MRGE Mirage Energy Corporation (PK)

We recently reiterated our Underperform rating on Merge Healthcare Incorporated (MRGE) with a target price of $5.25.

Merge reported an adjusted EPS of 6 cents in the second quarter of fiscal 2011, well above the year-ago quarter's loss of 3 cents per share. Solid growth across all the company’s segments triggered a 92% year-over-year increase in total revenue to $55.6 million in the quarter. However, reported revenues were in line with the Zacks Consensus Estimate.

We are pleased with Merge’s huge market potential based on the various incentives proposed by the HITECH Act. Moreover, we believe Merge’s iConnect platform with its interoperability infrastructure holds immense potential.

However, the company’s growth prospect is highly dependent on capital investments by hospitals for advanced imaging solutions, which in turn is tied to general economic conditions. The global downturn in the macroeconomic scenario negatively impacted the market for medical imaging technologies in the US.

General slowdown in hospital spending, low demand for imaging equipment and related technology arising from the global credit crisis and macroeconomic factors could result in lower Merge product sales. Additionally, medical imaging facilities have reduced spending as lower reimbursements and a changing regulatory environment have dampened profitability. Moreover, any reduction in reimbursement rates for radiology procedures could affect the company as demand for imaging related software and services would be hampered.

Additionally, declining consumer and business confidence, shifts in consumer spending patterns, increased unemployment, reduced levels of capital expenditures, fluctuating commodity prices, bankruptcies and other challenges are currently forcing customers to delay or reduce purchases. This could result in lower revenues, longer sales cycles, slower adoption of new technologies and increased price competition.

In recent years, medicare reimbursement for advanced medical imaging has declined significantly. At the beginning of 2011, the health care reform law, Patient Protection and Affordable Care Act (PPACA), again reduced reimbursements for advanced imaging by mandating an equipment utilization rate of 75%, thereby increasing the multiple procedural reductions up to 50% from 25%.

Further, the Centers for Medicare and Medicaid Services (CMS) implemented additional reimbursement changes using the Physician Payment Information Survey (PPIS) data, resulting in further reimbursements cuts in the range of 30%-40% for advanced modalities by 2013. This could negatively affect hospital and imaging clinic revenue, which in turn could reduce demand for imaging-related software and services offered by Merge.

Furthermore, the presence of many big players like General Electric (GE) and McKesson Corporation (MCK) has made the diagnostic imaging market highly competitive.

 
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MERGE HEALTHCAR (MRGE): Free Stock Analysis Report
 
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