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Merge Healthcare Incorporated (MRGE - Analyst Report) announced revised figures for the subscription backlogs for its Data and Analytics (DNA) segment. The total was brought down by nearly 27% to $41.22 million. Following the announcement, MRGE’s share price fell 8.33%.

Merge Healthcare issued the revised numbers following an investigation that revealed the falsification of contracts by an ex-employee in the eClinical business of the DNA segment. The employee of Merge Healthcare had fabricated the contracts for six quarters since Jun 30, 2012.

The accused employee, who resigned on Sep 30, 2013, agreed to having fabricated the contracts. The fraud was most likely committed to meet sales targets and helped the employee earn commissions amounting to a significant $250,000.

On a positive note, the investigation confirmed that no other employee of Merge Healthcare was involved in this illegal activity.

Management announced that the changes in subscription backlog totals will not affect the financial statements, retrospectively. This is mainly because no invoices were raised in connection with the falsified contracts.

Merge Healthcare has been taking steps to change its compensation plan for the eClinical sales employees. The company changed its compensation and internal monitoring and control policy, prior to finding out about the falsification. Per the new policy, sales employee compensation will be subject to actual realization of revenues and not on the number of contracts being signed.

Merge encompasses two major segments, viz. MRGE Healthcare and DNA. Year-to-date DNA contributed 17.82% to total revenue of Merge Healthcare. eClinical is an important business under this segment. Management remained optimistic about its growth potential and expects the business, which grew 30% in 2013, to grow another 20% at least in 2014.

Although the falsification of records will not have an impact on Merge Healthcare’s financials, we view this as another hit on investor sentiment as the company has been reporting lackluster results over the past few quarters.

Currently, Merge Healthcarehas a Zacks Rank #3 (Hold). Other better-ranked stocks in the broader healthcare sector include Cepheid (CPHD - Analyst Report), CryoLife Inc. (CRY - Snapshot Report) and Medidata Solutions, Inc. (MDSO - Snapshot Report). Cepheid and CryoLife sport a Zacks Rank #1 (Strong Buy) and Medidata Solutions carries a Zacks Rank #2 (Buy).

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