Charles River to Acquire WIL Research 2016 Charles River Laboratories International, Inc.
Safe Harbor Statement This presentation includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as anticipate, believe, expect, will, may, estimate, plan, outlook, and project and other similar expressions that predict or indicate future events or trends or that are not statements of historical matters. Forward-looking statements include statements in this presentation regarding the acquisition of WIL Research, expectations regarding the timing of the closing of the acquisition, and Charles River s expectations with respect to the impact of WIL Research on the Company, its service offerings, client perception, revenue, revenue growth rates, earnings, financing, stock repurchase activity, share count, credit facility, interest rates, tax rates, and operating margin; WIL Research s final 2015 reported financial results; Charles River s projected future performance including revenue and earnings per share; Charles River s expected operational synergies; as well as Charles River s future growth in the area of safety assessment and contract development and manufacturing. Forward-looking statements are based on Charles River s current expectations and beliefs, and involve a number of risks and uncertainties that are difficult to predict and that could cause actual results to differ materially from those stated or implied by the forward-looking statements. Those risks and uncertainties include, but are not limited to, the ability to successfully complete the acquisition of WIL Research. A further description of these risks, uncertainties, and other matters can be found in the Risk Factors detailed in Charles River's Annual Report on Form 10-K as filed on February 17, 2015, as well as other filings we make with the Securities and Exchange Commission. Because forward-looking statements involve risks and uncertainties, actual results and events may differ materially from results and events currently expected by Charles River, and Charles River assumes no obligation and expressly disclaims any duty to update information contained in this news release except as required by law. Regulation G This presentation contains non-gaap financial measures, such as non-gaap earnings per diluted share, which exclude the amortization of intangible assets, certain third-party integration costs, certain costs associated with efficiency initiatives, and other charges related to our acquisitions and expenses associated with evaluating acquisitions. We exclude these items from the non-gaap financial measures because they are outside our normal operations. There are limitations in using non-gaap financial measures, as they are not prepared in accordance with generally accepted accounting principles, and may be different than non-gaap financial measures used by other companies. In particular, we believe that the inclusion of supplementary non-gaap financial measures in this presentation helps investors to gain a meaningful understanding of our core operating results and future prospects without the effect of these often-one-time charges, and is consistent with how management measures and forecasts the Company's performance, especially when comparing such results to prior periods or forecasts. We believe that the financial impact of our acquisitions (and in certain cases, the evaluation of such acquisitions, whether or not ultimately consummated) is often large relative to our overall financial performance, which can adversely affect the comparability of our results on a period-to-period basis. In addition, certain activities, such as business acquisitions, happen irregularly and the underlying costs associated with such activities do not recur on a consistent basis. Non-GAAP results also allow investors to compare the Company s operations against the financial results of other companies in the industry who similarly provide non-gaap results. The non-gaap financial measures included in this presentation are not meant to be considered superior to or a substitute for results of operations prepared in accordance with GAAP. The Company intends to periodically assess the potential value of reporting non-gaap results consistent with applicable rules and regulations. Quiet Period Disclaimer The Company is presently in quiet period pending its fourth-quarter and full-year 2015 earnings and 2016 guidance release on February 11, 2016. As a result, the Company will not comment on financial performance for the fourth quarter of 2015 or guidance for 2016. 2
Transaction Overview On January 7, 2016, Charles River announced that we have entered into a definitive agreement to acquire WIL Research for ~$585M in cash subject to certain adjustments A premier provider of safety assessment services and contract development and manufacturing services (CDMO) for biopharma and agricultural/industrial chemical clients worldwide Seizing a unique opportunity to acquire a premier provider with complementary capabilities Enhances CRL s position as a leading early-stage CRO Drives profitable revenue growth and immediate EPS accretion 3
Transaction Overview, cont. Believe WIL Research is an exceptional strategic fit for CRL: Excellent quality and scientific expertise Attractive geographic footprint, particularly in continental Europe Complementary capabilities in different regions Complementary client base and access to new clients Very similar culture to CRL, focusing on supporting employees and delivering exceptional science and service to clients A highly respected provider of safety assessment and CDMO services with a reputation built over 40 years 4
