Merge Healthcare

views updated

Merge Healthcare

1126 South 70th Street
Milwaukee, Wisconsin 53214-3151
U.S.A.
Telephone: (414) 977-4000
Toll Free: (877) 446-3743
Fax: (414) 977-4200
Web site: http://www.merge.com

Public Company
Incorporated: 1987 as Merge Technologies Incorporated
Employees: 550
Sales: $82.6 million (2005)
Stock Exchanges: NASDAQ Toronto
Ticker Symbols: MRGE; MRG
NAIC: 511210 Software Publishers

Merge Healthcare is in the business of making it easier for hospitals and clinics to manage medical images by making software and hardware that enable imaging machines, viewing screens, printers, and other diagnostic equipment to interface and communicate with each other. The company's two divisions, Merge eMed and Cedara Software, cross-sell products but serve two distinct markets: eMed focuses on small and midsize hospitals and clinics and Cedara targets major manufacturers of CT scanners, magnetic resonance imaging (MRI) machines, and other medical imaging devices. The company is headquartered in the United States; has offices in Canada, Europe, Japan, and China; and markets its imaging network systems worldwide. After becoming three times as big as the nearest direct competitor with a major acquisition in 2005, Merge is in the process of recovering from allegations of accounting and financial mismanagement that surfaced publicly in February 2006.

EARLY YEARS

When William C. Mortimore founded Merge in the basement of his home in Milwaukee, Wisconsin, in 1987, he set out to fill a void in the healthcare industry that no one else was addressing. He saw hospitals and clinics filled with expensive computerized medical devices made by different manufacturers that were unable to share information because they lacked a common network. Mortimore decided to create a company whose mission would be to merge the clinical and the administrative sides of healthcare by providing what he called the "electronic plumbing" that would enable digital interfacing of CT scanners, MRI scanners, and other medical imaging devices with laser film printers, independent workstations, and other information management equipment. Initially, Merge's "electronic plumbing" was comprised of software and a little black box that allowed equipment from vendor A to communicate with equipment from vendor B.

In 1987, Chicago's Bernard Mitchell Hospital agreed to act as a test and demonstration site for Merge's information sharing software. MergeCom, which opened communications between imaging devices with incompatible or closed protocols and enabled images to be sent or received, made it possible for scanner images to be transmitted through a direct network, eliminating the need to transfer magnetic tapes from one device to another and enabling the clinic and the radiology department to discuss the diagnostic image over the phone while viewing images at their remote workstations. MergeLFM permitted a technician to select with a single command any number of magnetic resonance images to be sent to a laser film printer instead of processing each frame manually. The hospital credited Merge with eliminating manual work and freeing up time for its radiology technicians to be with patients, and in 1990 purchased a Merge system for its radiology department.

By 1991, Merge systems had been installed at 16 other sites, including the Fox Chase Cancer Center in Philadelphia; Georgetown University in Washington, D.C.; Millard Fillmore Hospital in Buffalo, New York; and ISG Technologies in Toronto, Ontario. The other, more dominant part of Merge's business was with the OEM (original equipment manufacturer) and VAR (value-added reseller) sectors, the makers and distributors of imaging devices and other medical equipment. By 1991, Merge had negotiated agreements or established joint marketing relationships with IBM, Toshiba Medical Systems, Hitachi, Eastman Kodak, Philips Medical Systems, and others. In 1990, total sales exceeded $400,000 but in 1991 grew to over $3 million. In 1995, the company shifted its main focus from the big manufacturing companies and began developing and marketing products for hospitals and clinics in the United States and Europe. In 1996, the company introduced MergeWorks, its first clinical network based on DICOM, a standard output format for medical-image communications.

INITIAL PUBLIC OFFERING FOLLOWED BY DOWNTURN

By the time Merge completed its initial public offering (IPO) in late 1997, it had 55 employees, a 12,000-square-foot facility in West Allis (a suburb of Milwaukee), a European office, and products installed in more than 1,000 healthcare facilities in the United States and overseas. Merge's IPO of 1.9 million common shares raised $10.6 million after expenses. In 1998 about half of the company's business was providing products directly to hospitals and clinics. In October 1998, General Electric Co.'s Medical Systems unit agreed to expand its distribution of Merge products and the company announced its 100th installation of Merge-Works, its DICOM clinical network.

