New Australian Deal for Merge

Imaging and interoperability solutions provider, Merge Healthcare ( MRGE - Analyst Report ) announced another addition to its ever-increasing client list with the latest deal with Datapharm Australia Pty Ltd., an Australian Contract Research Organization (CRO)that provides full-service drug development services. Per the deal, Datapharm Australia will deploy Merge’s eClinical OS that provides an end-to-end study support for in house electronic data capture (EDC) with control on electronic case report form (eCRF) creation and mid-study changes. However, financial settlements of the contract were not disclosed.

Datapharm Australia started an EDC vendor evaluation in 2010 involving 14 vendors who could offer in-licensing of software for technology transfer. The evaluation criteria included full set of EDC tools, time and costs associated with technology transfer. The company gradually understood the need of EDC in a growing number of client studies. Thus, it started outsourcing EDC projects to a third party vendor to handle the eCRF setup. However, on facing several drawbacks related to outsourcing, the company shifted to eClinical OS which has several EDC features.

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. Against 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. InMedica predicts that the market for VNA solutions will grow from 75 million studies in 2011 to 570 million studies by 2016, a CAGR of 49.9%.

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.

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 the company 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 likeMcKesson Corporation ( MCK - Analyst Report ) has made the healthcare solutions and services market highly competitive.

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