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In a concerted effort to tap the growing market for electronic health record ("EHR"), imaging and interoperability solutions provider Merge Healthcare (MRGE - Analyst Report) recently announced the launch of a picture archiving and communication system (PACS) solution for orthopedics called Merge OrthoPACS.

Prima facie, a subscription model of OrthoPACS, has been marketed by Merge to achieve proper client review and requirements in order to set its long-term operating plans.

This new complete set of image management and digital templating solutions will capture, store and manipulate digital orthopedic-specific images from multiple locations in a single viewer, providing orthopedic surgeons with efficient and faster query resolution.

The company also claims that the new device will perfectly into the current workflow of the surgeons. Georgia's largest orthopedic practice Resurgens Orthopaedics has opted to upgrade to Merge OrthoPACS immediately after the release of the product.

Currently, imaging in laboratories accounts for over 90% of data storage in healthcare. Merge noted that the Centers for Medicare & Medicaid Services (CMS) proposed a second set (Stage 2) of the Medicare/Medicaid Meaningful Use EHR program (released in March 2012) that included specialties like orthopedics and radiology in meaningful use. The company remains optimistic that with this Stage 2 requirement, the specialty physicians will come up to meet the Meaningful Use criteria, thereby driving the demand for its offerings.

According to Frost and Sullivan and Merge’s research reports in 2012, the global market for imaging software and services, healthcare IT interoperability solutions and electronic health records (EHR) solutions for orthopedics, radiology, cardiology and ophthalmology is currently worth $7.5 billion a year. With greater adoption of EHRs in doctor’s offices, hospitals and imaging centers, there is a corresponding increase in the need for data exchange.

In December last year, CMS declared that more than 175,000 professionals and hospitals 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.

Thus, favorable demographic trends, reinforced by a supportive regulatory environment, are expected to sustain the strong growth in demand for EHR-related software in the foreseeable future. We believe that Merge is well placed to gain a meaningful share of the multi-billion dollar American Recovery and Reinvestment Act (ARRA)-related healthcare information technology investment opportunity.

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.

Currently, Merge retains a short-term Zacks #3 Rank (Hold). Over the long term, we have a Neutral recommendation on the stock.

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