Boston University School of Management New England Investment Research Challenge February 10th

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6 Δεκ 2012 (πριν από 4 χρόνια και 11 μήνες)

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Boston University School of
Management

New England Investment Research Challenge

February 10
th
, 2009


Presented by

Joshua
Enzer

Jeff Li

Mukesh

Jagota

Ashan

Walpita


Investment Recommendation
-

BUY

Demand for
Outsourcing

Disease specific
expertise

6% Revenue CAGR

Price

Target

Upside

$25.01

$34.15

37%

High Profit Margin

Significantly
Undervalued

Significant Investor value

0%
5%
10%
15%
20%
25%
30%
35%
40%
$
-
$2,000
$4,000
$6,000
$8,000
$10,000
2000
2001
2002
2003
2004
2005
2006
2007
in millions
Growth in R&D Spending by 8 Largest Biotech Companies
R&D
YOY Growth
15
65
2/4/2008
5/4/2008
8/4/2008
11/4/2008
CF yield = 9%

Discovery

Preclinical

Phase I

Phase II
-
IV

Introduction

CRL provides research tools and support
services

to drug developers

Primary Customers:


Pharmaceuticals


Biotechnology


Not
-
for
-
profit research

How Does Charles River Make Money

Research Models and Services Business (RMS)

Leader

in Sales of Research Animals

Cash Cow

48%

of Revenue

Specialties:


Outbred Models


Immunodeficient Models


Disease Specific Models

Discovery

Preclinical

Preclinical Services Business (PCS)

Contract

Research Organization (
CRO
)

Growth Business

52% of Revenue

Specialties:


Toxicology


Oncology


Biologicals

Preclinical

Phase I

Industry
Growth

Market
expansion

Search for
Efficiency
(CRO)

Late stage
pipeline
focus

Product
focus

What’s going on

Product

Focus

Oncology

Custom

drugs

Biologicals

Expansion into
China

22% of Total R&D
on early stage

18% of Total R&D
on early stage

0%
5%
10%
15%
20%
25%
30%
2000
2007
Outsouring

Outsouring
Product
focus

RMS/
CRO
Offerings

Market
expansion

Geo
graphic
reach

FDA approved

facility in
Shanghai

Search for
Efficiency
(CRO)

CRO +
expertise

0
200
400
600
800
2002
2003
2004
2005
2006
2007
PCS rev

PCS rev
Late stage
pipeline
focus

Short
-
term
over
capacity

25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
2008
2010
2012
RMS
PCS
Margin
Compression

CRL’s
Value

0
20
40
60
80
100
120
2/4/2008
4/4/2008
6/4/2008
8/4/2008
10/4/2008
12/4/2008
S&P 500
CRL
Recent Events


November 5: CRL announced Q3 Earnings,
shares plunge on guidance


This Generates Revenue Opportunity

Methodology


Total therapeutics R&D
growth rate

Proportion dedicated to
pre
-
clinical research

Penetration of
preclinical
outsourcing

CRL
market
share

CRL
PCS
revenue

Total therapeutics R&D
growth rate

Total research model
market

CRL market
share

CRL

RMS
revenue

Pre
-
clinical services business

Research Models Business

Total therapeutics R&D
growth rate

Proportion dedicated to
pre
-
clinical research

Penetration of
preclinical
outsourcing

CRL
market
share

CRL
PCS
revenue

Total therapeutics R&D
growth rate

Total research model
market

CRL market
share

CRL

RMS
revenue

Revenue Breakdown

Methodology

Pre
-
clinical services business

Research Models Business

Revenue Projections

PCS


Revenue
Growth
D
river

In Billions

Margins and Leverage

Margin Compression


RMS 5
-
7% Compression


PCS 7
-
10% Compression

Low Financial Leverage


Large Cash Reserve


Little Long
-
term Debt


Maybe change this to
credit capacity


Low Capex going forward

25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
2008
2009
2010
2011
2012
2013
Margin Compression

