Merge Reiterated at Neutral - Analyst Blog


Recently, we reiterated our Neutral recommendation on Merge Healthcare ( MRGE ) with a target price of $6.25.

Merge reported adjusted EPS of 4 cents in the fourth quarter of fiscal 2011, which remained flat year over year but above the Zacks Consensus Estimate of a penny. The company also registered a 39% year-over-year increase in total sales during the reported quarter on the back of solid performance across all segments.

Presently, used at more than 300 sites, Merge's iConnect VNA is the most widely deployed vendor neutral archive in the healthcare industry. In addition to this, the Merge iConnect Suite also includes iConnect Share and iConnect Access. With greater adoption of electronic health records (EHR) in doctor's offices, hospitals and imaging centers, the smooth exchange of data becomes essential. Under this circumstance, Merge's iConnect platform has become significant given it is a vendor-neutral archive.

We also believe that Merge possesses strong growth potential in the Radiology Information System/ Picture Archiving and Communication System (RIS/PACS) market. There is immense potential in the diagnostic imaging market, especially with the government's emphasis on health IT ( HIT ) and an ageing population.

According to the Centers for Medicare and Medicaid Services ( CMS ), through December 2011, more than 175,000 professionals and hospitals were registered for meaningful use incentive programs and $2.5 billion was paid out in 2011 to eligible hospitals and professionals. The incentives will be offered for a period of 4-5 years, after which physicians will be penalized for not adopting proper measures. The Stimulus aims to enhance the use of EHR by medical practitioners, in both ambulatory and hospital-based settings.

However, in recent years, medicare reimbursement for advanced medical imaging has declined significantly. At the beginning of 2011, the health care reform law, Patient Protection and Affordable Care Act (PPACA), again reduced reimbursements for advanced imaging by mandating an equipment utilization rate of 75%, thereby increasing the multiple procedural reductions up to 50% from 25%.

Further, the Centers for Medicare and Medicaid Services ( CMS ) implemented additional reimbursement changes using the Physician Payment Information Survey (PPIS) data, resulting in further reimbursements cuts in the range of 30%-40% for advanced modalities by 2013.

However, we remain concerned about declining Medicare reimbursement for advanced medical imaging that could negatively affect hospital and imaging clinic revenues, thereby reducing demand for imaging-related software and services offered by Merge. Furthermore, the presence of many big players like General Electric ( GE ) and McKesson Corporation ( MCK ) has made the healthcare solutions and services market highly competitive.

GENL ELECTRIC ( GE ): Free Stock Analysis Report
MCKESSON CORP ( MCK ): Free Stock Analysis Report

MERGE HEALTHCAR ( MRGE ): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: CMS , GE , HIT , MCK , MRGE

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