensation Committee recognizes that while data is available on the performance of Pfizers 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.
Pfizers
2012 pharmaceutical peer group
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Abbott Laboratories
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Johnson & Johnson
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Amgen
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Merck
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AstraZeneca
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Novartis
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Bristol-Myers Squibb
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Roche
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Eli Lilly
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Sanofi-Aventis
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GlaxoSmithKline
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The general industry comparator group for 2012 was selected by Pfizers Compensation Committee from other industry
sectors based on the same criteria as described above.
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Pfizers 2012 general industry comparator group
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Alcoa
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Honeywell
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Altria Group
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IBM
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Boeing
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Lockheed Martin
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Caterpillar
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PepsiCo
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Chevron
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Procter & Gamble
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Coca-Cola
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TimeWarner
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Comcast
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United Parcel Service
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Dell
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United Technologies
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Dow Chemical
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UnitedHealth Group
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DuPont
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Verizon
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FedEx
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Walt Disney
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General Electric
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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 Pfizers 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 Pfizers 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 Pfizers 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 Pfizers compensation consultant
. Since 2003, Pfizers Compensation Committee has engaged the firm
of Frederic W. Cook & Co., represented by George Paulin, its Chief Executive Officer, as the Committees independent compensation consultant. Below are some of the consultants primary responsibilities:
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advise Pfizers Compensation Committee on management proposals, as requested;
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attend Pfizers Compensation Committee meetings;
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review Pfizers compensation philosophy, peer group and competitive positioning and advise Pfizers Compensation Committee on their
reasonableness and appropriateness;
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review Pfizers executive compensation program and advise Pfizers Compensation Committee of plans or practices that might be changed to
improve effectiveness;
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review the selected peer group and survey data for competitive comparisons;
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oversee and review survey data on executive pay practices and amounts that come before Pfizers Compensation Committee;
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provide market data and recommendations on Chief Executive Officer compensation without prior review by management (except for necessary
fact-checking); and
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proactively advise Pfizers Compensation Committee on best-practice approaches for governance of executive compensation as well as areas of
concern and risk in Pfizers program.
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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 executives position, the executives experience and the competitive marketplace. The competitive marketplace has been determined with the use of survey data, as described under Role of Pfizers
compensation consultant. Future base salary adjustments for our NEOs are expected to take into account changes in the executives responsibilities, the executives performance and changes in the competitive marketplace.
Annual incentive plan
. For 2012, eligible employees, including our NEOs, participate in Pfizers annual incentive programthe
Global Performance Plan, or GPP. The GPP utilizes a funded pool based on Pfizers 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.
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Financial objective
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Revenues
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Adj. diluted EPS
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Cash flow
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2012 Threshold
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$
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54.5 billion
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$
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1.97
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$
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15.5 billion
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2012 Target
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$
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59.0 billion
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$
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2.17
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$
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19.0 billion
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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:
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the financial performance of Pfizer (measured by revenues, adjusted diluted earnings per share and cash flow, as described above);
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the financial performance of their respective business unit/function measured by annual budgets for revenues and income before adjustments;
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the achievement of selected strategic and operational goals for their respective business unit/function; and
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an assessment by Pfizers Chief Executive Officer of each executives individual performance.
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The 2012 annual incentives for Mr. Alaix will be recommended by the appropriate member of Pfizers 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
Pfizers Chief Executive Officer. Pfizers 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. Alaixs 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
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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. Passovs 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. Pecks 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 Pfizers 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 Pfizers key
stakeholders; and (v) supporting initiatives to reduce costs and ensure efficiency in Pfizers commercial operating model.
As head
of Veterinary Medicine Research and Development of the Pfizer Animal Health business, Dr. Knupps 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 Pfizers 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:
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align the interests of our executives with Pfizers stockholders;
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focus our executives efforts on improving Pfizers total shareholder return, both on an absolute and relative basis; and
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promote retention through the use of multi-year vesting schedules.
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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
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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 Pfizers 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-holders 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 Pfizers
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
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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
. Pfizers 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 executives 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 executives base salary, plus two times the executives 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:
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Agilent Technologies Inc.
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Life Technologies Corp.
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Allergan Inc.
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Mead Johnson Nutrition
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Biogen Idec Inc.
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Monsanto Co.
