"current plan is you can merge two pets of the same family and pick the breed. Doing this gives chance at epic."
Blizzcon attendee gloriaboboria Tweeted some interesting tid-bits about pet battles in the next expansion. Most of this is unconfirmed, unofficial news from a chat with Mumper (developer, Cory Stockton):
"Breeding pets is coming, will be a building in the new garrisons. Doing this is how you will get epic pets." - gloriaboboriaAgain, none of this has been officially announced yet (save for Pet Stables in player garrisons), so we'll have to wait for additional confirmation and details. But it is interesting to hear the plans that devs have for the future of pet battles. I'll be eagerly waiting for more information on the Pet Stables!
"It will also allow you to get better breeds. No increase to pet level cap so ccurrent pet battles stay relevant contet. (Good idea imo)" - gloriaboboria
"The idea of gemming pet stats is scrapped, breeding replaces it." - gloriaboboria