Boston University School of
Management
New England Investment Research Challenge
February 10th, 2009
Presented by
Joshua Enzer
Mukesh Jagota
Jeff Li
Ashan Walpita
Investment Recommendation - BUY
Growth in R&D Spending by 8 Largest Biotech Companies
$10,000
Target
Upside
$25.01
$34.15
37%
40%
35%
30%
25%
20%
15%
10%
5%
0%
$8,000
in millions
Price
$6,000
$4,000
$2,000
$2000
2001
2002
2003
R&D
2004 2005 2006
YOY Growth
2007
Demand for
Outsourcing
6% Revenue CAGR
High Profit Margin
65
15
2/4/2008
Disease specific
expertise
CF yield = 9%
Significant Investor value
5/4/2008
8/4/2008
11/4/2008
Significantly
Undervalued
How Does Charles River Make Money
Discovery
Preclinical
Phase I
Phase II-IV
Introduction
Preclinical
Business
(PCS)
Research
Models Services
and
Services
Business
(RMS)
CRL provides
research
tools
and
support
Contract
Research
Organization
(CRO)
Leader into
Sales
of Research
Animals
services
drug
developers
Preclinical
Discovery
Growth Business
Cash Cow
Primary Customers:
52%
48% of Revenue
Pharmaceuticals
Specialties:
Toxicology
Outbred Models
Phase I Biotechnology
Preclinical
Oncology
Immunodeficient Models
Not-for-profit
Biologicals
Disease research
Specific Models
What’s going on
FDA approved
facility in
Shanghai
PCS rev
800
Expansion into
China 600
Geo
Market
graphic
expansion
reach
400
200
0
2002 2003 2004 2005 2006 2007
PCS rev
Outsouring
Product Focus
Oncology
Custom drugs
Biologicals
RMS/
Product
CRO
focus
Offerings
CRL’s
Industry
Growth
Value
Search for
CRO +
Efficiency
expertise
(CRO)
30%
25%
20%
15%
10%
5%
0%
50.0%
Margin
Compression
2000
2007
Outsouring
45.0%
40.0%
Short-
22% of Total R&D
on early stage
Late stage
term
pipeline
over
focus
capacity
35.0%
30.0%
18% of Total25.0%
R&D
on early stage
2008
2010
RMS
2012
PCS
Recent Events
120
100
80
60
40
20
0
2/4/2008
4/4/2008
6/4/2008
8/4/2008
S&P 500
10/4/2008
12/4/2008
CRL
•November 5: CRL announced Q3 Earnings,
shares plunge on guidance
This Generates Revenue Opportunity
Methodology
Pre-clinical services business
Total therapeutics R&D
growth rate
Proportion dedicated to
pre-clinical research
Research Models Business
Total therapeutics R&D
growth rate
Total research model
market
Penetration of
preclinical
outsourcing
CRL
market
share
CRL
PCS
revenue
CRL market
share
CRL
RMS
revenue
Revenue Breakdown
Methodology
Pre-clinical services business
Total therapeutics R&D
growth rate
Proportion dedicated to
pre-clinical research
Research Models Business
Total therapeutics R&D
growth rate
Total research model
market
Penetration of
preclinical
outsourcing
CRL
market
share
CRL
PCS
revenue
CRL market
share
CRL
RMS
revenue
Revenue Projections
In Billions
PCS – Revenue
Growth Driver
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
Margin Compression
50.0%
45.0%
40.0%
35.0%
30.0%
25.0%
2008 2009 2010 2011 2012 2013
RMS
PCS
Valuation
Target Price
Methodologies
Techniques
$34.15
DCF
$49.33
Perpetuity
Growth
Multiples
$18.97
EBITDA
Multiple
Key Assumptions
Discount Rate (WACC)
9.5%
Terminal Value Growth Rate
2.5%
Terminal Value Multiple
12.0x
Operating
Profit
Net
Earnings
Risks & Sensitivity
Sensitivity
Key Risks
• Short-term over
capacity
$25 $26 $27 $28 $30 $31 $32 $33 $34.15
Margin
compression
▫ 06-08 Rapid expansion
• Biotech bankruptcies
5 year rev
growth
▫ 20% of CRL’s business
Dollar
Appreciation
• FX risk
▫ 50% of operations
overseas
WACC
Scenario
SELL
200bp Change
0bp
Investment Recommendation - BUY
Price
Target
Upside
$25.01
$34.15
37%
Strong long-term
industry growth
Growth in top-line
High Profit Margin
Significant expertise
Stable financial
position
Significantly
Undervalued
Significant Investor value
Questions
BUY
Price
Target
Upside
$25.01
$34.15
37%
?
