Yesterday we talked about the healthcare sector being ahead of fair value such that the sector should be considered for a lighter weight (12.7%) than market weight (14.2%). Bristol-Myers is a good example of what is happening in the sector.
BMY is currently @ 117% of Fair Value (FV). The company recently received approval from the FDA for Opdivo a cancer fighting drug. This is a difficult task as only 7% of researched drugs ever reach the market and average development costs reach well above $2 billion. This is 3 times the cost of development than in 2003. A large company such as BMY have had difficulty in bringing new drugs to the market. Small companies have been very successful with 41 new medicines in 2014. Over 60% of all new drugs have been originating from smaller companies especially in the biotech field.
Market expectations appear a bit too high currently and may soon reach a 130% FV ($65/share) level pushing the sector further into overvalued territory. In an asset allocation strategy it is good to look for individual securities that are overvalued if trimming, or reduced levels of buying are considered. There is little reason to buy an overvalued security in an overvalued sector.