On Apr 2, 2013, we reaffirmed our long-term Neutral
Merge Healthcare Incorporated
) as the company's bright growth prospects are to some extent
dwarfed by escalating costs, lower demand for advanced imaging
solution and declining Medicare reimbursement. This imaging and
interoperability solutions provider carries a Zacks Rank #3
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MERGE HEALTHCAR (MRGE): Free Stock Analysis
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Why the Reiteration?
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 the transition to a subscription-based model,
Merge Healthcare has been experiencing increasing costs. Also,
focus on new product innovation continue to induce higher
professional fees. We believe any near-term margin improvement is
unlikely, although 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 growth was 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. Because of the
length of sales cycles under this model, Merge expects this
arrangement to turn more prevalent in 2013 and beyond. The
company expects more than 60% of its revenue to be generated from
the subscription based model in 2013 and reach about 80% in a
couple of years.
Recent findings also demonstrate immense growth potential in the
U.S. and overseas market for the company. 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 signs of improved execution. However,
other healthcare stocks such as
) are worth considering. These stocks carry a Zacks Rank #1