Financial Details Purchase price of ~$585M equates to non-gaap EBITDA multiples of: 12.9x in FY 2015E ~11x in FY 2016E including operational synergies WIL s revenue estimated at ~$215M in 2015 with mid-teens non-gaap operating margin Represents YOY revenue growth of ~9% (constant currency) in 2015 Expected to generate operational synergies of ~$17M-$20M within 2 years of closing Immediately accretive to non-gaap EPS and expected to exceed ROIC hurdle within our required timeframe of 3-4 years At least $0.20 accretive to 2016 assuming an early 2Q16 close $0.45-$0.50 accretive in 2017 Creates value for shareholders 5
Financial Details, cont. Acquisition and associated fees expected to be financed through expansion of credit facility Intend to increase borrowing capacity by $350M to $1.65B ($650M term loan & $1B revolver) Chose this approach because of our demonstrated ability to generate strong free cash flow Pro forma leverage ratio expected to be ~3.5x after close Expect to drive pro forma leverage below 3x within 18 months of closing Intend to deploy free cash flow to debt repayment over next 18 months Will limit stock repurchase activity resulting in modest increase to diluted share count Based on pro forma leverage, interest rate expected to increase to LIBOR+150 bps post-closing for drawn amounts (current: LIBOR+112.5 bps) 6
Financial Details, cont. Due to geographic earnings mix, expect WIL s earnings to be taxed at a higher rate (~35%) than CRL s consolidated tax rate Expect to close in early 2Q16 Subject to regulatory approvals and customary closing conditions Expect to report WIL primarily in DSA segment 7
Strategic Rationale BUILDS GLOBAL SCALE Provides capacity to support current demand and future growth Strategically located facilities to address global client requirements Adds needed footprint in continental Europe Expands CRL s global footprint for existing specialty services DIVERSIFIES PORTFOLIO Extends ability to partner with biopharma clients through new CDMO services Adds new services in safety assessment and bioanalysis Niche high-end specialty services for complex applications EXPANDS CLIENT BASE Aligns with strategy to build small and midsize biotech client base, our fastestgrowing market segment Broadens existing business with industrial chemical and agro-chemical companies ENHANCES GROWTH PROFILE Addition of a leading CRO with an excellent reputation for high scientific expertise and focus on client service Positions CRL to drive profitable growth and realize meaningful earnings accretion 8
WIL Research s Scientific Capabilities General Toxicology WIL s Services Analytical Services 1 Comprehensive in vivo studies Single dose to carcinogenicity Studies include all standard research model species and methods of administration General Toxicology 42% Specialty Toxicology 30% Analytical chemistry, bioanalysis, formulation support, and physical chemistry Specializes in the analysis of small organic compounds, peptides, proteins, monoclonal antibodies, and other specimens Specialty Toxicology Includes specialized toxicology, discovery support studies, and safety pharmacology DART, juvenile, neuro, genetic, environmental/ecological, and inhalation toxicology Premier market reputation Other 2% Analytical Services 17% Formulation & Mfg. 9% Formulation & Manufacturing Pre-formulation, formulation design and development, manufacturing, and analytical/ stability testing for small molecules Specialized capabilities in highpotency compounds Enhances CRL s leading position in specialty services; Scientists with advanced degrees will total ~900 Note: Business mix as a percentage of 2015E revenue 1 Analytical services are primarily completed in support of WIL s general/specialty toxicology services. 9
Increased Access to Industrial & Agro-Chemical Clients Expertise in advanced toxicology services to support global industrial and agro-chemical clients in meeting regulatory requirements Environmental and eco-toxicology services Industrial and agro-chemical clients represent ~25% of WIL s 2015E revenue Expect mid-single digit market growth for the next 5 years to be driven by: Demand for chemicals to increase crop yields prompted by growing global population and limited land for food Recurring need for testing services due to regulatory requirement for re-registration every 10 years for agro-chemicals already on the market REACH initiative testing backlog and anticipated future testing expected to create significant demand through 2025 Combined capabilities will more than double the size of CRL s existing business 10
CDMO Platform Differentiates Portfolio and Provides Avenue for Growth Expertise in formulation design and development of oral drug dosages Adjacent capability that expands opportunities to partner with biopharma clients Supports small molecule formulation from discovery through clinical trials Specialized capabilities in high-potency compounds Key market drivers: Increased outsourcing trend expected to drive penetration higher from today s ~30% level Need to enhance efficiency and productivity of R&D spend Growth in drugs from small and mid-size biopharma companies lacking inhouse capabilities Increasing complexity of regulatory and compliance requirements Greater scrutiny by regulatory agencies Scalable platform in fragmented CDMO market that is expected to grow in the mid-to-high single digits for the next 5 years 11
WIL s Global Footprint Den Bosch / NL Ashland, OH Harrogate, UK 30% Biopharma / 70% Chemical 145,000 ft 2 80% Biopharma / 20% Chemical 325,000 ft 2 Client Services Lyon, FR Skokie, IL Fairfield, NJ Corporate Headquarters 95% Biopharma / 5% Chemical 195,000 ft 2 95% Biopharma / 5% Chemical 25,000 ft 2 Boothwyn, PA Hillsborough, NC Pathology 9,000 ft 2 100% Biopharma (CDMO) 43,000 ft 2 U.S. ~65% ROW ~35% Worldwide reach with ~1,300 employees and >700,000 ft 2 of capacity in US and Europe 12
Safety Assessment Opportunity Safety Assessment will be a significant opportunity for growth over the next 5 years At least 50% outsourced currently, expected to increase to 80% or more in the future Large biopharma continues to increase its utilization of outsourced services to leverage expertise and efficiencies that CROs offer Robust funding to virtual, small, and mid-size biotech, which require outsourced services ~$4B Outsourced Safety Assessment* Other CROs Charles River WIL Covance MPI Envigo Includes non-glp/glp SA services, bioanalysis and ag/ind chem services; 2000-2015 market growth of ~7% CAGR* *Source: Wall Street research and management estimates. 13
