Covance Inc. (CVD) agreed to provide genomic analysis services to Merck & Co. (MRK), and acquire some of the drug giant's related facilities, under a five-year contract valued at $145 million.

Separately, the Princeton, N.J., company Wednesday reported better-than-expected second-quarter earnings, and boosted its expectations for the full year after cutting those expectations in April.

Shares of Covance rose 2.7% to $51.50 in after hours trading.

Under the agreement, Covance will acquire Merck's Seattle-based Gene Expression Laboratory for an undisclosed amount. The lab performs drug discovery services to identify biomarkers related to a drug or a patient for so-called personalized medicine, the idea of tailoring treatment to an individual's genetic makeup.

Joseph Herring, Covance's chief executive, said such genomic testing services are becoming more important for large drug developers, but the high cost of owning such a lab can be impractical.

"Merck is looking to cut costs," said Herring. "It is a big fixed-cost investment that they don't use all the time."

A Merck spokesman didn't have estimates for the company's cost savings, but said that it announced its decision to make such a deal for the Gene Expression Lab in December as part of its global research strategy.

Contract research organizations like Covance have benefited from pharmaceutical companies cutting costs and improving development efficiency as they deal with pipeline and patent pressures.

Though smaller, the deal is similar in structure to Covance's $1.6 billion deal with Eli Lilly & Co. (LLY) last August to provide broad drug development services over 10 years and assume control of Lilly's early drug development facility and related workers.

Herring said the deal will be "immediately profitable" for Covance. He noted that the acquired lab is far beyond Merck's needs and includes about 70 to 80 workers who will become Covance employees when it takes over in mid-August.

Separately, Covance reported second-quarter earnings of $43 million, or 67 cents a shares, compared with $50.9 million, or 81 cents a share, in the year-earlier quarter. Excluding items, the company earned 66 cents a share, beating an analysts estimate of 63 cents, according to Thomson Reuters.

Revenue rose 6% to $489.3 million, also beating expectations of $447.5 million.

Looking forward, the company now expects 2009 earnings, excluding items, of $2.60 to $2.80 a share, up from its previously lowered range of $2.50 to $2.70 a share. Wall Street expects $2.62 a share for the full year.

Covance said the strengthened outlook was based on weakening of the U.S. dollar and a lower tax rate.

The company now expects 2009 revenue growth in the "mid- to upper-single digits" compared with a previous target of "single-digit" growth

Despite that previous guidance, Wall Street has projected revenue for the year to be essentially flat at $1.81 billion.

-Thomas Gryta; Dow Jones Newswires; 212-416-2169; thomas.gryta@dowjones.com