Olema Pharmaceuticals (OLMA) is back in focus after its stock dropped sharply following Roche’s failed Phase 3 trial for breast cancer drug giredestrant, which raised fresh questions around estrogen receptor targeted therapies.

The 1 day share price return of 0.95% is small compared with a 7 day share price decline of 35.87% and a 90 day drop of 50.57%. However, the 1 year total shareholder return of about 2.5x suggests recent selling has followed a strong prior run rather than a long term slump.

If this volatility has you looking beyond a single biotech name, it could be a good moment to scan other healthcare opportunities using our 34 healthcare AI stocks as a starting list.

So with Olema’s shares down sharply from recent levels yet still showing a multi year total return that is several times higher, is this pullback creating an undervalued entry point, or is the market already factoring in years of future growth?

DCF Valuation: Olema Screens as Undervalued on Future Cash Flows

Our DCF model estimates a fair value for Olema Pharmaceuticals of $25.48 per share, compared with the latest close of $15.61, which points to a meaningful discount in the current price.

The SWS DCF model projects a stream of future cash flows for the business and then discounts those back to today using a required return, giving a single present value estimate. It is one way to translate long term growth and profitability expectations into a per share number that can be compared with the market price.

For a clinical stage biotech like Olema, which currently reports no revenue and a net loss of $149.96m, a cash flow based approach keeps the focus on what the pipeline could generate over time rather than on current earnings. The company is forecast to grow revenue at 57.8% a year and is viewed in our model as trading 38.7% below its future cash flow value. This is consistent with the DCF result of $25.48 versus the $15.61 share price.

Result: DCF Fair value of $25.48 (UNDERVALUED)

However, you are still relying on successful breast cancer trial outcomes and future funding to support a business that currently reports no revenue and a net loss of $149.96m.

Another Lens: P/B Ratio Sends a Different Signal

While our DCF work flags Olema as undervalued, the P/B ratio tells a more cautious story. The shares trade at 4x book value, which is higher than the US Biotechs industry average of 2.7x, even though Olema is loss making and not forecast to be profitable in the next 3 years. That kind of premium can leave less room for error if clinical or funding setbacks arise. How comfortable are you paying above the sector average for a company still pre revenue?

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 50 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

If this seems carefully balanced between potential and risk, it is worth acting promptly to review the full picture for yourself, including 2 key rewards and 4 important warning signs.

Looking for more investment ideas?

If Olema has grabbed your attention, do not stop here. Use this moment to widen your watchlist and compare other potential opportunities side by side.

• Target potential mispricings by reviewing companies our screen calls 50 high quality undervalued stocks and see which ones deserve a closer look alongside Olema.
• Strengthen the defensive side of your portfolio by scanning stocks in the solid balance sheet and fundamentals stocks screener (41 results) that pair resilient finances with clear fundamentals.
• Aim to get ahead of the crowd with our screener containing 23 high quality undiscovered gems where lesser known names with solid underpinnings might be waiting before they are widely noticed.

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.