Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

A "pivot" is a Silicon Valley term of art referring to doing something else after your first idea fails. 

Former Valley darling Theranos announced Wednesday evening it will shut down its clinical labs and "Wellness Centers" and fire 340 employees amid a firestorm of criticism of its blood tests. The company is refocusing on its "miniLab" platform, a printer-sized, automated lab-testing device. 

Theranos is setting fire to its promises to revolutionize the lab-testing industry, which it used to raise massive piles of money. It's unveiling a shiny new device that may not work and asking stakeholders to ignore that burning smell. This stretches the definition of the word "pivot." 

It also changes dramatically the nature of Theranos. It's now just an early stage diagnostic-device company that will likely need FDA approval to enter a crowded market, weighed down by a radioactive reputation.

So what's it worth? Certainly not the $9 billion valuation investors once assigned it. Even $1 billion is likely a stretch now -- Theranos is no longer the Blood Unicorn.  

The diagnostics industry is large, with big, diversified incumbents such as Abbott (with a $62.7 billion market cap) and Danaher ($53.7 billion) and many other, smaller firms. Abbott had close to $1 billion in sales in 2015 from the same markets Theranos seems to be targeting.

The Target
Abbott, one of the largest diagnostic and device companies, made just short of a billion dollars last year selling the sorts of machines Theranos apparently now aims to sell.
Source: Bloomberg

Theranos is either chasing a small part of that market, or it is once again promising vastly more than it can hope to deliver. It's likely years behind its would-be competitors, with a tiny fraction of their research budgets and no concrete proof its technology works. 

Even Cepheid, at a $3.2 billion market cap, isn't a particularly good comparison. It developed a leading molecular diagnostics system years ago and booked more than $500 million in revenue last year. 

A better set of valuation peers are early-stage or single-device companies targeting smaller portions of the market.  

One example is T2 Biosystems. The company has developed an approved device and test for fungal infections. The device is already in use, and the company is working on others. It is currently worth $216 million, and its value has fluctuated substantially.

Up and Down
The diagnostic device business is tough! Even with a device on the market, T2 Biosystems' value has fluctuated substantially.
Source: Bloomberg

Nanosphere, a small molecular diagnostics company with tests on the market, was acquired by Luminex for $58 million earlier this year. Luminex, which booked $237 million in revenue last year, is worth just short of $1 billion. 

It is telling that these smaller companies are focused on doing a specific thing well instead of what Theranos is promising, which remains quite broad. On its website it describes the MiniLab as something like "a huge diagnostics lab that has been condensed down to the size of a microwave." The company still appears to be committed to doing tests with finger-pricks instead of tapping veins.

It's tough to get any novel device or test approved, let alone get a serious foothold in this market. The customers are savvy and skeptical scientists, doctors, and hospitals -- not consumers eager to try the next new thing.

Can Theranos develop a unique platform good enough to go toe-to-toe with an Abbott? Given its track record, its inability to run a competent lab using even other people's technology, and a relative lack of details about MiniLab, it's hard to imagine it will. If the technology is just a collection of conventional tests crammed into a smaller box -- which it appears to be, according to some lab experts -- the company may not get very far.

For now, it's impossible to tell Theranos' new valuation, until someone makes the very strange choice of giving it more money and establishing one. But believing in its transformation depends on Elizabeth Holmes' word that the company can develop this technology, which is not worth very much at all. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net