CEO Interview: Larry Birch Discusses DataTRAK Collaboration and Patent Suit

Summary: After bringing his clinical research software company back from near bankruptcy to steady profitability in 2010, CEO Larry Birch is going on the offensive. Having recently closed a major relationship with NTT in Japan, he now has funds to grow and defend his intellectual property. Last week DATATRAK (OTCQX: DATA) filed suit against competitor Medidata (NASDAQ: MDSO) for patent violation. Birch seeks to make DATATRAK a major player in the Clinical Trial management business and the “Intel Inside” that drives efficiency in the managing of clinical trials globally.

DATATRAK Goes on Offensive, Files Patent Suit vs. Medidata.

Taking a product from Concept to Cure is a heavy task, a project, if you will, that involves putting many pieces of a puzzle together nicely. But, DATATRAK , a software services company serving the clinical trials industry worldwide, takes the burden off of any one player and manages a clinical trial submission from protocol to submission.  OneMedSentinel sat down with Larry Birch, DATATRAK’s CEO to get the inside scoop on the company, which is growing at a record pace.

Birch discusses a recently completed contract with NTT Data, already a long term partner of DATATRAK.  NTT, the largest technology company in Japan and one of the largest in the world, paid millions in cash to extend the relationship for a multi-year period contracting with DATATRAK to complete development work in the post-market arena.

But the breaking news around DATATRAK is their recently filed patent infringement lawsuit against Medidata.  “We believe that based on their marketing materials and other public information that they are now infringing on our data unifier patent,” Birch said. DATATRAK’s vision is to look at the clinical trial process as a single process with many components. The FDA is encouraging pharmaceutical companies to reduce the number of databases in use. “As you know that is the heart of our approach to the clinical trial market.  And with the FDA eSource guidance, we are not surprised that competitors want to copy us.  That said—we have a patent on this process and will defend it,” Birch continued.

Competitors are trying to develop unified systems but in the early 2000’s DATATRAK developed a patent around data unification.  While Birch’s team has opened the discussion with Medidata, they have yet to be convinced the team at Medidata is not infringing. In addition, DATATRAK is looking at several other competitors in an effort to protect their intellectual property.  Executive Editor, Brett Johnson, interviewed Larry Birch to get his side of the story.

Click below for audio. Click here to see full company profile.

Brett Johnson: Today we’re with Larry Birch.  Larry is the CEO of DATATRAK, a Cleveland-based software services company serving the clinical trials industry worldwide.  Larry, thanks for joining us.

Laurence Birch: Thanks for having me, Brett.

BJ: So, for those of our listeners who aren’t familiar with the DATA story, can you tell us a little bit about DATATRAK?

LB: Sure.  Well, DATATRAK’s vision is to be the clinical enterprise solution to safely accelerate every drug, every biologic, and every device from concept to cure.  And what that means is, we participate with pharmaceutical companies and CROs with an electronic clinical data system that manages the entire back office of the clinical trial process, from protocol to submission.  We have a single delivery of technology and services and have been in the market for – one of the leaders and pioneers in this industry.  We had a tough time in 2008 and 2009, but I’m pleased to report that, 2011, DATATRAK is on the offensive, growing quite well, and actually growing at a rate faster than the market.  We were profitable last year and we’re growing our sales at a record pace, quarter over quarter, entering 2011.

BJ: So, recently you had some developments.  You reported a contract with NTT DATA and also Medidata, which you’re – I understand you guys are in litigation, or may be soon in litigation, with.  Let’s start with the NTT DATA agreement.  Can you tell us a little bit about that, and why that’s important to DATATRAK?

LB: Well, yes.  That’s a great question.  NTT has been a long-term partner with DATATRAK, but this latest agreement provides a lot for this company.  One is validation of our business model.  NTT is really one of the largest technology companies in the world; certainly in Japan.  They re-market our technology, and they’ve standardized on the DATATRAK eClinical system in the Japanese market, reselling for us.  And that gives us, I think, a lot of global credibility.