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Covance Inc.
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Mylan Inc.
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Endo Health Solutions Inc.
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Watson Pharmaceuticals Inc.
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Forest Laboratories Inc.
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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:
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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.
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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 recipients 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 recipients continued employment, the attainment of performance goals, or both.
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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.
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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.
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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
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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 participants 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 1,700 of our employees, including each of our NEOs, at the time of this offering or shortly following
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 employees 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 approximately 1,700 of our 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.
The 2013 equity grants at the time of this
offering will be comprised of an aggregate of 795,310 restricted stock units and options to purchase an aggregate of 2,935,302 shares of Class A common stock, with an exercise price equal to the initial public offering price per share.
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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 $1 million paid in any fiscal year to the CEO and four other most highly compensated executive officers, other than the CFO, as of the end of any fiscal year. None of the compensation paid to our NEOs in 2012 was subject to the limitations on
deductibility under Section 162(m), because our NEOs were not among the executives of Pfizer who were subject to Section 162(m).
We
generally intend to structure our equity-based and cash-based incentive awards to meet the exception under Section 162(m) for performance-based compensation, taking advantage of transitional rules under Section 162(m) that will
apply to Zoetis, such that these amounts are fully deductible for tax purposes. RSUs do not qualify as performance-based compensation. Consequently, certain of our NEOs may be required to defer the receipt of RSUs. However, to maintain
flexibility in compensating our executives, we do not have a policy requiring compensation to be deductible.
Compensation tables
Unless otherwise stated, the compensation tables included in this section reflect amounts paid or payable or awards granted to our
NEOs by Pfizer under Pfizers compensation plans and programs. Following the completion of this offering, the NEOs will receive compensation and benefits under our compensation programs and plans.
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2012 summary compensation table
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Name and principal position
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Year
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Salary
($)
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Bonus
($)
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Stock
awards(2)
($)
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Option
awards(3)
($)
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Non-equity
incentive
plan
compensation(4)
($)
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Change in
pension
value
and
non-
qualified
deferred
compensation
earnings(5)
($)
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All other
compensation(6)
($)
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Total
($)
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Juan Ramón Alaix Chief Executive Officer
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2012
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613,533
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438,013
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441,787
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544,675
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49,559
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2,087,567
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2011
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566,075
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412,106
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368,983
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400,000
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687,446
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57,658
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2,492,268
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Richard A. Passov Executive Vice President and Chief Financial Officer
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2012
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|
|
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 Pfizers 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 Pfizers 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 Pfizers 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 Pfizers 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$25,375. These plans are discussed in more detail in the 2012 non-qualified deferred compensation table.
|
140
The following 2012 grants of plan-based awards table provides additional information about
non-equity incentive awards and long-term incentive awards granted to our NEOs by Pfizer during the year ended December 31, 2012. The long-term incentive awards were made under the 2004 Stock Plan, as amended and restated, and are described in
2012 long-term equity incentives.
2012 grants of plan-based awards table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated future
payouts
under non-equity incentive
plan awards
|
|
|
Estimated future
payouts
under equity incentive plan
awards
|
|
|
|
|
|
|
|
|
|
|
Name (A)
|
|
Grant
date (B)
|
|
|
Threshold
($) (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. Pfizers 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 $4.88, as of February 23, 2012.
|
(3)
|
The amounts represent the threshold, target and maximum non-equity incentive plan awards under the GPP for 2012.
|
(4)
|
The amounts represent the threshold, target, and maximum share payouts under the Pfizer Performance Share Award Program for the January 1, 2012December 31,
2014 performance period. The payment for threshold performance is 0% of target.
|
141
The following table summarizes the equity awards Pfizer made to our NEOs that were outstanding as of
December 31, 2012.
