Theranos Encounters More Regulatory Obstacles in Its National Buildout

Theranos founder Elizabeth Holmes has declared she would change the future of laboratory testing, but her startup's own future is looking increasingly thornier.

Late last month, the Centers for Medicare & Medicaid Services said Theranos' Newark, Calif. laboratory was posing an immediate danger to patients in the area of hematology. That's the same kind of ding hospitals get when they leave medical instruments inside patients.

The response was immediate: Walgreens, the Fortune 100 pharmacy retailer that just months ago was poised to make Theranos as much as a fixture in its stores as greeting cards or antacid tablets, has suspended operations at the company's retail lab at its Palo Alto store.

"No patient samples will be sent to the Newark lab until all issues raised by CMS have been fully resolved," Walgreens said in a statement. "Walgreens informed Theranos that tests collected at 40 Theranos wellness centers located at stores in Arizona must be sent only to Theranos' certified lab in the Phoenix area or to an accredited third-party lab for analysis."

Walgreens had previously put a hold on introducing Theranos testing centers at its other stores nationwide.

CMS gave Theranos 10 days to issue a plan of correction, a typical requirement of an immediate jeopardy letter. If Theranos does not satisfy CMS, it could have its CLIA certification revoked or suspended.

Regulatory experts were unable to say how common such immediate jeopardy letters are in the laboratory realm—they are fairly commonplace among hospitals, where patients are exposed to potentially dangerous medical errors on a daily basis. The agency suspended or revoked 35 CLIA certifications in 2014 and 37 in 2013, the most recent years for which records are available. Most of the revocations include smaller standalone or community hospital labs. The number of actual warning letters sent to labs by the CMS was not available.

Theranos issued a statement that simultaneously suggested that the problems were all but corrected while it was among the few labs that invited such scrutiny.

"Theranos remains the sole company to call for—and voluntarily submit itself to—stronger regulatory oversight," it said, in reference to the fact that it had decided to submit all of its tests to the U.S. Food and Drug Administration for approval—a practice that most other labs are actively resisting.

"It's important to note this particular survey was conducted months ago and is not a reflection of the current state of our lab in Newark," the statement continued. "As the survey took place we were simultaneously conducting a comprehensive review of our laboratory's systems, processes and procedures to ensure that we have best-in-class quality systems. CMS' findings included standard and condition-level deficiencies, and one finding at the 'immediate jeopardy' level...to be clear, that finding does not apply to the whole lab, and none of these findings relate to our Arizona lab, where we currently process over 90 percent of our tests."

To correct some personnel deficiencies, Theranos said it has hired two new key employees: Kingshuk Das, M.D., a board-certified pathologist and associate medical director of UCLA Health's Clinical Laboratories; and Waldo Concepcion, M.D., chief of clinical transplantation and professor of surgery at Stanford University Medical Center.

The Palo Alto, Calif.-based Theranos has had its testing platform come under fire from both the CMS and the FDA for a variety of issues, including the accuracy of its tests and its testing platform, which includes the ability to test tiny amounts of blood that can be drawn from patients without needles.

There are a variety of reasons Theranos is drawing such scrutiny from regulators. Laboratories are not glamorous or even high-visibility businesses. Holmes, a Stanford University dropout with a penchant for wearing black turtlenecks, has been a regular on the media circuit, talking up her company to national print and electronic news outlets. The company is also taking the risk of selling tests directly to consumers— a relatively new business model that often makes regulators uneasy if done so on a large scale, according to the publication Business Insider.

A former high-ranking lab executive who asked not to be named suggested that Theranos has also drawn the ire of would-be competitors, which in turn may be bringing more heat on the company.

"This sometimes happens when a lab is talking up a technology that may not be ready for prime time," the person said.

Theranos has more than 200 tests on its menu, but only one assay for herpes has received FDA approval for deployment through its own platform.

Takeaway: Theranos has more obstacles in its path toward becoming a lab giant, and they seem to be growing more formidable by the day.