I have been mulling over the current Theranos business model and have come to the conclusion that it is based on some fundamental flaws. In this note, I want to discuss these flaws and provide my reasoning for listing them:
- Overemphasis on direct access testing (DAT). I am personally enthusiastic about DAT and have been blogging about the topic for eight years. However, DAT remains a niche market. Most consumers who are very interested in their health have healthcare insurance that covers most lab testing. It's far more convenient to have blood drawn in a doctor's office or in a hospital than traveling to, say, a Theranos blood drawing station in a Walgreens drug store. Both Quest and LabCorp have conveniently located patient service centers to draw blood samples. The size of the DAT market is not known but I believe that it is a very small percentage of the total reference lab business. It consists of the "worried well" whose doctors may balk at ordering too many tests and some price conscious shoppers.
- Slow and expensive regulatory path. As both a manufacturer of IVD equipment and a reference lab, there is only one regulatory path available for Theranos -- the FDA and CLIA. Although one Theranos test, HSV-1, has been approved via 510(k) by the FDA, it is not necessarily a sure thing that similar approval can be achieved for the remainder of the Theranos analyzer test menu. It has also been reported that a formal complaint about the company has been filed with the FDA regarding proficiency testing (see: Problems with Theranos' Lab Proficiency Testing; Another Layer of Difficulty?). Moving through these federal hurdles wil be a slow and expensive process.
- Quest and LabCorp will be strong competitors. Theranos is now operating as a routine, mid-size reference lab using standard IVD analyzers in two states. The reference lab business is a high volume, low margin affair and Theranos is already on record as charging less than competing labs (see: unparalleled transparency). Most private physicians do not have a choice about where their patients' lab testing will be performed -- it's determined by provider network contracts. Both Quest and LabCorp also provide courier services for blood specimens pick-up at physicians' offices. Quest Sonora is going head-to-head with Theranos with a blood drawing station in a Scottsdale Safeway store (see: Sonora Quest Labs begins offering services at N. Scottsdale Safeway).
- Theranos' announced increased test volume may increase its burn rate. Theranos has reported that its test volume is increasing despite the recent bad publicity (see: Surprise: Theranos CEO Says Company Is Doing More Tests Than Ever). This may not necessarily be good news if the company is not turning a profit but, of course, most unicorns are more concerned with funding rounds than breakeven. However, some of the negative publicity about the company may affect such new funding rounds (see: Theranos may be seeking to raise $200 million in new funding).
- Questions about the validity of finger stick blood specimens. For months, lab professionals have raised questions about the quality of finger stick specimens compared to venepunctures. One current report suggests that finger stick specimens are not consistent over time (see: Rice University Researchers Publish Study about Variation in Drop-to-Drop Samples of Capillary Blood Collected by Fingerpick and Used for Clinical Laboratory Testing). These questions may impose another layer of uncertainty on the ongoing FDA 510(k) approval process.
- Lack of excitement about Theranos as it operates as a "standard" reference lab. As it exists now and certainly in the short term, Theranos will remain a mid-size reference lab operating in two states. Much of the buzz about the company has been focused on quotes from its founder, Elizabeth Holmes, and its prospects as a disrupter in a stodgy reference lab industry. What happens if these intangibles evaporate? Walgreens seems to have put its relationship with Theranos on pause. Safeway is now working with a competitor, Sonora Quest.