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Industry Tailwinds Blow Merge Healthcare Higher

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On a scale of zero (doctors scribbling notes on scraps of paper) to 10 (a seamless, integrated system of interoperability where your medical records are implanted in your earlobe), our country's health-care system is now about a 3, according to Jeff Surges, CEO of Merge Healthcare (Nasdaq: MRGE  ) . But with an array of tailwinds ushering in a new era of technology in the arena, he expects we'll be a 6 within the next 24 months.

In a phone chat yesterday, Surges painted the picture of a company that has benefitted from recent changes in the health-care system -- shares are up roughly 120% over the same time last year -- and that's well-positioned to capitalize on even more profound changes to come. His company's mission is to add a key layer to the portable health record by attaching X-rays, MRIs, CT scans, and other medical images, offering clinical interpretation to those clients who want it. Through a series of niche acquisitions and organic growth, Merge now has 1,500 or so hospitals and health systems as clients, as well as roughly 4,000 stand-alone imaging centers. Merge's goal is to capture the necessary image from all of these venues and attach it to your medical record so that it transports along with you.

A court case
"Let's say you blow out your knee playing basketball," says the personable Surges, who's been CEO since November. "The ER is going to take X-rays, then your regular doctor is probably going to do another set, and then the orthopedist will take a third. That's incredibly inefficient in terms of cost, it's increasing your exposure to radiation, and pretty soon, two of those three X-rays won't be reimbursed."

The industry is in the midst of legislative reform, medical records are moving increasingly to electronic format, interoperability is gaining momentum, and bellwether California is instituting an initiative to monitor radiation dosage. Those trends, along with an ever more active medical consumer who wants his records in hand, mean even better times could be ahead for the industry.

Surges' watchlist
"The companies I watch are the large health-care information technology companies, companies such as Cerner (Nasdaq: CERN  ) , Siemens (NYSE: SI  ) , and Allscripts (Nasdaq: MDRX  ) ," says Surges. "When they move, they tend to pull the whole industry along with them. If they're seeing great buying, the next tier of pure plays follows in their footsteps. Purchasing in the past 12 months suggests a big push is coming."

Interestingly, Surges volunteers that he's also watching a player decidedly not in his immediate field.

"I love watching Apple (Nasdaq: AAPL  ) and the way they're able to make the best use of technology," he says. "You can go to iTunes and download a 5-gig movie with the click of a mouse from anywhere in the world. You don't even think about it. Medical images are really just large data files, but it can be a problem just to get a 5-gig X-ray across the street." 

While he quickly disavows the idea of making people's X-rays available on iTunes, he thinks the medical field can learn something from other industries, from Apple to those who specialize in cloud computing. 

"We're still in the early stages and we are going to find new and better ways to improve the process," says Surges of both his industry and his $440 million-market-cap firm. "I said when I started that I came here to build a $1 billion company. We're on our way."

If you want to keep track of Merge Healthcare or any of the companies that Surges is watching, it couldn't be much easier. To build your free and personalized watchlist, just click any of the links or enter your email address in the box below. You'll also get instant access to the free report, "6 Stocks to Watch from David and Tom Gardner," which features a handful of companies that the Fool's co-founding brothers think you should be watching. The watchlist service and the report are free. Click to get started.

Roger Friedman doesn't own shares of any of the companies mentioned here, but he's going to keep an eye on Merge. Apple is a Motley Fool Stock Advisor selection. The Fool has written puts on Apple. Motley Fool Options has recommended a bull call spread position on Apple. The Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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