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On Mar 05, 2014, we initiated coverage on Covance Inc. (CVD - Analyst Report). Covance has managed to post better-than-expected fourth-quarter results with modest top- and bottom-line beats on healthy growth across both its segments.

Adjusted EPS of 87 cents were up 18.6% and ahead of the Zacks Consensus Estimate by 3 cents. Revenues surged 10.8% to $623.1 million, ahead of the Zacks Consensus Estimate of $622 million.

Late-Stage Development continues to grow steadily. Despite increased spending on strategic IT projects, the segment witnessed growth on the back of better-than-estimated kit volumes in central laboratories and the continued strong performance of Phase II-IV clinical development services.

Over the past few quarters, Covance had been suffering from sluggish early-stage R&D spending by the biopharmaceutical industry which resulted in overcapacity in this segment. However, of late, the company is showing signs of recovery with improvement in Early Development performance on the back of robust growth in clinical pharmacology and a substantial increase in toxicology orders.

Although capital spending environment and competitive landscape remain as overhangs, we believe Covance is positioned well to drive growth in the coming quarters. Another reason behind this optimistic approach might be the expiration of several patents in the pharmaceutical industry, which are likely to improve market conditions for Covance, going forward.

The stock currently carries a Zacks Rank #2 (Buy).

Key Picks from the Sector

Medical stocks such as Natus Medical Inc. (BABY - Snapshot Report), AngioDynamics Inc. (ANGO - Analyst Report) and ABIOMED, Inc. (ABMD - Analyst Report) are also expected to do well. While BABY carries a Zacks Rank #1 (Strong Buy), ANGO and ABMD hold a Zacks Rank #2.

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