RMS
PCS
Valuation

Techniques

Methodologies

Target Price

$34.15

DCF

$49.33

Perpetuity
Growth

EBITDA
Multiple

Multiples
$18.97

Operating
Profit

Net
Earnings

Key Assumptions

Discount

Rate (
WACC
)

9.5%

Terminal Value

Growth Rate

2.5%

Terminal Value Multiple

12.0x

5 year rev
growth

Risks & Sensitivity


Short
-
term over
capacity


06
-
08 Rapid expansion




Key Risks

Sensitivity

$34.15

$30

0bp

200bp Change

Margin
compression

Dollar
Appreciation

WACC


Biotech bankruptcies


20% of CRL’s business




FX risk


50% of operations
overseas





$31

$28

$32

$33

$25

$26

$27

Scenario

SELL

Investment Recommendation
-

BUY

Strong long
-
term
industry growth

Significant expertise

Stable financial
position

Growth in top
-
line

High Profit Margin

Significantly
Undervalued

Significant Investor value

Price

Target

Upside

$25.01

$34.15

37%

Questions

?

BUY

Price

Target

Upside

$25.01

$34.15

37%

Industry
Growth

Market
expansion

Search for
Efficiency
(CRO)

Late stage
pipeline
focus

Product
focus

What’s going on

Product

Focus

Oncology

Custom

drugs

Biologicals

Expansion into
China

22% of Total R&D
on early stage

18% of Total R&D
on early stage

0%
5%
10%
15%
20%
25%
30%
2000
2007
Outsouring

Outsouring
CRL’s
Value

Geo
graphic
reach

CRO +
expertise

Short
-
term
over
capacity

CRO /
RMS
Offerings

0
200
400
600
800
2002
2003
2004
2005
2006
2007
PCS rev

PCS rev
CRL’s

Positioning

FDA approved

facility in
Shanghai

25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
2008
2010
2012
RMS
PCS
Margin
Compression

Implied Valuation is Unreasonable

Implied Valuation

Assumptions

Pre
-
Guidance

Post
-
Guidance

Price

$33.90

$26.87

Total

therapeutics
R&D growth

0.98%

-
1.96%

%

Outsourced

30%

30%

Gross

margin

33.12%

31.38%

EBITDA Margin

23.51%

21.76%

WACC

10.21%

9.83%

Target

Valuation

$34.15

2.8%

35%

34.6%

25.2%

9.51%

Appendices



Charles River Laboratories



Revenue Model



Valuation



Industry & Competitive Positioning



Investment Risks


Charles River Laboratories


Earnings Estimates


Projected Income Statement


Income Statement Assumptions


Projected Balance Sheet


Balance Sheet Assumptions


Revenue Model


Segment Breakdown


Geographical Reach


CRL Customers


Revenue Model


Revenue Model: Summary


Projected Therapeutics R&D


Regression Model


Preclinical Spending Projections


Outsourcing Penetration


Market Share 6 YR Projections

Valuation


Discounted Cash Flow Model


TV: Perpetuity Growth Method


TV: EBITDA Multiple Method


WACC


Comparable Company Analysis


Historical P/E


CRL Market Profile

Industry and Competitive
Positioning


Sector Breakdown


Industry Trends


RMS Market Revenue Breakdown


PCS Market Revenue Breakdown


Competitive Positioning


Industry Trends


Outsourcing


Specialist
-
Driven Products


Emerging Markets


Investment Risks


Sensitivities


Biotech Funding


Refocus on Late
-
Stage Drug Development

Segment Breakdown

2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
R
e
s
e
a
r
c
h

M
o
d
e
l
s

a
n
d

S
e
r
v
i
c
e
s

B
u
s
i
n
e
s
s
R
e
v
e
n
u
e
s













4
2
8
.
2














4
7
6
.
7














5
0
3
.
2














5
1
5
.
0














5
7
7
.
2

R
e
v
e
n
u
e

G
r
o
w
t
h
1
5
.
0
%
1
1
.
3
%
5
.
6
%
2
.
4
%
1
2
.
1
%
O
p
e
r
a
t
i
n
g

M
a
r
g
i
n
3
1
.
9
%
3
2
.
0
%
3
1
.
8
%
2
8
.
7
%
3
0
.
7
%
P
r
e
c
l
i
n
i
c
a
l