2012 outstanding equity awards at fiscal year-end table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option/SAR Awards (2)
|
|
|
Stock Awards(3)
|
|
Name (a)
|
|
Grant Date/
Perf Share
Period
(1)
|
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
(b)
|
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
(c)
|
|
Number of
Securities
Underlying
Unexercised
SARs
(#) Vested
(d)
|
|
|
Number of
Securities
Underlying
Unexercised
SARs (#)
Unvested (e)
|
|
|
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#) (f)
|
|
Option
Exercise
Price
($) (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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
(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 Pfizers 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. Alaixs election.
|
144
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 Pfizers 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 employees 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 employees 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
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. Knupps
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 employees 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 participants 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
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 Pfizers 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: Pfizers Non-Funded Deferred Compensation and Supplemental Savings Plan, or the PSSP; Pfizers 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 executives 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
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 executives 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
Pursuant to tax law limitations, effective for 2012, the Pfizer Savings Plan limits the
additions that can be made to a participating employees 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 employees 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, Pfizers 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 Pfizers 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 years 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 Pfizers closing stock price of $25.08
on December 31, 2012.
|
149
(4)
|
These amounts represent severance equal to 2 times the NEOs 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 Pfizers 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 Pfizers 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 executives pension and deferred compensation are also payable in accordance
with the plans and the executives 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 Pfizers plans.
Payments made upon change in control.
Under the
2004 Stock Plan, if a participants 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
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 Pfizers 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. Each non-employee director will receive 5,384 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
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 UnderwritingThe 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 UnderwritingDirected share program.
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Common stock beneficially owned
prior
to the completion of this offering
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Common stock beneficially
owned
following the completion of this offering
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Class A
common
stock
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Class B
common
stock
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Class A
common
stock
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Class B
common
stock
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Name of beneficial owner
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Number
of shares
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Percentage
of class
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Number
of shares
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Percentage
of class
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Number
of shares
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Percentage
of class
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Number
of shares
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Percentage
of class
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5% Beneficial Owner:
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Pfizer Inc.
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86,100,000
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100%
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413,900,000
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100%
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0%
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413,900,000
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100%
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Directors and Executive Officers:
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Juan Ramón Alaix
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Richard A. Passov
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Catherine A. Knupp
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Clinton A. Lewis, Jr.
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Kristin C. Peck
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Frank A. DAmelio
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Geno J. Germano
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Douglas E. Giordano
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Charles H. Hill
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Amy W. Schulman
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Michael B. McCallister
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Gregory Norden
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William C. Steere, Jr.
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Directors and executive officers as a group (19 persons)
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152
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 factorsRisks 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 Pfizers animal health business and we have assumed all of Pfizers 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:
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warranty obligations created as part of the animal health business;
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product liability claims with respect to any animal health product;
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environmental liabilities relating to the animal health business and environmental liabilities at the real property that we acquired from Pfizer;
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liabilities related to animal health businesses or operations that were discontinued or divested by Pfizer;
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litigation liabilities; and
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our debt obligations, including under the senior notes offering.
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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
(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 Pfizers 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 Pfizers 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:
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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;
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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;
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restrictions on incurring any debt obligations without Pfizers 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
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restrictions on issuance of our capital stock without Pfizers 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.
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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 Pfizers ownership of our outstanding common stock.
154
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 Pfizers 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 Pfizers 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 Pfizers 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 Pfizers 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:
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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.
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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.
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Pfizer will be responsible for certain specified foreign taxes directly resulting from certain aspects of the Separation.
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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 partys 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
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 indebtednessSenior 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:
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issuance or sale of stock or other securities (including securities convertible into our stock but excluding certain compensatory arrangements);
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sales of assets outside the ordinary course of business; and
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entering into any other corporate transaction which would cause us to undergo a 40% or greater change in our stock ownership.
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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
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 Pfizers 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 partys 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
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 partys 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 Pfizers 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 Pfizers, 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:
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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;
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the allocation of assets and liabilities generally relating to employees, employment or service-related matters and employee benefit plans; and
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other human resources, employment and employee benefits matters.
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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
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
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Separation, see BusinessManufacturing 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 Pfizers 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 partys 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 Pfizers 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 Pfizers 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.
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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 Pfizers 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 partys 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 partys 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 Pfizers 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.
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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 Pfizers 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, Pfizers 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 partys 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 Pfizers 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 Pfizers human health business.
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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:
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such shares have been sold pursuant to an effective registration statement under the Securities Act;
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such shares have been sold to the public pursuant to Rule 144 under the Securities Act;
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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
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such shares have been sold in a transaction in which the transferee is not entitled to the benefits of the registration rights agreement.
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Brazil lease agreements
In September 2012, Pfizers 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.
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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 Laboratórioss 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.
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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.
