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Another Deal for Merge Healthcare

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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 recently struck another deal with St. Cloud, Minnesota-based St. Cloud Hospital, a part of Centracare Health System and the largest healthcare provider in St. Cloud.

Per the deal, St. Cloud Hospital will deploy Merge’s Picture Archiving and Communication Systems (“PACS”), a real-time picture archiving communication system, helping radiologists to manage images and data in order to meet the “Meaningful Use” need.

With the latest Supreme Court mandate upholding the majority of the Patient Protection and Affordable Care Act 2010, we expect the health care market to be more competitive and challenging with the healthcare providers looking to reform their business by drastically reducing costs. In this regard, we believe Merge “Meaningful Use” need solutions will emerge more successfully with several ways to reduce cost and increase work efficiencies.

Piloting over 350,000 imaging studies annually, St. Cloud Hospital believes that the implementation of Merge PACS in its system will eliminate the need for other workstations and provide with one centralized place for the radiologists, thereby streamlining the workflow and reducing expenses.

Apart from PACS, Merge’s radiology solutions comprise Merge RIS, a web-based radiology information system used for streamlining workflow as well as to meet the Meaningful Use criteria. The other meaningful use solutions of Merge are Merge Financials (a web-based billing system), Merge Documents (a paperless office solution), Merge Referral Portal and Merge Dashboards.

In May of this year, Merge entered into another deal with national radiology group Lakeland Healthcare to provide its entire suite of cloud-hosted radiology solutions. In the same month, Merge also added 12 new practices to its ever-growing list of users who selected its complete EHR solution to achieve Meaningful Use need. Presently, Merge Meaningful Use solutions are deployed by over 89 clients, representing more than 850 physicians.

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. We believe that Merge is well placed to grab 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 imaging-related software and services offered by Merge. Furthermore, the presence of many big players like General Electric (GE - Free Report) and McKesson Corporation (MCK - Free 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.

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