New Contract for Merge Healthcare - Analyst Blog

Merge Healthcare (MRGE) entered into a new contract with McLeod Health, which would integrate Merge's cardiology workflow solutions with McLeod's existing radiology solution. Following this agreement, McLeod will have access to Merge's Vericis and Hemodynamics, which would complement its existing system - Merge enterprise content manager (ECM) and RadSuite. This would facilitate storing of information as the common infrastructure of ECM stores both cardiology and radiology images.

This is expected to provide McLeod with improved data quality associated with its cardiovascular services as well as a unified image management platform. McLeod Health, a non-profit institution, caters to acutely ill patients of northeastern South Carolina. Merge Healthcare, based in Milwaukee, Wisconsin develops healthcare information software solutions to create more comprehensive electronic records of the patients and deliver related services.

Merge reported revenues of $29 million during the second quarter of fiscal 2010, 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. Merge's growth prospect is highly dependent on capital investments by hospitals for advanced imaging solutions, which are tied to general economic conditions. Moreover, the presence of many big players has made the diagnostic imaging market highly competitive.

Although organic revenues declined during the quarter, we believe Merge has strong growth potential in its RIS/PACS market. There is immense potential in the diagnostic imaging market, especially with 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 aims to achieve the targeted $15 million by way of cost synergies. We believe over the long term, Merge is well positioned to take advantage of this opportunity.

We have a Zacks #3 Rank (short-term Hold recommendation) on the shares. We also reiterate our long-term Neutral rating.