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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 transactionsRelationship with PfizerTax 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 Moodys Investors Service, Inc. and Standard & Poors 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
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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.
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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.
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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:
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terms of redemption and liquidation preferences; and
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the number of shares constituting each series.
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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.
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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. DAmelio 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 directors 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:
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the chairman of the board, or
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by the chairman of the board or by our corporate secretary at the request in writing of a majority of the board of directors.
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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 stockholders 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
90
th
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 stockholders 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:
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the name and address of that stockholder and any beneficial owner, if any, and of any holder of record of the stockholders shares as they appear
on our books;
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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 stockholders 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;
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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;
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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 stockholders 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;
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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;
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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
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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.
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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
stockholders 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 stockholders notice must set forth:
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the name, age, business and residence address, and the principal occupation and employment of the person;
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the class and number of shares of each class of our capital stock which are owned beneficially or of record by the person;
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a statement whether such nominee, if elected, intends to tender, promptly following such persons 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;
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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
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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.
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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:
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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;
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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
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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.
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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 corporations 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 corporations 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
Pfizers 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
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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:
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engaging in the same or similar business activities or lines of business as us;
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doing business with any of our customers; or
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employing or otherwise engaging any of our officers or employees.
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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:
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will have fully satisfied his or her fiduciary duties to us and our stockholders with respect to that corporate opportunity;
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will not be liable to us or our stockholders for breach of fiduciary duty by reason of Pfizers actions with respect to that corporate
opportunity;
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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
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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:
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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;
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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
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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.
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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
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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 corporations 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:
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will have fully satisfied and fulfilled its fiduciary duties to us and our stockholders with respect to the contract, agreement, arrangement or
transaction;
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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;
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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
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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:
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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;
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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
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the contract, agreement, arrangement or transaction, judged according to the circumstances at the time of the commitment, is fair to us.
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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 directors 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
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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.
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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,
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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:
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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
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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.
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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 transactionsRelationship with PfizerRegistration rights
agreement.
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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:
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an individual citizen or resident of the United States;
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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;
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an estate the income of which is subject to United States federal income taxation regardless of its source; or
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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.
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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
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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:
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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);
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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
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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. holders 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. holders holding period) more than 5% of Class A common stock.
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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. holders 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.
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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 holders 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. holders 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 entitys 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.
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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:
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Name
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Number of shares
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J.P. Morgan Securities LLC
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23,314,245
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Merrill Lynch, Pierce, Fenner &
Smith
Incorporated
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18,793,219
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Morgan Stanley & Co. LLC
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18,793,219
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Barclays Capital Inc.
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2,737,291
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Citigroup Global Markets Inc.
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2,737,291
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Credit Suisse Securities (USA) LLC
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2,737,291
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Deutsche Bank Securities Inc.
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2,737,291
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Goldman, Sachs & Co.
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2,737,291
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Guggenheim Securities, LLC
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2,737,291
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Jefferies & Company, Inc.
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2,737,291
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BNP Paribas Securities Corp.
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805,121
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HSBC Securities (USA) Inc.
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805,121
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Loop Capital Markets LLC
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805,121
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RBC Capital Markets, LLC
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805,121
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The Williams Capital Group, L.P.
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805,121
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UBS Securities LLC
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805,121
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Lebenthal & Co., LLC
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402,518
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Piper Jaffray & Co.
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402,518
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Samuel A. Ramirez & Company, Inc.
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402,518
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Total
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86,100,000
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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 $0.5616 per share. 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,
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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 $0.962 per share. The
following table shows the per share and total underwriting discounts and commissions assuming both no exercise and full exercise of the underwriters option to purchase additional shares.
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Per share
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Total
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Without
option
exercise
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With full
option
exercise
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Without
option
exercise
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With full
option
exercise
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Underwriting discounts and commissions paid by the debt-for-equity exchange parties(1)
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$
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0.962
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$
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0.962
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$
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82,828,200
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$
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95,252,430
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(1)
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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.
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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.
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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
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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:
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the information set forth in this prospectus and otherwise available to the representatives;
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our prospects and the history and prospects for the industry in which we compete;
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an assessment of our management;
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our prospects for future earnings;
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the general condition of the securities markets at the time of this offering;
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the recent market prices of, and demand for, publicly traded common stock of generally comparable companies; and
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other factors deemed relevant by the underwriters and us.
