DATATRAK International, Inc. (DATA) is a global technology and services company delivering electronic clinical (eClinical) solutions to support clinical research. Its software suite and service offerings are used to collect, review, report, store and submit to regulatory agencies clinical trial data electronically.
While the competition uses an integrated heterogeneous solution (information silos), DATATRAK uses a unified system. The result is seamless communication, optimized data flow and lower costs. The products within the information silos were never designed to work together and “real time” communications per customers is more like 24 hrs…not bad, but if a patient in site #102 is having an adverse reaction and a similar patient at site #3 has the potential to suffer a similar event…the “not bad” could cost a life. We are initiating our Outperform rating on the firm.
The firm has four characteristics that should enable it to outperform the industry and the competition:
- Superior Technology
- A Debt Free Balance Sheet
- Growing Backlog
- Increasing Market Share in a Growing Complex Industry
As complexity and regulatory challenges ration up in clinical trials, paper-based methods as well as integrated systems will prove more expensive and less reliable. Investors that buy the stock today are essentially buying a firm that emerged from the recession of 2008/2009 with no debt, has grown its backlog in four straight quarters, and continues to gain traction in clinical research.
DATA is trading at a reasonable Enterprise Value to Revenue ratio of 1.9x compared to the Software Industry average of 2.2 to 2.3x. Enterprise Value is essentially the takeover price of the company by adding market capitalization, debt, preferred shares etc. and subtracting cash on the balance sheet.
We see further upside for the stock and value the firm at $3.00 based on 5.1x our 2011 revenue estimate. While similar firms in the space — OmniComm Systems Inc., Medidata Solutions Inc. (MDSO) — have lower multiples, it should also be noted they have significant debt levels.