This particular agreement does two things.  One, it extends the relationship with us for a multi-year period; and they have also contracted with us to do some development work for them in the post-marketing arena, and – because a lot of drugs require post-marketing studies.  And so, we’re building an application which we’ll use globally, but they want to use it in Japan.

And the really nice thing about this deal is, they paid us – it was a multi-million deal.  They paid us in cash, all upfront.  And so, one of the issues DATATRAK has had over the last couple of years, again, coming out of restructuring, is access to capital.  And I’ve been very careful not to dilute our shareholders or place burdensome debt.  And this is a way that  we really strengthened our balance sheet tremendously, and recapitalized the company without diluting our shareholders, and providing us with some growth capital and some defense capital of our intellectual property.

And let me move into that discussion around Medidata; and, really, everyone else in this marketplace.  As a little background, DATATRAK’s vision from the onset has been to look at the clinical trial process as a single process with very, very complex components.  Our competitors—Medidata and many others—traditionally viewed the market as many processes within the clinical trial process.  They either licensed or acquired technologies to – that would be applications to address those processes, and they would consider themselves – they would talk about best of breed, et cetera.  That was the way they marketed themselves.  That was a very fast way into the market, and frankly were very flexible in the way they marketed their products, and we weren’t as flexible, and the – part of our problem in 2008.  We now are very flexible as well.  But, the point being is that, with these best of breed technologies, they created silos of data.  As you can imagine, again, one process versus multiple processes, creates these silos of data.

With DATATRAK’s proprietary clinical data repository, we have one database for the entire clinical trial process.  Now,  over time, the FDA is encouraging pharmaceutical companies to limit the number of databases.  And of course, just from a market perspective, 8[%] to 10% of the cost of a trial is reported to be just moving data from place to place.  No analysis; no review—just moving it.  And so, we eliminate all that.  So, over time, as these – as our competitors had some success, for sure, they’re moving into this arena, trying to develop what they are also trying to call unified systems.

Well, in 2000 and – early – in the early 2000s, we developed a patent around data unification.  And we applied for it and we were awarded that patent in 2009.  That patent was the result of a lot of complex thinking from our engineers and a lot of hard work.

And, again, we took our time to build the right system.  And as these other competitors start marketing their systems in a way that looks like ours, we’ve taken pause to say, “Wait a second. DATATRAK invented this.  And we want you to not do this.  You’re in this business.  You have a business model as best of breed; that’s what you’ve done.  If you want to move into our business model, you know, we want you to not do that, because we believe that’s infringing.”

Now, we’ve opened up some discussions with Medidata.  And frankly, those weren’t very fruitful.  We’ve yet to be convinced that they are not infringing.  I’m open to having discussions with them to find out in fact that – you know, all we know is what we can identify in the public market.  But, yes, we have sued them because we haven’t been able to acquire from them the information that would lead us to believe they’re not – and so, we can’t do that in an informal fashion.  Our management team and board has decided to do that in a more formal fashion through the litigation process.

And frankly, we’re looking at every one of the competitors in this marketplace.  As they start transitioning their systems to something that looks more like ours, we will protect our intellectual property.  Our view is, this is a competitive marketplace; Would Pepsi allow Coke to use their formula?  Would a drug company—in our marketplace— allow another drug company to copy one of their proprietary formulas?  They would not.  They’d protect it.  And we are protecting our intellectual property in exactly the same way.

BJ: What’s your sense of the timing of this suit in terms of when you’re going to get some feedback from Medidata, and/or when this thing might come to a head, or there be some sort of indication of its outcome?

LB: Well, I’ve got to say, first off,  litigation is a long process.  I would say it’s really up to Medidata.  If they want to have some discussions with us that lead us to believe that they aren’t infringing, and convince us of that, for sure, this is not, at this point, not a punitive venture.  It’s just, we want them to stop using our technology.

On the other hand, the legal process takes a long time.  And there will be discovery; there will be depositions; there will be, potentially a trial, and a decision made and – in the – you know, due course.  Those things take a long time.  So, you know, we’re fully ready to pursue that long haul.  But my shareholders spent a lot of money to build this technology and it’s my job to protect it.  So, that could take some time.

