PAYS - PaySign Is Finally Getting Promising Traction In Its Pharma Business

2023-06-22 10:09:54 ET

Summary

• The company has steadily amassed a dominant position in plasma centers and is set for further steady growth.
• Despite the loss of its prepaid pharma business, it's the pharma segment, still tiny, where additional growth seems now likely.
• The company has had some recent wins and is in talks with a number of big pharma companies.
• There is considerable operating leverage in the model, and the shares, while not cheap, have fallen back to more reasonable levels.

PaySign ( PAYS ) is a prepaid card processor that mostly supplies to plasma centers, accounting for 90%+ of revenues where the cards are used for donors.

This segment suffered during the pandemic, but it's now well on the way to recovery. The company also suffered from aggressive accounting for spoilage in its other segment, pharma, but that too is now behind us.

So we notified our members of the recovery in PaySign a year ago and that recovery is still in progress (despite the recent fallback in the shares) and has legs to run:

• Adding plasma centers
• Growth at existing plasma centers
• Mexicans returning
• Patient affordability business
• Prepaid disbursement programs

From the Q3 earnings deck :

Plasma centers recovery

Worldwide, the plasma market is set to grow at a CAGR of 6.9% to $54.37B by 2031 with the US providing roughly two-thirds of this, so there is a tailwind for the company here.

Revenue from plasma centers increased 27% from Q1/22 to $9.4M, both on organic growth at existing customers as well as adding new centers:

• The average revenue per month, per plasma center was $7,066 versus $6,672 in Q1/22.
• The company added 10 new plasma centers in Q1 for a total of 439 centers, up from 359 a year ago.
• 11 centers closed as a result of non-performance and 4 centers were sold to a non-client, so there was actually a net loss of centers.
• Mexican blood donors returned to Southern plasma centers after a court injunction allowed that at the end of Q3/22. While too late for Q3, in Q4 management noticed that donations were increasing from 40 to 1200 a day in these Southern centers. We know from the Q2CC that this affected about 7% of locations but 12-15% of their market because these tended to be bigger.
• A large Q2/22 win (with 100+ centers) is slow with onboarding, management expects 20 centers to be onboarded in early 2023 from this large customer.
• PaySign is in negotiations with one of the four largest plasma collection companies and won two contracts with new entrants with onboarding of patients beginning in Q3/23.

The company has achieved a viable niche for itself that seems to be too small for big competitors to bother with. There was Germany's Wirecard, but they famously got into trouble and got out.

PaySign manages a diet of steady customer wins which should give investors a considerable deal of comfort, the company, already well entrenched in the segment, is increasing its position.

While we're not there yet, growth opportunities will start to taper off after becoming dominant and the core processing technology can be leveraged in multiple other segments.

The company has tried this for years with only fleeting success, but it seems they finally have a real shot.

Pharma

The company's prepaid pharma business was that fleeting success, but the last two programs closed in November 2022. However, the company has embarked on pharma copay (or customer affordability) programs, and while it's early days for definite conclusions, they seem to have established a beachhead.

These copay programs are producing somewhat smaller gross margins compared to the previous prepaid ones, but in the greater scheme of things, this isn't all that important as:

• Revenues from this segment are tiny ($590K in Q1).
• The company is gaining traction, raking in 7 new programs in Q1, the company has 26 programs running, and their programs tend to replace those of competitors, a very promising sign.
• Three of the programs that launched in Q1 were from a top 25 pharma company.
• They had meetings with 10 of the top 20 pharma companies, another promising sign.
• Margins are still quite a bit higher than in the plasma segment, in the upper 70s-80s for their pharma copay programs while plasma generates gross margins in the upper 40s-low 50s.

With the patient affordability program, it looks like the company has hit on a new growth vector to blow new life into its pharma segment. Why is it off to such a promising start? From the Q1CC:

Our success in winning new business is directly related to our innovative products addressing critical industry issues such as copay accumulators and maximizers. We are expanding the therapeutic classes addressed by our services, which is crucial for winning new business and larger programs this year.

As we argued above, the jury is still out, but at least the company is off to a promising start. This matters as the pharma segment is much larger than the plasma segment, so there are reasons for optimism about the company.

Other programs

The company has a small third segment, payroll solutions, which was on a roll in Q1, increasing revenues by 883% to $194K in Q1, so it's still tiny.

