Still Neutral on Merge Healthcare - Analyst Blog
April 05 2013 - 10:10AM
Zacks
On Apr 2, 2013, we reaffirmed our
long-term Neutral recommendation on Merge Healthcare
Incorporated (MRGE) as the company’s bright growth
prospects are to some extent dwarfed by escalating costs, lower
demand for advanced imaging solution and declining Medicare
reimbursement. This imaging and interoperability solutions provider
carries a Zacks Rank #3 (Hold).
Why the Reiteration?
The business of Merge Healthcare depends on the capital investments
for advanced imaging solutions made by hospitals. Its business is
also susceptible to the Medicare reimbursement rates for advanced
medical imaging that could adversely impact hospital and imaging
clinic revenues, thereby reducing demand for imaging-related
software and services offered by the company.
Additionally, with the transition to a subscription-based model,
Merge Healthcare has been experiencing increasing costs. Also,
focus on new product innovation continue to induce higher
professional fees. We believe any near-term margin improvement is
unlikely, although we expect the same to improve in the long run
with greater adoption of the new subscription-based model
Nevertheless, Merge Healthcare also witnessed events that favor the
company. Its client wins and bookings growth was encouraging. With
a clientele increasingly willing to adopt subscription-based model,
the company is optimistic about an increase in backlog by at least
$25 million or 55% by the end of 2013. Because of the length of
sales cycles under this model, Merge expects this arrangement to
turn more prevalent in 2013 and beyond. The company expects more
than 60% of its revenue to be generated from the subscription based
model in 2013 and reach about 80% in a couple of years.
Recent findings also demonstrate immense growth potential in the
U.S. and overseas market for the company. While its eClinical
solution serves a market size of $4.8 billion, the combination of
iConnect and Merge Honeycomb reflects a $550 million market
opportunity. Thus, persistent client wins and market penetration
should accelerate growth. Further, Meaningful Use Stage 2 criteria
and incentive payments for Merge Healthcare’s radiology clients are
also likely to support positive business momentum.
Despite the lucrative market opportunity, we remain on the
sidelines until we see signs of improved execution. However, other
healthcare stocks such as Cepheid (CPHD),
Medical Action (MDCI) and Given
Imaging (GIVN) are worth considering. These stocks carry a
Zacks Rank #1 (Strong Buy).
CEPHEID INC (CPHD): Free Stock Analysis Report
GIVEN IMAGING (GIVN): Free Stock Analysis Report
MEDICAL ACTION (MDCI): Free Stock Analysis Report
MERGE HEALTHCAR (MRGE): Free Stock Analysis Report
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