What’s going on
Expansion into
China
Market
expansion
Outsouring
Product Focus
Oncology
Custom drugs
Biologicals
Product
focus
Industry
Growth
Search for
Efficiency
(CRO)
30%
25%
20%
15%
10%
5%
0%
2000
2007
Outsouring
22% of Total R&D
on early stage
Late stage
pipeline
focus
18% of Total R&D
on early stage
CRL’s Positioning
FDA approved
facility in
Shanghai
PCS rev
800
Geo
graphic
reach
600
400
200
0
2002 2003 2004 2005 2006 2007
PCS rev
CRO /
RMS
Offerings
CRL’s
Value
CRO +
expertise
Margin
Compression
50.0%
45.0%
40.0%
Shortterm
over
capacity
35.0%
30.0%
25.0%
2008
2010
RMS
2012
PCS
Implied Valuation is Unreasonable
Implied Valuation
Pre-Guidance
Post-Guidance
Target
Valuation
Price
$33.90
$26.87
$34.15
Total therapeutics
R&D growth
0.98%
-1.96%
2.8%
% Outsourced
30%
30%
35%
Gross margin
33.12%
31.38%
34.6%
EBITDA Margin
23.51%
21.76%
25.2%
WACC
10.21%
9.83%
9.51%
Assumptions
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
Research Models and Services Business
Revenues
428.2
Revenue Growth
15.0%
Operating Margin
31.9%
Preclinical Services Business
Revenues
185.5
Revenue Growth
2%
Operating Margin
9%
2004
2005
2006
2007
476.7
11.3%
32.0%
503.2
5.6%
31.8%
515.0
2.4%
28.7%
577.2
12.1%
30.7%
247.6
33%
13%
490.2
98%
14%
543.4
11%
15%
653.4
20%
16%
Geographical Reach
Sales by Geography
Japan,
4.6%
Other,
1.0%
Canada,
16.4%
US, 50.5%
Europe,
27.6%
CRL operates 60 facilities in 16 countries worldwide
CRL Customers
Non-Profit,
20%
Big Pharma
and Large
Biotechs,
60%
Small
Biotechs,
20%
EPS Estimates
Mar.
Jun.
Sept.
Dec.
Year
2007A
.544
.554
.619
.523
2.24
P/E
Ratio
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
Projected Income Statement
Estimated
Projected
2009
2010
2011
2012
2013
Research models and services
627.02
624.5
639.03
663.09
700.08
Preclinical services
691.34
735.24
851.57
971.96
1108.66
1318.36
1359.75
1490.59
1635.04
1808.73
Research models and services
-388.75
-374.7
-377.03
-391.22
-406.04
Preclinical services
-504.68
-522.02
-596.1
-660.93
-742.8
-893.43
-896.72
-973.12
-1052.15
-1148.84
Research models and services
238.27
249.8
262
271.87
294.03
Preclinical services
186.66
213.22
255.47
311.03
365.86
424.93
463.02
517.47
582.89
659.89
-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
Interest income
7
7
7
7
7
Interest expense
-29.78
-29.78
-29.78
-29.78
-29.78
Other
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
Total Revenues
Cost of Revenues
Gross profit
SG&A
EBITDA
Depreciation
Operating Income (EBIT)
Pre-Tax Income (EBT)
Income taxes
Income from continuing operations
Income Statement Assumptions
Revenue Growth
Income Statement
Support
Estimated
Projected
($ in thousands, except per share
data)
Research models and
services
2008
2009
2010
2011
2012
2013
5YR Average
15.50%
-6.00%
-0.40%
2.30%
3.80%
5.60%
6.15%
Preclinical services
-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 Assumptions
COGS
COGS % of Revenue
Research models and
services
2008
2009
2010
2011
2012
2013
5YR Average
55.90%
62.00%
60.00%
59.00%
59.00%
58.00%
57.28%
Preclinical services
67.00%
73.00%
71.00%
70.00%
68.00%
67.00%
66.66%
Income Statement Assumptions
S,G & A
2008
2009
2010
2011
2012
2013
3YR Average
Research models and
services
12.40%
12.00%
12.00%
12.00%
12.00%
12.00%
12.00%
Preclinical services
13.80%
13.30%
13.30%
13.30%
13.30%
13.30%
13.30%
S,G & A
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
Capex ( in million $)
Research models and
services
2008
2009
2010
2011
2012
2013
-59.7
-41.35
-41.35
-29.85
-29.85
-29.85
Preclinical services
-150.3
-28.3
-28.3
-84.8
-84.8
-84.8
-210
-70
-70
