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A New Global Deal for Merge

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Imaging and interoperability solutions provider, Merge Healthcare announced another addition to its ever-increasing client list with the latest deal with Worldwide Clinical Trials, Inc., a global contract research organization (CRO) that provides full-service drug development services to the pharmaceutical and biotechnology industries.

Per the deal, Worldwide Clinical Trials will deploy Merge’s eClinical OS that provides an end-to-end study support from a single clinical trial operating platform so that users can conduct the studies more efficiently. However, financial settlements of the contract were not disclosed.

At first, Worldwide Clinical Trial selected eClinical OS only to manage the Phase I trials of their clients. However, with the solution’s capability of multiple functioning, Worldwide Clinical Trial chose the eClinical OS for other trials as well. Merge believes that its association with a global CRO like Worldwide Clinical Trials is likely to provide it with a huge exposure in the international clinical trial market.

Merge realigned its business into two operating groups in the second quarter of 2012, after observing changes in customers’ buying habits. These operating groups, Merge Healthcare and Merge DNA (Data & Analytics), were formed to better focus on two primary end users: providers and consumers. Consequently, earlier this month, the company noted another significant addition to its client list.

We are encouraged by the fact that Merge changed its focus according to the purchasing requirements of its clients.

We note that despite the general slowdown in hospital spending, low demand for imaging equipment and related technology due to the global credit crisis and macroeconomic factors, the company reported balanced segmental revenue growth during the second quarter of 2012.

This has been possible because of favorable demographic trends, reinforced by a supportive regulatory environment. We expect these factors to lead to sustained growth in demand for electronic health record (“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 big players like General Electric (GE - Free Report) and McKesson Corporation (MCK - Free Report) has made the healthcare solutions and services market highly competitive.

Currently, 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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