Another puff-piece about Theranos has been published in The Economist (see: Young blood). The media continues to be fascinated by Elizabeth Holmes and the Theranos story despite the fact that the company has revealed very little abut its upstream technology. I have covered the company in multiple previous blog notes (see: Finally, Some Important New Details about the Theranos Business Model; Cleveland Clinic Develops Business Partnership with Theranos; Further Discussion about the Cleveland Clinic Relationship with Theranos). However, reading between the lines of the Economist article, it's possible to tease out some nuggets that highlight the major vulnerabilities of Theranos in the fiercely competitive reference lab business. I list the quotes below:
- ...[A]n important question is to what extent Theranos is a threat to the “reference” laboratories to which hospitals and doctors’ surgeries outsource many tests. In America this market is a near-duopoly between LabCorp of North Carolina and Quest Diagnostics of New Jersey. Each offers a broad range of perhaps 3,000-4,000 different tests, but each depends heavily on the technology it buys from the equipment-makers. Thus far Theranos only offers about 250 tests, and aspires to 1,000. But its test technology is all home-grown.
- Besides their range, LabCorp and Quest, both stockmarket-listed and worth $12 billion and $10 billion respectively, have other advantages. They are well embedded in the American health-care ecosystem, and have national networks of laboratories and collection services. Theranos’s central laboratory capacity is tiny, only 5% of LabCorp’s, reckons Morningstar.
- Whereas Silicon Valley firms based on digital technology, such as Facebook and Uber, can quickly achieve global scale, Theranos’s growth now depends on building its network of laboratories and opening new testing centres—in other words, it has to attain scale the old-fashioned way.
- As regards selling tests directly to patients, so far Theranos has clinics in only 40 Walgreens branches; ...an executive at the chain, emphasises that their alliance is in “pilot mode”. Though Arizona is liberalising, elsewhere in America there is a patchwork of regulations on whether consumers can order their own tests....It is possible that much of Theranos’s growth will come from expanding the market for testing rather than by taking business off established firms. It may do so not only by encouraging consumers to take tests on their own initiative, but by making it more likely that they will comply when their doctors ask them to go for testing.
Here is what I consider the key quote from above: Theranos’s growth now depends on building its network of laboratories and opening new testing centres—in other words, it has to attain scale the old-fashioned way. An open question is how the company will build scale when competing against the Quest and LabCorp entrenched lab networks. Below is my response to this question:
- One way to attain scale is to compete on the basis of cost. The Theranos price list is remarkably low and far less than the prices charged by its competitors. I suspect that the prices are pegged below cost even allowing for the possible lower cost of multiplexing multiple tests on a single chip. Since we don't know much about their technology, we will assume that all of this will be revealed later. If their test prices are subsidized, building scale, at least initially, will cost them more. Here's a link to a "fact sheet" about one of their two major competitors -- Quest. Here's a couple of the facts about Quest copied from this web site: (1) Strong logistics capabilities, including approximately 3,000 courier vehicles and 20 aircraft that collectively make tens of thousands of stops daily; (2) Operates more than 2,200 patient service centers.
- As to the possibility of Theranos seeking to expand the lab test market with a new business model I am pessimistic about this. Most of the standard lab tests performed by Quest and LabCorp are ordered in physician offices. Many physician office practices and clinics are being gobbled up by health systems that will then perform most lab testing in-house. For those physician practices that remain independent, the lab to which they send their specimens is often chosen based on logistics issues. Which lab is most efficient in convenient blood draws, picking up samples, and sending back test results?. The physicians are not that price sensitive because the cost of testing is often covered by health insurance.
- As to expanding the lab test market via direct access testing (DAT) (i.e., consumers ordering tests by and for themselves), I don't think that this option will expand rapidly. It's been around for more than a decade and has largely been confined to the relatively affluent worried-well.
On the positive side of the ledger, Theranos has just received FDA approval for its finger stick test for herpes simplex 1 virus IgG (see: FDA approves Theranos’ $9 finger stick blood test for herpes). According to the article, Theranos provided the agency with extensive information about its technology. Here's a quote from this article about the cost of the newly approved test:
The herpes test, which costs $9.07, is one of more than 100 the company sells for less than $10. (Holmes said a more traditional herpes blood test would cost about $175.) The tests currently are sold at 42 Walgreens in Arizona and one store in California.