POC IVD a Viable Business Model for Theranos

POC IVD a Viable Business Model for Theranos

Intrigue regarding stealthy diagnostics and lab testing company Theranos has given way to controversy as recent reports and allegations question the efficacy of the company’s core technology. Theranos recently disclosed that the fingerstick sampling method used in conjunction with its in-house developed IVD analyzer, referred to as ‘Edison’ in reports, is now limited to only one test, a FDA-approved laboratory developed test (LDT) for herpes simplex virus-1 (HSV-1). The reduced role of Theranos’ proprietary testing platform was announced following recent questioning of the company’s protocol for proficiency testing (PT) as part of CLIA certification and request from the FDA to cease using ‘nanotainers’ or blood collection devices unapproved for tests outside of the Theranos HSV-1 test.

While ostensibly committed to revolutionizing and succeeding within the clinical laboratory service space, Theranos could conceivably transition to an IVD-centric business model focused on ‘Edison’ placements and associated revenue streams

That two regulators (CMS and FDA) hold oversight for the Silicon Valley start-up’s crucial business operations illustrates Theranos’ unique and potentially mixed approach to clinical markets. While ostensibly committed to revolutionizing and succeeding within the clinical laboratory service space, Theranos could conceivably transition to an IVD-centric business model focused on ‘Edison’ placements and associated revenue streams. The company’s microfluidic analyzer technology has already been approved by the FDA for CLIA-waived qualitative HSV-1 testing and could thus compete in the dynamic point-of-care test (POCT) market space. The ethos for Theranos - to provide actionable information at the time it matters most - additionally remains just as viable if the company chooses to further develop its technology as a POCT analyzer. Alternatively, continued plans for Theranos in clinical lab services must account for the company’s currently low-margin, if not unprofitable, operations using third-party analyzers.

In this blog post, Kalorama Information assesses recent developments for Theranos and how they may translate to the company’s future involvement in IVD markets.

In an interview earlier this summer, Theranos founder Elizabeth Holmes countered the view that the Edison platform should be made available for independent review. Instead, the company would initiate an exhaustive, and largely unprecedented review process as a LDT provider with the FDA:

[Holmes:] And we think that the first place for that is the FDA. Because the FDA will take, you know, sometimes years to thoroughly review a system, a platform, the test data… And our position on this was, what is the best way that we could provide that assurance. And without question, especially when you are dealing with something like a test that is binary, either you have the right result or you don`t, the FDA is the gold standard for that.

The June 2015 interview with Elizabeth Holmes reiterated the company’s stance that the FDA was the “gold standard” for the review of their product. Theranos’ early engagement of the FDA prior to the release of an IVD product is opportune for a company raising its profile as a disruptive LDT company. Operating as a lab, Theranos could submit its over one hundred ‘binary’ or qualitative tests that may take years for FDA approval and in the meanwhile perform those tests as LDT services to win clients.

Another opening for Theranos to compete as a POCT IVD specialist came with the CLIA waiver of its fingerstick HSV-1 test in July 2015. The waiver classified the qualitative serological (immunoassay) test at the lowest level of complexity, associating its use by professionals with minimal risk of error and to patient outcome. A CLIA waiver is unusual for a LDT as the designation is used to allow the performance of the test outside of a laboratory at POCT sites such as physician office laboratories (POLs), small outpatient clinic labs and decentralized testing points in hospitals and field sites. Typically, a POCT device manufacturer secures a CLIA waiver to sell its product outside of traditional IVD client bases among clinical and reference laboratories (CLIA moderate- and high-complexity labs). In comments regarding the test’s newest clearance, Holmes identified end users markets commonly targeted by POCT device companies:

“This is a milestone in bringing our technology and services not only to our Wellness Centers, but also to physician offices and hospitals,” Theranos founder and CEO Elizabeth Holmes says in an email. “Now the lab can come to people at the time it matters, rather than the other way around.”

The implications of Theranos’ CLIA waiver were not fully explored with the deluge of other recent headlines regarding the company, but the clearance was generally regarded as indicative of a new or at least more diverse future business model for Theranos. Unlike a reference lab giant such as Quest Diagnostics and LabCorp, Theranos has repeatedly signaled its aspirations to lead in the decentralization of lab testing. The company could choose to follow its goal of decentralized testing to its ends - POCT performed by clinicians and other healthcare users - and forego the overheads and low margins of clinical lab services. Without adequate business scale, clinical lab services are an unappealing target market without high-value esoteric test services where Theranos has yet to concentrate itself.

The economics of POCT are potentially conducive to the launch of Edison as a POC diagnostics device. Clinical users would be attracted by the low-cost tests developed for an Edison or Edison-derivative platform; user-performed tests would provide rapid near-patient results and serve as an in-house revenue stream; and Theranos would collect revenue from instrument placements and reagent/disposable orders or reagent rental agreements.

More specifically, Theranos could reach its market valuation or annual revenues of around $3 billion with only a 10-15% market share of its likely target market of U.S. outpatient testing (whether in-house or send-out). However, market share in the clinical lab services market would require extensive infrastructural and operational build-out including personnel and testing centers at retail clinics, outpatient clinics, and regional hubs

How then to properly scope the market opportunity available to Theranos? Originally slotted next to Quest and LabCorp (and valued similarly at $9-10 billion), Theranos would compete in the roughly $100 billion global market for clinical laboratory services. More specifically, Theranos could reach its market valuation or annual revenues of around $3 billion with only a 10-15% market share of its likely target market of U.S. outpatient testing (whether in-house or send-out). However, market share in the clinical lab services market would require extensive infrastructural and operational build-out including personnel and testing centers at retail clinics, outpatient clinics, and regional hubs.

Market projections from Kalorama Information’s The Worldwide Market for In Vitro Diagnostic Tests, 9th Edition indicate that the market associated with those tests in the professional POC space will be worth approximately $5.3 billion by 2018

Theranos’ mission “to provide actionable information at the time it matters most” could arguably best be met by placing devices among users without being responsible for the test services. FDA approval of Theranos tests are likely to be earned on the efficacy of fingerstick sampling to provide qualitative or ‘yes/no’ blood test results. Market projections from Kalorama Information’s The Worldwide Market for In Vitro Diagnostic Tests, 9th Edition indicate that the market associated with those tests in the professional POC space will be worth approximately $5.3 billion by 2018 and will include primary care screens (glucose, lipids, HbA1c), infectious disease tests, coagulation, and some biomarkers. The ability of Theranos’ platform to leverage real-time PCR and isothermal amplification-analysis methods could also allow the company to enter higher growth expansion markets for molecular POC diagnostics.

Significant doubts remain regarding the proprietary platform’s efficacy for quantitative IVD testing and, unless resolved, such technical limitations would hamstring Theranos’ development as a monolithic lab testing service provider in the mold of Quest or LabCorp. A relatively limited, yet still broad test menu would, however, not be a hindrance to a Theranos analyzer released as a POC platform

More immediately, Theranos must navigate its way between two U.S. regulators, a consequence of the company’s mixed course of development to this point. Major market opportunities remain available to Theranos regardless the course it chooses (LDT or IVD or both), though its microfluidic analyzer for fingerstick samples may be most able to subvert lab testing as a medical device for versatile, low-cost POC diagnostics. Significant doubts remain regarding the proprietary platform’s efficacy for quantitative IVD testing and, unless resolved, such technical limitations would hamstring Theranos’ development as a monolithic lab testing service provider in the mold of Quest or LabCorp. A relatively limited, yet still broad qualitative results test menu would, however, not be a hindrance to a Theranos analyzer released as a POC platform.