CEO SUMMARY: On July 7, CMS imposed severe sanctions on Theranos for CLIA violations. Included is a two-year ban on owning and operating a clinical laboratory for Theranos, CEO Elizabeth Holmes, the former COO, and the former medical director. Theranos appears to be pivoting away from a clinical lab testing business strategy and back to development of its proprietary diagnostic analyzers and test methodologies. Meanwhile, a congressional committee is asking Theranos for information.
PLENTY OF BAD NEWS HAS DOGGED Theranos, Inc., in recent months. Now, in a series of announcements, the company is providing hints of how it may want to move forward. Based on these public statements, it could be that Theranos will put its clinical laboratory testing strategy on the back burner for the moment.
Instead, there are indications that Theranos intends to emphasize developing its diagnostic technologies so that it can obtain regulatory clearance. This would be logical, for a simple reason. Gaining FDA clearance for its proprietary specimen collection devices, diagnostic analyzers, and test methodologies would go a long way to restoring the confidence of both investors and the public in the lab company and its products.
Should the controversial lab company’s prime strategy now be to obtain regulatory review and clearance of its diagnostic inventions and innovations, this would be a significant departure from the business course that Theranos has followed since the fall of 2013.
That’s when Theranos, based in Palo Alto, Calif., announced it would provide consumers with low-cost clinical laboratory tests and charge just half of Medicare Part B lab test prices. At the same time, Theranos also announced its agreement with Walgreens to do lab testing in Walgreens’ pharmacies nationwide. (See TDR, September 30, 2013.)
The thrust of this business strategy was to take on the entire clinical laboratory industry directly. In fact, between 2013 and 2015, Theranos CEO Elizabeth Holmes regularly commented that Theranos was determined to disrupt the entire clinical laboratory industry.
That bold talk suddenly changed last October, when The Wall Street Journal published the first of a series of devastating exposés of Theranos. The latest hammer to drop on the beleaguered lab company came on July 7. That’s when CMS sent a letter that imposed severe CLIA sanctions on Theranos.
Theranos reacted by making several important announcements last week as it struggles to find the right response to the steady stream of negative news stories that have plagued the company for the past 10 months.
Last week, for example, Theranos took steps to improve its regulatory, quality, and compliance efforts when it named two new executives to report directly to CEO Elizabeth Holmes. The two executives, experienced in medical compliance, are joining the company immediately.
Theranos announced on July 21 that Dave Wurtz will be the Vice President, Regulatory and Quality. Wurtz has extensive experience in the in vitro diagnostics (IVD) industry. At ThermoFisher Scientific, he was Senior Director of Regulatory, Quality and Compliance. In this role, Wurtz managed FDA inspections, and headed up the company’s pre- and post-market regulatory activities worldwide. Wurtz also has worked in compliance at Beckman Coulter Inc., and held positions at Osmetech and G.D. Searle.
New Compliance Officer
On the same day, Theranos tapped Daniel Guggenheim to be Chief Compliance Officer. Before joining Theranos, Guggenheim worked as assistant general counsel for regulatory law at McKesson Corp. where he was the chief regulatory and compliance counsel and senior counsel for its pharmaceutical division. Guggenheim was thus involved with the sale of medical devices, the marketing and sale of drugs, and the sales of health care information technology.
In another move to boost compliance, last week the lab company’s board of directors created a Compliance and Quality Committee to oversee and advise the board and the company’s executives on regulatory compliance and quality systems.
“The new executive appointments and the creation of the committee are the latest in a series of significant actions Theranos has taken to ensure that it meets the highest standards in its laboratories, medical products, and operations,” Theranos said in its announcement.
Tough CLIA Lab Sanctions
These steps to beef up compliance come quite late in the 13-year business life of Theranos. They appear to be in response to the severe CLIA sanctions that the federal Centers for Medicare & Medicaid Services imposed in a letter it sent to Theranos on July 7.
The biggest sanction CMS imposed is revocation of the company’s CLIA license to operate a lab in Newark, Calif., because of unsafe practices. CMS is banning founder Elizabeth Holmes (and two other individuals) from the blood-testing business for at least two years. The CMS letter was addressed to: Holmes; Medical Director Sunil Dhawan, MD; owner Ramesh Balwani; and Theranos, Inc.
In the letter, CMS said Theranos was out of compliance with Clinical Laboratory Improvement Amendments of 1988 (CLIA) condition-level requirements and had not removed the finding of immediate jeopardy, as CMS had cited in a letter to Theranos on Jan. 25, 2016. That’s when CMS listed all of the deficiencies its inspectors identified. In the letter of Jan. 25, CMS notified Theranos that the seriousness of the deficiencies resulted in a finding of “immediate jeopardy to patient health and safety.”
CMS requested a response from Theranos to each of the deficiencies it cited and Theranos provided that response on Feb. 12.
After reviewing Theranos’ response, CMS wrote on July 7, “After careful review, we determined that the laboratory’s submission did not constitute a credible allegation of compliance and acceptable evidence of correction for the deficiencies cited during the CLIA recertification and complaint survey completed on Dec. 23, 2015, and did not demonstrate that the laboratory had come into condition-level compliance and abated the immediate jeopardy.”
