Theranos Aims Big Outside of LDTs’ Esoteric Pigeonhole

Theranos Aims Big Outside of LDTs’ Esoteric Pigeonhole

More information regarding the clinical lab testing or clinical lab services market can be found in Kalorama Information’sClinical Lab Services Market (Growth Opportunities, Competitive Analysis and Competitor Profiles). Kalorama also offers specialty market coverage of retail clinics withRetail Clinics 2015: Growth of Stores, Consumer Opinion, Leading Competitors, Sales of Products to Clinics (Diagnostic Tests, Pharmaceuticals, Vaccines), Clinic Sales Forecasts and Trends.

Carefully watched for its disruptive potential and unconventional business plan, Theranos continues to rise in profile within the clinical lab testing industry with the FDA approval of its fingerstick immunodiagnostic herpes simplex virus-1 (HSV-1) test. Theranos’ voluntary submission of study data for its laboratory developed test (LDT) was unexpected at a time when LDTs have come under mounting scrutiny from regulators and criticism from the IVD industry. The involvement of regulators is also unprecedented from a LDT provider; lab test services from a CLIA-certified lab are otherwise excluded from FDA oversight as long as the tests are not sold as kits or devices to third-party labs. More broadly, Theranos is an intriguing case study within the wider IVD and clinical lab services industries. The company’s strategy is to improve the accessibility and convenience of even basic or core lab testing services - immunoassay screens (infectious and non-infectious), clinical chemistry, hematology, drugs of abuse - using proprietary analyzer platforms rather than conventionally procured, and FDA-approved third-party instruments.

Theranos’ business development strategy is also unique by the fact that it internally manufactures its own instruments for in vitro testing. Such vertical integration is very rare in the clinical lab industry, and is pursued more in a horizontal fashion through bolt-on acquisitions that introduce companies to new markets. Quest Diagnostics has acquired and held IVD business units and Roche Diagnostics has entered high-growth markets only serviced by LDTs. The LDT cross-plays executed by large IVD companies typically focus on high-end esoteric testing such as oncological companion diagnostics (CDx), non-invasive prenatal testing (NIPT), and other services using sequencing, microarrays or other high-complexity molecular methods. Almost Theranos’ entire test menu (~95%) addresses testing areas uncommon to LDTs - core lab chemistry (including core lab immunodiagnostics) (~59%); therapeutic drug and drug of abuse testing (~9%); hematology (~7%); and infectious disease (~20%). The black box nature of Theranos’ IVD systems limits informed technical discussion, but their evident diversity or versatility in terms of test disciplines is a potential long-term threat to the IVD market.

(UPDATE: Theranos is limiting its fingerstick technology to only its FDA-approved HSV-1 test pending FDA review of its other submissions. Remaining menu tests are being run on third-party, FDA-approved analyzers.)

With a menu of common or routine tests, Theranos is seemingly at a significant disadvantage across from competitors such as Quest and LabCorp that command greater scale and large parts of the ambulatory care or outpatient testing market. Other LDT companies understandably target higher margin, premium or esoteric testing services that are not supported by FDA-approved IVD devices or assays.  Theranos aims to be competitive in core lab tests by offering them at prices well below Medicare reimbursement rates. Cost savings for the company presumably come from simpler sample collection (fingerstick vs. venous blood); potentially lower shipping rates (smaller individual sample volumes and currently limited regional [AZ, CA] collection points); and undisclosed efficiency improvements related to the instrument. The profitability of Theranos’ current pricing scheme has been questioned, though skeptics acknowledge the company remains in development and with outside capital can tolerate operating in the red through its initial stages.

Theranos’ emergence has coincided with the implementation of the Affordable Care Act (ACA) and widespread advocacy for accountable care models and preventive care. The technological seed of Theranos and its founders first endeavor was a wearable device that performed routine testing and adjusted pharmaceutical therapy with telemetric reporting to a physician. Though the company has deemphasized therapy in its current business, its diagnostics strategy shares a similar focus on building a direct connection or barebones interface between the consumer and clinical decision-making. Consumer empowerment and involvement is an element in preventative care, but also runs countered to carefully managed patient care under accountable care models. Theranos supported the recently passed bill in Arizona, the company’s largest regional market so far, that will allow consumers to obtain lab testing without a referral or lab order from a physician.

Partnering with Walgreens, Theranos has responded to post-ACA healthcare market development by distributing its wellness centers or collection points among retail sites to reach the newly insured. High co-pays and deductibles plans have become more common in the market, attracting consumers to Theranos due to its low prices and direct marketing.

Theranos is also challenging the IVD industry through its market deployment of laboratory developed tests. The company uses the LDT designation to bypass the more arduous path of FDA approval that would also reveal its carefully guarded technology to competitors. In addition to potential cost savings in testing, the microfluidics-powered analyzers used by Theranos also leave open IVD market opportunities through licensing and manufacturing (especially following the successful FDA review of its HSV test).

Despite its advantageous use of LDT designation to meet competitors head on in clinical lab testing, the company will follow a long, if not difficult, path to market expansion in clinical lab testing and delivering fully on its goal of accessibility. So far, accessibility of its testing has been supported by its lower cost, delivery in retail testing, and overall consumer friendliness. True accessibility - as defined by the company goal to place sample collection within five miles of every American - will require dramatic expansion in the market. Encouraging steps have been made by Theranos with service agreements with providers Capital Blue Cross Pennsylvania, AmeriHealth Caritas and the Carlos Slim Foundation in Mexico. More providers are needed to grow Theranos’ footprint, as direct consumer appeals have historically fared poorly in the clinical lab services market. Many consumers do not know which tests to request and are otherwise hesitant to seek testing due to anxiety over results. In-home HIV testing has most recently fell far short of market projections in the United States.

With an innovative, pioneering head in Elizabeth Holmes and an impressive number of advisors and board members, Theranos will remain closely watched due to its disruptive potential. The company’s alternative narrative also warrants continued attention as it addresses the major challenges facing the IVD and clinical lab industries - primarily testing costs and other healthcare pressures - and several emerging or prospective market opportunities - LDTs, retail clinics, and direct-to-consumer testing.