S
e
r
v
i
c
e
s

B
u
s
i
n
e
s
s
R
e
v
e
n
u
e
s













1
8
5
.
5














2
4
7
.
6














4
9
0
.
2














5
4
3
.
4














6
5
3
.
4

R
e
v
e
n
u
e

G
r
o
w
t
h
2
%
3
3
%
9
8
%
1
1
%
2
0
%
O
p
e
r
a
t
i
n
g

M
a
r
g
i
n
9
%
1
3
%
1
4
%
1
5
%
1
6
%
Geographical Reach

CRL operates 60 facilities in 16 countries worldwide

US, 50.5%

Europe,
27.6%

Canada,
16.4%

Japan,
4.6%

Other,
1.0%

Sales by Geography

CRL Customers

Big Pharma
and Large
Biotechs,
60%

Small
Biotechs,
20%

Non
-
Profit,
20%

EPS Estimates

Mar.

Jun.

Sept.

Dec.

Year

P/E
Ratio

2007A

.544

.554

.619

.523

2.24

29.38

2008E

.640

.713

.630

.487

2.47

9.58

2009E

.529

.539

.602

.509

2.18

11.47

2010E

.607

.618

.691

.584

2.50

10.00

Projected Income Statement

Estimated
2009
2010
2011
2012
2013
627.02
624.5
639.03
663.09
700.08
691.34
735.24
851.57
971.96
1108.66
1318.36
1359.75
1490.59
1635.04
1808.73
-388.75
-374.7
-377.03
-391.22
-406.04
-504.68
-522.02
-596.1
-660.93
-742.8
-893.43
-896.72
-973.12
-1052.15
-1148.84
238.27
249.8
262
271.87
294.03
186.66
213.22
255.47
311.03
365.86
424.93
463.02
517.47
582.89
659.89
SG&A
-222.75
-230.04
-252.77
-277.75
-307.69
298.78
334.03
378.37
432.21
494.89
-55.68
-57.58
-63.44
-69.85
-77.5
243.1
276.45
314.93
362.37
417.39
7
7
7
7
7
-29.78
-29.78
-29.78
-29.78
-29.78
0.1
0.1
0.1
0.11
0.11
220.43
253.77
292.25
339.69
394.72
-66.13
-76.13
-87.68
-101.91
-118.42
154.3
177.64
204.58
237.79
276.31
Projected
Preclinical services
Total Revenues
Preclinical services
Pre-Tax Income (EBT)
Other
Income from continuing operations
Income taxes
Interest expense
Operating Income (EBIT)
Interest income
EBITDA
Depreciation
Preclinical services
Gross profit
Research models and services
Cost of Revenues
Research models and services
Research models and services
Projected Income Statement
Income Statement Assumptions

Revenue Growth

2008
2009
2010
2011
2012
2013
5YR Average

15.50%
-6.00%
-0.40%
2.30%
3.80%
5.60%
6.15%
-1.10%
7.00%
6.40%
15.80%
14.10%
14.10%
28.64%

6.70%
0.40%
3.10%
9.60%
9.70%
10.60%
14.93%
Preclinical services
Research models and
services
Total Revenue growth
Income Statement
Support


Estimated
Projected
($ in thousands, except per share
data)
Income Statement Assumptions

COGS

2008
2009
2010
2011
2012
2013
5YR Average

55.90%
62.00%
60.00%
59.00%
59.00%
58.00%
57.28%
67.00%
73.00%
71.00%
70.00%
68.00%
67.00%
66.66%
Preclinical services
COGS % of Revenue
Research models and
services
Income Statement Assumptions