-115
-115
-115
Projected Balance Sheet
Assets
ASSETS
Cash And Equivalents
2008
2009
2010
2011
2012
2013
294.8
287.6
296.7
325.2
356.7
394.6
108.6
266.6
379.9
538.9
725.3
Excess cash from operations
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
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
3023.2
3146.7
3333.6
3561.6
3834.8
4142.1
Net Property, Plant & Equipment
Total Assets
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
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
1040.9
1010
1019.3
1042.8
1078.2
1109.1
Total Current Liabilities
Total Liabilities
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
1982.4
2136.7
2314.3
2518.9
2756.7
3033
Total Common Equity
Balance Sheet Assumptions
Balance Sheet Assumptions
2008
2009
2010
2011
2012
2013
Assets
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%
5%
4%
5%
4%
5%
4%
16%
16%
16%
16%
16%
16%
10%
10%
10%
10%
10%
10%
Liabilities
Accounts Payable (% COGS)
Accrued Exp. (% COGS)
Unearned revenue (% sales)
Revenue Model: Summary
Revenue ($millions)
Total therapeutics R&D
Growth
Preclinical & Phase I spending
% of R&D spending
Growth of preclinical spending
Pre-clinical CRO penetration
Growth in penetration
CRL Market share
Pre-clinical & Phase I services revenue
Growth
Total therapeutics R&D
Growth
Total RMS Revenue
CRL Market Share (%)
Mkt share growth
CRL RMS Revenue
Growth
Total Revenue (CRL)
Growth
2007
58800.00
7%
14030.39
24%
8%
24.46%
13.7%
19%
653.40
20%
58800.00
6.5%
1200
48.1%
577.20
12%
1230.60
16.3%
2008
2009
2010
2011
2012
2013
60235.90 59696.78 59456.80 60839.77 63130.39 66651.80
2.4%
-0.9%
-0.4%
2.3%
3.8%
5.6%
13826.84 12058.72 11770.03 12646.00 13515.78 14555.09
23%
20%
20%
21%
21%
22%
-4%
-12%
-2%
5%
3%
2%
27.36%
30.17%
32.88%
35.44%
37.85%
40.09%
11.9%
10.3%
9.0%
7.8%
6.8%
5.9%
19%
19%
19%
19%
19%
19%
645.96
691.34
735.24
851.57
971.96 1108.66
-1%
7%
6%
16%
14%
14%
60235.90 59696.78 59456.80 60839.77 63130.39 66651.80
2.4%
-0.9%
-0.4%
2.3%
3.8%
5.6%
1,229.3
1,218.3
1,213.4
1,241.6
1,288.4
1,360.2
51.5%
51.5%
51.5%
51.5%
51.5%
51.5%
7.0%
0.0%
0.0%
0.0%
0.0%
0.0%
666.77
627.02
624.50
639.03
663.09
700.08
16%
-6%
0%
2%
4%
6%
1312.73 1318.36 1359.75 1490.59 1635.04 1808.73
6.7%
0.4%
3.1%
9.6%
9.7%
10.6%
R&D Therapeutics Regression
Model
Projected Therapeutics R&D
2008
Total theraputics R&D
R&D Growth rates
2009
2010
2011
2012
2013
60,236
59,697
59,457
60,840
63,130
66,652
4.6%
4.5%
5.9%
7.9%
7.6%
8.5%
R&D Therapeutics Regression
Model
Regression Model
Re gre ssi on Satisti
t
cs
Mu lti ple R
0.4211
R Square
0.1773
Adju ste d R Square
0.1653
S tan dard Error
0.135
O bse rvation s
70
df
SS
Significance
F
MS
F
14.6595
0.00028
P-value
Lower 95%
1
0.2681
0.2681
Re si dual
68
1.2436
0.0182
Total
69
Coefficients
1.5117
Standard
Error
0.057
0.024
2.383
0.0199
0.0092
0.1043
0.487
0.127
3.829
0.00028
0.2331
0.7406
Re gre ssi on
Inte rce pt
EBITD A Growth i f EBITDA >
2500
t Stat
Upper
95%
14 Largest Pharmaceutical and Biotechnological Companies with EBITDA
over $2.5 billion in 2007
Preclinical Spending Projections
Projected Preclinical Spending Growth
2008
Preclinical & Phase I spending
% of R&D spending
Growth of preclinical spending
2009
2010
2011
2012
2013
13,827
12,059
11,770
12,646
13,516
14,555
23%
20%
20%
21%
21%
22%
-3.8%
-12.0%
-2.0%
5.0%
3.0%
2.0%
Outsourcing Penetration
Penetration Growth
2008
2009
2010
2011
2012
2013
Pre-clinical CRO penetration
27.4%
30.2%
32.9%
35.4%
37.8%
40.1%
Growth in penetration
11.9%
10.3%
9.0%
7.8%
6.8%
5.9%
40% of preclinical research will be conducted by outsourcing providers in 2013 (CAGR of 8%).
