Updated: Oct 19, 2021
The United States is called the OPEC of plasma as roughly 70% of the world's plasma supply is sourced there. This is due to one reason- people get paid to donate plasma in the US. Each plasma donation draws roughly seven hundred milliliters worth of plasma and is worth around forty-five dollars ( money paid to the donator). The plasma industry has been growing at around a ten percent CAGR for the last twenty years and is valued at around 30B dollars. It is dominated by three large players: Grifols, CSL, and BioLife. They all intend to grow the number of collection centers at around a twelve percent CAGR for the next five years. The chart below shows the growth of plasma centers and plasma collected (in liters) in the US. Paysign (NYSE: PAYS), a payment processor for plasma centers, will benefit directly from these trends. Rapidly taking share in a duopolistic environment and coupled with high margins and insider ownership, we believe Paysign has more than one hundred percent upside from today’s levels.
Plasma is the liquid portion of blood, which is about half the volume. The other half consists of red and white blood cells (solids). Once donated, plasma is run through a battery of tests before it is used to help treat burn and trauma patients as it helps with blood clotting. It also assists in the treatment of immune deficiencies and bleeding disorders. Treating just one patient with plasma therapies could take the equivalent of more than 100 donations! Fortunately, plasma is quickly regenerated in the human body thus donors can give plasma up to 2x a week. Generally, plasma donors are lower-income, and the money received from donating plasma supplements their income significantly. At forty-five dollars per donation at 2x a week, donors can make upwards of four thousand dollars per year, not a small sum when compared to the minimum wage salary.
So how does one get paid? Given that most of the donors are in the low-income bracket- they generally do not have debit cards to load funds onto (overdrafts and maintenance fees are cost-prohibitive). Checks and cash are also not good alternatives as checks do not provide for a clean ledger system and cash is prone to be stolen. This is where PAYS comes in with its prepaid card offerings. A prepaid card is simply a card that has a preset amount of funds loaded onto it, once that amount is spent, the card can no longer be used. PAYS as a payment processor (and in partnerships with banks such as VISA) takes a fee for every transaction usually around 3.5%. The payment processing industry for plasma centers is dominated by Onbe (formerly Wirecard) and Paysign with about 60% and 40% market shares respectively.
The plasma industry has been hit significantly as the combination of COVID infection risk along with a deluge of stimulus checks have inhibited people from donating plasma. Across the board, there has been at least a 20% reduction in plasma supply donations with the ARPC (average revenue per center) according to PAYS dropping to five thousand dollars per month whereas before COVID it was almost nine thousand dollars. This is even with plasma centers offering almost 20% more to donate along with promotions for new donors to make one thousand dollars for the first month, before COVID it was about four hundred dollars, more than a 2x increase! Screenshots of CSL plasma’s website were taken using the Wayback Machine to show the price plasma centers are willing to pay first-time donors. Before COVID, plasma supplies were setting records.
CSL website - March 2020
CSL website - Dec 2020
CSL website -May 2021 until now
The economics of Paysign
PAYS earns revenue primarily through its payment processing arm (analogous to a toll booth). For every transaction made using their prepaid cards, PAYS receives roughly a 3.5% cut. The people donating the plasma,not the plasma centers, incur the majority of PAY’s costs. PAYS also earns money through breakage- this is a term for all the unused funds left on a prepaid card after it expires and it applies more so for special purposes such as company incentives and pharma copay (discussed later). The average amount of funds remaining on cards when they expire typically is around 15%, not a small sum when aggregated with millions of cards. Lastly PAYS earns interest income on restricted cash- all the funds on their prepaid cards. PAYS costs are directly related to network fees(partner banks e.g. Visa and others seen below), card production costs, customer service, and sales expenses. This is a high margin business that we expect over time will have a net margin close to 30%, their gross margin is typically around 50%.
PAYS operates in a duopolistic environment with Onbe (formerly Wirecard). PAYS was able to take share away from Wirecard as the plasma industry was not a needle mover, and as a result, not a large focus for Wirecard. This lack of focus resulted in downtime and issues with their prepaid card offerings. Payments are a highly sensitive touch-point for plasma centers as it will cause their customers to either not donate at their center and likely go to another competitor. Nobody wants to spend an hour donating plasma only to have issues with getting paid. PAYS on the other hand has 99.999% uptime and 24/7 customer service which is why it was able to take market share rapidly since it entered the scene in 2013. PAYS now has 40% market share. Wirecard’s own operational mishaps were what helped PAYS come onto the plasma scene and take market share.
