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Merge Upgraded to Neutral - Analyst Blog

Posted: 11/18/2011 6:14:00 PM
Referenced Stocks: CMS;GE;HIT;MCK;MRGE

Recently we have upgraded Merge Healthcare ( MRGE ) to Neutral with a target price of $5.50.

Merge reported adjusted EPS of 6 cents in the third quarter of fiscal 2011, surpassing the prior-year quarter level of 4 cents. The company also registered a 33% year-over-year increase in total sales during the reported quarter on the back of solid performance across all the segments.

Alongside, the company's successful product innovation and cross-selling efforts resulted in the achievement of $3 million in sales growth in each of the past four sequential quarters. A significant portion of the sequential quarterly growth came from new sales of hardware and software.

We believe Merge has 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.

With greater adoption of electronic health records (EHR) in doctor's offices, hospitals and imaging centers, the smooth exchange of data becomes more necessary. Under this circumstance, Merge's iConnect platform becomes significant since it is a vendor-neutral archive.

iConnect VNA (currently deployed at more than 300 sites) is the most widely deployed vendor neutral archive in the healthcare industry. With iConnect VNA, clients can centralize storage for all types of image and clinical data across their entire health system. In addition to iConnect VNA, the Merge iConnect Suite also includes iConnect Share and iConnect Access. With the iConnect Suite, Merge expects to capitalize on the $1 billion opportunity in enterprise-wise imaging.

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. This could negatively affect hospital and imaging clinic revenue, which in turn could reduce 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 diagnostic imaging 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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