MILWAUKEE – One year ago, Merge Healthcare was shedding assets and contemplating bankruptcy. Now, the Milwaukee-based developer of medical imaging software and services is enjoying healthy sales and looking overseas to continue its growth.

The difference? CEO Justin Dearborn says the company just needed a change of attitude.
“The market wasn’t kind to us, and we were caught in a perfect storm of negative news (as a result of a financial restatement and reimbursement reductions caused by the Deficit Reduction Act)” he said.

What the company apparently needed was new leadership, and that came in June 2008. Merrick RIS, LLC, a Delaware-based investment firm that had had its eye on Merge for more than a year, finally swung a deal with the troubled company that included $20 million in funding, the resignations of four company officers and the installation of a new team that included Dearborn, a managing director and general counsel at Merrick, who became Merge’s CEO.

Concurrent with the investment, Merge settled a long-standing consolidated securities class action suit, announced the layoffs of some 60 people and halted the planned divestiture of its EMEA operations. The company also sought to stop the sale of its Chinese operations (a move which was realized earlier this year) and shut down its teleradiology service read offering, while holding onto the technology to enable teleradiology.

Dearborn and his new management team also took a look at where Merge was leaking money.
“For whatever reason, this company never cut back on their R&D spending,” he said.  That proved to have good and bad consequences, for while the company was struggling financially – it had lost $18 million during the second quarter of 2008 – it was developing new products, some of which were released at the RSNA show last November.

But that market had taken a turn for the worse.

“If you had told me that the economy would look like this, we probably would not have done it,” Dearborn said of Merrick’s decision to buy into Merge Healthcare in May of 2008. “No matter how good a sales team you have, you’re not going to convince someone into taking on a project they didn’t plan.”

Still, Dearborn added, company officials were “very pleased” with the results of the first two quarters of operations and the company’s long-term ROI, and “the number of studies clearly isn’t diminishing.”

With that in mind, Dearborn said, Merge is focused on developing licensing contracts that reflect the depressed economy, showing off its newest products to existing customers and working on some deals with a few startup companies. The company has also been active in M&A discussions, and is looking to release several new products this year.

Dearborn said the company has won contracts in Turkey and Saudi Arabia to add to its roughly 175 OEM customers and has seen its new Merge Mammo software installed in 500 healthcare settings, many of them in Japan.  Recently, the company introduced version 6.5 of its Cedara I-ReadMammo solution for digital breast imaging reviews as well as version 3.1 of its eFilm Workstation product. Those two announcements come on the heels of the release of Cedara ProPlanner 3.1, a solution designed specifically for orthopaedic surgical planning.

Evidence of the Merge Healthcare turnaround can be found in financial results for the fourth quarter and year, ending Dec. 31, 2008. Fourth quarter net sales totaled $15.1 million, down a bit from the $15.6 million recorded for the same quarter in 2007 but an increase over the $14.6 million recorded in the third quarter. Operating income, meanwhile, was $3.7 million in the fourth quarter, compared to an operating loss of $8.5 million in the fourth quarter of 2007 and operating income of $1.3 million in the third quarter.

Net income, meanwhile, was $1.9 million in the fourth quarter, compared to a net loss of $9.5 million in the fourth quarter of 2007 and a net income of $400,000 in the third quarter. Also, the company’s cash balance increased by $3.4 million in the fourth quarter to $17.8 million, while deferred revenue increased by $1 million to $16.8 million.