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On Mar 24, 2014, we issued an updated research report on Merge Healthcare Incorporated (MRGE - Analyst Report). Merge recently posted yet another weak quarter with revenues trailing the Zacks Consensus Estimate.

Although the company’s fourth-quarter 2013 adjusted earnings per share of 3 cents improved significantly from the loss per share of 4 cents incurred in the year-ago quarter, a 17.2% year-over-year decline in revenues failed to boost investors’ confidence.The company has been battling losses as its strategy to grow with the AMICAS takeover came to naught due to slower-than-anticipated market growth leading to choppy revenues and an improper cost structure.

Further, the falsification of the company’s subscription backlog numbers propelled negative sentiments among investors leading to a slash in the share price. Notably, on Jan 8, 2014, Merge announced in an internal review that a former sales employee in its eClinical business had falsified the existence or amounts of certain customer contracts.

Since then several class action law suits and derivative complaints have been filed asserting that a class of the stockholders suffered damages due to the alleged dissemination or approval of false and misleading statements by Merge from Aug 1, 2012 through Jan 7, 2014. Although Merge is currently working on defending the claims, there is high chance that the company may incur a loss in this matter.

We also remain wary about declining Medicare reimbursement for advanced medical imaging that could negatively affect hospital and imaging clinic revenues, thereby reducing demand for imaging-related software and services offered by Merge. Moreover, the company’s growth prospect is highly dependent on capital investments by hospitals for advanced imaging solutions, which are in turn tied to the general economic conditions.

Per management, the tough capital spending environment in the hospital space was mainly to be blamed for the fourth-quarter debacle. The company is also battling a lower-than-anticipated market demand for its solutions. It remains to be seen whether the new management can bring about a turnaround in Merge’s quarterly performances going forward. Amid several ongoing challenges and in the dearth of any near-term catalyst, we expect these negative factors to persist even in 2014.

Merge currently carries a Zacks Rank #5 (Strong Sell). Omnicell, Inc. (OMCL - Analyst Report)), athenahealth, Inc. (ATHN - Analyst Report) and Streamline Health Solutions, Inc. (STRM - Snapshot Report) are some better-ranked stocks in the Medical Information Systems space. While Omnicell sports a Zacks Rank #1 (Strong Buy), athenahealth and StreamlineHealthcarry a Zacks Rank #2 (Buy).

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