Might Lawsuits Come Next in Theranos Story?

Grocery store operator Safeway spent $350M to build blood collection centers in 800 of its stores

CEO SUMMARY: Recent disclosures in the news indicate that an agreement between Theranos and Safeway has gone sour— after Safeway spent a third of a billion dollars to fulfill its part of the collaboration! Reporting by The Wall Street Journal claimed that Theranos and Safeway are negotiating over this situation. If the two parties cannot agree in this matter, would Safeway’s owners file a lawsuit? In response to the Journal’s reporting, Theranos said it was “inaccurate and defamatory.”

FOR TWO YEARS, both CEO Elizabeth Holmes and Theranos, her lab testing company, have been the darlings of the national media. A procession of cover stories in prominent magazines hailed her as an entrepreneurial genius who developed revolutionary diagnostic technology that would enable her company to disrupt the entire clinical lab industry.

That positive news spin may have ended on September 15, when The Wall Street Journal published the first of several front page exposés that described serious issues inside the highly-secretive Theranos. In response to the facts and questions about Theranos raised by reporter John Carreyrou in his investigation, a number of additional issues and concerns about Theranos have been published by major newspapers and business publications. Theranos and Holmes have scrambled to respond to the negative news coverage. They vigorously challenge the accuracy of the reporting and those statements can be found on the Theranos website at www.theranos.com.

In our previous issue, we provided a useful overview of issues concerning Theranos that are of specific interest to pathologists, lab administrators, and hospital executives. Carreyrou identified these points in his stories published between September 15 and October 23. (See TDR, October 26, 2015.)

Last week, Carreyrou and the Journal published another bombshell about Theranos. On November 10, the Journal published a story that claimed Safeway had spent $350 million to build blood collection centers in as many as 800 of its grocery stories across the United States as part of an agreement it had with Theranos.

$350 Million Price Tag

Carreyrou wrote, “The plan called for Safeway to build upscale clinics that would house Theranos’s blood analyzers and provide patients with rapid test results, according to current and former Safeway executives. The $350 million price tag was equivalent to more than half of Safeway’s net income of $596.5 million in 2012. Safeway had revenue of $44.21 billion. Safeway also invested more than $10 million in Theranos, one former Safeway executive said.”

As part of this story, the Journal published a response by Theranos about the report of an agreement between Theranos and Safeway. The WSJ noted, “In an email Tuesday, Theranos’s general counsel, Heather King, said: ‘We don’t comment on discussions with other companies. The questions and information you have presented… are inaccurate and defamatory.’ She declined to comment on the claims by former Safeway executives.” A spokesperson from Safeway declined to comment to the Journal.

The Journal made another stunning claim about the perceived failure of Theranos’ proprietary lab testing technology to produce accurate and reproducible lab test results for specimens collected from Safeway employees.

Drawing Blood Twice

Carreyrou wrote, “In an initial phase of the project, Safeway had Theranos conduct blood testing at the headquarters clinic [in Pleasanton, California], current and former Safeway executives said. Theranos often drew the same employee’s blood twice, first with blood from a finger prick and then the traditional method of a needle in the arm, according to one former Safeway executive.”

This description of how Theranos collected two specimens—a capillary blood specimen by fingerstick and a venous blood specimen by venipuncture—from Safeway employees mirrors the experience of THE DARK REPORT’S editor when visiting the Theranos Wellness Center in the Walgreens in Palo Alto, California last May. (See TDR, May 11, 2015.)

The Journal further described issues associated with the lab tests Theranos performed for employees at the Safeway corporate clinic. It stated that “the former [Safeway] executive said he worried that Theranos’s finger-prick process was still a work in progress. ‘If the technology is fully developed, why would you need to do a venipuncture?’ this person said, using the term for a traditional blood draw.”

Different Test Results

The Journal continued, “The concerns deepened when Theranos’ test results for several Safeway employees differed from the results the same employees got from other laboratories, according to the former executive. Another former Safeway executive confirmed those recollections.

“It isn’t clear how many Safeway employees got blood tests from Theranos or whether the varying results came from finger-prick or venous tests. One Safeway executive got a frighteningly high result from Theranos on a test to gauge his prostate-specific antigen [PSA], according to two former Safeway executives. They said the test suggested that the executive had prostate cancer. Retesting by another lab came back normal,” wrote the Journal.

Carreyrou made another notable disclosure involving Theranos’ reluctance to put its proprietary lab test analyzer into Safeway stores. He wrote, “Theranos also backed away from putting its blood analyzers in Safeway’s clinics so patients could get the results quickly, the current and former executives said. Instead, Theranos said blood samples collected at Safeway would have to be shipped to a central lab for analysis, according to the former executives.”

Pathologists will recognize the significance of this situation, if it is true. In order to perform clinical laboratory testing within a Safeway grocery store, Theranos would need to comply with regulatory requirements of the FDA and the Clinical Laboratory Improvement Amendments (CLIA) that are supervised by the Centers for Medicare & Medicaid Services.

Labs in Grocery Stores

To comply with these federal laws, Theranos would have to gain clearance or approval from the FDA for use of these analyzers for clinical testing purposes for waived or complex testing and/or offer these lab tests to patients by operating a CLIA-certified complex laboratory that performs LDTs in each Safeway store.

