Finally, Some Important New Details about the Theranos Business Model

I have been reluctant in the past to write much about Theranos because the founder, an entrepreneurial prodigy named Elizabeth Holmes, does not speak to the press much. I have posted some information about the company in connection with its relationship to Walgreen's (see: Retail Chain Drug Stores Ramp-Up Their Healthcare Delivery Services). At any rate, a long article about Theranos and Holmes by Ken Auletta has recently been published in the New Yorker and it contains some very important details (see: Blood, Simpler). It's a very long piece so I have copied some significant quotes from it below in italics followed by my analysis and interpretation of the quote:

• The phrases “disruptive technology” and “the future of medicine” come up a lot. Holmes, who is thirty, is the C.E.O. of Theranos, a Silicon Valley company that is working to upend the lucrative business of blood testing.
• Holmes in on a mission to disrupt at least two major healthcare industries: (1) IVD equipment manufacturers; (2) the major national reference labs (Quest and LabCorp). Her plan may also disrupt portions of the healthcare software industry.
  
• [Theranos] has also opened centers in forty-one Walgreens pharmacies, with plans to open thousands more. If you show the pharmacist your I.D., your insurance card, and a doctor’s note, you can have your blood drawn right there....In 2013, Theranos announced a “long-term partnership” with Walgreens that will eventually establish its wellness centers in most of the eighty-two hundred Walgreens stores. The Walgreens in Palo Alto has one, as do forty Walgreens pharmacies in Phoenix. Holmes envisages wellness centers in most Walgreens and Duane Reade stores, which would put Theranos “within five miles of every American.” Theranos also could sign up the rival drugstore chain CVS, which has seventy-eight hundred outlets.
• Part of the brilliance of the Theranos business model is that it avoids a build-out of the patient service centers (PSCs) maintained by Quest and LabCorp, leveraging instead its alliance with Walgreens. In so doing, it legitimizes direct access testing (DAT) about which I have posted numerous notes in the past. I am strongly in favor of DAT.
• A typical lab test for cholesterol can cost fifty dollars or more; the Theranos test at Walgreens costs two dollars and ninety-nine cents.
• Part of the disruptive nature of Theranos is that it's technology is inherently more efficient and part of its mission is to drastically reduce the costs of lab testing. Part of this low cost may involve losing money per test but its cost structure is inherently lower than that of Quest or LabCorp.
• Holmes thinks that getting a blood test should instead be a “wonderful” experience, and the aim of Theranos is to lower the barriers. She told the crowd that between forty and sixty per cent of people who are ordered by their doctor to get a blood test do not.
• Part of Holmes' story is that a finger puncture is a less traumatic than a venipuncture. It's certainly cheaper because of the lower cost of disposables. I think that her reference to creating a more wonderful experience for blood testing is over-hyped. I do think, however, that she is trying to make the experience more efficient for the patient. I am not surprised that a high percentage of tests ordered for ambulatory care patients are never performed.
• Investors have valued the company at more than nine billion dollars, comparable to the two major diagnostic labs. Holmes owns more than fifty per cent of the company; she was profiled last spring in Fortune and subsequently featured in Forbes as “the youngest self-made female billionaire in the world.”
• Part of the strategy of Quest and LabCorp in the past has been to buy out its competitors. This won't work with Theranos. On paper, the company is worth more than them combined. She also plans to take over their mission-critical ambulatory care market. Even if Theranos were worth much less, she does not seem the type to relish a buy-out offer regardless of its size.
  
• The board of her company is stocked with prominent former government officials, including George P. Shultz, Henry Kissinger, Sam Nunn, and William H. Foege, the former director of the Centers for Disease Control and Prevention. Dr. Delos M. Cosgrove, the C.E.O. and president of the Cleveland Clinic, is an avid supporter.
• She is going to be well advised by her board and other well-placed individuals who undoubtedly have large financial stakes in the company. She will be a formidable competitor.
• Cosgrove predicts that blood tests for many common health issues, including high cholesterol and diabetes, will be initiated by patients as well as by doctors. “The CVSs and the Walgreens and the Walmarts of the world are going to be taking a lot of things that currently go to primary-care physicians,” he said. 
• I have posted a number of previous notes about how the retail drug stores will become key players in the lowest level of healthcare delivery (see: Retail Chain Drug Stores Ramp-Up Their Healthcare Delivery Services).
• Last year, the U.S. Food and Drug Administration barred 23andme from disseminating some information out of concern that consumers might misunderstand or misuse it. Some observers are troubled by Theranos’s secrecy; ....the company has published little data in peer-reviewed journals describing how its devices work or attesting to the quality of the results.
• Ordinarily and to attack competitors with some new technology, Quest and LabCorp or IVD manufacturers would merely drop a note to the FDA. Unfortunately for them, Theranos manufactures its own analyzers, thus qualifying the company for an exemption for laboratory developed tests (LDTs) (see: FDA Issues Draft LDT Guidance Documents; Provides 120-Day Comment Period and will Host October Public Meeting). These other companies, in fact, also derive benefit from their LDT tests. The FDA is now trying to regulate LDTs but the final rules are far in the future. Moreover and by the time they are published, Theranos will undoubtedly be prepared to qualify under them.
• Clarke [Quest’s senior scientific director for mass spectrometry, immunology, and automation] argues that finger-stick blood tests aren’t reliable for clinical diagnostic tests; because the blood isn’t drawn from a vein, the sample can be contaminated by lanced capillaries or damaged tissue. Holmes strongly disagrees: “We have data that show you can get a perfect correlation between a finger stick and a venipuncture for every test that we run.”....Holmes also pointed me to a pilot study published by Hematology Reports, an online-only peer-reviewed journal; she is listed as a co-author. The report, released in April, concluded that Theranos tests “correlated highly with values obtained” from standard lab tests.
• Quest needs some powerful ammunition against Theranos than the possible contamination of blood samples with "tissue juice" due to a finger stick. Even if it can be proved that some of the Theranos samples are unreliable for analysis, the company can always revert to a venipuncture and microsample for selected tests. It's of interest, but clearly predictable, that Holmes chose to publish her results in a very obscure, on-line pathology journal.

In summary, I don't see any flaws in the Theranos business model although it's quite radical when compared to the IVD and reference lab industry as it stands today. Holmes is going about her business in a quiet and methodical way. There's a lot more to discuss about Theranos. I will return to the company in subsequent notes. I am interested in their approach to IT. However and if I were the CEO of Quest or LabCorp, I would be very,very worried. 

Comments

[matt]

Not sure I would go with "no flaws." So far they seem to be refusing to allow thorough comparison with existing technologies and methods. This is fine but if these results are to have any validity for most significant patient care they will need to have these comparisons. Otherwise, every test they run is going to have to be repeated when the patient actually needs treatment. Running everything as an LDT to avoid regulation and quality issues is ok to start, but to establish a significant footprint outside of walgreens or similar places they have to make sure people can trust their results. Their business model also seems to overvalue some of the advantages they have - like the "price" of the test for which they are comparing to non-real existing lab prices. Pricing is much more problematic when insurance reimbursement is at play. Pricing will come down elsewhere if their technology takes off. And their assumptions about lab TAT are pretty weak, although their ability to do certain DNA tests would be a significant difference. The small amount of blood is important, but probably not as important as reporters and media like to think.