In my note of two days ago, I discussed the challenge that Theranos is presenting to the two major reference labs in the U.S., Quest Diagnostics and Lab Corp (see: Finally, Some Important New Details about the Theranos Business Model). Although the focus of that note was on Theranos, my arguments got me thinking about the business models of these two large companies. It occurred to me that there might be fundamental flaws in them such that a new entrant into the lab testing market, Theranos, could threaten their core business with what could be described as disruptive innovation. The purpose of today's note is to discuss these potential flaws that are listed below:
- Information technology. Effective IT lies at the heart of any modern clinical laboratory. To stay abreast, every laboratory must frequently upgrade their LIS or seek new software to operate more efficiently. Both Quests and Lab Corp have grown, in part, by purchasing regional labs and grafting their operations into their IT infrastructure. This has resulted in large IT systems with a patched mixture of older, commercial systems plus homebrew software. They can't shut it down and can't replace it. By comparison, a relatively new company like Theranos can begin operations with homogeneous, state-of-the-art software.
- Client base: The key clients of Quest and Lab Corp are physician offices whose staff members draw blood samples from patients or refer them to reference lab service centers (PSCs) to have blood drawn. The test results are then sent back electronically to the physician office's office EHR supplied by the reference lab (e.g., Care360) or to a commercial office EHR. Such systems are very complex, partly because there are so many office EHRs available in the market. The fundamental problem here is that private physician practices are disappearing or being bought by health systems. The health systems then install their own brand of EHRs in the physician offices and switch the physician practices to the hospital-based pathology labs.
- Sample collection: Quest and Lab Corp have built patient services centers to collect patient blood samples. As noted in my previous note about Theranos, it has been able to leverage the physical space provided by retail drug store chains like Walgreens for sample collection. Moreover, I anticipate that the range of clinical services offered by these retail drug store chains will increase, thus increasing the success of the Theranos enterprise.
- In-vitro testing platforms: Quest and Lab Corp depend on the major IVD companies to provide them with large-scale analyzers and reagents and are thus highly dependent on these companies for innovation. In contrast, Theranos is vertically integrated, designing and manufacturing its own testing platform. Moreover, it has developed a radically new testing technology based on lab-on-a-chip (LOC) technology and microfluidics (see: Elizabeth Holmes: The Breakthrough of Instant Diagnosis; Lab-on-a-chip). This technology uses very small amounts of blood collected in a "nanotainer" and very little reagent. Because Theranos owns its upstream technology, it will utilize all of its manufacturing capability for its own business purposes and scale it up as demand for testing increase. It will also, obviously, deny the technology to its competitors.
- Point-of-care (POC) testing: I believe that hospital lab testing will gradually move away from what can be called the general lab model and toward point-of-care-testing (POC). The general lab model consists of the transportation of blood samples to a laboratory in a hospital or reference lab where they are processed using large-scale analyzers with a low cost-per-test. Point-of-care testing, as the name implies, involves sample analysis near the patient using compact analyzers and at higher cost-per-test. In the short term, Theranos can pursue the ambulatory care market with Walgreens as its partner. Quest and Lab Corp may react to a loss of outpatient testing business by bidding on hospital contracts, trying to gain more inpatient testing business. At some later time, Theranos can then begin to sell its patented chip-based analyzers to hospitals as the demand for inpatient POC testing increases.