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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 Pfizers
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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.
The debt-for-equity exchange parties hold indebtedness of Pfizer having an aggregate principal
amount of at least $2.5 billion. 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 Pfizers 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
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
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
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
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 SECs 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 sites Internet address is www.sec.gov.
190
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
I
NDEX
TO
F
INANCIAL
S
TATEMENTS
|
|
|
|
|
|
|
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
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 Companys 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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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)/deductionsnet
|
|
|
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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
|
|
|
|
4
|
|
Dividends declared and paid
|
|
|
(101
|
)
|
|
|
|
|
|
|
(101
|
)
|
|
|
|
|
|
|
(101)
|
|
Net transfersPfizer
(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 transfersPfizer
|
|
|
(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 transfersPfizer
(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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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
|
|
|
|
6
|
|
|
|
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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 Kings 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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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, Pfizers global external supply group and Pfizers 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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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 expensesApproximately $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 costsApproximately $34 million in 2011, $42 million in 2010 and $37 million in 2009 (in
Cost of sales).
|
|
|
|
Restructuring charges and certain acquisition-related costsApproximately $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 initiativesAdditional depreciation associated with asset restructuringApproximately
$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 initiativesImplementation costsApproximately $14 million in 2009 ($8 million in
Cost of sales
and $6 million in
Selling, general and administrative expenses
).
|
|
|
|
Share-based compensation expenseApproximately $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 costsApproximately $2 million in 2011, $1 million in 2010 and $23 million in 2009 (in
Restructuring charges and certain
acquisition-related costs
).
|
|
|
|
Compensation-related expensesApproximately $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 expenseApproximately $36 million in 2011, $37 million in 2010 and $26 million in 2009 (in
Other (income)/deductionsnet)
.
|
F-10
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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 Pfizers 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 Pfizers centralized hedging and offsetting programs. As such, in the combined
statements of operations, we include the impact of Pfizers 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
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.)
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:
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Income approach, which is based on the present value of a future stream of net cash flows.
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Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or
liabilities.
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Cost approach, which is based on the cost to acquire or construct comparable assets less an allowance for functional and/or economic obsolescence.
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These fair value methodologies depend on the following types of inputs:
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Quoted prices for identical assets or liabilities in active markets (Level 1 inputs).
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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).
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Unobservable inputs that reflect estimates and assumptions (Level 3 inputs).
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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
.
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.)
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)/deductionsnet.
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)/deductionsnet
, 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.
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.)
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:
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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.
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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.
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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.
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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.
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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:
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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.
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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.
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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.
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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.
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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
Pfizers 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.
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ZOETIS INC.
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NC
.)
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 Pfizers 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 Pfizers 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).
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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 $345 million relates to KAH.
Recording of Assets Acquired and
Liabilities Assumed
The assets acquired and liabilities assumed from King for KAH follow:
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(
MILLIONS
OF
DOLLARS
)
|
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Amounts recognized
as of the acquisition date
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Working capital deficit, excluding inventories
(a)
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$(11)
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Inventories
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104
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|
Property, plant and equipment
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94
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Identifiable intangible assets
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130
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Net tax accounts
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(10)
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All other noncurrent assets and liabilities, net
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(7)
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Total identifiable net assets
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300
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Goodwill
(b)
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45
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|
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Net assets acquired/total consideration transferred
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$345
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(a)
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Includes accounts receivable, other current assets, accounts payable and other current liabilities.
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(b)
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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.
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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:
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the expected synergies and other benefits that we believe will result from combining the operations of KAH with the operations of Zoetis;
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any intangible assets that do not qualify for separate recognition, as well as future, as yet unidentified projects and products; and
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the value of the going-concern element of KAHs 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).
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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 $2.3 billion relates to FDAH. In connection with the regulatory approval process, we were
required to divest certain animal health assets (see
Note 4D. Acquisitions, Divestitures and Certain Investments: Divestitures)
.
