On Mar 6, 2015, we issued an updated research report on Merge Healthcare Incorporated MRGE. Merge recently posted yet another weak quarter with revenues trailing the Zacks Consensus Estimate.
Fourth-quarter 2014 adjusted net income per share was 4 cents, a penny higher than the year-ago quarter. Total revenue in the reported quarter remained almost flat year over year at $53.6 million, missing the Zacks Consensus Estimate of $55 million.
Revenue loss over the past few quarters remains a major cause of concern. We remain wary about declining Medicare reimbursement for advanced medical imaging that could negatively affect hospital and imaging clinic revenues, thereby reducing demand for imaging-related software and services offered by Merge.
Moreover, the company’s growth prospect is highly dependent on capital investments by hospitals for advanced imaging solutions, which are in turn tied to general economic conditions. Per management, the tough capital spending environment in the hospital space was mainly to be blamed for the fourth-quarter debacle.
Nevertheless, we are encouraged by the company’s recent acquisition of DR Systems – a privately held San Diego-based company that provides medical imaging information systems, for a total of $70 million. Following this buyout, Merge Healthcare will be able to deploy its iConnect Network services, including pre-authorization services, to a broader client base of DR Systems.
The transaction is expected to be accretive to Merge's non-GAAP adjusted EPS in 2015 and beyond. Merge expects this acquisition to expand the company's footprint in the medical imaging arena.
Moreover, increase in the number of cardiology bookings and significant revenue growth from Merge's eCOS platform was the highlight of the fourth quarter. Significant increase in operating profit was another upside. According to management, the company will be able to achieve positive top-line growth in 2015.
It is also commendable that despite the general slowdown in hospital spending, low demand for imaging equipment and related technology due to global credit crisis and macroeconomic factors, Merge witnessed client wins and bookings growth. We believe the company has immense potential in the diagnostic imaging market, especially with the government emphasis on Healthcare IT and demographic tailwind. We believe Merge is well positioned to take advantage of this opportunity over the long term.
Merge currently carries a Zacks Rank #2 (Buy).
Key Picks in the Sector
Investors interested in the broader medical sector can also consider stocks like Cerner Corp. CERN, Cardiovascular Systems Inc. CSII and Hospira Inc. HSP. All the three stocks carry the same Zacks Rank as Merge.
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