On December 8, 2015, I posted a note listing what I considered as six fundamental flaws in the Theranos business model (see: Some Fundamental Flaws in the Current Theranos Business Model). They were the following:
- Overemphasis on DAT
- Slow and expensive regulatory path
- Quest and LabCorp as strong competitors
- Increased test volume will increase capital burn rate
- Questions about the validity of finger stick blood specimens
- Questions about its current operation as a standard reference lab
In a note four days previously, I had emphasized what I considered to be a key fundamental flaw in the Theranos strategy (see: Why Has Theranos Been Unable Thus Far to Defend Its Science?). Below is a quote from that note:
Theranos is both a reference lab and an IVD manufacturer. For the sake of this discussion, I will proceed on the assumption that it is mainly operating as the latter in the eyes of the FDA. It needs to apply for 510(k) approval for all of the analytes that it wants to perform on its analyzer. The company has suggested that this process will be relatively routine but I have my doubts given the complexity of the problem.
Combining the gist of these two notes, I hold the view that it is very challenging for Theranos to operate as both a reference lab and an IVD device manufacturer. Its major competitors on the reference lab side are Quest Diagnostics and LabCorp, both multibillion dollar enterprises. As competitors on the IVD side, it faces powerful multinational companies companies like Roche Diagnostics, Siemens Laboratory Diagnostics, Abbott Diagnostics, and Beckman Coulter. If this was not a sufficient challenge for Theranos, the company has also been pursuing a third leg in its business model -- the development of a lab test for the Ebola virus. This was detailed in a number of articles including a recent one in the NYT (see: Theranos Founder Faces a Test of Technology, and Reputation). Below is an excerpt:
It should have been Theranos’s moment to shine. Last year, as the deadly and highly contagious Ebola virus threatened to spread around the globe, Theranos, a Silicon Valley start-up, was scrambling to find a test that could quickly detect if a person was infected. This was exactly the sort of thing the company was supposed to do. Its fundamental promise was to revolutionize laboratory testing by offering hundreds of different blood tests that could be done through a simple finger stick for a fraction of the cost of typical lab blood work. More than that, Elizabeth Holmes, who started the company in 2003, had a higher-minded purpose. She also wanted to defeat epidemics.The company devoted significant resources to the Ebola effort.
I believe that the notion of Theranos functioning as a reference lab, the manufacturer of a new type of analyzer, and the developer of a multiple lab tests including one from scratch for the Ebola virus bespeaks a naiveté on the part of the founder of the company, Elizabeth Holmes. The crux of the problem is captured by a quote from the NYT in the excerpt above: Holmes "had a higher-minded purpose. She also wanted to defeat epidemics." In short, she was pursuing a complex mission that seems to run counter to the rules governing how to start a new company. We still don't know if that company will succeed but I personally think that the deck is stacked against it.