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Following on with our case study on Regeneron Pharmaceuticals Inc. (Part I here, Part II here), we will proceed to do a discounted cash flow model on the company. To understand the assumptions we will make, we have to look at the numbers again:

We will proceed to calculate an weighted average of the growth rate (WGR) by using the growth rates of each year (GR_yyyy) the following formula:

Based on this, we have made the following assumptions:

1. The growth rate as a multiple of WGR is as follows:
   • Base Case: 1
   • Bear Case: 0.4
   • Bull Case: 1.25
2. The probability of each of the following cases occurring is as follows:
   • Base Case: 80%
   • Bear Case: 15%
   • Bull Case: 5%
3. The growth rate halves every 5 years.
4. The company stops growing after 15 years.
5. We used the hurdle rate of 16% as this is slightly higher than the best returns pharmaceutical ETFs have given us to date (highest for pharmaceutical ETF came from VanEck Pharmaceutical ETF 3 year return at 14.52%). The slightly higher hurdle rate is to account for systematic risks of lack of diversification.

Using this model, we have built the following calculations:

As we can see, there is a value of $1916.88 per share to be extracted. However, the company is trading only at $801.79 per share. This means the company is undervalued with a good margin of safety of 58%.

We will also do a modified version of the FCF yield, where we take the company’s FCF and compare that to the enterprise value. We will then compare that to its closest competitors and do a discussion around that.

As we can observe, REGN’s 4.1% Modified FCF Yield is not the best, and there are a number of competitors that you can look at as well. This is lower than the average of 4.6%, suggesting a relative overvaluation of 12.17%.

Combining the data points from this and Part II, we can see the following:

I would say that there is still room for growth for Regeneron, but I would like to wait for the company’s share price to correct a little further before I enter. I wouldn’t mind investing a bit more now, but I will invest if the share price comes down even further. This is especially since I already own the shares of the company previously and have made a good return on investment since.