Management was very excited with their Q1/22 signing of a processing deal with Spentra as a partner as it opened the payroll segment, as well as a Mastercard connection that ( Q2/22CC ):

Our Mastercard connection allows us to offer greater choice to our clients by adding an additional payments network to our offerings. Additionally, with this connection, we are now enabled to support not only payroll but gift, general purpose reloadable, corporate incentive and debit on the Mastercard brand. The Mastercard connection also enables EMV, contactless and tokenization support for our products. We are very excited by the opportunities that this new connection with Mastercard will bring.

The companies recently announced a partnership enabling payroll card issuing utilizing the Mastercard network:

This partnership allows PaySign to provide a full-featured payroll debit card program that seamlessly integrates with Spentra's Money Earned® pay access system, enhancing the cardholder experience and delivering essential money management tools.

The Mastercard connection was recently finalized .

The company won an RFP from a nationwide membership organization with 440+ shops for a corporate payout program in Q3 and this is expected to launch in Q4. They won another corporate payout program from one of their plasma customers as well, so the payroll segment is coming alive.

Their cash-back award program (which all PaySign cardholders can benefit from, irrespective of the program they're in) received a major boost through the recent partnership with fintech company EvoShare.

There are some other services here, most notably Paysign Premier :

But there wasn't any additional information about progress. Again, promising green shoots but too early for investors to rejoice.

Finances

After having suffered from the pandemic effect on their plasma business and the aggressive spoilage accounting in their pharma business, the company is almost back to its former glory, and this time on a much sounder footing:

Plasma revenues increased 27% to $9.4M. Pharma revenues declined 27% to $590K and other revenue increased 883% to $194K. Adj. EBITDA was $720K and the net loss was $160K.

Operational leverage

Gross margins took a considerable dip to 49.8% (from 60.8% a year ago) but that's mainly the result of the disappearance of the pharma-prepaid business, which tends to have the highest gross margins, a one-time benefit in Q1/22 producing difficult comps and some wage and price pressures.

OpEx only grew by 8.8% to $5.8M, so there is considerable operational leverage as revenues grew considerably faster at 23% to $10.1M.

The company announced a $5M share buyback program , of which, it used $666K in Q1 already. There was $6.4M unrestricted cash at the end of Q1 (-$3.3M for the quarter), and the company has no debt.

Apart from the odd quarter, the company isn't bleeding cash, given the pandemic headwinds blowing for a couple of years that's fairly remarkable:

Outlook

• Revenue +16%-21% to $44M-$46M
• Plasma 90% of revenue and 45-55 new centers added
• Pharma +30% despite the $1.5M loss of pharma prepaid in FY22
• Gross margin 52.5%-55% on lower pharma copay (versus higher prepay margins)
• OpEx $23M-$25M
• Net income $2.5M-$3.5M or an EPS of $0.05-$0.06
• AEBITDA $6M-$7.5M

Risk

• The company is still very dependent on the plasma segment and although its customer win rate suggests they have no immediate serious competitive threat, such a situation can change.
• The company has dealt with its exit from Pharma prepaid and is off to a promising start in Pharma copay, as well as in payroll. But it's early days, and we remind readers that their Pharma prepaid once looked similarly promising.
• The company has enough cash (and no debt) to even start a share buyback program, so it's not in any immediate cash crunch, but the $6M or so on the balance sheet isn't a huge buffer should things get worse.

Valuation

FY23 revenue at the midpoint at $45M and earnings at $0.06 per share. There are 52.4M shares outstanding and ( 10-Q ):

For the three months ended March 31, 2023, the amount of potential common share equivalents excluded were 1,839,500 for stock options and 3,698,000 for unvested restricted stock awards.

So that's 57.9M shares fully diluted for a market cap (at $2.5 per share) of $145M and an EV of $139M, which produces an EV/S of 3.1x.

On an earnings basis, the shares are actually still quite pricey, but there is a good deal of revenue growth and operational leverage, so we expect that to come down (indeed, the single analyst has the FY24 EPS at $0.09).

Conclusion

The company is making steady progress:

• It's becoming dominant in the plasma center market, which has gotten a boost from the recovery from the pandemic and a court injunction allowing the return of Mexican donors.
• The company keeps winning new customers both in plasma as well as in its pharma business, but it's the pharma business that could provide considerable upside as the TAM is large, and the company starts from a very small base but has made some impressive progress lately.
• There is considerable operational leverage already and this will increase if pharma becomes bigger due to the considerably higher margins in that segment.
• The stock is not a real bargain at these levels but offers a nice risk/reward ratio here.

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