Big Stumble For State’s Hottest Startup

Little more than a week ago, Theranos was California's hottest healthcare startup. Now it is on the hot seat.

The Palo Alto-based Theranos was poised to transform the laboratory business with a proprietary technology aimed at all but eliminating the practice of using needles to draw blood, and doing so at a fraction of the cost of standalone and hospital labs. 

The company's founder and chief executive officer, Elizabeth Holmes, had styled herself along the lines of a Steve Jobs, favoring black turtlenecks and often zealous secrecy regarding her company's initiatives.

Holmes dropped out of Stanford University at 19 to form her company, and no doubt leveraged the connections developed by her father, Christian Holmes, a high-ranking member of the George H.W. Bush administration. Both former Secretaries of State Henry Kissinger and George P. Schultz sit on the Theranos board of directors.

Theranos has raised $400 million and was valued earlier this year at $9 billion, making the 31-year-old Holmes – who owns half of the company – one of the youngest self-made billionaires in the world. The company and Holmes was also the subject of a lengthy profile in the New Yorker magazine last summer, a rarity for a healthcare executive.

Theranos' momentum had been propelled by a pact with pharmacy giant Walgreens to install draw centers at many of its retail locations throughout the U.S., a deal that could potentially generate billions of dollars in annual revenue for the former. Theranos started with 40 such centers in Arizona and one near its headquarters in Palo Alto. It also priced its tests at half the rates Medicare reimburses – undercutting the rates that many hospital laboratories charge by substantial amounts.

But the company's practices have drawn some skeptical glances from some industry observers, who have questioned its business model and its secrecy. And Theranos' fortunes took a dive last week when the Wall Street Journal reported that its proprietary testing system was only being used for a handful of the more than 200 assays being performed, test results from that platform were not always accurate, and that it was instead relying on testing platforms developed by other companies for most of its business. The newspaper also reported that Theranos was collecting blood primarily in the traditional needle-and-draw fashion.

As a result of the reporting, Walgreen's said it was revisiting its pact with Theranos and putting on hold any further expansions of its draw centers at its retail sites. The Food and Drug Administration also released documents earlier this week concluding that Theranos' tiny tubes used for collecting blood samples were an uncleared medical device that was nonetheless being transported from California to Arizona and Pennsylvania for its intended use, in violation of federal regulations. The FDA also said the agency was not conducting required quality control inspections and reviews.

“This has the potential to be one of the biggest scams we have ever seen,” said Dennis Weissman, a Washington, D.C.-based laboratory industry consultant and a longtime publisher of influential trade publications that cover the laboratory sector. But Weissman noted that Theranos could still turn things around by providing specific evidence that its testing platforms and protocols work as advertised.

“They have a lot of explaining to do,” he said.

Erik Deutsch, a Los Angeles-based healthcare communications consultant who specializes in crisis PR, echoed Weissman's remarks.

“If they have data (about the reliability of their tests), they should present it or publicize it. It would go a long way toward allaying any concerns about their technology and business model,” he said.

Deutsch added that Theranos would benefit by having a clinical professional serve as a spokesperson in order to boost its credibility.

Theranos has issued two sharply worded rebukes to the articles, including one where it stated “the (Wall Street Journal) reporter purportedly spent five months working on a story about Theranos but his story did not reflect the views of the many eminent scientists, thought leaders, hospitals, and business partners who have worked and partnered with the company around our technology and found it to be innovative and revolutionary,” it said in one lengthy, point-by-point statement. 

“From his very first interactions with Theranos, the reporter made abundantly clear that he considered Theranos to be a target to be taken down, and not simply the subject of an objective news story,” the company later added. “The articles that appeared last week are the inevitable product of that approach.”

Yet despite slamming the Journal repeatedly, Theranos has not demanded any retractions or corrections of the Wall Street Journal's reporting.

Deutsch observed that without further transparency, the company may be stuck in a hunker-down mode for the foreseeable future.

“Public relations is not about concealing secrets. But at the moment, they seem to not have anything positive to publicize,” he said.