S,G & A


2008
2009
2010
2011
2012
2013
3YR Average

12.40%
12.00%
12.00%
12.00%
12.00%
12.00%
12.00%
13.80%
13.30%
13.30%
13.30%
13.30%
13.30%
13.30%
Preclinical services
S,G & A
Research models and
services
Income Statement Assumptions

Other estimates

2008
2009
2010
2011
2012
2013
3YR
Average
5YR
Average
Effective Tax Rate
28.00%
30.00%
30.00%
30.00%
30.00%
30.00%
21.81%
28.79%
Depreciation
4.80%
4.22%
4.23%
4.26%
4.27%
4.28%
4.22%
4.11%
Amortization
2.36%
3.10%
3.20%
3.37%
3.50%
3.60%
3.67%
2.75%
Other expense
0.02%
0.02%
0.02%
0.02%
0.02%
0.02%
0.02%
-0.04%
Income Statement Assumptions

CAPEX

2008
2009
2010
2011
2012
2013

-59.7
-41.35
-41.35
-29.85
-29.85
-29.85
-150.3
-28.3
-28.3
-84.8
-84.8
-84.8

-210
-70
-70
-115
-115
-115
Capex ( in million $)
Preclinical services
Research models and
services
Projected Balance Sheet

Assets

ASSETS
2008
2009
2010
2011
2012
2013
Cash And Equivalents
294.8
287.6
296.7
325.2
356.7
394.6
Excess cash from operations
108.6
266.6
379.9
538.9
725.3
Total Cash & ST Investments
294.8
396.2
563.3
705.1
895.6
1119.9
Accounts Receivable
237.5
231.7
239
262
287.3
317.9
Inventory
99.3
110.1
110.5
119.9
129.6
141.6
Prepaid Exp.
27.9
31
31.1
33.7
36.5
39.8
Restricted cash
3.2
3.2
3.2
3.2
3.2
3.2
Other Current Assets
5.4
5.4
5.4
5.4
5.4
5.4
Total Current Assets
668.1
777.6
952.4
1129.3
1357.7
1627.7
Gross Property, Plant & Equipment
1459.2
1528.8
1598.5
1713.1
1827.8
1942.4
Accumulated Depreciation
-467.1
-522.7
-580.3
-643.8
-713.6
-791.1
Net Property, Plant & Equipment
992.1
1006.1
1018.2
1069.4
1114.2
1151.3
Long-term Investments
20.5
20.5
20.5
20.5
20.5
20.5
Goodwill
1154.9
1154.9
1154.9
1154.9
1154.9
1154.9
Other Intangibles
152.5
152.5
152.5
152.5
152.5
152.5
Other Long-Term Assets
35.2
35.2
35.2
35.2
35.2
35.2
Total Assets
3023.2
3146.7
3333.6
3561.6
3834.8
4142.1
Projected Balance Sheet

Liabilities

LIABILITIES
2008
2009
2010
2011
2012
2013
Accounts Payable
39.3
39
43.8
42.4
51.3
50.1
Accrued Exp.
129
143.1
143.6
155.9
168.5
184
Curr. Port. of LT Debt
239
239
77.9
31.2
48
146.5
Curr. Income Taxes Payable
24.6
24.6
24.6
24.6
24.6
24.6
Unearned Revenue, Current
129.6
126.5
130.4
143
156.9
173.5
Def. Tax Liability, Curr.
0.6
0.6
0.6
0.6
0.6
0.6
Other Current Liabilities
0.1
0.1
0.1
0.1
0.1
0.1
Total Current Liabilities
562.3
572.9
421.1
397.9
450.1
579.5
Long-Term Debt
303.7
303.7
464.8
511.5
494.7
396.2
Minority Interest
0.8
0.8
0.8
0.8
0.8
0.8
Pension & Other Post-Retire. Benefits
47.9
47.9
47.9
47.9
47.9
47.9
Def. Tax Liability, Non-Curr.
71.5
71.5
71.5
71.5
71.5
71.5
Other Non-Current Liabilities
54.6
13.1
13.1
13.1
13.1
13.1
Total Liabilities
1040.9
1010
1019.3
1042.8
1078.2
1109.1
Projected Balance Sheet

