Many in healthcare have been wondering what is going on at the Chicago-based Merge Healthcare these days. The company, which specializes in solutions around imaging informatics and the vendor-neutral archive, has seen two high-profile departures in the space of less than one month. First, CEO Jeffrey Surges resigned on Aug. 9, following disappointing second-quarter results. Then on Aug. 26, the company announced that Michael W. Ferro, Jr. had resigned as chairman of the board and as a director, effective immediately.
The company announced on that date that Dennis Brown would be named as the company’s new chairman, also effective immediately, while Justin Dearborn, who had headed up the company’s clinical trials platform division, took over as CEO upon Surges’ resignation on Aug. 9.
Just before Surges’ resignation, Merge had reported that its sales decreased to $57.2 million ($57.6 million on a pro forma basis) in the second quarter of 2013, from $62.9 million ($63.4 million on a pro forma basis) in the second quarter of 2012.
In an industry-exclusive interview, Steven Tolle, 45, who joined Merge Healthcare in November 2010 as senior vice president, and who became chief product officer for the company on Aug. 9, spoke with HCI Editor-in-Chief Mark Hagland regarding the various developments within Merge, and his perspectives on the future prospects of the organization. Below are excerpts from that interview.
What’s going on these days at Merge Healthcare? Do the departures of Messrs. Surges and Ferro signal anything worrisome that we should know about?
Well, the two departures are largely unrelated. Jeff Surges came to Merge Healthcare in 2010 from Allscripts; he was already on the board of Merge, and was asked by Michael to come in as CEO. They saw image interoperability at the time as a growing opportunity; we still think it is. So if you think about meaningful use Stages 2 and 3, and EMR [electronic medical record] adoption, being able to easily link to images is going to be a mandate, and is also going to be a market-driven need. And so we made a significant investment in products, like our iConnect portfolio, which just won a Frost & Sullivan award [Frost & Sullivan, the research company, on Aug. 27 recognized Merge Healthcare with its 2013 North America Frost & Sullivan Award for Product Leadership in Interoperability Solutions, for its iConnect® enterprise clinical platform], thinking we would be ready with a large sales organization with these products in 2013, so we’d be prepared for meaningful use Stage 2 in 2014. A couple of things happened: one of them was sequester [the federal budget sequester of 2013]. We didn’t know at the beginning of the year that that $11 billion would be taken out of the healthcare system.
So those decisions about making investments in imaging—we didn’t foresee that some of those decisions might be made uncomfortable as a result of the sequester. So we had a number of key sales stall. And we had invested in a larger salesforce and marketing dollars in anticipation of the market opening up in early 2013. That didn’t happen; our Q1 was OK and our Q2 was not OK. So Jeff made the decision with Michael that it was time for him to depart.
In terms of Jeff’s background, it was really in private-equity companies and in getting them ready for sale. We realized that the market wasn’t going to be there, and we had stopped our process in terms of strategic options, since we had been approached by a number of funds looking to potentially invest in or acquire the company, but ultimately, our board decided that the offers we had received were ultimately unsatisfactory. So we announced that in Q1; and in Q2, we had a bad quarter, and had to make changes [including the Surges resignation].
So we haven’t reduced any of our investments in product; we know that meaningful use is going to happen. And we know that because of the tipping point of EMR usage, that physicians are going to need our products. So what we’ve done is to reorganize our company into three business units: clinical trials, because we have a clinical trials platform; cardiology; and imaging, called our iConnect business unit. And these three units, run by presidents of those units, give us flexibility. So really, we’re going to act and behave like three small companies, with three P&Ls, and much more focused sales organizations.
Is that reorganization of salesforces and development teams effective now already?