Recently, Merge Healthcare (MRGE) decided to acquire Ophthalmic Imaging Systems for approximately $30.3 million, before considering debt. Ophthalmic Imaging provides digital imaging and informatics solutions for ophthalmology and other medical specialties.
As per the agreement, for each share of Ophthalmic Imaging, shareholders will receive 0.1693 share of Merge. Around 72% of Ophthalmic Imaging shareholders have agreed to the deal, which is expected to conclude in the third quarter of 2011.
Merge has grown through several acquisitions, the most significant being AMICAS, an image and information management solutions provider, in April 2010. The deal with Ophthalmic Imaging will enable Merge to expand its portfolio to include ophthalmic imaging and informatics.
Its current portfolio is focused on radiology, cardiology and orthopedics; products for clinical trials; software for financial and pre-surgical management. Merge sees huge potential for ophthalmic imaging solutions based on an aging population, better treatment results owing to early detection of disease, increased incidence of visual impairment, and the growing need for portable diagnostic equipment.
However, we do not expect any significant benefit from the deal in the near term. This is because in the first quarter of 2011, Ophthalmic Imaging reported revenue of $3.5 million (lower than $4.1 million in the year-ago period) with a net loss of $1.5 million.
Merge is already witnessing pressure in its bottom line owing to higher interest expense due to the debt incurred on AMICAS acquisition. Moreover, issuance of shares to fund the current deal will lead to dilution of shareholder value.
There is immense potential in the diagnostic imaging market, especially with the government’s emphasis on HIT and an ageing population. However, Merge’s growth prospect is highly dependent on capital investments by hospitals for advanced imaging solutions which are tied to general economic conditions.
To better penetrate the market, Merge has improved its sales force, thereby increasing its operating expenses and pressurizing margins. The presence of many big players like General Electric (GE) and McKesson (MCK) has made the diagnostic imaging market highly competitive.
We currently have an Underperform rating on Merge, which also corresponds to a Zacks # 5 Rank (Strong Sell).
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