Theranos Outsources Tests to UCSF, Suffering Losses as a Result

John Carreyrou of the Wall Street Journal has written a series of revealing investigative articles about Theranos in the last several months. I have also provided coverage of the company dating back about a year because it initially seemed to be offering technology that would disrupt the clinical lab industry. However, many of the company claims now seem to be unjustified (see, for example: Theranos Business Model Begins to Unravel; Much Negative Press Follows; Questions Continue about Theranos; Company Intends to Publish Rebuttal; Holmes May Have Exaggerated Data about Theranos Business Relationships; Why Is This Unicorn, Theranos, Different from All Other Unicorns?; Theranos's Tripartite Business Model: Impractical or Impossible?). The latest piece by him and colleagues revealed a very interesting new point about the company relating to its outsourcing policy (see: Deficiencies Found at Theranos Lab). Below is an excerpt from it:

Theranos has told Walgreens it is outsourcing only “highly complex” tests collected at its stores to outside labs, including the University of California, San Francisco and ARUP Laboratories, which is affiliated with the University of Utah, a person familiar with the matter said. Walgreens was told that Theranos tested “moderately complex” patient samples at its own labs, this person said....Since mid-November, Theranos has sent more than 1,200 test orders to UCSF, according to lab records....Tests done on behalf of Theranos by UCSF include some of the most common blood tests ordered during routine doctor visits, such as blood counts and screening for prostate-specific antigen, or PSA, the same lab records show. UCSF charges Theranos more than $300 for a comprehensive metabolic panel, said a person familiar with the matter. Theranos’s website shows that patients who get the same test at one of the company’s blood-draw sites pay just $7.19. A comparison of all the tests done by UCSF for Theranos shows that the company appears to be incurring losses on many of those tests.

One important point that needs to be emphasized here is that Theranos has backed off on the use of its proprietary "Edison" analyzer for testing micro-aliquots of blood and currently is using almost totally industry standard analyzers from major vendors. It's also important to note that the company, from the start, has priced its tests aggressively low. I assume that this was based on the assumption that they could multiplex tests with their Edison device and thus perhaps have a lower cost per test. This strategy seems to have backfired in that the Edison device is only now being used for a single test.

Most medium to large sized clinical labs perform the majority of the tests that they offer in-house and only "send out" or outsource the most esoteric of them. This decision is based on whether it's cheaper to perform tests in-house than to send them to another lab. It would be almost inconceivable that such labs would send out, say, a "comprehensive metabolic panel" which is the name for a standard set of tests that are routinely performed in most labs using standard analyzers. The only conclusion that could be drawn from this information is that Theranos was in such a disarray that it was not able to perform even basic lab tests on its equipment. As noted in the excerpt above, this send-out decision also caused the lab to take a substantial loss on each of these tests. 

Comments

[sun]

Severely underpricing tests is the best way to try to capture huge contracts ( DOD anyone?) and to get marketshare away from the The Big Two (Q & LC). They still have lots of vc cash to keep this going, but it will be disastrous for them once they raise prices

[sun]

I thought their Arizona lab was also fully operational. Why reference routine labs to UCSF/ARUP rather than just off to Arizona?.....

[A]

They also have larger issues with CMS according to today's news: http://www.nytimes.com/2016/01/28/business/theranos-lab-found-in-violation-of-clinical-standards.html?_r=0

[Sam]

Can't imagine they are making much money on the tests they are running IN HOUSE either if they are using equipment and reagents from traditional IVD vendors like Siemens given Theranos's "disruptively" low prices to their customers. I would assume their prices to customers were based on the total cost per test using their Eduson device to run the tests. But of course since late last year, at least, except for one low volume test, they have NOT been using their Edison devices.