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Recently, Merge Healthcare (MRGE - Analyst Report) showcased its new cloud-based platform ‘Merge Honeycomb’ along with its first application in the cloud, namely ‘free image sharing’ at the Radiological Society of North America (RSNA). This application enables users to upload, download, view and share medical images everywhere without the help of any additional software. Through this new solution the company intends to improve image interoperability and achieve the ‘Meaningful Use’ stamp from the federal government.

Earlier this month, Merge selected Dell, Inc as its preferred cloud computing services provider. The company expects to launch “Merge Honeycomb” in the first quarter of 2012, which led to a 17.5% increase in the stock price to $5.18 on Monday. Presently, Merge boasts the largest image sharing network opportunity with 6,000 clinics across the US,

This apart, Merge also displayed its Enterprise-Wide Image Interoperability with iConnect at the RSNA and demonstrated Merge RIS v7.0. Earlier, in October this year, Merge got the complete EHR Ambulatory certification for its RIS v7.0, which enables healthcare providers to efficiently record patient details. Merge also showcased Anywhere, Anytime Image Access with Merge PACS. Furthermore, the company hosted Hands-On CADstream Workshops for MRI Studies.

As per estimates, the US health IT (HIT) market, valued at $7.6 billion in 2010, is expected to grow to $9.6 billion by 2014. The US HIT market is gradually adopting EHRs to meet the funding requirements under the Health Information Technology for Economic and Clinical Health (HITECH) Act. It aims to expand the use of EHR by medical practitioners, in both ambulatory and hospital-based settings. As a result, selected companies in this space are witnessing heightened investor interest. Favorable demographic trends, reinforced by a supportive regulatory environment, are expected to sustain strong growth in demand for EHR-related software in the foreseeable future.

We believe this will benefit Merge in the long run. Merge is presently well placed to garner a meaningful share in the multi-billion dollar HIT investment opportunity.However, in recent years, medicare reimbursement for advanced medical imaging has declined significantly.

Further, the Centers for Medicare and Medicaid Services (CMS) implemented additional reimbursement changes using the Physician Payment Information Survey (PPIS) data, resulting in further reimbursements cuts in the range of 30%-40% for advanced modalities by 2013. This could negatively affect hospital and imaging clinic revenue, which in turn could reduce demand for imaging-related software and services offered by Merge.

Furthermore, the presence of many big players like General Electronics (GE - Analyst Report) and McKesson Corporation (MCK - Analyst Report) has made the diagnostic imaging market highly competitive.

Presently, Merge retains a short-term Zacks #3 Rank (Hold) which also corresponds to our long-term ‘Neutral’ recommendation on the stock.

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