Despite topping a list of Wisconsin companies whose managers were using capital well, the price of a share of Merge stock fell from $6.375 on March 30, 1998, to $1.188 on July 4, 1999. As company founder, President, and CEO William C. Mortimore explained in a Wall Street Journal interview, management was so distracted by what turned out to be a two-year IPO process that the expanded sales force and support systems needed to run a larger business had not been properly put in place. Using $600,000 worth of stock, Merge announced plans in July 1999 to acquire Interpra Medical Imaging Network, Ltd., a Toronto maker of Java-based clinical workflow and information management products. Merge not only kept Interpra's Toronto office intact, the company further expanded its international presence in October when it announced the formation of Merge Technologies Kabushiki Kaisha in Tokyo, Japan. Merge hoped that its move into Japan would parallel the success of its European expansion, which in five years had grown to generate 30 percent of the company's revenue. The company continued to grow but ended 1999 with a $2.9 million loss.

COMPANY PERSPECTIVES

Merge Healthcare (NASDAQ: MRGE) markets integrated healthcare image and information workflow solutions that create a filmless workflow environment, addresses the clinical imaging needs across the healthcare enterprise, and enables cost-effective, patient-centric care. For more than fifteen years, Merge Healthcare has leveraged its healthcare IT, clinical and engineering experience to create elegant and affordable solutions that improve the clinicians' productivity and enhance the quality of the care they provide.

September 2000 brought a change in management, with Richard A. Linden named as the new president and chief executive, replacing founder William C. Mortimore, who remained with the company as chairman and chief strategist. The company finished 2000 with a net loss of $5.7 million on total revenues of $12.6 million. The year 2001 was a turnaround year as revenue rose 25 percent to $15.74 million and the company posted a $1.27 million profit after suffering losses from 1998 to 2000. Merge shares hit a 52-week low of 65 cents on February 20, 2001, but after a series of profitable quarters rose to a high of $5.69 in December. With the rising sales of software and professional services, Merge hired four new salespeople in the first quarter of 2002 and continued its pace of offering new medical image management products every three to four months.

2002: COMPANY CONTINUES TURNAROUND

February 2002 brought the release of MergeNet, a picture archiving and communications system (PACS) that provided online access to radiology images and reports. In April 2002, Merge announced that it would acquire eFilm Medical Inc., a privately held Toronto-based company that made medical imaging workflow products. The $8 million stock deal was finalized in June, and followed a May purchase by Merge of Aurora Technology Inc., a medical technology company based in Lake Bluff, Illinois. The mostly stock purchase price for Aurora totaled about $869,000. Merge further refined its sales strategy in 2002 toward small and midsize hospitals and clinics, where the company's price tag of $100,000 to $500,000 for a basic system compared favorably to the big-name $1 million networks. One of the biggest changes of the year came in September when the company announced it would start doing business as Merge eFilm. September also brought the release of FUSION Server 1.0, a filmless medical image and information management system that blended the technology of Merge and eFilm, and generated sales to 35 facilities by the end of the year.

Merge continued its growth surge in 2003 as more and more healthcare facilities were moving away from viewing film on light boxes to examining computerized images. In July, Merge acquired Ohio-based RIS Logic Incorporated, a privately held company that made radiology information systems (RIS) software, for $2.72 million in cash, plus about $10.5 million in company stock. RIS Logic had a client base with over 200 sites in the United States. In September, four European companies agreed to resell or distribute Merge's FUSION RIS/PACS and eFilm Workstation products. The year ended with the share price hovering around $14.

In 2004, Merge continued to expand its customer base and product offerings with the release of eFilm Workstation 1.9 in March and an agreement in April to supply FUSION PACS to ten facilities owned by InSight Health Corp., a provider of diagnostic imaging and imaging-guided therapy services with 118 U.S. facilities. On July 28, Merge stock hit its one-year low of $11.36. In October, InSight Health expanded their original contract from ten imaging centers to a total of 25, and Merge secured a contract with Radiologix, Inc., a provider of diagnostic imaging services with 94 sites in 13 states, for the purchase of FUSION RIS/PACS and related services for its operations in the Northeast.

2005: MERGE DOUBLES SIZE WITH SINGLE ACQUISITION

On January 28, 2005, Merge acquired California-based AccuImage Diagnostics Corp., an advanced visualization software developer, for $6 million in cash. More significantly, on January 18, Merge announced an agreement to purchase Cedara Software Corp., a Toronto-based provider of medical imaging technologies, and its subsidiary eMed Technologies Corporation, in a $393.4 million stock swap transaction. Under the terms of the arrangement, the company acquired Cedara, which had more employees, more revenue, and a greater market value than Merge. The transaction more than doubled the size of Merge and created a company three times as large as the next competitor and one of North America's leading suppliers of medical imaging technology.

