On Dec 17, 2013, we reaffirmed our long-term Neutral
Merge Healthcare Inc.
) as the company's bright growth prospects have been to some
extent dwarfed by escalating costs, lower demand for advanced
imaging solution and declining Medicare reimbursement.
The company has been battling losses as its strategy to grow
with the AMICAS takeover came to naught due to
slower-than-anticipated market growth resulting in choppy
revenues and an improper cost structure. This imaging and
interoperability solutions provider carries a Zacks Rank #3
Why the Reiteration?
Merge's third-quarter 2013 adjusted earnings per share of
a penny marked a slight improvement from the loss incurred in the
year-ago quarter. Revenues declined 5.2% to $57.2 million. Dismal
performance over the past few quarters and the recent exit of the
company's CEO and chairman raised our concern. Notably, the
growth prospect of the company is highly dependent on the capital
investment environment at hospitals and reimbursement rates.
The business of Merge Healthcare depends on the capital
investments for advanced imaging solutions made by hospitals. Its
business is also susceptible to the Medicare reimbursement rates
for advanced medical imaging that could adversely impact hospital
and imaging clinic revenues, thereby reducing demand for
imaging-related software and services offered by the company.
Additionally, with its transition to a subscription-based model,
Merge Healthcare has been experiencing increasing costs. Also,
focus on product innovation continues to result in higher
professional fees. We believe any near-term margin improvement is
unlikely. But we expect the same to improve in the long run with
greater adoption of the new subscription-based model.
Nevertheless, Merge Healthcare also witnessed events that favor
the company. Its client wins and bookings were encouraging. With
a clientele increasingly willing to adopt subscription-based
model, the company is optimistic about an increase in backlog by
at least $25 million or 55% by the end of 2013.
Recent findings also demonstrate an immense growth potential
for the company in the U.S. and overseas markets. While its
eClinical solution serves a market size of $4.8 billion, the
combination of iConnect and Merge Honeycomb reflects a $550
million market opportunity.
Thus, persistent client wins and market penetration should
accelerate growth. Further, Meaningful Use Stage 2 criteria and
incentive payments for Merge Healthcare's radiology clients are
also likely to support positive business momentum.
Despite the lucrative market opportunity, we remain on the
sidelines until we see improved execution. However, better-ranked
healthcare stocks include
Align Technology Inc.
Cardinal Health, Inc.
). These stocks carry a Zacks Rank #2 (Buy).
ALIGN TECH INC (ALGN): Free Stock Analysis
CARDINAL HEALTH (CAH): Free Stock Analysis
MCKESSON CORP (MCK): Free Stock Analysis
MERGE HEALTHCAR (MRGE): Free Stock Analysis
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