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Boston University School of Management

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

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  1. Boston University School of Management New England Investment Research Challenge February 10th, 2009 Presented by Joshua Enzer Jeff Li MukeshJagotaAshanWalpita

  2. Investment Recommendation - BUY Demand for Outsourcing 6% Revenue CAGR High Profit Margin Significantly Undervalued CF yield = 9% Disease specific expertise Significant Investor value

  3. How Does Charles River Make Money Discovery Preclinical Preclinical Phase I

  4. 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

  5. Recent Events • November 5: CRL announced Q3 Earnings, shares plunge on guidance

  6. This Generates Revenue Opportunity Methodology Research Models Business Pre-clinical services business

  7. Revenue Breakdown Methodology Research Models Business Pre-clinical services business

  8. Revenue Projections In Billions PCS – Revenue Growth Driver 6% CAGR

  9. Margins and Leverage

  10. Valuation

  11. 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

  12. 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

  13. Questions ?

  14. What’s going on 33% CAGR

  15. CRL’s Positioning 29% CAGR Margin Compression

  16. Implied Valuation is Unreasonable

  17. Appendices Charles River Laboratories Revenue Model Valuation Industry & Competitive Positioning Investment Risks

  18. 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

  19. Revenue Model: Summary Projected Therapeutics R&D Regression Model Preclinical Spending Projections Outsourcing Penetration Market Share 6 YR Projections Revenue Model

  20. Discounted Cash Flow Model TV: Perpetuity Growth Method TV: EBITDA Multiple Method WACC Comparable Company Analysis Historical P/E CRL Market Profile Valuation

  21. Sector Breakdown Industry Trends RMS Market Revenue Breakdown PCS Market Revenue Breakdown Competitive Positioning Industry and Competitive Positioning

  22. Outsourcing Specialist-Driven Products Emerging Markets Industry Trends

  23. Sensitivities Biotech Funding Refocus on Late-Stage Drug Development Investment Risks

  24. Segment Breakdown

  25. Geographical Reach Sales by Geography CRL operates 60 facilities in 16 countries worldwide

  26. CRL Customers

  27. EPS Estimates

  28. Projected Income Statement

  29. Income Statement Assumptions Revenue Growth

  30. Income Statement Assumptions COGS

  31. Income Statement Assumptions S,G & A

  32. Income Statement Assumptions Other estimates

  33. Income Statement Assumptions CAPEX

  34. Projected Balance Sheet Assets

  35. Projected Balance Sheet Liabilities

  36. Projected Balance Sheet Stockholder’s Equity

  37. Balance Sheet Assumptions

  38. Revenue Model: Summary

  39. R&D Therapeutics Regression Model Projected Therapeutics R&D

  40. R&D Therapeutics Regression Model Regression Model 14 Largest Pharmaceutical and Biotechnological Companies with EBITDA over $2.5 billion in 2007

  41. Preclinical Spending Projections Projected Preclinical Spending Growth

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

  43. 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

  44. Discounted Cash Flow Model

  45. TV: Perpetuity Growth Method

  46. TV: EBITDA Multiple Method Conservative EV/EBITDA multiple of 12x

  47. 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

  48. Comparable Company Analysis

  49. Market Profile

  50. Historical P/E CRL is trading at historically-low levels

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