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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. 6% Revenue CAGR. High Profit Margin.
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Boston University School of Management New England Investment Research Challenge February 10th, 2009 Presented by Joshua Enzer Jeff Li MukeshJagotaAshanWalpita
Investment Recommendation - BUY Demand for Outsourcing 6% Revenue CAGR High Profit Margin Significantly Undervalued CF yield = 9% Disease specific expertise Significant Investor value
How Does Charles River Make Money Discovery Preclinical Preclinical Phase I
Market expansion • Geo graphic reach What’s going on • CRL’s Value • Product focus • RMS/ CRO Offerings • Search for Efficiency (CRO) • CRO + expertise 33% CAGR • Late stage pipeline focus • Short-term over capacity Margin Compression
Recent Events • November 5: CRL announced Q3 Earnings, shares plunge on guidance
This Generates Revenue Opportunity Methodology Research Models Business Pre-clinical services business
Revenue Breakdown Methodology Research Models Business Pre-clinical services business
Revenue Projections In Billions PCS – Revenue Growth Driver 6% CAGR
Risks & Sensitivity Sensitivity Key Risks • Short-term over capacity • 06-08 Rapid expansion $25 $26 $27 $30 $31 $32 $33 $34.15 $28 Margin compression • Biotech bankruptcies • 20% of CRL’s business 5 year rev growth Dollar Appreciation • FX risk • 50% of operations overseas WACC Scenario SELL 200bp Change 0bp
Investment Recommendation - BUY Strong long-term industry growth Growth in top-line High Profit Margin Significantly Undervalued Stable financial position Significant expertise Significant Investor value
What’s going on 33% CAGR
CRL’s Positioning 29% CAGR Margin Compression
Appendices Charles River Laboratories Revenue Model Valuation Industry & Competitive Positioning Investment Risks
Earnings Estimates Projected Income Statement Income Statement Assumptions Projected Balance Sheet Balance Sheet Assumptions Revenue Model Segment Breakdown Geographical Reach CRL Customers Charles River Laboratories
Revenue Model: Summary Projected Therapeutics R&D Regression Model Preclinical Spending Projections Outsourcing Penetration Market Share 6 YR Projections Revenue Model
Discounted Cash Flow Model TV: Perpetuity Growth Method TV: EBITDA Multiple Method WACC Comparable Company Analysis Historical P/E CRL Market Profile Valuation
Sector Breakdown Industry Trends RMS Market Revenue Breakdown PCS Market Revenue Breakdown Competitive Positioning Industry and Competitive Positioning
Outsourcing Specialist-Driven Products Emerging Markets Industry Trends
Sensitivities Biotech Funding Refocus on Late-Stage Drug Development Investment Risks
Geographical Reach Sales by Geography CRL operates 60 facilities in 16 countries worldwide
Income Statement Assumptions Revenue Growth
Income Statement Assumptions S,G & A
Income Statement Assumptions Other estimates
Projected Balance Sheet Assets
Projected Balance Sheet Liabilities
Projected Balance Sheet Stockholder’s Equity
R&D Therapeutics Regression Model Projected Therapeutics R&D
R&D Therapeutics Regression Model Regression Model 14 Largest Pharmaceutical and Biotechnological Companies with EBITDA over $2.5 billion in 2007
Preclinical Spending Projections Projected Preclinical Spending Growth
Outsourcing Penetration Penetration Growth 40% of preclinical research will be conducted by outsourcing providers in 2013 (CAGR of 8%).
Market Share 6 YR Projections RMS business – market share of 48% • Leadership position • Proximity to customers • Expertise in disease-specific models PCS business – market share of 19% • Pool of renovated facilities • Expertise in specialty therapeutics (biologics, oncology) • Expansion to China
TV: EBITDA Multiple Method Conservative EV/EBITDA multiple of 12x
WACC • 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
Historical P/E CRL is trading at historically-low levels