boston university school of management

Boston University School of Management

New England Investment Research Challenge February 10th, 2009

Presented byJoshua Enzer Jeff LiMukesh 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 m

illio

ns

Growth in R&D Spending by 8 Largest Biotech Companies

R&D YOY Growth

2/4/2008 5/4/2008 8/4/2008 11/4/20081535557595

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 AnimalsCash Cow48% of RevenueSpecialties: Outbred Models Immunodeficient Models Disease Specific Models

Discovery

Preclinical

Preclinical Services Business (PCS)

Contract Research Organization (CRO)Growth Business52% of RevenueSpecialties: Toxicology Oncology Biologicals

Preclinical

Phase I

http://www.taconic.com/

Industry

Growth

What’s going on

Product FocusOncology

Custom drugs

Biologicals33% CAGR

Expansion into China

22% of Total R&D on early stage


2000 20070%5%

10%15%20%25%30%

Outsouring

Outsouring

Product focus

RMS/ CRO

Offerings

Market expansio

n

Geo graphic reach

FDA approved facility in Shanghai

Search for

Efficiency (CRO)

CRO + expertis

e

2002 2003 2004 2005 2006 20070

200

400

600

800

PCS rev

PCS rev

Late stage

pipeline focus

Short-term over

capacity

2008

2009201

02011

20122013

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

RMS PCS

Margin Compressio

n

CRL’s Value

2/4/2008 4/4/2008 6/4/2008 8/4/2008 10/4/2008 12/4/20080

20

40

60

80

100

120

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 research model market

CRL market share

CRL RMS revenue

Pre-clinical services business Research Models Business


Proportion dedicated to pre-clinical research

Penetration of preclinical outsourcing

CRL market share

CRL PCS revenue


Total research model market

CRL market share

CRL RMS revenue

Revenue BreakdownMethodology

Pre-clinical services business Research Models Business

Revenue ProjectionsPCS – Revenue Growth Driver

In Billions

6%

CAGR

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 forward2008 2009 2010 2011 2012 2013

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

Margin Compression

RMS PCS

Valuation $34.15

DCF $49.33

Perpetuity

Growth

EBITDA Multipl

e

Multiples $18.97

Operating

Profit

Net Earnings

Target Price

Methodologies

Techniques

Key AssumptionsDiscount 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

0bp200bp 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

?

BUYPrice Target Upside

$25.01 $34.15 37%

Industry

Growth

What’s going on

Product FocusOncology

Custom drugs

Biologicals33% CAGR

Expansion into China



2000 20070%5%

10%15%20%25%30%

Outsouring

Outsouring

CRL’s Value

2002 2003 2004 2005 2006 20070

200

400

600

800

PCS rev

PCS rev

CRL’s Positioning FDA approved facility in Shanghai 29% CAGR

2008

2009201

02011

20122013

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

RMS PCS

Margin Compressio

n

Implied Valuation is Unreasonable

Implied ValuationAssumptions Pre-Guidance Post-Guidance

Price $33.90 $26.87Total 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%

TargetValuation

$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

2003 2004 2005 2006 2007Research Models and Services BusinessRevenues 428.2 476.7 503.2 515.0 577.2 Revenue Growth 15.0% 11.3% 5.6% 2.4% 12.1%Operating Margin 31.9% 32.0% 31.8% 28.7% 30.7%Preclinical Services BusinessRevenues 185.5 247.6 490.2 543.4 653.4 Revenue Growth 2% 33% 98% 11% 20%Operating Margin 9% 13% 14% 15% 16%

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 EstimatesMar. Jun. Sept. Dec. Year P/E

Ratio2007A .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 StatementEstimated

2009 2010 2011 2012 2013627.02 624.5 639.03 663.09 700.08691.34 735.24 851.57 971.96 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 -1148.84238.27 249.8 262 271.87 294.03186.66 213.22 255.47 311.03 365.86424.93 463.02 517.47 582.89 659.89

SG&A -222.75 -230.04 -252.77 -277.75 -307.69298.78 334.03 378.37 432.21 494.89-55.68 -57.58 -63.44 -69.85 -77.5243.1 276.45 314.93 362.37 417.39

7 7 7 7 7-29.78 -29.78 -29.78 -29.78 -29.78

0.1 0.1 0.1 0.11 0.11220.43 253.77 292.25 339.69 394.72-66.13 -76.13 -87.68 -101.91 -118.42154.3 177.64 204.58 237.79 276.31

Projected

Preclinical servicesTotal Revenues

Preclinical services

Pre-Tax Income (EBT)Other

Income from continuing operationsIncome taxes

Interest expense

Operating Income (EBIT)Interest income

EBITDADepreciation

Preclinical servicesGross profit

Research models and servicesCost of Revenues

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%



Total Revenue growth

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


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 RevenueResearch models and services


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 & AResearch models and services


Other estimates

2008 2009 2010 2011 2012 20133YR

Average5YR

AverageEffective 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%


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 $)



Projected Balance SheetAssets

ASSETS 2008 2009 2010 2011 2012 2013Cash 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 237.5 231.7 239 262 287.3 317.9Inventory 99.3 110.1 110.5 119.9 129.6 141.6

