Merge Upgraded to Neutral - Analyst Blog

We have upgraded Merge Healthcare (MRGE) to Neutral with a target price of $2.75.

Merge reported adjusted net loss per share of 3 cents compared with the Zacks Consensus Estimate of loss per share of 2 cents. Revenues were $29 million, up 89% from the year-ago quarter. This is not comparable since the reported quarter included revenues from AMICAS ($13.9 million), subsequent to its acquisition on April 28, 2010. However, revenues were lower than the Zacks Consensus Estimate of $34 million.

Merge has made several acquisitions in the past few years, which include etrials Worldwide Inc. in July 2009 and Confirma Inc. in September 2009. The latest is the April 2010 acquisition of AMICAS Inc for approximately $248 million, which should complement it in various ways.

While Merge is primarily focused on outpatient imaging sites in the RIS/PACS market, AMICAS derives its revenues from outpatient imaging sites as well as radiology, cardiology and enterprise solutions in the hospital market. The geographical diversity of the two companies will also complement each other – while Merge derived 23% of its revenues in 2009 from international operations, AMICAS’ does not have significant presence outside the US. The combined company will be primarily focused on medical imaging IT with a 12% market share of the North America RIS/PACS market.

As per estimates, the US healthcare IT (HIT) market valued at $7.6 billion in 2009 is expected to grow to $9.6 billion by 2014. This market will gradually adopt electronic health records (EHRs) to meet HITECH funding requirements. The Act also provides for $1.2 billion of incentives to promote the use of health information exchanges (HIEs), which requires broader interoperability. Merge, banking on its imaging interoperability platform will be able to target this market. We are pleased with the customer profile of the company, which includes 1,500 hospitals, 2,200 imaging centers, 800 orthopedic centers with 70 patents and 250 OEM partners.

There is immense potential in the diagnostic imaging market, especially with the government’s emphasis on HIT and an ageing population. The acquisition of AMICAS has transformed Merge into a stronger company with an expanded product portfolio. Moreover, the company has taken several initiatives recently based on which it is on track to achieve the targeted $15 million cost synergies. We believe over the long term Merge is well positioned to take advantage of this opportunity.