Merge Expands with iConnect

Enterprise imaging and interoperability solutions provider Merge Healthcare ( MRGE - Analyst Report ) recently extended its existing relationship with Mercy, the 8^th major Catholic health care system in the US, through a new deal. As per the new deal, Mercy will adopt Merge’s vendor neutral archive iConnect VNA to serve its enterprise of over 200 clinics and hospitals in the midwest. However, financial terms of the deal were not disclosed.

The recent deal enables Mercy to meet the ‘Meaningful Use’ needs of imaging interoperability and provide better service to more than 3 million people per year.

Presently, used at more than 300 sites, Merge's iConnect VNA is the most widely deployed vendor neutral archive in the healthcare industry. In addition to this, the Merge iConnect Suite also includes iConnect Share and iConnect Access. With greater adoption of electronic health records (EHR) in doctor’s offices, hospitals and imaging centers, the smooth exchange of data becomes essential. Under this circumstance, Merge’s iConnect platform has gained significance as it is a vendor-neutral archive.

Currently, imaging in laboratories accounts for over 90% of data storage in healthcare. According to Frost and Sullivan and Merge’s recent research reports, the global market for imaging software and services, healthcare IT interoperability solutions and electronic health records (EHR) solutions for radiology, cardiology, ophthalmology and orthopedics is worth $7.5 billion annually. With greater adoption of EHRs in doctor’s offices, hospitals and imaging centers, there is a consequent increase in the need for data exchange.

We also believe that Merge possesses strong growth potential in the Radiology Information System/ Picture Archiving and Communication System (RIS/PACS) market. There is immense potential in the diagnostic imaging market, especially with the government’s emphasis on health IT (HIT) and an ageing population.

According to the Centers for Medicare and Medicaid Services (CMS), through December 2011, more than 175,000 professionals and hospitals were registered for meaningful use incentive programs and $2.5 billion was paid out in 2011 to eligible hospitals and professionals. The incentives will be offered for a period of 4-5 years, after which physicians will be penalized for not adopting proper measures. The incentive aims to enhance the use of EHR by medical practitioners, in both ambulatory and hospital-based settings.

However, we remain concerned about the declining Medicare reimbursement for advanced medical imaging that could negatively affect hospital and imaging clinic revenues, thereby reducing the demand for imaging-related software and services offered by Merge. Furthermore, the presence of many big players like General Electric ( GE - Analyst Report ) and McKesson Corporation ( MCK - Analyst Report ) has made the healthcare solutions and services market highly competitive.

Presently, Merge retains a short-term Zacks #2 Rank (Buy). Over the long term, we have a ‘Neutral’ recommendation on the stock.