Market Share 6 YR Projections
RMS business – market share of 48%
 Leadership position
 Proximity to customers
 Expertise in disease-specific models
PCS business – market share of 19%
 Pool of renovated facilities
 Expertise in specialty therapeutics (biologics, oncology)
 Expansion to China
Discounted Cash Flow Model
A B
1
2
4
5
6
7
8
9
10
11
13
14
C
D
E
F
Discounted Cash Flow Analysis
($ in thousands, except per share data)
EBITDA
EBIT
Less: Cash Taxes @ 30.0%
Tax-effected EBIT
Plus: Depreciation
Less: Capital expenditures
Less: Change in net working capital
Unlevered free cash flow
WACC @
9.5%
NPV of Unlevered free cash flow @ 9.5%
I
Estimated
2008
$ 312.1
$ 249.1
$ (74.7)
$ 174.4
$ 63.0
$ (210.0)
$ (3.0)
$ 24.4
$683.81
J
2009
$ 298.8
$ 243.1
$ (72.9)
$ 170.2
$ 55.7
$ (69.7)
$ (0.7)
$ 155.5
K
L
Projected
2010
2011
$ 334.0
$ 378.4
$ 276.5
$ 314.9
$ (82.9)
$ (94.5)
$ 193.5
$ 220.5
$ 57.6
$ 63.4
$ (69.7)
$ (114.7)
$ (5.5)
$ (17.2)
$ 176.0
$ 152.0
M
2012
$ 432.2
$ 362.4
$ (108.7)
$ 253.7
$ 69.8
$ (114.7)
$ (19.0)
$ 189.8
N
2013
$ 494.9
$ 417.4
$ (125.2)
$ 292.2
$ 77.5
$ (114.7)
$ (22.9)
$ 232.1
TV: Perpetuity Growth Method
A B
C
D
E
15 PERPETUITY GROWTH METHOD
16 Terminal Value
17
Perpetuity Growth Rate
18
19
20
21
22 DCF Range (Implied Enterprise Value)
23
24
(a)
25 Equity Value
(b)
26 Implied Price per Share
27
F
I
J
2.0%
2.5%
3.0%
K
L
Undiscounted Discounted Total debt
$ 3,968
$ 2,300 Preferred equity
$ 4,271
$ 2,476 Minority interest
–
$ 4,622
$ 2,680 Cash
S/Out
Target
– EV
$ –
2,984
3,160.18
$ 3,363
Weighted Average
49.33
$ 2,654
$ 39.51
Target Price
$ 3,033
$ 45.16
$42.13
M
542.71
0
0.336
213
67.167
TV: EBITDA Multiple Method
28
29
30
31
32
33
34
35
36
A B
C
D
E
EBITDA MULTIPLE METHOD
Terminal Value
EBITDA Multiple
F
I
–
DCF Range (Implied Enterprise Value)
Equity Value (a)
Implied Price per Share (b)
J
10.0x
12.0x
14.0x
Undiscounted
$ 4,949
$ 5,939
$ 6,928
K
L
M
N
–
Discounted –
$ 2,869
$ 3,443
4,017 –
Target EV
$ 3,553
$ 3,223
$ 47.98
Target price
4126.80
$ 4,701
$ 3,797
$ 4,370
$ 65.07
$56.52
19.00x
17.00x
15.00x
13.00x
11.00x
9.00x
7.00x
5.00x
Conservative
EV/EBITDA
multiple of 12x
WACC
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
P
Q
WACC Calculations
Debt+Equity
1. Debt component
Long tern debt
Short-term debt
Total debt
Pre-tax cost of LT debt
Pre-tax cost of ST debt
Weight (LT)
Weight (ST)
Pre-tax cost of total debt
Effective tax rate
After tax cost of debt
2. Equity component
Market capitalization
16
17
18
19
20
Risk free rate (Tbonds10yr)
Beta (raw)
Beta adjusted
Market risk premium
Cost of equity
21 WACC
R
2,370.11
303.681
239.03
542.711
8.51%
3.92%
55.96%
44.04%
6.49%
30.00%
4.54%
1,827.40
3.83%
0.815
0.876
0.08
10.99%
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
60.00x
50.00x
40.00x
30.00x
