Theranos Shifts Focus from Labs to Technology

Theranos announced that it will shut down its laboratory operations in wake of the Centers for Medicare and Medicaid's Services (CMS) sanctions resulting from the 2015 inspection of its Newark, Calif., laboratory, even though it is appealing the sanctions.

On Oct. 5, the company released a statement indicating that "[a]fter many months spent assessing our strengths and addressing our weaknesses, we have moved to structure our company around the model best aligned with our core values and mission." That structure includes closing clinical labs and wellness centers affecting more than 300 employees in Arizona, California and Pennsylvania.

The company will now focus on developing technology—namely the miniLab, which Holmes detailed at the AACC annual meeting in August. The miniLab is a compact device (2.5 cubic feet) containing a mini-robot that processes single-use cartridges with a Theranos Virtual Analyzer remotely dictating protocols for processing. "Our ultimate goal is to commercialize miniaturized, automated laboratories capable of small-volume sample testing, with an emphasis on vulnerable patient populations, including oncology, pediatrics, and intensive care," according to the company's Oct. 5 statement.

In late July, the company brought in some heavy hitters with experience at major technology companies in-house, including attorney David Guggenheim as chief compliance officer and David Wurtz as vice president of regulatory and quality. Guggenheim previously served as an assistant general counsel at McKesson Corp., while Wurtz was senior director of regulatory, quality and compliance at ThermoFisher Scientific. Theranos's board also created a compliance and quality committee to "oversee and advise the board and the company's executive leadership on regulatory compliance and quality systems obligations," the company said.

In July, CMS had rejected the company's proposed corrective action as failing to "constitute a credible allegation of compliance and acceptable evidence of correction" of the deficiencies cited in the inspection. CMS's proposed sanctions include:

• Revocation of the lab's CLIA certificate;
• Cancellation of its approval to receive Medicare/Medicaid payment for lab services;
• Penalties of $10,000 per day until deficiencies are resolved; and
• Banning Theranos founder Elizabeth Holmes from owning, operating or directing a lab for two years.

CMS also asked the lab for a list of the names and addresses of all physicians and clients who used its services since January 2014. Theranos had taken steps to appeal those sanctions before this latest announcement that it would shift from lab testing to developing test technology.

Takeaway: Theranos is an excellent example of how CMS sanctions and the negative publicity they bring can cause a lab to shift strategic direction.