Average In-Licensing Share of Major Biopharma Pipeline Rising* Large biopharma focusing less on who discovers the molecule and more on whether the molecule addresses a significant medical need Trend has funded many of the virtual, small, and mid-size biotech companies Have little or no infrastructure Rely almost exclusively on CROs like CRL Large biopharma s emphasis on early-stage R&D is driving: Industry capacity continuing to fill Improving industry pricing Share of Pipeline Supports CRL s continued growth through addition of services and capacity 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 25% 34% 37% 39% 41% 42% 2007 2010 2012 2013 2014 2015 E * Parexel Biopharmaceutical R&D Statistical Sourcebook 2008-2014 and Citeline, Inc. (Pharmaprojects/Pipeline). 14
Biotech Client Base WIL s primary client base is small and mid-size biotech One aspect of due diligence focused on assumptions of drivers of biotech outsourcing, sources for biotech funding, and impact on revenue if funding were to slow Large biopharma will continue to utilize biotech for discovery of new drugs Large biopharma has been leveraging biotech heavily since 2008 Has led to stronger and more productive pipelines Many of the drugs approved by the FDA in the last few years or currently in the pipeline are the products of large biopharma s collaboration with biotech We are very proud that CRL worked on 55% of the drugs approved by the FDA in 2014 We are respected for our scientific expertise and support we provide to clients Believe that acquisition of WIL will enhance our reputation 15
Biotech Funding Outlook Genomics/proteomics have come of age and are driving identification of new types of drugs, like immunotherapies, which are showing tremendous potential for curing disease Driving a steady increase in large pharma investment in biotech, as well as from capital markets and venture capital Biotech companies have a significant amount of cash on hand given the broad-based investment in the biotech sector Expect this cash to be invested over a minimum of 3 years, and likely longer Using VC funding as a proxy for the length of time it takes to get a drug to proof of concept suggests a period of 3-4 years Believe the horizon for large biopharma funding would likely be longer, and that contractual milestone payments would be made during that time 16
Combined Client Profile WIL acquisition aligns with CRL s strategy to build biotech client base and further diversifies client concentration WIL has low client concentration No single client represents more than 2.5% of WIL revenue Some CRL-WIL client overlap, as would be expected for similarly focused companies with a reputation for scientific expertise Two-thirds of WIL s YTD September 2015 revenue was generated from WIL clients that were either not CRL Safety Assessment (SA) clients or represented <$100K in CRL SA revenue WIL Client Profile Biotech 84% Global 14% Acad/Gov t 2% Biotech 50% Global 33% Acad/Gov t 17% Combined Pro Forma CRL Client Profile Note: Client profile is based on CRL s clients segments; percentages are based on YTD September 2015 revenue. 17
Disciplined M&A Strategy Delivering Compelling Financial Benefits Supported by CRL s Disciplined M&A Strategy Accretive on a non-gaap EPS basis in year one ROIC expected to meet or exceed cost of capital within 3-4 years Enhances organic growth opportunities Financial Impact Revenue Non-GAAP EPS accretion 2016E (1) ~$150M- $170M At least $0.20 2017E ~$240M- $250M $0.45-$0.50 5-Year Strategic Plan >10% revenue CAGR for combined CRL SA business Non-GAAP operating margin >20% (including WIL), due in part to benefits from efficiency initiatives and operational synergies Increased Shareholder Value (1) 2016 Partial-year contribution based on expected close in early 2Q16 18
Operational Synergies Implementation of operational synergies to begin in 2016 post-closing, with estimated benefits of ~$17M-$20M within 2 years of closing Operational synergies expected to be achieved through: Productivity and efficiency initiatives Optimize labor and capacity utilization Centralize certain services Procurement and insourcing synergies Expanded use of CRL s services and research models Leverage CRL s supplier relationships Corporate savings Reduction of duplicate corporate costs Leveraging CRL s productivity and efficiency expertise to achieve margin improvement goals 19
Operational Integration Plan Comprehensive integration planning already in process Dedicated integration resources In-house Finance, IT, and operational resources External consultants for short-term support SVP Birgit Girshick to manage the operational integration full time >25 years of operational experience Focus on utilizing best-in-class processes from both companies and applying CRL operating efficiency expertise Priority to achieve cost synergies Similar cultures and operational core competencies facilitate integration 20
Acquisition Summary 1 Expands and further differentiates CRL s position as a leading early-stage research and development CRO 2 Provides additional capabilities and infrastructure to support current client demand and future growth and critical footprint in continental Europe 3 Adds well-recognized platform tailored to fast-growing small and mid-size biopharma clients 4 Provides larger presence in agro-industrial chemical business and new capabilities in CDMO industry 5 Reinforces scientific leadership: Adds wealth of scientific talent with deep experience in specialty areas 6 Drives revenue growth and immediate accretion to non-gaap EPS; meets ROIC hurdles 21
2016 Charles River Laboratories International, Inc.