On Aug 13, Zacks Investment Research downgraded drug development services provider Covance Inc. (CVD) to a Zacks Rank #3 (Hold).
Why the Downgrade?
N.J.-based Covance continues to be plagued by a sluggish Early Development business. In the last reported quarter, the company reported Early Development revenues of $215 million, down 2.3% year over year (or down 0.4% on an adjusted basis).
Growth in nutritional chemistry and clinical pharmacology was offset by pharmaceutical chemistry services and discovery support services. According to the company, discovery support is an emerging and fragmented market with a slower-than-expected growth rate. According to the company, the research products business has been sluggish historically.
Over the past few quarters, decreasing early-stage research and development spending by the biopharmaceutical industry has led to overcapacity in this segment. We believe that factors like these have affected the company adversely in the recent past.
However, a strong performance by the company’s Late-stage Development neutralized these negative factors. This segment continues to be the sole growth driver for Covance. In the reported quarter, net revenue from Late-Stage Development surged 16.9% year over year to $377.7 million. Despite increased spending on strategic IT projects, the segment witnessed growth on the back of better-than-expected kit volumes in central laboratories and Clinical development.
Stocks That Warrant a Look
While we expect Covance to perform in line with its peers and industry levels in the coming months and advice investors to wait for a better entry point before accumulating shares. Apart from Covance, Cyberonics Inc. (CYBX), Affymetrix Inc. (AFFX) and Alere Inc. (ALR) are good buying opportunities. All these three medical device stocks carry a Zacks Rank #1 (Strong Buy).
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