Moreover, the Wirecard fraud debacle in July 2020 has further changed the optics of plasma centers on the reliability of having Wirecard as their sole payment provider and has prompted the laggards to seriously consider PAYS as an alternative. This has caused a significant portion of new centers to enroll with PAYS and a current customer of Wirecard’s to enroll one hundred plus centers within 1 month of Wirecard’s downfall! These have yet to go online, presumably because they are still under contract however PAYS has installed the kiosks and card products to turn payment options on immediately. The client cited “business continuity” as the reason for bringing PAYS on. A side note on the kiosks, they were put in place in plasma centers so that customers could do activities such as check their balance. Wirecard does not have these kiosks and it acts as an incentive for donators to switch. Remember, these customers typically don’t have their own transportation and even smartphones thus a kiosk at a plasma center is a large convenience for them. As the larger plasma clients will typically have both payment providers (PAYS and Wirecard), having an edge at the plasma center front is a large advantage as it converts customers. We expect that PAYS will continue to take share especially in the next couple of years as Wirecard has been divvied up and sold off to other companies. The plasma industry is a very niche field and is not a needle mover for larger prepaid firms.
On Prepaid Cards
So what are prepaid cards and are they going to become obsolete ? As it turns out, the Prepaid Card industry is a massive and rapidly growing industry. The Global Prepaid Card Market size was valued at USD 2.01 trillion in 2019 and is predicted to reach USD 18.47 trillion by 2030, a CAGR of almost twenty-three percent.
In a growing cashless society, prepaid cards play an important role for low-income earners. The Federal Deposit Insurance Corporation (FDIC) in 2018 reported that 6.5% of U.S. households were unbanked, roughly 9mm households! This means being unable to participate in the e-commerce space, make direct deposits, access ATMs etc. Prepaid cards help these households and also benefit issuers(eg plasma centers, corporations). These benefits include: avoiding the use of cash, physical items (doctors giving out free samples), improved recordkeeping, and data collection to be able to roll out loyalty programs etc.
There are many different types of prepaid cards and for simplicity's sake we will only address two of them. The first one, which PAYS rolls out to its plasma partners, is currently one use only. Once funds run out on the card, the card is worthless and not eligible to be reloaded. The other type of prepaid card is General Purpose Reloadable (GPR). These can be reloaded like a debit card and used to enroll in programs such as direct deposit and be eligible for cashback rewards etc. PAYS used to operate primarily in the first category, however, has increasingly been making inroads into the latter category with the launch of their Paysign Premier card. They also recently launched their merchant rewards cashback program in March 2021 to their premier and plasma clients. PAYS is trying to convert their plasma cardholders to a GPR card which would increase their revenue as the more funds that are loaded onto their cards, whether it be from a direct deposit or transfer, the greater their revenue stream will be. Guessing how many cardholders will convert and the amount of money that will be loaded is murky at best given the customer base. However, PAYS can only see upside from leveraging its customer base.
Another industry PAYS has been making headways in is pharma copay. Traditionally when pharma companies were about to face competition from generics, they launched marketing campaigns to create habit-forming behaviors and gave doctors free samples to give to patients. That way, even if a generic came out, those customers would stick with a brand they know. Now, those pharma companies are turning to prepaid cards to help patients buy medication at a pharmacy. This enables them to track spending and launch new promos or loyalty programs. These programs typically last two years and PAYS also collects the “breakage” fee after the cards have expired.
PAYS has multiple competitors in this space- ConnectiveRX, Trialcard, and BlackHawk. PAYS used to operate as solely a payment processor for ConnectiveRX previously, however, there was a fallout as PAYS claimed the breakage fees associated with expired prepaid cards as their own. ConnectiveRX disagreed and promptly sued them in 2015. PAYS settled for a 5mm dollar payout.
This business segment has also seen a downturn with COVID with people willing to spend less money on newer drugs as well as some accounting mishaps. PAYS had to reverse all recognized settlement income (from breakage) as COVID changed historical trends for them. This resulted in a 6.3mm write-down in Q3 2020. PAYS now recognizes breakage using the remote method of recognition which is when the prepaid card expires.