But again, that’s up to them, and frankly, up to any competitor, as we approach them, to decide their own path.  You know, we’re open to being educated.  On the other hand, if they marke in a way that looks like our patent, we are not open to having our intellectual property used without our permission.

BJ: How many other competitors are there out there, that you think might be also infringing on your patent?

LB: Several.  Several.

BJ: And in terms of the market share, who are the significant companies in this space, and where do you guys fit into the overall market?

LB: Oracle’s acquisition of Phase Forward earlier last year really validated the space, actually—this clinical trial management space.  And though I don’t see their numbers broken out per se, they have two systems now, the Phase Forward InForm system and the Oracle – they have their own proprietary system as well, which they’re marketing separately.  Having the strength of Oracle is good, though, frankly, Medidata is second.  There are other players as well in this.

DATATRAK exists in, I would say, the second tier of that, because we had our own restructuring.  And we weren’t as flexible in the marketplace as Medidata and Phase Forward were.  They were very flexible in the contract and were flexible in dealing with CROs, and we weren’t.  And again, as I said, we’ve changed our way of marketing.  That’s why we’re growing at a good rate.

And frankly, the feedback we’re getting from our customers is, we’re a lot easier to deal with than the bigger players.  As you might imagine, a smaller player, we’re a little more flexible today.  So, we have to play to our advantages.  So, we have, you know, market-leading technology.  And being smaller, being nimbler, being more flexible, you know, I think ultimately, we can recapture our position as a market leader in the clinical space.  That’s my goal.

I’m not in this for a short-term – you know, I haven’t been so far.  I’ve been involved in this company now for three years.  We’ve done a great job of turning it around and I have a management team that’s excited, that sees the vision of how we can grow and how we can expand our functionality, maybe even into other markets which, when we’re ready to talk about that we will; and really build a market-leading enterprise.  So, that’s the goal.

BJ: What’s your sense about sort of top line revenues in the year ahead and years ahead?  How big do you think you can grow the top line of the business, and where are you guys at today?

LB: Well, it’s a question of building –  we’re selling contracts, and the contracts are multi-year contracts.  Again, we came out of a year when we had a going concern in our financial results, and it’s tough when you’re selling multi-year contracts, to sell on that.  It was tough.  And now we’ve overcome that.  Again, I don’t know any other company that’s done it while raising capital, but we did that last year.

So, now we have a growing number of clients.  We have more clients today than we ever had.  We are doing enterprise agreements.  We’ve done more enterprise agreements this year than I think we’ve done in our company’s history.  We continue to sell multi-million dollars each quarter, and those will be reflected in our revenue over the coming years.

My expectation, frankly, is to grow at a rate greater than the market.  And – oh, and by the way, we also came out of a pharma market that was a disaster a couple of years – clinical trials have grown at the rate of about 15% per year.  I think they fell – some reports I’ve read, around 25% in 2009.  If you can imagine, we’re doing restructuring the year the market’s shrinking.

But now, it appears that the market in the US is starting to grow closer to that 15% level, and frankly, globally, we’re seeing growth.  You know, China’s growing at a rate of 25%, both with trials (sounds like: done) from international markets, but also their own market growing dramatically.  We’ll be looking at global markets as well, as we move into 2011 and 2012.

You know, if I had additional capital, frankly, I think we could grow faster.  I’d be investing in sales and marketing folks at a – greater than I am today.  But we’re still investing at a rate that’s pretty high.  You know, we’ve doubled our sales force over the last year – doubled our marketing efforts, because, you know, we see that we can capture a greater market share going forward.

I think that, you know, my objective now is to invest every dime we earn and reinvest it in growth—either sales, marketing, or product development—and grow that top line as rapidly as possible, without suffering big losses, as you might imagine a growth company would, right?  A growth company typically would take big losses to make that upfront investment.  We don’t have that flexibility.  So, our growth curve will be adjusted for that.  But, you know, we’re going to continue to grow; again the important thing is, at a rate faster than the market.  That’s the objective.

