Merge Upgraded to Outperform - Analyst Blog

We have recently upgraded Merge Healthcare (MRGE) to Outperform with a target price of $4.75.

Merge reported revenues of $45.2 million, up 167.5% from $16.9 million in the year-ago period. Results for the reported quarter include sales of AMICAS, which was acquired in April 2010. However, adjusted revenue was $48.5 million, higher than the year-ago quarter's adjusted revenue of $45.7 million and the Zacks Consensus Estimate of $43 million.

The overall US health IT (HIT) market witnessed a dramatic change in February 2009 with the passing of the Health Information Technology for Economic and Clinical Health (HITECH) Act, as part of the American Recovery and Reinvestment Act (ARRA), an economic stimulus bill.

According to the HITECH Act, almost $20 billion will be spent on health care providers who can demonstrate by 2011 that they are using HIT applications in meaningful ways to reduce health care costs. Though initially confusing, the requirements to qualify for the funds are now becoming clearer, helping health providers make the necessary purchases.

With greater adoption of electronic health records by doctor's offices, hospitals and imaging centers, the necessity to exchange data arises. In this scenario, Merge's iConnect platform is significant since it is a vendor-neutral archive. Additionally, it is also compliant with Web accessibility and Enterprise Master Patient Index (EMPI) technology.The company is confident about its iConnect platform and expects greater acceptance of the solution going ahead.

During the third quarter, Merge announced changes in its management structure. The company announced its new CEO, Jeffrey Surges, who was the president of sales at Allscripts Healthcare (MDRX), a Merge partner.

Moreover, the company plans to double the number of sales representatives over the next year from the current level of 60. The company is confident of recording higher revenues based on its efforts to increase the sales team. As a result, the company's 2011 revenue guidance of $235-$240 million was much higher than expectations.

We are also encouraged by Merge's renewed focus on the international market. Although the company derived 23% of its revenues from international operations, the contribution has come down (2010 projected contribution is 10%-12%) following its acquisition of AMICAS as the latter's presence in markets outside the US is limited. However, Justin Dearborn, whom Mr. Surge replaced, will now focus on the company's international business.

 
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