KEY DATES

1987:: William C. Mortimore founds Merge Technologies Incorporated in Milwaukee, Wisconsin.
1997:: Merge raises over $10 million in public offering.
2000:: Company hires new president and CEO, Richard A. Linden; Mortimore becomes chairman.
2002:: Merge acquires eFilm Medical Inc. and Aurora Technology Inc.; company begins doing business as Merge eFilm.
2003:: RIS Logic Incorporated is bought by Merge.
2005:: Merge purchases Diagnostics Corp.; doubles size with acquisition of Cedara Software Corp.; company changes name to Merge Healthcare and reorganizes into two divisions.
2006:: Accounting scandal erupts; Linden and Mortimore resign; stock value plunges.

In April 2005, Merge moved its operations to a larger 22,000-square-foot West Allis facility in anticipation of headquartering the expanded company. The deal was finalized in June and Merge Technologies Incorporated announced that it was changing its corporate name to Merge Healthcare. Richard Linden continued as president and CEO and company stock continued to trade on the NASDAQ under the ticker symbol MRGE and on the Toronto Stock Exchange under the ticker symbol MRG. Merge Healthcare was set up in two divisions: Merge eMed and Cedara Software. Merge eMed essentially integrated Merge eFilm with Cedara's subsidiary eMed Technologies Corporation and continued with the historical mission as developers of RIS/PACS products and services for small and midsized hospitals and clinics. Merge's Cedara Software division continued with Cedara's historical mission of developing medical imaging for OEM customers as well as international markets.

August 2005 saw the rollout by Cedara Software of its new PET/CT workstation software, and in September, Merge eMed launched I-Conference, its medical presentation software application, which closely followed the release of Baby Explorer, a 3D fetal imaging application. In September, Merge eMed also announced the sale of Cedara PET/CT software to the Center for Diagnostic Imaging, a chain of 33 imaging centers with locations in eight states, which had been a Merge RIS/PACS customer since 2003. In November 2005, Merge stock traded for around $26 a share.

2006: ACCOUNTING TROUBLES SLOWS GROWTH TREND

Acting on anonymous letters sent to its board in January 2006, Merge made announcements in February and March that called into question its financial statements for the second and third quarters of 2005. The company also delayed the filing of its fourth-quarter results and annual report. As a result, a number of class-action lawsuits were filed that accused management of deceiving investors about the Cedara Software merger by overstating and prematurely recognizing revenue. The company blamed complexities associated with accounting for sales contracts and the board's audit committee hired independent advisers to investigate.

On May 17, 2006, Merge stock closed at $12.80, less than half the price it was the day before the February announcement. Waiting until the market closed for the day, Merge announced the resignation of Richard A. Linden as president and CEO. On July 3, the company declared that its investigation had uncovered improper accounting that required it to restate financial reports from 2002 to 2005. Merge's founder and interim chief executive, William C. Mortimore, a chief financial officer, and a senior vice-president also announced their resignations. Merge shares dived almost 41 percent with the news and closed the day at $7.30, down about 75 percent from December's 52-week high of $30.05.

In July 2006, Merge executives acknowledged that sales had been hurt by the accounting scandal, and on August 26, the company lost another top executive when Brian Pedlar, interim co-chief executive, announced his resignation less than two months after taking the job. Merge also began spending its available cash, which stood at about $60 million, down from $64 million at the end of December. Merge filed its second quarter 2006 statement in September and reported revenue of $31.7 million, but with a write-down of goodwill, the company also reported a loss of $215.8 million. On September 6, Merge appointed Kenneth D. Rardin as its new president and CEO, to succeed interim CEO Robert J. White, who was named president of Merge's eMed unit. Rardin was also named interim president of the company's Cedara Software division.

After recovering from financial struggles in the years immediately following its 1997 IPO, Merge had begun to establish an impressive record of growth, including its industry-changing 2005 acquisition of Cedara Software. Yet the year 2006 brought trouble to the company with an accounting scandal and investigation that sapped management's time and energy and resulted in a significant turnover of top executives, severely distressed stock prices, falling sales revenue, and ongoing litigation. In October 2006, investors appeared to remain skeptical as to whether the company could regain its footing and resume growing, even with new management, in a promising market where it had once shown such great potential.

Ted Sylvester