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Merge Healthcare (MRGE - Analyst Report) continues to expand rapidly through new client wins. Following last week’s agreement with Worldwide Clinical Trials, Inc., a global contract research organization (“CRO”), the company has won another deal with St. Vincent's Hospital, a member of the Hospital Sisters Health System and the largest hospital in Wisconsin.

Per the deal, St. Vincent's Hospital will deploy Merge’s complete cardiology solution suite to provide end-to-end support for managing cardiac images, hemodynamics and ECG data. Merge expects this to help improve workflow and patient care. However, financial terms of the contract were not disclosed.

The entire suite of cardiology solutions includes Merge Cardio, an enterprise-level image and information system and Merge Hemo, which is a catheterization laboratory knowledge tool for data management.

The list also includes iConnect Access, (a zero-download DICOM image and XDS viewer) and iConnect Share, (Internet-based gateway for image sharing). The company noted that in 2011 Merge Hemo was awarded rank 1 by KLAS, an organization that measures product perceptions of customers.

With the entire suite of Merge Cardio, cardiologists can access integrated patient information through a centralized web-based system, thereby ensuring fast and better treatment even if they are not present on location. This is likely the reason that Advocate Health Care, one of the top 10 health care systems in the U.S. implemented Merge's Cardio suite across its 250+ care sites, including 10 acute-care hospitals and two integrated children's hospitals.

Healthcare-IT Industry - Current Scenario

Currently, imaging in laboratories accounts for over 90% of data storage in healthcare. As per the estimates of the global market research and information analysis company RNCO, the U.S. healthcare IT market is anticipated to grow at a compound annual growth rate (CAGR) of over 24% during 2012-2014.

This market will gradually adopt electronic health records (EHRs) to meet HITECH funding requirements. Merge is expected to target this market given its imaging interoperability platform.

According to Frost and Sullivan and Merge’s 2011 internal research report, 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, the need for data exchange is on the rise. In this backdrop, a reliable imaging interoperability platform becomes significant as a vendor-neutral archive (VNA).

During the second quarter of fiscal 2012, Merge was acknowledged by InMedica, a division of IMS Research as the global market leader in VNA Solutions. Data from InMedica’s study revealed that in 2011, Merge's iConnect VNA customers accounted for 37% of all studies archived in VNAs worldwide.

The overall U.S. health IT (HIT) market witnessed a dramatic change in February 2009 with the passing of the Health Information Technology for Economic and Clinical Health (HITECH) Act, which was included as part of the American Recovery and Reinvestment Act (ARRA), an economic stimulus bill.

The ARRA, along with the accompanying HITECH provisions included more than $35 billion in incentives, which rewarded providers who use certified EHRs in a meaningful way.

In August 2012, the final regulations for the second stage of the ‘Meaningful Use’ incentive program for EHRs were released, along with the final rule on the certification of EHR technology. As per this final mandate, the 2009 ARRA, which authorized the $27 billion program, requires providers to use certified EHRs in order to earn bonus payments from Medicare, Medicaid or both for ‘Meaningful Use’. Implementation of the final stage 2 ruling will begin in 2014.

The stimulus aims to increase the use of EHR by medical practitioners, in both ambulatory and hospital-based settings. As a result, selected companies in this space, including Merge, are witnessing improved and positive investors’ 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.

This will benefit Merge in the long run. It is believed that Merge is well placed to capture a meaningful share of the multi-billion dollar 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 the 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 #4 Rank (Sell). Over the long term, we have a Neutral recommendation on the stock.

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