Stockholder’s Equity

Stockholder's Equity
2008
2009
2010
2011
2012
2013
Common Stock
0.8
0.8
0.8
0.8
0.8
0.8
Additional Paid In Capital
1959.2
1959.2
1959.2
1959.2
1959.2
1959.2
Retained Earnings
352.6
506.9
684.6
889.2
1126.9
1403.2
Treasury Stock
-401.1
-401.1
-401.1
-401.1
-401.1
-401.1
Comprehensive Inc. and Other
70.9
70.9
70.9
70.9
70.9
70.9
Total Common Equity
1982.4
2136.7
2314.3
2518.9
2756.7
3033
Balance Sheet Assumptions

Balance Sheet Assumptions
2008
2009
2010
2011
2012
2013
Cash And Equivalents (for
ongoing operations) (% sales)
22%
22%
22%
22%
22%
22%
Accounts Receivable (% sales)
18%
18%
18%
18%
18%
18%
Inventory (% COGS)
12%
12%
12%
12%
12%
12%
Prepaid Exp. (% of COGS)
3%
3%
3%
3%
3%
3%
Accounts Payable (% COGS)
5%
4%
5%
4%
5%
4%
Accrued Exp. (% COGS)
16%
16%
16%
16%
16%
16%
Unearned revenue (% sales)
10%
10%
10%
10%
10%
10%
Assets
Liabilities
Revenue Model: Summary

Revenue ($millions)

2007

2008

2009

2010

2011

2012

2013

Total
therapeutics
R&D

58800.00

60235.90

59696.78

59456.80

60839.77

63130.39

66651.80

Growth

7%

2.4%

-
0.9%

-
0.4%

2.3%

3.8%

5.6%

Preclinical & Phase I spending

14030.39

13826.84

12058.72

11770.03

12646.00

13515.78

14555.09

% of R&D spending

24%

23%

20%

20%

21%

21%

22%

Growth of preclinical spending

8%

-
4%

-
12%

-
2%

5%

3%

2%

Pre
-
clinical CRO penetration

24.46%

27.36%

30.17%

32.88%

35.44%

37.85%

40.09%

Growth in penetration

13.7%

11.9%

10.3%

9.0%

7.8%

6.8%

5.9%

CRL Market share

19%

19%

19%

19%

19%

19%

19%

Pre
-
clinical & Phase I services revenue

653.40

645.96

691.34

735.24

851.57

971.96

1108.66

Growth

20%

-
1%

7%

6%

16%

14%

14%

Total
therapeutics
R&D

58800.00

60235.90

59696.78

59456.80

60839.77

63130.39

66651.80

Growth

6.5%

2.4%

-
0.9%

-
0.4%

2.3%

3.8%

5.6%

Total RMS Revenue

1200


1,229.3


1,218.3


1,213.4


1,241.6


1,288.4


1,360.2

CRL Market Share (%)

48.1%

51.5%

51.5%

51.5%

51.5%

51.5%

51.5%

Mkt share growth

7.0%

0.0%

0.0%

0.0%

0.0%

0.0%

CRL RMS Revenue

577.20

666.77

627.02

624.50

639.03

663.09

700.08

Growth

12%

16%

-
6%

0%

2%

4%

6%

Total Revenue (CRL)

1230.60

1312.73

1318.36

1359.75

1490.59

1635.04

1808.73

Growth

16.3%

6.7%

0.4%

3.1%

9.6%

9.7%

10.6%

R&D Therapeutics Regression
Model

Projected Therapeutics R&D

2008
2009
2010
2011
2012
2013
Total theraputics R&D
60,236
59,697
59,457
60,840
63,130
66,652
R&D Growth rates
4.6%
4.5%
5.9%
7.9%
7.6%
8.5%
R&D Therapeutics Regression
Model