Recording of Assets Acquired and Liabilities Assumed
The assets acquired and liabilities assumed from Wyeth for FDAH follow:
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(
MILLIONS
OF
DOLLARS
)
|
|
Amounts recognized
as of the acquisition date
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|
Working capital, excluding inventories
(a)
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$ 191
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|
Inventories
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344
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|
Assets held for sale
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652
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|
Property, plant and equipment
|
|
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394
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|
Identifiable intangible assets (including $25 million of IPR&D assets)
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444
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|
Net tax accounts
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(424)
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|
All other noncurrent assets and liabilities, net
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(14)
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Total identifiable net assets
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1,587
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|
Goodwill
(b)
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|
|
738
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|
|
|
Net assets acquired
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2,325
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|
Less: Amounts attributable to noncontrolling interests
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4
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|
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Total consideration transferred
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|
|
$ 2,321
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(a)
|
Includes cash and cash equivalents, accounts receivable, other current assets, accounts payable and other current liabilities.
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(b)
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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.
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ZOETIS INC.
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.)
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.
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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).
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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 managements best estimate of probable losses and approximated $14 million as of the acquisition date.
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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 FDAHs 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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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)/deductionsnet
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)/deductionsnet
, related to the inventory included in the transaction.
|
F-21
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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)/deductionsnet
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)/deductionsnet
($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)/deductionsnet
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 Jilins 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 Pfizers
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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 restructuringdirect
(d)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
Additional depreciation associated with asset restructuringallocated
(d)
|
|
|
20
|
|
|
|
17
|
|
|
|
43
|
|
Implementation costsdirect
(e)
|
|
|
3
|
|
|
|
|
|
|
|
9
|
|
Implementation costsallocated
(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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
NOTES TO COMBINED FINANCIAL STATEMENTS
The direct restructuring charges are associated with the following:
|
|
|
2011 DirectU.S. ($2 million), EuAfME ($33 million), CLAR ($2 million), APAC ($2 million income) and manufacturing/research/corporate ($19
million).
|
|
|
|
2010 DirectU.S. ($14 million income), EuAfME ($24 million), CLAR ($4 million), APAC ($10 million) and manufacturing/research/corporate ($31
million).
|
|
|
|
2009 DirectU.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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
NOTES TO COMBINED FINANCIAL STATEMENTS
6. Other (Income)/DeductionsNet
The components of
Other (income)/deductionsnet
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
|
|
|
|
|
|
|
|
5
|
|
Other, net
|
|
|
5
|
|
|
|
4
|
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income)/deductionsnet
|
|
$
|
84
|
|
|
$
|
(93
|
)
|
|
$
|
23
|
|
|
|
(a)
|
The interest expense on allocated long-term debt reflects an allocation of Pfizers 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 Pfizers 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 Pfizers 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 entitys 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. 2010The 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. 2009The 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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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:
|
|
|
2011A 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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
NOTES TO COMBINED FINANCIAL STATEMENTS
|
|
|
2010A 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
|
|
|
|
2010The 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.
|
|
|
|
2009We 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 othernet
|
|
|
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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. 2010The 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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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
|
|
|
|
4
|
|
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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, Kings 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. Kings 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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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
|
|
|
4
|
|
|
|
5
|
|
|
|
9
|
|
|
|
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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 Pfizers 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 Zoetiss 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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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
|
|
|
|
4
|
|
|
|
5
|
|
|
|
5
|
|
|
|
29
|
|
Other
(c)
|
|
|
(4)
|
|
|
|
(2)
|
|
|
|
(1)
|
|
|
|
(1)
|
|
|
|
(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
476
|
|
|
|
148
|
|
|
|
155
|
|
|
|
155
|
|
|
|
934
|
|
Additions
(d)
|
|
|
28
|
|
|
|
9
|
|
|
|
9
|
|
|
|
9
|
|
|
|
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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)/DeductionsNet).
|
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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)/DeductionsNet.