We value PAYS by segmenting its plasma and pharma segments without ascribing much value to the their other segments (corporate loyalty programs and GPR). We believe it is likely that PAYS can grow their plasma business at around a twenty percent CAGR for the next five years. This would put them at a little over 50% market share by 2026, up from almost 40% today. This would equate to about a 70mm revenue run rate by 2026. Given the recession-resistant nature of this business-during the Great Recession, the plasma industry doubled in size- and its predictability, we believe a 15x earnings multiple is reasonable. Given net margins of around 30% (gross margins are currently around 50%) in 2026 would yield a value of around 315 mm for their plasma segment.
PAYS pharma segment is a bit more opaque as their competitive advantages there are not as clear (it is heavily relationship-based). Coupled with accounting mishaps that occurred last year and executive turnover, we are less convicted in our ability to value this business and estimate its worth conservatively. We will update our valuation of this segment as future earnings play out. This segment will bring in roughly ten mm dollars in revenue for FY 21. We value this segment at around 1x revenue or around 10mm dollars. Combined, this yields a total EV for PAYS to be around 325mm dollars (taking into account cash), around a 20% IRR from here.
Catalysts & Tailwinds
1. The number of plasma centers in the USA is set to grow around low to mid double-digit CAGRs for the next five years. PAYS will be a direct beneficiary from these new plasma centers. Another tailwind is the price per donation increasing. In 2011, the average donor was paid roughly about $30 and the dollar amount for the average donor is roughly $45 today (4% CAGR). This is without the possible inflationary tailwinds that could result from the deluge of stimulus (the increase in prices CSL was willing to offer first-time donors may be a prelude). PAYS benefits from an increase in price as the more dollars loaded on the prepaid cards, the more revenue they generate. Plasma centers are an incredibly high-margin business and there is likely no near-term price ceiling for what they are willing to pay for plasma. Here is what the former VP of Sales at PAYS said:
“I think it does. But I don't know how much money they (plasma center) make... I know this much. It's a 4 or 5X profit margin from what they pay people to what they sell it for, and they get on the back end with the customers with the hemophiliacs and the other diseases that this helps. I know it's a 5x. I know that.”
2.The tapering of stimulus checks starting September 6th will allow for a more normalized environment and the plasma industry will see a marked increase in revenues from today’s numbers. PAYS will likely see more analyst coverage when this happens, PAYS had ZERO analyst questions in the last conference call (Q2 2021).
3.PAYS recently expanded their client relationship team in Aug 2021 with the hiring of Alan Geiger who was the former VP of Relationship Management at Wirecard for their plasma division. He was there for 15 years. Having an intimate understanding of your opposition’s relationships is a big advantage.
4.PAYS has significant revenue potential in a new client. PAYS signed up 104 plasma centers in August of 2020, however are yet to go live in them. This would represent roughly a 25% increase in the number of plasma centers they are in. PAYS has been reticent on who it is and we suspect that it is a client that exclusively uses Wirecard ( eg Octopharma, Takeda) and after the debacle decided to have PAYS as an alternative. They are probably under contract with Wirecard and when the contract expires will likely sign with PAYS. Here is a snippet from their Aug 2020 conference call.
”What that means is that we can't tell you that those 104 centers are going to go live. It's really up to the client and what they make -- and what decision they make in the end. They were nervous in respect to what's going on in the world and what's going on with one of their service providers and, therefore, asked us to provide a continuity plan and which we did. So... Yes. And I think it's important to point out that all of those centers have received card product and can go live immediately the day they make that decision. The technology, the card product, the terms and conditions, all of the packaging is in each site.”
Risks & Headwinds
1.If new strains of COVID appear that are more transmissible and immune resistant, this will cause the stimulus spigots to turn on again. The plasma business would deteriorate as it did in 2020 if this occurs. We ascribe a low likelihood to this.
2. A revolving door on management is hardly a good sign. Since 2018, there has been significant C-suite turnover. This included CFO Mark Atinger, Al Negron, Jim Mcroy (VP of Strategic Development), COO Joan Herman, Chief Marketing Officer Dana Barciz, and Chief Information Officer Ergon Kardum. Continued turnover will likely stymie growth and fundamentals.
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