Regression Model

Regression St
a
tistics







M
ul
t
ipl
e
R

0.4211






R S
q
u
a
re

0.1773






A
djust
e
d

R

S
q
u
a
re

0.1653






St
a
nd
a
r
d
Error

0.135






Observ
a
tions

70








df

SS

MS

F

Si
gn
i
f
i
c
a
nce

F


Regression

1

0.2681

0.2681

14.65
95

0.000
2
8


Residu
a
l

68

1.2436

0.0182




Tot
a
l

69

1.5117










C
oeff
i
c
i
en
t
s

Sta
nd
ar
d

Err
o
r

t Stat

P
-
v
alu
e

L
owe
r

95%

Uppe
r

95%

Intercept

0.057

0.024

2.383

0.0199

0.0092

0.1043

EBITD
A

G
ro
w
t
h
if

E
BITD
A

>
2500

0.487

0.127

3.829

0.000
28

0.2331

0.7406


14 Largest Pharmaceutical and Biotechnological Companies with EBITDA
over $2.5 billion in 2007

Preclinical Spending Projections

2008
2009
2010
2011
2012
2013
Preclinical & Phase I spending
13,827
12,059
11,770
12,646
13,516
14,555
% of R&D spending
23%
20%
20%
21%
21%
22%
Growth of preclinical spending
-3.8%
-12.0%
-2.0%
5.0%
3.0%
2.0%
Projected Preclinical Spending Growth

Outsourcing Penetration

Penetration Growth

40% of preclinical research will be conducted by outsourcing providers in 2013 (CAGR of 8%).

2008
2009
2010
2011
2012
2013
Pre-clinical CRO penetration
27.4%
30.2%
32.9%
35.4%
37.8%
40.1%
Growth in penetration
11.9%
10.3%
9.0%
7.8%
6.8%
5.9%
Market Share 6 YR Projections

RMS business


market share of 48%

PCS business


market share of 19%



Leadership position



Proximity to customers



Expertise in disease
-
specific models




Pool of renovated facilities



Expertise in specialty therapeutics (biologics, oncology)



Expansion to China


Discounted Cash Flow Model

1
2
4
5
6
7
8
9
10
11
13
14
A
B
C
D
E
F
I
J
K
L
M
N
Discounted Cash Flow Analysis
Estimated
Projected
($ in thousands, except per share data)
2008
2009
2010
2011
2012
2013
EBITDA
$ 312.1


$ 298.8


$ 334.0


$ 378.4


$ 432.2


$ 494.9


EBIT
$ 249.1


$ 243.1


$ 276.5


$ 314.9


$ 362.4


$ 417.4


Less: Cash Taxes @ 30.0%
$ (74.7)


$ (72.9)


$ (82.9)


$ (94.5)


$ (108.7)


$ (125.2)


Tax-effected EBIT
$ 174.4


$ 170.2


$ 193.5


$ 220.5


$ 253.7


$ 292.2


Plus: Depreciation
$ 63.0


$ 55.7


$ 57.6


$ 63.4


$ 69.8


$ 77.5


Less: Capital expenditures
$ (210.0)


$ (69.7)


$ (69.7)


$ (114.7)


$ (114.7)


$ (114.7)


Less: Change in net working capital
$ (3.0)


$ (0.7)


$ (5.5)


$ (17.2)


$ (19.0)


$ (22.9)


Unlevered free cash flow
$ 24.4


$ 155.5


$ 176.0


$ 152.0


$ 189.8


$ 232.1


WACC @
9.5%
NPV of Unlevered free cash flow @ 9.5%
$683.81
TV: Perpetuity Growth Method

15
16
17
18
19
20
21
22
23
24
25
26
27
A
B
C
D
E
F
I
J
K
L
M
PERPETUITY GROWTH METHOD
Terminal Value
Undiscounted
Discounted
Total debt
542.71
Perpetuity Growth Rate
2.0%
$ 3,968


