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Merge Healthcare exiting kiosk business


By Kristin Schorsch, Crain's Chicago Business
Posted: November 13, 2013 - 2:15 pm ET
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Nearly three months after Michael Ferro resigned as chairman of Merge Healthcare, the health IT company is exiting the medical information kiosk business, a consumer service that company executives projected would be a key growth area.

Merge, which makes medical imaging software for hospitals, jumped into the consumer health sector in 2011, when the company gained control of more than 20,000 health stations nationwide. Ferro, Merge's largest shareholder, hoped to create a national network of the ATM-like machines. The devices are typically located in pharmacies and allow shoppers to quickly check their weight, blood pressure and heart rate.

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“It's a new market and we are the leaders in real estate,” Justin Dearborn, Merge's president at the time, said during a May 8, 2012 conference call with analysts, according to a transcript. A long-time executive with Ferro, he is now the company's CEO.

The Chicago-based company even promised to place 100 free, Internet-connected devices throughout the city, drawing praise from Mayor Rahm Emanuel. But they were never installed.

Ferro was “passionate” about health kiosks, Dearborn said in an interview yesterday. “He likes the consumer side of healthcare.”

Ferro apparently liked the kiosks so much he bought 500 of them for $2.8 million in 2012, one of 11 transactions between Merge and Ferro.

Dearborn was named CEO on Aug. 9 after the company reported disastrous second-quarter financial results. Ferro resigned as chairman on Aug. 26, saying he was considering taking the company private.

Now, Merge is dropping Ferro's pet project.

“We did not lose any money, but it just didn't have the attributes we wanted, too capital-intensive,” Dearborn said during an Oct. 30 conference call with analysts to discuss third quarter results, according to a transcript.

Upgrading the company's portfolio of aging health kiosks with Internet connections so that the machines could display advertising and record more vital signs proved to be too expensive, Dearborn said in the interview yesterday. As part of a settlement earlier this year with a Reno, Nev.-based company that alleged patent infringement, Merge agreed to get out of the business entirely, Dearborn said.

“Going forward, we need to focus for 2014 on earning-generating ideas,” he said. “So we can't invest in things that are going to be break even at best.”

The consumer kiosks accounted for just $10 million in annual sales, he said. That's a small fraction of Merge's 2012 net sales of nearly $250 million.

As a result of the decision, Merge categorized $4.2 million in third-quarter revenue as non-recurring. Merge is going to let contracts for kiosks expire when they come up, completely winding down the business by the end of 2014, Dearborn said.

Two years ago, Emanuel commended Merge, saying its machines “will allow Chicagoans to take control of their individual health and get crucial information that will help them live longer and better,” according to an Oct. 7, 2011 news release.

But company executives and city officials couldn't agree on where the stations would go and the plan fizzled out last year, Dearborn said.

A spokesman for Emanuel didn't return messages to comment.

Merge's net loss rose to $4.1 million during the third quarter, up from $3.8 million during the third quarter 2012. But the most recent financial results marked an improvement from the second quarter this year, when the company lost $28.1 million.

Net sales fell 5.3%, to $57.2 million during the third quarter, from $60.4 million during the second quarter 2012.

The kiosk deal was one of 11 transactions between Merge and ventures controlled by Ferro in 2008-12. Only four of the transactions were reviewed by the company's audit committee of independent directors, according to filings with Securities and Exchange Commission that were analyzed by Crain's.

While such related-party transactions are not forbidden by securities laws, experts say they raise questions about fairness to shareholders.

The company defended the transactions, saying they benefited Merge. All of the deals were approved either by the audit committee or by the full board without the participation of interested shareholders, the company claimed.

Ferro didn't return a message to comment. He was thrust into a much more public role after leading a group of investors in 2011 to pay $23 million for Chicago-based Sun-Times Media Holdings, which includes the flagship Chicago-Sun Times and about 40 suburban dailies and weeklies and has been struggling to turn a profit.

"Merge Healthcare exiting health kiosk business, one of Ferro's favorites" originally appeared on the Crain's Chicago Business website.


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