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Merge Healthcare: Updated Research Report

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On Jun 20, 2014, we issued an updated research report on Merge Healthcare Incorporated . Merge recently posted yet another weak quarter with revenues trailing the Zacks Consensus Estimate.

Merge posted a mixed quarter with adjusted earnings per share of 3 cents, rebounding from the 3 cents per share of loss incurred in the year-ago quarter. Pro forma revenues declined 19.9% to $51.1 million lagging the Zacks Consensus Estimate of $52 million.

Widening loss over the past few quarters remains a major cause of concern. We remain wary about declining Medicare reimbursement for advanced medical imaging that could negatively affect hospital and imaging clinic revenues, thereby reducing demand for imaging-related software and services offered by Merge.

Moreover, the company’s growth prospect is highly dependent on capital investments by hospitals for advanced imaging solutions, which are in turn tied to general economic conditions. Per management, the tough capital spending environment in the hospital space was mainly to be blamed for the first-quarter debacle.

However, we are encouraged by the fact that the subscription-based model is gaining traction as reflected in the healthy growth of subscription backlog. Over the past few quarters, the company’s financial results clearly indicate a shift to the subscription-based model.

It is also commendable that despite the general slowdown in hospital spending, low demand for imaging equipment and related technology due to global credit crisis and macroeconomic factors, Merge witnessed client wins and bookings growth. We believe the company has immense potential in the diagnostic imaging market, especially with the government emphasis on Healthcare IT and demographic tailwind. We believe that Merge is well positioned to take advantage of this opportunity over the long term.

Merge currently carries a Zacks Rank #4 (Sell).

Other Stocks to Consider

Investors interested in the broader medical sector can consider stocks like Actelion Ltd. , Gilead Sciences Inc. (GILD - Free Report) and Osiris Therapeutics, Inc. . All the three stocks carry a Zacks Rank #1 (Strong Buy).

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