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
Pfizers pension plans. An employees 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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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 CostsDedicated
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 AssumptionsDedicated Plans
The following table provides the weighted-average actuarial assumptions for the dedicated pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(P
ERCENTAGES
)
|
|
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 Zoetiss dedicated pension
plan assets are associated with Zoetiss 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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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 StatusDedicated 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
|
)
|
Othernet
|
|
|
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
|
)
|
Othernet
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, ending
|
|
|
33
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
Funded statusProjected 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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
NOTES TO COMBINED FINANCIAL STATEMENTS
Plan Assets
Dedicated 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 fundsquoted 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
|
|
(P
ERCENTAGES
)
|
|
|
|
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 insurers investment strategy, which takes into account historical experience, as well as the impact of portfolio diversification, active portfolio management, and the insurers 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 insurers 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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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 FlowsDedicated 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 Pfizers 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 Pfizers 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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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 Pfizers 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
|
|
|
$
|
7
|
|
RSU expense
|
|
|
10
|
|
|
|
8
|
|
|
|
8
|
|
TSRU/PSA expense
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expensedirect
|
|
|
19
|
|
|
|
16
|
|
|
|
15
|
|
Share-based compensation expenseallocated
|
|
|
6
|
|
|
|
6
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expensetotal
|
|
|
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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
(T
HOUSANDS
)
|
|
|
Weighted-average
Exercise Price
Per
Share
|
|
|
Weighted-average
Remaining
Contractual Term
(Y
EARS
)
|
|
|
Aggregate
Intrinsic
Value
(
a
)
(M
ILLIONS
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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
|
|
|
|
(T
HOUSANDS
)
|
|
|
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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 readers 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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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 Pfizers 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 attorneys 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 FDSALs 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 Municipalitys 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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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)/DeductionsNet,
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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 KAHs U.S. operations and approximately
ten months of KAHs international operations.
|
(b)
|
In accordance with our domestic and international year-ends, 2009 includes approximately two-and-a-half months of FDAHs U.S. operations and
approximately one-and-a-half months of FDAHs 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 KAHs U.S. operations and approximately
ten months of KAHs international operations.
|
(b)
|
In accordance with our domestic and international year-ends, 2009 includes approximately two-and-a-half months of FDAHs U.S. operations and
approximately one-and-a-half months of FDAHs international operations.
|
F-49
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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, Zoetiss cash disbursements were funded through Pfizers 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
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 Companys 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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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)/deductionsnet
|
|
|
(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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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 transfersPfizer
|
|
|
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 transfersPfizer
|
|
|
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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 Kings 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, Pfizers global external supply group and Pfizers 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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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 expensesApproximately $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 costsApproximately $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 costsApproximately $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 initiativesAdditional depreciation associated with asset
restructuringApproximately $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 initiativesImplementation costsApproximately $4 million in the nine months ended
September 30, 2012 (in
Selling, general and administrative expenses
).
|
|
|
|
Share-based compensation expenseApproximately $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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
|
$14 million and $13 million in
Selling, general and administrative expense
s; and $3 million and $3 million in
Research and development expenses
).
|
|
|
|
Transaction costsApproximately $1 million in the nine months ended October 2, 2011 (in
Restructuring charges and certain
acquisition-related costs
).
|
|
|
|
Compensation-related expensesApproximately $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 expenseApproximately $23 million in the nine months ended September 30, 2012 and $27 million in the nine months ended October 2,
2011 (in
Other (income)/deductionsnet).
|
The income tax provision in the combined statements of operations has
been calculated as if Zoetis filed a separate tax return.
We participate in Pfizers 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 Pfizers centralized hedging and offsetting programs. As such, in
the condensed combined statements of operations, we include the impact of Pfizers 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 Pfizers 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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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 restructuringdirect
(d)
|
|
|
10
|
|
|
|
6
|
|
Additional depreciation associated with asset
restructuringallocated
(d)
|
|
|
10
|
|
|
|
12
|
|
Implementation costsallocated
(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, 2012U.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, 2011U.S. ($2 million), EuAfME ($21 million), CLAR ($1 million), and
manufacturing/research/corporate ($16 million).
|
F-60
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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)/DeductionsNet
The components of
Other (income)/deductionsnet
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)/deductionsnet
|
|
$
|
(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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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)
|
|
|
|
2
|
|
|
|
(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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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/DeductionsNet
), 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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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 readers 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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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 Pfizers 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 attorneys 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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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 FDSALs 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 Municipalitys 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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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
|
)
|
|
|
6
|
|
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
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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 KAHs U.S. operations and approximately
seven months of KAHs international operations.
|
F-69
ZOETIS INC.
(
THE
ANIMAL
HEALTH
BUSINESS
UNIT
OF
P
FIZER
I
NC
.)
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 KAHs U.S. operations and approximately
seven months of KAHs 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
86,100,000 shares
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.
January 31, 2013
Until February 25, 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.
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