$ 2,300


Preferred equity
0
2.5%
$ 4,271


$ 2,476


Minority interest
0.336
3.0%
$ 4,622


$ 2,680


Cash
213
S/Out
67.167
Target EV
3,160.18


DCF Range (Implied Enterprise Value)
2,984
$

$ 3,363


Weighted Average
49.33
Equity Value
(a)
$ 2,654


$ 3,033


Implied Price per Share
(b)
$ 39.51


$ 45.16


Target Price
$42.13



TV: EBITDA Multiple Method

5.00x
7.00x
9.00x
11.00x
13.00x
15.00x
17.00x
19.00x
28
29
30
31
32
33
34
35
36
A
B
C
D
E
F
I
J
K
L
M
N
EBITDA MULTIPLE METHOD
Terminal Value
Undiscounted
Discounted
EBITDA Multiple
10.0x
$ 4,949


$ 2,869


Target EV
4126.80
12.0x
$ 5,939


$ 3,443


$ 3,553


$ 4,701


14.0x
$ 6,928


4,017


$ 3,797


DCF Range (Implied Enterprise Value)
$ 3,223


$ 4,370


$ 47.98


$ 65.07


Equity Value
(a)
Target price
$56.52
Implied Price per Share
(b)






Conservative
EV/EBITDA
multiple of 12x

WACC

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
P
Q
R
WACC Calculations
Debt+Equity
2,370.11
1. Debt component
Long tern debt
303.681
Short-term debt
239.03
Total debt
542.711
Pre-tax cost of LT debt
8.51%
Pre-tax cost of ST debt
3.92%
Weight (LT)
55.96%
Weight (ST)
44.04%
Pre-tax cost of total debt
6.49%
Effective tax rate
30.00%
After tax cost of debt
4.54%
2. Equity component
Market capitalization
1,827.40
Risk free rate (Tbonds10yr)
3.83%
Beta (raw)
0.815
Beta adjusted
0.876
Market risk premium
0.08
Cost of equity
10.99%
WACC
9.51%

Pre
-
tax cost of LT debt:
yield to maturity on the
most junior debt issued
in Nov, 2007


Beta: CRL vs S&P 600
for 2 year period

Comparable Company Analysis


Market Profile

52
-
Week Price Range

$19.92
-
$69.19

Average Daily Volume

1,378,590

Dividend Yield (Est.)

N/A

Shares Outstanding

67,167,000

Market Capitalization

1.69B

Institutional Holdings

N/A

Insider Holdings

15%

Book Value per Share

28.71

Debt to Total Capital

0.218

Return on Equity

9.55%

Historical P/E

10.00x
20.00x
30.00x
40.00x
50.00x
60.00x
CRL is trading at historically
-
low levels

Sector Breakdown

Healthcare Sector

$2,230 billion

Life Sciences Tools &
Services Sub
-
Sector $50
billion (2.2%)

Outsourced Drug Development Services
and Tools Industry

$19 billion (38%)

Early Drug Development Outsourcing

$4.65 billion (24.5%)

Outsourcing


Higher cost of introducing a new drug

-
Stringent FDA regulations

-
70% increase in # of clinical studies since 2000

-
In 2007, FDA approved 19 new drugs, the fewest in 24 years


Outsourcing Represents an Efficient Alternative to
In
-
House Drug Development


4
-
5 months time savings translated into $120
-
150 million in
incremental prescription revenue per drug


13.49%
14.05%
14.58%
14.88%
15.37%
15.21%
16.03%
16.40%
16.12%
13%
14%
14%
15%
15%
16%
16%
17%
17%
2000
2001
2002
2003
2004
2005
2006
2007
2008
Average R&D/Sales of 12 Largest Pharmaceutical Companies
Specialist
-
Driven Products

Specialist
-
Driven Products

Biologics

Oncology drugs

Reshaping Drug Development Pipelines

Blockbuster Drug Expirations

Lost Market Share to Generics


Specialty therapy sales are expected to grow 15% in 2008,
compared to 6% for the global pharma market