To meet CLIA requirements for operating a complex clinical lab doing LDTs, Theranos would have to staff a certified clinical laboratory scientist/medical technologist at each of the 800 Safeway clinics and each of these labs would need a physician as the medical director on the CLIA license for this site.

Lab Costs vs. Revenue

Pathologists recognize that such arrangements would make it prohibitively expensive for Theranos to operate a CLIA-licensed lab in each Safeway store This is because the daily volume of lab tests to be performed would fall short of the number needed to cover the costs of operating that lab facility. Further, because Theranos prices those tests at just 50% of Medicare Part B clinical lab test fees, it generates substantially less revenue per test than a typical clinical lab.

It is a major claim that Safeway invested more than a third of a billion dollars to build blood collection centers in 800 stores as part of its agreement with Theranos. The Journal said the two companies were negotiating to resolve this issue. What the Journal did not report is that Safeway changed ownership this year.

On January 30, an investor group led by private equity firm Cerberus Capital Management bought Safeway and merged it with Albertsons, which it purchased in 2006. Next, on October 6, Cerberus pulled an attempted $2 billion initial public offering (IPO) for Albertsons (and Safeway) because of unfavorable conditions in the stock market. Then, on November 10, the Journal did its story about the agreement between Safeway and Theranos.

The newly-published claims of this deal and the money spent by Safeway to build patient service centers in its grocery stores may further complicate Theranos’ business plans going forward. Further, since unhappy partners often sue each other, might lawsuits be part of the next chapter in this story?

 

Medical Director Needed for Theranos’ CLIA Lab

ONE RECENT NEWS STORY ABOUT THERANOS that raised eyebrows among some pathologists and lab administrators was the disclosure on November 5 by The Wall Street Journal that a dermatologist was serving as a part-time medical director of Theranos’s CLIA-licensed laboratory in Newark, California, since early this year.

This dermatologist is Sunil Dhawan, MD, whom the Journal describes as a “dermatologist without a degree or board certification in pathology or laboratory science… Dr. Dhawan, 56 years old, meets federal and state requirements to be a lab director because he is a medical doctor and has experience overseeing a lab. Theranos said he has supervised the lab affiliated with his dermatology practice for over 21 years.”

The Journal also stated that “Diagnostics startup Theranos Inc. is seeking to hire a laboratory director to oversee one of its key facilities amid questions raised in laboratory circles about the qualifications of a physician who now runs the lab.”The timing of Dhawan’s arrival as medical director of the Theranos CLIA-licensed lab is consistent with reporting by THE DARK REPORT that the board-certified clinical pathologist who was the previous full-time medical director of the Theranos CLIA- licensed lab had left the company in December 2014. That pathologist was Adam Rosendorff, MD. (See TDR, January 26, 2015.)

In recent years, Theranos has gone through several medical directors for its CLIA lab. Because of the restrictive non-disclosure agreements that Theranos requires of all its employees, these individuals, including former medical directors, cannot reveal that they once worked at Theranos. Commonly, their resumes and career summaries simply note that they worked at a biotech company for the dates when they were employed at Theranos.

 

Theranos Claim of Revenue from Pharma Firms Investigated by Reporter from the Financial Times

DID THERANOS EARN INCOME by providing its proprietary lab tests to pharmaceutical companies since its founding in 2003? That’s one statement made multiple times in news profiles of Theranos and its CEO, Elizabeth Holmes, over the past two years.

Now, no less than the Financial Times has investigated this aspect of the Theranos story. On October 23, FT reporters David Crow and Adam Samson reported, “Several articles about the company, including a profile of Ms. Holmes in The New Yorker in December, have said that the company ‘earned income from large pharmaceutical companies, including Pfizer and GlaxoSmithKline, which use its tests when they are conducting clinical trials on new drugs.’ A spokesperson for Pfizer said: ‘We’ve done only very limited historical exploratory work with Theranos through a few pilot projects, and we do not have any current or active projects with them. I cannot find any evidence that we’ve done business with them in recent years,’ said a spokesperson for GSK.’ ”

Another insight about the relationship Theranos may have had with pharmaceutical companies in past years can be found in a comment posted on a Wall Street Journal blog, at this url: http://tinyurl.com/ndudj3k.

This was posted on October 21, when Theranos CEO Elizabeth Holmes spoke at the WSJDLive 2015 conference in Laguna Beach, a week after The Wall Street Journal published its investigative stories about Theranos.

The commenter was identified as EX PHARMA and wrote: “I worked for AstraZeneca… Theranos tried to pitch pharma on ‘Adaptive Clinical Trials’ with the idea of collecting $100M strategic agreements… and saving pharma billions in clinical trials for pharma… trouble was the technology didn’t work at all—the assays didn’t work and the informatics didn’t work. Pharma didn’t bite strategically nor were any of the pilots extended. There was an apparent transformation [at Theranos from a business strategy of serving pharma] into a direct-to-consumer diagnostic company.”

THE DARK REPORT was unable to find any response by Theranos to this reporting by the Financial Times, although the company has strenously pushed back against claims its technology has not lived up to expectations. Additionally, the blog comment by EX PHARMA reproduced above is unverified.

What is significant about this reporting and the blog comment is that they are examples of how journalists and others are now questioning the statements and assertions Theranos made in the many news stories and company profiles that were published over the past two years. As the reporters from the Financial Times discovered, when asked, officials at GlaxoSmithKline and Pfizer did not confirm the claims made by Theranos.

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