Want to invest in the pharmaceutical industry but aren't sure which stock to buy? You can always hedge your bet in this often-risky sector by buying shares of Covance (CVD) .

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Why Covance? Simple. The company provides crucial research and clinical work for big pharmaceutical companies as well as for upstart biotechs. Although its work is primarily behind the scenes, this company is and will remain an integral part of the drug-approval process for years to come.

Backing Up the Buy

I'm certain of that fact for several reasons:

  • The pharmaceutical industry is outsourcing more and more clinical work because it can be very time consuming and capital intensive. Covance stands to benefit from this growing trend.
  • The company's future doesn't overly depend on any one drug or demographic. Rather, its health and earnings potential are tied simply to the longer-term demand for prescription drugs. As our nation ages, well, you get the idea.
  • Covance is growing -- adding capacity in its early development/toxicology business, which represents about 21% of total sales. In fact, it's opening a new facility that will come on line in the second half of 2002. Most sell-side analysts are expecting this addition to enable the high-margin division to grow at a healthy 20% to 25% clip in 2002.
  • Double-digit revenue growth continues at its central laboratory business, which coordinates clinical trials, provides data-crunching services and represents about 28% of total sales, and at its strategic consulting business, where Covance's scientists consult drug companies about the viability of their compounds. The latter, however, represents less than 5% of total sales.
  • Its periapproval business, which gathers clinical data to support marketing efforts and represents about 8.8% of total sales, is expected to grow at a 20% clip over the next year. Why is this so important? The division's operating margins are more than 16%. Compare that with the entire company's operating margin of only about 7.6%. In other words, this segment is a big earnings driver.
  • As of Sept. 30, the company's backlog of work was about $996 million -- up 9% sequentially from the second quarter and up 19% from the comparable year-ago period. Clearly, demand for Covance's services remains robust.

Bottom Line

According to Thomson Financial/First Call, Covance is expected to earn 58 cents a share in 2001 and 77 cents a share in 2002, implying a 32% rate of growth. Considering strong demand for its services as well as its prospects for growth, which could accelerate at a roughly 18% pace over the next five years, Covance looks like a no-brainer. So give it a look.

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In keeping with TSC's editorial policy, Glenn Curtis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Curtis welcomes your

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