20.00x
10.00x
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
Average R&D/Sales of 12 Largest Pharmaceutical Companies
17%
17%
16.40%
16%
16%
15.37%
15%
15.21%
14.88%
14.58%
15%
14%
14%
16.12%
16.03%
14.05%
13.49%
13%
2000
2001
2002
2003
2004
2005
2006
2007
2008
Specialist-Driven Products
Reshaping Drug Development Pipelines
Blockbuster Drug Expirations
Lost Market Share to Generics
Specialist-Driven Products
Biologics
•
•
•
Oncology drugs
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 specialistdriven
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
Charles River Labs
Covance
MDS
Life Sciences Research
Industry
Ticker
CRL
CVD
MDZ
LSR
2004
18.0%
16.4%
-24.4%
19.0%
4.0%
2005
37.2%
17.4%
26.9%
9.1%
27.0%
2006
6.6%
12.6%
6.4%
11.7%
8.4%
2007 5YR CAGR
16.3%
17.3%
22.9%
16.2%
0.9%
4.1%
23.2%
15.4%
15.0%
13.4%
Operating Margin
Charles River Labs
Covance
MDS
Life Sciences Research
Industry
Ticker
CRL
CVD
MDZ
LSR
2004
21.8%
23.3%
0.2%
10.0%
16.1%
2005
18.6%
24.9%
-12.1%
12.2%
12.5%
2006
17.8%
24.3%
-9.8%
5.0%
12.1%
2007 5 YR Median
18.5%
18.6%
25.2%
24.3%
-21.5%
-9.8%
13.5%
10.0%
11.8%
12.5%
Sensitivities
Base Case
- 100 basis points
- 300 basis points
- 500 basis points
- 200 basis points
- 400 basis points
- 600 basis points
- 200 basis points
- 400 basis points
- 600 basis points
Perpetuity
56.52
EBITDA
42.13
WACC
2%
50.72
30.47
4%
45.57
23.17
6%
41.01
18.21
LIBOR
2%
56.09
41.09
4%
55.66
40.08
6%
55.23
39.12
2009 Revenue Growth
-10%
56.24
41.85
-30%
55.67
41.27
-50%
55.09
40.7
2009-2013 Revenue Growth
-10%
50.08
37.13
-20%
43.63
32.12
-30%
37.18
27.11
2009-2013 Therapeutics R&D Growth
53.7
40
48.36
35.97
43.42
32.23
Pre-clinical & Phase I services Market Share
52.69
39.23
48.86
36.33
45.03
33.43
CRL RMS Market Share
51.65
38.34
46.78
34.55
41.9
30.76
Combined
49.33
40.59
34.37
29.61
48.59
47.87
47.18
49.04
48.47
47.9
43.6
37.87
32.15
46.85
42.17
37.82
45.96
42.6
39.23
45
40.66
36.33
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
Growth in R&D Spending by 8 Largest Biotech Companies
$10,000
40%
35%
30%
25%
20%
15%
10%
5%
0%
in millions
$8,000
$6,000
$4,000
$2,000
$2000
2001
2002
2003
R&D
2004 2005 2006
YOY Growth
2007
Refocus on Late-Stage
Patent
Expirations
Lost Market
Share to
Generics
Reprioritization
on Late Stage
Drug
Development
Major Potential Patent Expirations (2008-2009)
Company
Brand Name
2008
Janssen
Risperdal
Merck
Fosamax
Abbott
Depakote
Pfizer
Zyrtec
2009
GlaxoSmithKline
Requip
Novartis
Revacid
Orth-McNeil
Topamax
Eisai
AcipHex
GlaxoSmithKline
Imitrex
Study Slippage
and Delays in
Early Stage
Outsourcing
2006 Sales (Bil $)
2544
1971
769
1457
327
3590
1822
1296
1207
Gross Margin Graph
45.0%
40.0%
35.0%
30.0%
25.0%
2008
2009
2010
Research models and services
2011
2012
Preclinical services
2013