Olema Pharmaceuticals (OLMA) shares are back in focus after the company released new preclinical data for palazestrant and KAT6 inhibitor OP-3136 at the AACR Annual Meeting, highlighting their combined activity in ER+/HER2- breast cancer models.

The latest AACR data arrive after a volatile year, with a 19.46% 1 month share price return and a 33.47% year to date share price decline, alongside a very large 1 year total shareholder return that hints at shifting expectations around Olema’s pipeline progress and risk profile.

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With Olema now valued at about US$1.47b and trading at US$16.82, plus a very large 1 year total return and a sizeable discount to the average analyst target, is the recent weakness a fresh entry point, or is the market already baking in future growth?

DCF valuation suggests a wide gap to the current price

Our DCF model estimates Olema Pharmaceuticals' fair value at about $201.04 per share, compared with the last close of $16.82. This indicates a large valuation gap.

The SWS DCF model projects Olema's future cash flows and discounts them back to today using a required rate of return. This gives a single fair value estimate per share. This approach focuses on the cash the business is expected to generate over time rather than short term earnings or revenue multiples.

For a clinical stage biotech with no current revenue, ongoing losses of $162.451m and forecasts that it remains unprofitable over the next 3 years, a cash flow based approach can be useful because it puts all of the expected pipeline economics into one number. It also helps frame how much of the current US$1.47b market cap is tied to future growth in ER+/HER2- breast cancer and other solid tumor opportunities rather than current financials.

Result: DCF Fair value of $201.04 (UNDERVALUED)

However, the story could change quickly if clinical data for palazestrant or OP-3136 disappoints, or if continued annual losses of $162.451m put pressure on funding options.

Another angle from the P/B ratio

While the SWS DCF model points to a wide gap between price and fair value, Olema trades on a P/B of 3.1x versus 2.5x for the US Biotechs industry, yet below a 19.9x peer average. That mix of premium to the sector and discount to peers raises a simple question: how much valuation risk are you comfortable with around an unprofitable, early revenue story?

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Olema Pharmaceuticals for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 60 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

With all this mixed sentiment around valuation, risk and potential rewards, it makes sense to look through the data yourself and decide where you stand. To see both sides clearly, start with these 2 key rewards and 5 important warning signs.

Looking for more investment ideas?

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• Target potential mispricings by scanning 60 high quality undervalued stocks that pair stronger fundamentals with prices that may not fully reflect them.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.