80% of new drugs introduced in 2008 are expected to be specialist
-
driven


Sales of oncology drugs are expected to account for 17% of
projected market growth

Emerging Markets


Research Models Business

Estimated Market Size $1.2 billion

Preclinical Services Business

Estimated Market Size $ 3.5 billion

Competitor Financials

Revenue Growth
Ticker
2004
2005
2006
2007
5YR CAGR
Charles River Labs
CRL
18.0%
37.2%
6.6%
16.3%
17.3%
Covance
CVD
16.4%
17.4%
12.6%
22.9%
16.2%
MDS
MDZ
-24.4%
26.9%
6.4%
0.9%
4.1%
Life Sciences Research
LSR
19.0%
9.1%
11.7%
23.2%
15.4%
Industry
4.0%
27.0%
8.4%
15.0%
13.4%
Operating Margin
Ticker
2004
2005
2006
2007
5 YR Median
Charles River Labs
CRL
21.8%
18.6%
17.8%
18.5%
18.6%
Covance
CVD
23.3%
24.9%
24.3%
25.2%
24.3%
MDS
MDZ
0.2%
-12.1%
-9.8%
-21.5%
-9.8%
Life Sciences Research
LSR
10.0%
12.2%
5.0%
13.5%
10.0%
Industry
16.1%
12.5%
12.1%
11.8%
12.5%
Sensitivities

Perpetuity
EBITDA
Combined
Base Case
56.52
42.13
49.33
2%
50.72
30.47
40.59
4%
45.57
23.17
34.37
6%
41.01
18.21
29.61
2%
56.09
41.09
48.59
4%
55.66
40.08
47.87
6%
55.23
39.12
47.18
-10%
56.24
41.85
49.04
-30%
55.67
41.27
48.47
-50%
55.09
40.7
47.9
-10%
50.08
37.13
43.6
-20%
43.63
32.12
37.87
-30%
37.18
27.11
32.15
- 100 basis points
53.7
40
46.85
- 300 basis points
48.36
35.97
42.17
- 500 basis points
43.42
32.23
37.82
- 200 basis points
52.69
39.23
45.96
- 400 basis points
48.86
36.33
42.6
- 600 basis points
45.03
33.43
39.23
- 200 basis points
51.65
38.34
45
- 400 basis points
46.78
34.55
40.66
- 600 basis points
41.9
30.76
36.33
Pre-clinical & Phase I services Market Share
CRL RMS Market Share
WACC
LIBOR
2009 Revenue Growth
2009-2013 Revenue Growth
2009-2013 Therapeutics R&D Growth
Biotech Funding


Since 2007, the growth in biotech R&D spending has
declined to 16% in 2007.


In 2007, for 8 largest biotech companies, the amount of
long
-
term debt increased only by 8%

compared to

21%
and 39%

in 2004
-
2005


0%
5%
10%
15%
20%
25%
30%
35%
40%
$
-
$2,000
$4,000
$6,000
$8,000
$10,000
2000
2001
2002
2003
2004
2005
2006
2007
in millions
Growth in R&D Spending by 8 Largest Biotech Companies
R&D
YOY Growth
Refocus on Late
-
Stage

Patent
Expirations

Lost Market
Share to
Generics

Reprioritization
on Late Stage
Drug
Development

Study Slippage
and Delays in
Early Stage
Outsourcing

Company
2006 Sales (Bil $)
Janssen
2544
Merck
1971
Abbott
769
Pfizer
1457
GlaxoSmithKline
327
Novartis
3590
Orth-McNeil
1822
Eisai
1296
GlaxoSmithKline
1207
Zyrtec
Depakote
AcipHex
Imitrex
Topamax
Revacid
Requip
2009
Risperdal
Fosamax
2008
Major Potential Patent Expirations (2008-2009)
Brand Name
Gross Margin Graph

25.0%
30.0%
35.0%
40.0%
45.0%
2008
2009
2010
2011
2012
2013
Research models and services
Preclinical services