BJ: Can you talk a little bit about the company’s, I guess, balance sheet and sort of the market cap, the trading activity, and I guess the opportunity for shareholders or people to buy the stock now?

LB: Well, personally, I look at competitors –I think that we should be looked at very seriously by investors, because of our market valuation and the strength of our balance sheet.  Look, this is a company that when I look at investor opportunity and I – you know, I continue to buy shares myself.  I think this is a very vastly undervalued stock, for me personally; take my CEO hat off.

But I would tell you this.  Here – we almost went into bankruptcy in 2009, and that scared a lot of investors, and really drove our stock price down.  We were delisted from the NASDAQ and went to the OTC markets.  Now, we stayed OTCQX, with the highest reporting level of the OTC Markets, with the greatest amount of – we give the same transparency as an SEC reporting company, with very little variance from that.  So, very transparent company.  Our balance sheet, especially with the NTT deal, very strong, with capital to weather some storms now, which we didn’t have today.  And maybe make a few investments, and growing a little bit faster.  We have great software margins.

In 2010, I didn’t talk about, we created a clinical and consulting services business, DATATRAK Clinical and Consulting Services, DCCS, which is working with our CRO partners and our pharma customers to augment CRO services.  And so, we’re – now have a great consulting practice and clinical data practice along with our software.  So, again, more avenues to grow the – grow market share and grow our presence in this industry.

And we have – and, back to the balance sheet, no debt of note.  And our stock is very simple.  We have common stock.  I don’t have complex convertible securities.  I don’t have preferred securities.  I just got shares of stock.  We’ve got, let’s say 13 or 14 million shares outstanding.  We haven’t done great numbers of offerings.  Again, as I said, I’m very careful about my – about diluting shareholders.  I’m a major one, so  I’m fully aligned with the shareholders.

And so, my view is, you know, our stock price is languished, though, because these OTCQX markets don’t have a lot of volume and they are – and so, difficult to trade, and to find, you know, funds to come in and accumulate, though I think they – some have said they᾽d like to.  We want to find a way to do it.  So, I think there’s growing momentum, and as we deliver on our results.  But, for me, you know, you look at the valuation, our market cap – if you (sounds like: compared/played) our market cap to any one of our competitors and just look at stock value and relation – you know, adjust for revenue and adjust for number of shares—our stock, you know, could be undervalued by a factor of ten.  And it’s a factor of…

BJ: Hmm.  So, what is your current market cap versus the – what it should be, I guess?  And what is the current market cap for the company?

LB: I would tell you that our market cap ranges day to day, anywhere from $8 [million] to $10 million, maybe $12 [million], depending on the day.  And again, if you look at our largest competitors, they’re maybe ten times larger but have 100 times greater market cap, and they have debt and giant levels of deferred revenue—if you adjust for those, which we don’t have, you know, maybe it’s greater than a factor of ten.

I ask our investors to be patient, because, again, the last sort of residue, if you will, of our restructuring is happening in OTCQX stock that – where the volume is minimal and visibility is minimal.  But over time, as we continue to perform, we have options.  We have options in terms of returning to the NASDAQ and doing some other things that will occur as we continue to deliver the results that we’re delivering, and build our market share and, you know, think about how we return that to earnings over the coming years.

Again, as I said, we’re going to be reinvesting as much as possible, but better earning with our margins will be occurring on a regular basis over the next couple of years.  And so I think that our investors who come into the stock today are going to be greatly rewarded.

And by the way, folks who came into the stock when this management team took over, have already been greatly rewarded.  The stock has increased in value several-fold.  We were – you know, we were truly a penny stock at one time.  And I think that momentum will continue.  But I think the upside opportunity is really tremendous.  And that’s our objective as a management team, is to ultimately deliver that over the coming years.

BJ: Sounds like an interesting story, Larry.  Thanks very much for joining us.

LB: Thank you.

BJ: This is Brett Johnson here at OneMed Radio, signing off from New York.


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