As a result of its finding that the lab was out of compliance, the agency imposed the following six sanctions:
- Revocation of the laboratory’s CLIA certificate
- Limitation of the lab’s CLIA certificate for the specialty of hematology
- A civil money penalty of $10,000 per day for each violation
- Directed portion of a plan of correction
- Suspension of the laboratory’s approval to receive Medicare and Medicaid payments for any services performed for the specialty of hematology
- Cancellation of the lab’s approval to receive Medicare and Medicaid payments for all laboratory services.
Daily Monetary Fine of $10K
Most of the sanctions do not take effect for 60 days, which CMS said would be Sept. 5. But one sanction, the monetary fine of $10,000 a day until all deficiencies are corrected, went into effect July 12, The Wall Street Journal reported. Until Sept. 5, Theranos can request a hearing before an administrative law judge of the Departmental Appeals Board (DAB), CMS said.
The Wall Street Journal reported that if Theranos cannot reach a settlement with CMS, its options would be limited. Almost any course it takes could dramatically reshape the company, the Journal added.
Theranos May Be ‘Down,’ But Says It Is not yet ‘Out’
AFTER THERANOS GOT ITS SANCTIONS letter from CMS on July 7, the company outlined the steps it could take to address the agency’s concerns, saying it was working closely with CMS.
In a statement issued on July 7, Theranos said, “It’s important to note that the CMS review pertained to the operations of the company’s Newark lab, not its technologies. Over the last 13 years, Theranos has developed a broad range of technologies, including small-volume sample assays, capillary collection and testing capabilities, the ability to test small-volume samples on a variety of different platforms (high-throughput and field devices), and a software suite for testing analysis and decision support. The clinical lab is just one of Theranos’ many opportunities to provide access to high-integrity, affordable and actionable health care information, and the company will continue to carry out its mission under the leadership of its founder and CEO, Elizabeth Holmes.”
Theranos also described a path it could take to move forward without testing consumers. “Clinical lab services is one of Theranos’ business units. Its research and development unit has developed many technologies that are not dependent on running a clinical laboratory. The company will continue to build infrastructure and build on its mission of improving access through affordable diagnostic testing, and its proprietary technologies and accessible business model. Improving access through innovative technologies is a universal need, with growth opportunities in global and domestic vertical markets,” Theranos said.
This Theranos statement describes how the lab company will emphasize development of its diagnostic analyzers and technologies, while jettisoning that part of the business that does the actual testing in compliance with the CLIA sanctions.
In an article published on July 8, the three journal reporters who have covered Theranos closely, John Carreyrou, Michael Siconolfi, and Christopher Weaver, wrote, “The company could appeal the sanctions to an administrative judge, which would put some [sanctions] on hold. Its odds of winning would be slim, according to legal experts and government data. Or it could withdraw from the lab-testing business altogether, focusing on developing devices. That would significantly change its mission.”
Would Holmes Leave?
Given that she faces a two-year ban, Holmes could leave the company entirely, they added. In addition, they reported, federal prosecutors have been conducting a criminal probe into whether the company misled investors and regulators.
In response to the sanctions, Holmes said in a statement on July 7, “We accept full responsibility for the issues at our laboratory in Newark, California, and have already worked to undertake comprehensive remedial actions. Those actions include shutting down and subsequently rebuilding the Newark lab from the ground up, rebuilding quality systems, adding highly experienced leadership, personnel and experts, and implementing enhanced quality and training procedures. While we are disappointed by CMS’ decision, we take these matters very seriously and are committed to fully resolving all outstanding issues with CMS and to demonstrating our dedication to the highest standards of quality and compliance.”
During the 60 days before sanctions take effect, Theranos said it would not conduct any patient testing in the Newark lab until further notice. Also, the company continues to work with CMS, “to resolve and remediate outstanding issues in the Newark lab,” and would continue to run its lab in Scottsdale, Ariz. In Arizona, it is outsourcing hematology testing to a reference laboratory in response to the CMS sanction on hematology testing.
What is unknown at this point is whether Theranos will appeal any or all of the sanctions CMS imposed on July 7. On pages that follow, THE DARK REPORT interviews two experienced lab industry attorneys about the options available to Theranos, should it decide to appeal.
Congress Committee Wants Answers from Theranos
IS IT A CASE OF POLITICIANS PILING ON after events have already taken their course? On June 30, three Democrats from the House Energy and Commerce Committee sent a letter to Theranos CEO Elizabeth Holmes.
Ranking member Rep. Frank Pallone, along with Diana DeGette and Gene Green, sent the letter to Holmes. It detailed the compliance problems with federal laws uncovered by government agencies.
Pallone, DeGette, and Green then requested that Holmes and Theranos “provide a briefing to committee staff” on a number of issues. One request is for more information on the FDA 483 inspection reports from August and September 2015.
Other requests are for Theranos to provide information on how it is working with physicians and patients “who may have been harmed by inaccurate test results.” The letter also asks for information as to how Theranos determined which patients got inaccurate test results and whether this included results from its Edison device and conventional analyzers. Another request is to “explain how Theranos determined that no patients have been harmed due to inaccurate test results.”
Given the subpoena powers available to Congress, this effort may create an opportunity for these three members to put more useful information into the public domain. If this effort leads to a hearing in which Theranos officials testify under oath, the disclosures could be more damaging than the CMS CLIA inspection and sanction documents that have been made public.