Keep a Sell on Merge Healthcare

Merge Healthcare Inc. (MRGE) received the much-needed cash injection of $20 million through a private placement, bringing its cash position to roughly one year, at current quarterly burn rates. The company has also launched two new products aimed at mammography and integrating third-party scanners. In its 2007 annual report, Merge received a 'going concern' qualification. Since then, it has replaced its independent auditors. We continue to rate the stock a Sell.

The good news is that Merge sorted out its reporting issues with the U.S. Securities and Exchange Commission and received additional financing. The bad news is MRGE still faces numerous issues like management turnover, lack of clarity on its accounting, competition, and reimbursement challenges that will continue plaguing the stock in the foreseeable future.

The company's cash balances stand at roughly $29 million. This provides enough time to begin refocusing attention back towards the business. However, it won't be long before the management needs to start looking for fresh sources of cash should the business not pick up.

The company needs to start trimming expenses, reestablishing relationships with lost customers and vendors, and consider finding a suitor or selling off the EMEA (Europe, Middle East and Africa) division to raise additional cash. At $1.19 per share, Merge does not have a currency it can trade in the market to raise cash. A sale of the company is looking more likely.

We believe the company should trade at a discount to the 2008 2.1x group revenue multiple and the industry median 3.3x 2008 revenue multiple. The price moves to $0.61, closely reflecting its cash per share of $0.50 plus an option on a turnaround. We reiterate that positions taken in this security more closely represent speculation than an investment.

Strong Yen Not Helping Canon

Canon, Inc. (CAJ) is one of the world's leading designers, manufacturers, and marketers of office equipment, cameras, and optical products. The company's investment in digital cameras has given it an industry leadership position and has been a significant contributor to growth.

Canon's goal is to achieve the number one position in all of its current core businesses and establish new production systems to sustain competitiveness. Within the long-term management plan, Canon aims to achieve ¥1,100 billion in consolidated net sales and a consolidated ordinary income margin of at least 5.2% in 2010, as well as sales of ¥300 billion for its IT solutions operations. In order to achieve these targets, the company plans to increase its R&D spending to 10% of revenue by 2010 versus 8.2% in 2007.

Increasing price competition and slowing consumer demand for some of its optical products are causes for concern, as are decreasing profit margins. However, strong Yen appreciation has caused the company to lower its outlook for 2008 and pressures in developed nations pose further risks to sales. We therefore maintain a Hold rating on the shares.

Canon is currently trading at 12.9x estimated 2008 EPADR, a premium to the industry mean and median. Although we believe that some premium is warranted given its strong position in the digital camera business, we don't see room for meaningful appreciation from current levels.

We set our six-month price target at $52.00. This price is based on a P/E multiple of 13.2x our EPADR estimate of $3.93 for 2008, a premium to the industry mean and median.

Medicines Co. Needs Expansion

We believe that recent positive data from two trials on Medicines Company's (MDCO) lead product Angiomax will help boost sales of the anticoagulant in the coming quarters. Besides this, two late-stage candidates position the company well for the future. We hope to have more clarity on the launch of blood pressure drug Cleviprex in August. We are maintaining our Hold rating.

We were both surprised and disappointed with the U.S. Food and Drug Administration's action on data from the ACUITY trial. If added to the label, this would have really helped accelerate Angiomax trends in the coming years. Despite this, we are impressed with the recently presented HORIZON data and both Transcatheter Cardiovascular Therapeutics and American College of Cardiology.

Medicines Company is trying to educate physicians on Angiomax being a superior option for major bleeding for percutaneous coronary intervention (PCI) patients. Unfortunately, we have witnessed a slowdown in the PCI market over the past few quarters. This puts even more pressure on the management to expand the label in order to maintain growth.

The company needs to differentiate its product from generic alternatives or else sales will struggle. ACUITY and HORIZON go a long way to demonstrate the advantages of Angiomax, but fall short of home runs.