Theranos CEO’s 2-Year Ban Leaves Few Options to Save Startupby , , and
Holmes barred for two years from operating laboratories
‘It’ll be very tough’ to come back after sanctions: analyst
Theranos Inc. Chief Executive Officer Elizabeth Holmes was banned by U.S. regulators from owning or operating laboratories for two years, a devastating blow for the blood-testing startup that’s come under scrutiny for risking harm to patients with unreliable tests.
The once high-flying Silicon Valley company was battered with sweeping sanctions from the Centers for Medicare and Medicaid Services, which regulates clinical laboratories. They include the revocation of a key lab certificate, monetary penalties and cancellation of payments from federal health insurance programs for lab services. Holmes, in a statement late Thursday, said Theranos is committed to resolving its issues.
The entrepreneur is left with few options to save her startup. Theranos already had lost a key partner last month when national pharmacy chain Walgreens Boots Alliance Inc. said it would end their relationship and close its 40 blood-testing centers, leaving Theranos with just five testing locations. The sanctions followed an inspection of Theranos’s Newark, California, lab by federal health regulators, which found failures so severe as to jeopardize patients’ health and forced the company to cancel or alter tens of thousands of results.
A ban is an exceptional and rare sanction, and recovering from such severe punishment will be an uphill battle, according to Ira Loss, a senior health-care analyst at the Washington Analysis LLC research firm.
“It’s serious -- can they come back? It’ll be tough, it’ll be very tough,” Loss said by phone. “They need to become a real company instead of whatever it is they are now, which is something short of that.”
In a 33-page letter to Theranos that CMS released Friday, the agency said it “has not removed the finding of immediate jeopardy” and, in reviewing the list of failures that were noted during the inspection, wrote repeatedly that “the laboratory’s allegation of compliance is not credible and evidence of correction is not acceptable.”
While the main sanctions won’t go into effect for 60 days, according to the letter, Theranos will be fined $10,000 per day starting July 12, until it can verify that it’s corrected all the deficiencies.
Theranos plans to shut down the lab and rebuild it, and will continue to provide services through its Arizona facility, according to its statement.
The company said in the statement that it’s “committed to fully resolving all outstanding issues with CMS and to demonstrating our dedication to the highest standards of quality and compliance.”
In response to questions about whether Holmes would step down and whether the company would cut its workforce, spokeswoman Lauren Vroom said by e-mail that Theranos hasn’t made any announcements.
Fall From Grace
It’s been a stunning fall from grace for a company that at one time commanded a $9 billion private valuation. Holmes had been profiled as a wunderkind after dropping out of Stanford University to found Theranos, promising to revolutionize the blood-testing industry -- dominated by Quest Diagnostics Inc. and Laboratory Corp of America Holdings -- with cheap, less-painful tests that used only a finger-prick of blood and could be run on what the company had said were its breakthrough analyzers.
One option for Theranos would be to appeal CMS’s decision within 60 days, which would delay some sanctions, including the ban and the license suspension. The company could first argue its case to an administrative law judge, and then to the departmental appeals board. If those decisions went against the firm, Theranos could then take its case to a federal appeals court. Theranos hasn’t said if it will appeal.
The startup faced increased scrutiny over whether its technology worked following an investigation by the Wall Street Journal last year. In January, CMS sent Theranos a scathing letter detailing deficiencies at its Newark lab that the department said was putting patients’ health and safety in “immediate jeopardy.”
Soon after, Theranos told the agency that there was “no evidence of systemic errors” at its lab and that “no patient impact is expected.” In a March 18 letter, CMS told Theranos that it hadn’t backed up those claims and threatened fines and a ban. The letter, posted by the Wall Street Journal in April, gave the company 10 days to respond.
Theranos said Friday in a statement that the the CMS review pertained to the operations of the company’s Newark lab, not its technology, and it’s still planning on a presentation at the American Association for Clinical Chemistry’s annual meeting on Aug. 1. The company is unaware of any harm to patient health resulting from its tests, according to the statement.
The letter from CMS on Friday showed that the startup has struggled with proper documentation of its actions. The agency said it wasn’t able to easily assess the patient reports that Theranos submitted, which were split over five flash drives. The startup also didn’t send complete records on the patients whose test results had been corrected, didn’t have documentation to show that new quality assessment mechanisms were put in place, and had incomplete training records for some laboratory personnel, according to the letter.
The Palo Alto, California-based startup has since tried to take steps to improve its business, including the creation of a scientific advisory board with physicians from prominent hospitals and the addition of board members.
Three class-action lawsuits have been filed against the company, claiming consumer fraud and false advertising. It’s also been the subject of investigations by the U.S. Securities and Exchange Commission, the U.S. Attorney’s Office in San Francisco, and federal and state health regulators. And last month, Democrats in the U.S. House of Representatives sent a letter to Theranos asking for more information about the company’s problems.