Prepaid Exp. 27.9 31 31.1 33.7 36.5 39.8Restricted 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 1942.4Accumulated 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 1151.3Long-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 1154.9Other 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 35.2Total Assets 3023.2 3146.7 3333.6 3561.6 3834.8 4142.1

Projected Balance SheetLiabilities

LIABILITIES 2008 2009 2010 2011 2012 2013Accounts Payable 39.3 39 43.8 42.4 51.3 50.1

Accrued Exp. 129 143.1 143.6 155.9 168.5 184Curr. 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 24.6Unearned 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 0.6Other Current Liabilities 0.1 0.1 0.1 0.1 0.1 0.1

Total Current Liabilities 562.3 572.9 421.1 397.9 450.1 579.5Long-Term Debt 303.7 303.7 464.8 511.5 494.7 396.2Minority 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 47.9Def. 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 13.1Total Liabilities 1040.9 1010 1019.3 1042.8 1078.2 1109.1

Projected Balance SheetStockholder’s Equity

Stockholder's Equity 2008 2009 2010 2011 2012 2013Common 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 1959.2Retained 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 -401.1Comprehensive 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 AssumptionsBalance 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: SummaryRevenue ($millions) 2007 2008 2009 2010 2011 2012 2013

Total therapeutics R&D 58800.00 60235.90 59696.78 59456.80 60839.77 63130.39 66651.80Growth 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&D2008 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 Statistics

Multiple R 0.4211

R Square 0.1773

Adjusted R Square 0.1653

Standard Error 0.135

Observations 70

df SS MS F Significance

F

Regression 1 0.2681 0.2681 14.6595 0.00028

Residual 68 1.2436 0.0182

Total 69 1.5117

Coefficients Standard

Error t Stat P-value Lower 95% Upper 95%

Intercept 0.057 0.024 2.383 0.0199 0.0092 0.1043 EBITDA Growth if EBITDA > 2500 0.487 0.127 3.829 0.00028 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 2013Preclinical & 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 PenetrationPenetration Growth

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

2008 2009 2010 2011 2012 2013Pre-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 ProjectionsRMS 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 Model12456789

10111314

A B C D E F I J K L M NDiscounted Cash Flow Analysis Estimated Projected($ in thousands, except per share data) 2008 2009 2010 2011 2012 2013EBITDA $ 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

15161718192021222324252627

A B C D E F I J K L MPERPETUITY GROWTH METHODTerminal Value Undiscounted Discounted Total debt 542.71

Perpetuity Growth Rate 2.0% $ 3,968 $ 2,300 Preferred equity 02.5% $ 4,271 $ 2,476 Minority interest 0.3363.0% $ 4,622 $ 2,680 Cash 213

S/Out 67.167Target EV 3,160.18

DCF Range (Implied Enterprise Value) 2,984$ $ 3,363 Weighted Average

49.33Equity Value (a) $ 2,654 $ 3,033 Implied Price per Share (b) $ 39.51 $ 45.16

Target Price $42.13

––

–

TV: EBITDA Multiple Method

Jun-01

-2000

Jun-01

-2001

Jun-01

-2002

Jun-01

-2003

Jun-01

-2004

Jun-01

-2005

Jun-01

-2006

Jun-01

-2007

Jun-01

-2008

5.00x

7.00x

9.00x

11.00x

13.00x

15.00x

17.00x

19.00x

282930313233343536

A B C D E F I J K L M NEBITDA MULTIPLE METHODTerminal Value Undiscounted Discounted

EBITDA Multiple 10.0x $ 4,949 $ 2,869 Target EV 4126.8012.0x $ 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 $56.52Implied Price per Share (b)

–

––––

–

Conservative EV/EBITDA

multiple of 12x

WACC123456789

101112131415161718192021

P Q RWACC CalculationsDebt+Equity 2,370.111. Debt componentLong tern debt 303.681Short-term debt 239.03Total debt 542.711Pre-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 componentMarket capitalization 1,827.40Risk free rate (Tbonds10yr) 3.83%Beta (raw) 0.815Beta adjusted 0.876Market risk premium 0.08Cost 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

Jun-01-2000 Jun-01-2001 Jun-01-2002 Jun-01-2003 Jun-01-2004 Jun-01-2005 Jun-01-2006 Jun-01-2007 Jun-01-200810.00x

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

• 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 FinancialsRevenue Growth Ticker 2004 2005 2006 2007 5YR CAGRCharles 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 MedianCharles 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%

SensitivitiesPerpetuity EBITDA Combined

Base Case 56.52 42.13 49.33

2% 50.72 30.47 40.594% 45.57 23.17 34.376% 41.01 18.21 29.61

2% 56.09 41.09 48.594% 55.66 40.08 47.876% 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 m

illio

ns

Growth in R&D Spending by 8 Largest Biotech Companies

R&D YOY Growth

Refocus on Late-StagePatent 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 2544Merck 1971Abbott 769Pfizer 1457

GlaxoSmithKline 327Novartis 3590

Orth-McNeil 1822Eisai 1296

GlaxoSmithKline 1207

ZyrtecDepakote

AcipHexImitrex

TopamaxRevacidRequip

2009

RisperdalFosamax

2008

Major Potential Patent Expirations (2008-2009)Brand Name

Gross Margin Graph

2008 2009 2010 2011 2012 201325.0%

30.0%

35.0%

40.0%

45.0%

Research models and services Preclinical services

boston university school of management

Documents