CEO SUMMARY: With each passing month, Theranos pulls open the curtain a bit more on its business structure and its market growth plans. Its clinical lab tests are now offered in Walgreens pharmacies in Palo Alto, California, and Phoenix, Arizona. Recent news coverage in Fortune and USAToday disclosed that company officials—based on stock sales to date– value the company at $9 billion. That’s more than the market value of the shares of Quest Diagnostics or LabCorp.
ONE COMPANY WITH BIG AMBITIONS in the clinical laboratory testing market is Theranos, based in Palo Alto, California. It has declared its goal of introducing disruptive technology and a different lab testing business model into clinical practice.
In recent months, Theranos has been the subject of high-profile media stories. Theranos founder Elizabeth Holmes made the cover of Fortune in June and her company was the subject of a detailed story in that issue. Then, on July 8, USA Today ran its story about Theranos.
The elevator pitch for Theranos has four basic elements: It intends to revolutionize (and disrupt) the existing process of clinical laboratory testing because it can use (1) a finger-stick to collect (2) a micro-quantity of specimen from which it can perform hundreds of lab tests. It can (3) produce lab test results in four hours and (4) will charge only 50% of Medicare Part B prices.
In September, Theranos and Walgreens, the nation’s largest pharmacy chain, announced that the companies agreed to establish Theranos lab testing services in the more than 8,200 Walgreens pharmacies nationwide. That same week, The Wall Street Journal published an article about Theranos that discussed the company’s plans in positive terms. (See TDR, September 30, 2013.)
Currently, there are two Walgreens pharmacies in Palo Alto, California, where patients can obtain Theranos lab tests. In Arizona, Theranos shows 29 Walgreens pharmacies that offer its lab tests and, at this time, all these locations are in the Phoenix metro area.
Publication of the Fortune and USA Today stories about Theranos came in the weeks before the American Association of Clinical Chemistry’s annual conference in Chicago. For this reason, many lab scientists and vendors at the conference were asking questions about Theranos.
Because Theranos has a reputation as being secretive (and litigious), little is known about the company, outside of the carefully-orchestrated news stories that the company allows to be printed. Former employees, for example, are not allowed to identify their former employer on their resumes.
At the center of the media coverage is Elizabeth Holmes, the founder and CEO of Theranos. News accounts describe how she dropped out of Stanford in 2003 at the age of 19 to found the company.
According to Fortune, since the company’s founding, it has attracted $400 million of venture capital. Its investors say that the company is valued at $9 billion.
For comparison, in today’s stock market, Quest Diagnostics Incorporated (2013 revenue of $7.1 billion) is valued at $8.7 billion. Laboratory Corporation of America (2013 revenue of $5.8 billion) is valued at $8.8 billion. Thus, despite its diminutive presence in the clinical testing marketplace today, executives at Theranos are declaring that the company is more valuable than the nation’s two multi-billion-dollar lab testing behemoths.
Details discussed in the Fortune story will help pathologists and lab managers understand the elements the company says will make it disruptive. These center upon small specimen quantities.
Fortune noted that the company currently has approximately 200 different lab tests that it can perform with its micro- specimens. It is regularly validating and adding additional tests to that number.
Moreover, wrote Fortune, “The company has performed as many as 70 different tests from a single draw of 25 to 50 microliters collected in a tiny vial the size of an electric fuse, which Holmes has dubbed a ‘nanotainer.’ Such a volley of tests with conventional techniques would require numerous tubes of blood, each containing 3,000- to 5,000-microliter samples.”
The big question that THE DARK REPORT hears from pathologists and lab executives is “what technology Theranos is using to do extensive testing on such small specimens?”
On this point, Fortune wrote that, “Precisely how Theranos accomplishes all these amazing feats is a trade secret. Holmes will only say—and this is more than she has ever said before—that her company uses ‘the same fundamental chemical methods’ as existing labs do. Its advances relate to ‘optimizing the chemistry’ and ‘leveraging software’ to permit those conventional methods to work with tiny sample volumes.”
Working with Health Systems
It was also disclosed in the Fortune story that Theranos was now “working closely… with the aim of deploying its lab services at UCSF Medical Center in San Francisco, Dignity Health’s 17-state hospital group, and Intermountain Healthcare’s 22-hospital system in Utah and Idaho.”
The Fortune reporter did note that the laboratory medicine profession has questions and criticisms about what is publicly known about Theranos. Fortune wrote, “The most frequent criticism is that Theranos is using purportedly breakthrough technology to perform tests that are relied on for life-and-death decisions without having first published any validation studies in peer-review journals.”
On this point, Richard A. Bender, M.D, “an oncologist who is also a medical affairs consultant for Quest Diagnostics,” was quoted by Fortune as saying “I don’t know what they’re measuring, how they’re measuring it, and why they think they’re measuring it.”
No Peer-Reviewed Studies
The rebuttal on this point by Holmes, wrote Fortune, was that “peer-review publication of validation studies is both unnecessary and inappropriate” because “her tests employ ‘the same fundamental chemical methods’ as existing tests.”
Holmes went on to note that Theranos was proceeding under the FDA’s laboratory-developed test (LDT) exemption. Wrote Fortune, “Moreover, Holmes stresses, Theranos is currently seeking FDA clearance for every one of its tests, even though it’s under no legal obligation to do so. (She has submitted many hundreds of pages of validation data in this effort, and has shown much of that data to Fortune.) Theranos may, in fact, be the only lab to have ever sought FDA clearance for LDTs.” Some pathologists and Ph.D.s will certainly challenge the truth of that last sentence, as multiple companies have obtained FDA clearance for their LDTs.
Another fact came out of the Fortune story which may help lab professionals understand how Theranos gained access to the human specimens that would be useful in validating the performance and analytical accuracy of its proprietary diagnostic technology. “…since 2005 Theranos has been doing work for major pharmaceutical companies, including Pfizer and GlaxoSmithKline, that are conducting clinical drug trials. Early on it was a way for the company, working under confidentiality agreements, to stealthily refine its technology while earning revenue needed to build out infrastructure. Theranos would test drug-trial subjects three times a week—which wouldn’t have been feasible using venipuncture—and catch adverse drug effects quickly, before they became dangerous.”
Growing Patent Portfolio
Another point of interest for in vitro diagnostics companies is the patent portfolio that Theranos is building. According to Fortune, Holmes is a co-inventor on 82 U.S. and 189 foreign patent applications. Of these, 18 in the U.S. and 66 abroad have been granted. Theranos has also filed 186 patents worldwide which don’t list Holmes as an inventor and 18 of those have been granted to date.
Another interesting development is that, in September 2013, The Wall Street Journal reported that Theranos had gone through $100 million in capital during its 10-year life. Now, 10 months later, Fortune is reporting that the company has $400 million in capital investment. This addional $300 million in capital would imply that Theranos has a substantial war chest available to use in its drive to disrupt and transform the clinical laboratory testing marketplace as it exists today.
Theranos to Hire 500 in Phoenix Expansion
LAST MONTH, NEWSPAPERS IN PHOENIX reported that Theranos had signed a lease for a major office facility in the city.
The company will occupy 20,000 square feet in the SkySong development. This is the The Arizona State University Scottsdale Innovation Center.
News accounts said that Theranos plans to hire 500 people to work in this office. It currently has 100 employees in Arizona.