• by Bruce Carlson
  • March 16 2018

Theranos a Note of Caution on Company Hype

Theranos a Note of Caution on Company Hype

A few years ago, we received a question about a company called Theranos and found our amazement that another market research firm already had a report on them.  Our interest piqued, we looked into them and added a small profile in one of reports, the place reserved for startups to watch.  With a small operation in a few retail stores, and not much to show in the way of revenues or patients serviced, we didn't think they were a significant player in the market, though they were saying some big things about changing the way testing was done.  Yet their name was everywhere.  It culminated in Holmes's appearance in the 2017 American Association for Clinical Chemistry, where her designers and medical staff debated with the audience of pathologists and lab technicians, and a new product was unveiled, to much news coverage.  

At the same time we watched other innovative point-of-care products and lab-in-a-kit type products from other companies  get no minimal attention from major media.  

With news this week that Theranos founder Elizabeth Holmes, who promised to revolutionize blood testing, has been charged by the SEC with a "massive fraud" involving more than $700 million, we think the story is a cautionary tale of taking companies at face-value and using market research resources such as Kalorama Information who can sort through what a company is saying versus where the market is.  

Before it had really come out with a significant and working test product, the company was worth what is little over eight percent of the entire clinical testing services market.  The concept was innovative and one that is desired in some quarters - a fingerprick tests for many conditions. (though perhaps overvalued - fingerpricks are not necessarily a far greater experience for all people than blood draws).  Kalorama even researched the possibility of Theranos getting out of the difficult and competitive services market and looking at an IVD product, perhaps a point of care product.  This was before the FDA noted issues with the product's development and with the Theranos facilities.  

Kalorama pegged the world market at 108.5 billion, though Theranos only operated in the U.S.  Major players Quest and LabCorp own most of the routine market, and the market also includes advanced cancer testing that Theranos was not offering, so available market was even lower than that figure.  Investors had already bet that the business would take on these large competitors and succeed to capture a significant market share.   Kalorama Information's Clinical Laboratory Services made this estimate.  

Theranos is a Silicon Valley startup once valued at as much as $9 billion. It was formed in 2003 by then 19-year-old Elizabeth Holmes, who dropped out of Stanford University to launch the company.  It's now become a topic in the news, a story of Silicon Valley overinvestment, and even a movie.  

For the IVD Industry, two lessons are clear - the market opportunity is large in diagnostics and already includes a lot of innovators.  And companies shouldn't always follow hype but use filtered research.