"Letter to the Editor"

Pathologist Raises Questions about Theranos’ Business Model

Dear Editor:

I read your two articles on Theranos in the August 11 issue of THE DARK REPORT, and concur in large part with your thoughtful conclusions.

For several years, I have closely followed Theranos and have been quoted in trade publications speaking favorably on Theranos and its relationship with Walgreens. Originally, I was attracted to the potentially disruptive model based on knowledge of the industry and the following representations of the two companies:

1) Theranos manufactures an analyzer which can rapidly measure the common analytes ordered by physicians for outpatient visits.

2) The analysis can occur on a small amount of blood, between 25 to 50 microliters.

3) The analysis could be done in up to 8,200 existing retail locations (Walgreens) almost in real time.

4) The company can be profitable charging and collecting a price equal to half that of Medicare.

Unique Business Model

Under this business plan, I envisioned that a physician would order lab tests for patients and the lab orders could be electronically sent to a nearby Walgreens (as prescriptions are now). The patients could walk into the Walgreens pharmacy, identify themselves and display the lab test order with a mobile app (like at Starbucks). After Theranos collected the specimen, the patient and the doctor could get the lab results quickly.

For tests like INR, glucose, HgbA1c, and cholesterol, the cash cost of the test might be comparable to a copay. (Examples are: Prothrombin time with INR=$2.70, fasting glucose=$2.70, cholesterol=$2.99, HgA1c=$6.67). The convenience to the consumer—as with flu shots—is a value that empowered consumers would find desirable and for which they would pay.

Major Threat to Labs?

Such a model would be obviously disruptive to commercial outpatient laboratories. That’s because these labs have less favorable business hours, higher personnel costs for collections, higher space costs, and slower services. Depending on the scope of the menu, the degree of disruption could be sufficiently large to be a major threat to the routine outpatient services of commercial laboratories.

Unfortunately, the business model I described above—emphasizing routine lab tests—does not appear to match the Theranos/Walgreens service as described by Editor Robert Michel when he visited a Walgreens in Palo Alto to have Theranos perform some clinical laboratory tests. (See TDR, August 11, 2014.)

Rather, Theranos appears to have moved from its stated goal of being a rapid provider of routine tests to something that already exists today: a centralized lab provider of a couple of hundred tests for outpatient care, acute care, and specialized care.

Originally, it was implied that the samples would be analyzed onsite at Walgreens. Theranos recently stated on its website, and I quote: “Our proprietary infrastructure allows us to perform our test analyses with unprecedented speed. So we can have results to you and your doctor in a matter of hours, not days. Which means a fast diagnosis to support better, more informed treatment.”

But, in reality, today Theranos does not provide a faster service because Theranos centers at Walgreens are just draw stations, not laboratories. At the current time, all samples are sent to its central CLIA lab in Palo Alto. Turnaround time, (I called two Walgreens in Phoenix and Theranos itself this past July) is at least 24 hours. Theranos plans a second CLIA laboratory site in Arizona, but that doesn’t substantially change the service it delivers.

In other words, the lab is not providing a better service than, say, Enzo (where I used to work), BioReference, with whom we competed, or many other laboratories, which endeavor to get all results to the doctor by 8 A.M. the next morning. Additionally, unless it has the same in-network insurance contracts in Arizona as Sonora Quest Laboratories, it would seem Theranos is unlikely to be competitive for insured patients in that state.

Regulatory Issues

As best as I can determine at the moment (and assuming that its instruments measure what they are supposed to measure), Theranos seems to have realized that it faces significant regulatory issues were it to put its instruments into 8,200 Walgreens pharmacies—although the company claims a point-of-care instrument is in development.

I see no way it could skirt the FDA and run those sites as independent CLIA labs with LDTs, as it now does in Palo Alto. It would have to get FDA approval, either as IVD assays to be used in CLIA labs, or as waived tests done in sites with CLIA waivers. Moreover, Theranos would need site directors and appropriately-trained lab personnel at each of those 8,200 sites. Either approach would be time-consuming and costly.

Further complicating the issue, the entire menu of tests Theranos wishes to offer to patients would need to be approved at launch in order to implement the rapid on-site lab testing model described above.

