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If there is any part of the US healthcare market that is ripe for disruption, it is surely in-vitro diagnostics — medical examinations that take place outside the human body such as blood tests in a test tube or culture dish.
Ask any American about their experiences and they will complain of delayed blood tests, long call-waiting times when chasing up results and extortionate costs.
There are just two large nationwide US testing groups, Quest Diagnostics and LabCorp. Together they control 46 per cent of the non-hospital independent laboratory market, which boasts $25bn in annual revenues. The rest of the market is accounted for by small independent labs and niche providers.
Enter Theranos, a Silicon Valley business that has promised to revolutionise the market for in-vitro diagnostics. Founded in 2003 by Elizabeth Holmes, then aged 19, the company said it would consign needle-brandishing nurses to history while cutting the price of tests and reducing the amount of time it takes to receive results from a few days to a few hours.
The Palo Alto-based privately held company has also led a push to allow patients to bypass their doctors and order their own diagnostics from a menu of more than 260 tests at Theranos outlets and Walgreens, a pharmacy chain. Arizona recently changed the law to permit this kind of direct-to-consumer testing.
Ms Holmes, who dropped out of Stanford University to set up Theranos, has said she was inspired in part by her fear of needles. Hence the company’s decision to build its own laboratories around two pieces of proprietary technology.
The first, a so-called nanotainer, is a finger-prick vial into which a patient deposits just a few drops of blood. The second is a laboratory machine, known as an Edison, that can purportedly return accurate results from the nanotainers, which collect much less blood than nurses and doctors typically take from veins.
The arrival of Theranos has had little noticeable impact on the volume of testing conducted by the dominant test providers.
Investors have, nonetheless, taken the potential of Theranos seriously, bestowing it with a $9bn valuation at its most recent fundraising — almost the same as Quest’s $9.7bn market capitalisation and not too far from LabCorp’s $12.3bn.
However, since the autumn, Theranos has been battling claims that its technology is overhyped and its business model is flawed. In October, the Financial Times reported that the company had struggled with the accuracy of its tests and staffing issues at one of its labs. A Wall Street Journal investigation uncovered problems with its finger-prick vials.
After consultation with the US Food and Drug Administration, the US regulator, Theranos scaled back the use of nanotainers to just one of its 262 tests in October. The rest of the diagnostics are performed using commercially available equipment commonly found in traditional labs.
It has since emerged that the company was criticised by the FDA in September after an inspection found it was using devices to collect blood without the necessary approvals. Inspectors also identified issues with the way the company handled customer complaints and evaluated its suppliers.
Theranos has said it addressed and corrected all of the FDA’s concerns immediately or within a week of the inspection. It is currently seeking regulatory approval to use the nanotainers for its other tests.
Ms Holmes has come out fighting against her critics, some of whom she casts as part of an old-fashioned medical elite, scared of the change she promises. At a healthcare conference earlier this month, she said the negative headlines had done little to deter customers, and that in fact “we’ve seen our highest volume” to date.
Some in the industry fear that the loss of its technological edge over larger rivals could make it hard for Theranos to compete. “Without adequate business scale, clinical lab services are an unappealing target market,” said analysts at Kalorama Information, a medical market research group, in a report earlier this month.
Theranos’s problems echo those experienced by 23andMe, the direct-to-consumer genetic-testing company. In 2013, the FDA ordered the group to stop selling its $99 DNA tests, which the agency said constituted medical advice and, therefore, required regulatory approval.
This forced 23andMe to recast its DNA kit as a product for hobbyists interested in their genealogy rather than a bona fide diagnostic. It has since sought to rebuild its relationship with the FDA and this year won approval for a test to identify a gene associated with a rare condition called Bloom syndrome — the first direct-to-consumer test of its kind backed by US regulators.
Kalorama thinks Theranos should adjust strategy too, by moving into simpler “point of care” testing. Here diagnostics are carried out in a surgery, clinic or a pharmacy and the patient waits a few minutes for results. This cuts out the need for a laboratory altogether.
The clash of Silicon Valley start-ups and in-vitro diagnostics looks set to continue. For the former, the most important thing is the pace of disruption, while the latter adopts a painstakingly slow, highly regulated approach, where new products take years to win approval and where standards of accuracy are understandably very high.
“There is a cultural mismatch,” says one Theranos investor. “Both regulators and the companies need to work together to better understand each other.”