The importance of knowledge of market and ethical standards; Theranos

by David Lester

Case Study

July 01, 2020

The importance of knowledge of market and ethical standards; Theranos

I (David Lester) was on the management team of Theranos for approximately one year. I joined the company in 2009 as a result of understanding of the vision and meeting the strong management team. The company had the three critical features that I considered provided a great opportunity for success: 1) A strong management team (excellent CMO and CTO and visionary CEO), 2) Board of Directors (including Larry Ellison and Don Lucas), and 3) Strong investors (Larry Ellison, VCs).

It did not take me long to realise that this company, in spite of having these three exemplary features, was not going to succeed. And this was because that the company had as I call it “founderitis”. The founder did not listen nor believed in the decades of experience her management team and technology leaders had. Not uncommon in many startups.

Our CEO, Elizabeth Holmes, who did not have any background in the business of healthcare, was focused on the “best opportunities”, not appreciating the barriers to entry. At that time, she had interest in a global epidemic that was happening and was keen to develop a solution to penetrate the market. What was not understood was the pathway to providing a healthcare solution, even in those challenging times where exceptions were being made, including the steps, technical, regulatory and standards of practice. Her solution was very appealing on paper but by the time it could go through these stages, the epidemic would either have passed or the competition would have provided a simpler solution that provided a sufficiently suitable response. So while the best technology solution was developed it was not the one that was going to win. An important lesson in market vs. technology focus.

On speaking with a global leader in management of that particular virus, he stated that things were moving so quickly that if we took someone’s temperature and it was high they would be assumed to be affected by the virus, and the appropriate intervention applied; so a simple thermometer versus a potentially highly accurate, expensive software/hardware solution. Which do you think would win???

In terms of the Theranos offering, it would take extensive time to develop the hardware and software and then integrate them, followed by regulatory approval. The whole process taking probably one and a half years. And by that time, the epidemic would be expected to have passed or under management.

The distraction of resources to work on such project will often kill a young company, even a well-funded startup such as Theranos.

Fortunately, the potential customers, a country, were slow in deciding and Theranos moved onto its next “opportunity”.

You may all have heard of Theranos’s most famous foray into personal blood testing (see Bad Blood by John Carreyrou), which was in my opinion another poorly defined commercial opportunity. The impossible technical challenges were well described, but if we were to just look at the commercial opportunities alone, it was recognisable from the beginning to be a failure. First of all, the ridiculously low cost offering was not feasible. No company would be able to survive these prices. It is known that the big lab clinicals make “pennies or a penny” on each test. Their business is about high volume, low margin. The margin offered by Theranos was even more unreasonable as it would clearly cost the company more to provide the service than any potential financial compensation. In terms of patient adoption, there is a different attitude in terms of patients and their care. They see that as a right, not as a choice. While in the US, the health insurance disaster is well recognised, why would Theranos have expected that it would have large numbers of people going to their clinics for testing? Certainly not the uninsured! And others have some form of healthcare coverage, so their personal cost is not an issue. While I worked at Pfizer, we made a study on patients with cardiovascular risk and their taking of required blood tests for physician support. We found that around 50% of patients that were given a prescription by their doctors to do a blood test on cardiovascular risk factors, never had the tests done. It made sense to have a device/instrument in the doctor’s office to take the blood and measurements while at the office. This would benefit Pharma as more prescriptions would be written for their drugs. But the company I worked for never continued this program as they saw themselves as a pharmaceutical company, not a medical device company! An important lesson. Without the strong endorsement of such technology offering by the Pharma company, the doctors and patients are unlikely to respond.

This was a good lesson that the direct to patient model was very challenging and the challenge was changing people’s behaviours, something not even the large Pharma companies wish to challenge.

So, this model really had no very little chance of success from the outset, in spite of all of the excitement of the profession, community and the media.

Theranos would also have needed to overcome the challenge of medical standards of practice. They would have had to been able to influence doctors that their offering was as good as the existing large clinical labs. I had a colleague was very senior in one of these organizations and he indicated that they felt little threat from Theranos as they were so imbedded in medical practice that by the time Theranos had made some impact, their own company would have developed a strategy/offering that would be very competitive. This is assuming that the doctors were willing to support Theranos’s offering! For a startup, by the time that adoption had happened it is highly likely, as was learned the hard way by Theranos, that even large funding was not sufficient.

Lessons learned……….KNOW YOUR MARKET, understand the associated stakeholders and the barriers to adoption of your target market!