Hub-and-Spoke Lab Model

As it operates today, it appears that Theranos has moved to a typical hub-and-spoke model with minimal advantages and several disadvantages compared with competing labs. The use of drug stores for draw locations is uncommon, not the least because the space devoted to phlebotomy does not generate revenue comparable to other retail uses for that square footage.

Next, the use of finger sticks instead of venipuncture is not a benefit if many patients require venipuncture anyway (as was the experience of editor Robert Michel). As well, Theranos currently does not provide the full menu of tests that commercial labs offer.

Nor does Theranos apparently take on the burden of drawing and sending out lab tests that they don’t perform in-house. In the New York area, no lab would survive if it had patients go to second laboratory for a second draw in order to complete a routine order, as was required in editor Michel’s example.

There are two communities following Theranos. One is the traditional lab testing community. The other is made up of professional investors and financial analysts. Both communities have several outstanding questions.

Questions about Technology

For example, how much lab testing from its current menu of 219 assays is being done with technology that is unique and proprietary to Theranos? Alternatively, how much existing testing is done using standard diagnostic technologies for which Theranos has no specific advantage? How many of these tests does it currently perform in-house?

Such tests as ABO/RHD blood typing, CBC with reflex, ESR, Occult Blood, Platelet Count, Prothrombin Time, Stool Culture, and Urinalysis would most likely use standard and established techniques. It would be hard to imagine validating non-FDA approved procedures for these tests.

Collecting Lab Specimens

Theranos does not have an obvious collection mechanism for collecting specimens for Chlamydia and Gonorrhea, or for urine and stool collections. Does it really have a unique respiratory virus panel, or is it offering the panels developed by such companies as Biofire, Luminex, or Genmark?

Does Theranos have its own LDTs in place of molecular tests for HIV, HCV, and HBV? Or does Theranos use Roche or Abbott test kits, like most every other lab? Does Theranos actually run its extensive menu of endocrinology, tumor markers, serology, rheumatology, and toxicology on proprietary platforms? Or, like most every other lab, does it use a complex and cumbersome cluster of analyzers and instrument systems that are needed to provide reliable results for clinical purposes?

I estimate that the current Theranos test menu includes about 95% of the tests, by value, of a typical regional laboratory (i.e, not including genetics, cancer diagnostics, anatomic pathology, and cytology with associated molecular tests). I would be very skeptical, until proven otherwise, that Theranos currently has a significant competitive advantage for the majority of these types of lab tests.

Small Device for Lab Testing

It was initially plausible that Theranos might design a platform to do say, 40 routine analytes using small sample volumes on a simple device. In this case, such a proprietary device might supercede the Piccolo Express (the chemistry analyzer sold by Abaxis, Inc.) or the i-Stat (the hand-held point-of-care device sold by Abbott Laboratories) on ease of use, test menu, and price. However, keep in mind that such a business model would face the same types of regulatory and reimbursement challenges faced by the manufacturers and users of those devices.

It would be a remarkable tour de force if Theranos has technologies that could simplify clinical laboratory testing and reduce costs for the majority of the tests it now offers. Many trained laboratory scientists and pathologists with whom I speak are skeptical that Theranos, as of today, is doing such testing on their proprietary platform, as it claims.

Given these observations, Theranos does have one factor that works in its favor: This is the general belief by many smart people that Theranos “can’t be making it up.” Obviously, I have no better idea about this as any other outsider. Having said that, it is always useful to remind oneself that “if it sounds too good to be true,” it probably is!

Prices Less than Medicare

My only disagreement with the information presented by THE DARK REPORT is your skepticism that Theranos can be profitable charging just 50% of Medicare Part B clinical laboratory test prices. This is not a problem that is unique to Theranos. My understanding is that commercial laboratories are being presented with payment schedules from health insurers at rates less than that.

In fact, some capitated contracts may pay as little as 10% to 20% of Medicare Part B Prices for certain high-volume tests. Given the potential for Congress and CMS to enact deep cuts to lab test fees over the next seven years, we may end up considering a cash price that is 50% of today’s Medicare rates to be quite desirable.

Yours truly,

Robert J. Boorstein, M.D., Ph.D.

Editor: Robert J. Boorstein M.D., Ph.D., is the founder of the ClasGroup Company, a pathology consultancy, and provides molecular pathology services for regional laboratories in the New York metropolitan area. Contact him at rjboorstein@yahoo.com.

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