Recently, we reiterated our Neutral recommendation on
Merge Healthcare Inc.
(
MRGE
) with a target price of $2.50.
Merge reported a loss of 2 cents per share in the first quarter of
fiscal 2012, narrower than the year-ago loss of 4 cents per share.
However, adjusted EPS came in at 3 cents in the reported quarter,
in line with the prior-year adjusted EPS but ahead of the Zacks
Consensus Estimate of break-even.
Total revenue during the quarter stood at $61.0 million, up 16%
year over year but down 4.8% sequentially. Total revenue also
missed the Zacks Consensus Estimate by $6 million.
The company made some operational alteration to better focus on its
two primary end users, providers and consumers. These operational
changes were required as the company shifted from traditional
perpetual software license arrangement to subscription-based
pricing in order to meet the purchasing requirements of the
company's clients in a better way.
Additionally, perceiving change in customers' buying habits with
regard to subscription-based models over the past few months, Merge
launched Honeycomb, a cloud-based platform for sharing, managing
and storing diagnostic images in March 2012.
Currently with greater adoption of EHRs in doctor's offices,
hospitals and imaging centers, Merge's iConnect platform is
becoming significant since it is a vendor-neutral archive. In the
first quarter of 2012, the company signed 9 iConnect contracts,
including major healthcare systems such as Mercy, Lutheran
HealthCare, Northwestern Memorial Hospital and Dignity Health
(formerly Catholic Healthcare West).
The company also extended its enterprise-wide imaging partnership
with Advocate Health Care, one of the US's top ten healthcare
systems and executed 12 contracts for Merge's meaningful use
platform within Radiology and Orthopedics. Currently, Merge has
total meaningful use client base of 89 with 850 physicians.
In June 2012, the Community Health Network selected iConnect VNA
and iConnect Access to provide real-time access to images and
information among its network of providers and referring
physicians. Community Health Network also selected Merge Honeycomb
to provide cloud-based image storage.
We remain encouraged by Merge's decision to shift toward
subscription-based models from traditional perpetual software
license arrangements. However, supposing lower upfront revenue in
the near term, the company suspended its previous revenues
guidance.
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 aging 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, 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.
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.
Moreover, Merge's growth prospect is highly dependent on capital
investments by hospitals for advanced imaging solutions, which are
in turn tied to the general economic conditions. 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.
In the short run, we have a Zacks #4 Rank on the stock, which
translates into a short-term Sell rating.
GENL ELECTRIC (GE): Free Stock Analysis Report
MCKESSON CORP (MCK): Free Stock Analysis Report
MERGE HEALTHCAR (MRGE): Free Stock Analysis
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