Big news on the diagnostic front this morning with the announcement of a $44M investment in Genalyte led by Khosla Ventures.  We have been supporters of the point of care (POC) movement for a long time as highlighted by our investment in Xagenic so we are not surprised at the volume of investment in this area.

Many people, including me, have been skeptical of the Theranos “platform” during the past year as highlighted here and here. The largest concern is that it just doesn’t seem like that much of an innovation.  What I see is that they are attempting to make it more convenient to donate blood by providing more access points and trying to take less fluid, which on its face is more convenient.  I would say that I would rather have a phlebotomist take a blood draw from my arm than do a needle stick in my finger but perhaps that is my personal preference.  My father tested his finger puncture device on me to show how he tests his blood sugar and not only did it hurt like hell, but it was sore for the rest of the day.  When I get my blood drawn from my arm, I ignore it almost immediately and do I really care about the amount of blood they take?  I have approximately 5L of blood volume and the typical draw is 3ml so do I really care about the difference in volume (for the math challenged 5L=5,000ml so 3/5,000=.06%)

The second innovation, which I think is the main one, is the offer to do a broad range of tests at prices that are far below current list prices for LabCorp and Quest.  I’m skeptical of the cost savings here and I will tell you why.  Labcorp and Quest have massively automated facilities and the competitive pressure between the two companies will have already driven costs down dramatically.   Gross margin for the Labcorp’s last quarter from centralized lab tests was 38.2%, which is healthy, but not in the level of high gross margin businesses.  Theranos is claiming that they can offer the same panel of tests at less than 50% of what is currently being charged by large labs.

Theranos has started offering tests that it can’t yet integrate into its systems, using full blood draws. It still charges at most 50% of what Medicare allows, sometimes losing money on the tests.

Source: http://www.forbes.com/sites/matthewherper/2015/07/15/giving-theranos-a-few-tests/

So, the innovation appears to be “traditional Silicon Valley”.  Take an existing service, improve it slightly, wear a black turtleneck everywhere you go and raise a tremendous amount of equity money from disruption desperate investors and use that equity money to subsidize losses until you get enough volume to breakeven or run out of money.  For more on that model see: Fab.

According to Crunchbase, the last venture round (insiders only) was in 2010 and according to Crunchbase, the company has only raised $92 million but other sources attribute over $400 million of capital to the company (No Reg D filings to confirm that number).   Over the past year, the press has been talking about the company being valued at $8 billion, based solely on information provided by the company.

All was well and good until today.  Hmm, seems that the advantage of Theranos may be slipping away even before it began.  Granted the Genalyte technology isn’t commercial yet but I can see tremendous advantage to POC over the Theranos centralized testing model that whatever mysterious cost “innovation” that may or may not exist at Theranos.  Many commentators are finding the secrecy around the company puzzling and it is doing things like getting their tests unnecessarily FDA approved to change the conversation about their technology.  They may have something truly revolutionary, or not.

Having lived through the Bre-X stock market scandal I feel like I have instincts to be at least suspicious about things that don’t exactly check out.  The use of high secrecy usually means that rather than protecting innovative secrets, that it is used to hide the fact that there are no innovative secrets.  I still remember that when the Indonesian government seized control of 40% of the “gold deposit” that the company simply issued a press release to declare that the gold deposit was twice as large as initially though, thereby retaining market value.  What will Theranos do to finally provide necessary disclosure of their technological approach or will other competitors like Genalyte just make that question irrelevant.

Thoughts? Comments?  Am I off base?  Would love to hear from our audience.

Dion Madsen

Those that know me well, know that my favorite words are “Super”, “Great” and “Awesome”. The geek part of me is energized solving the complexity of biology and improving the delivery of care.  I learned patience, hard work and entrepreneurship growing up on a farm in Saskatchewan and teamwork in the rinks and ballfields of my hometown.  After working in Europe and then dealing with bare-knuckle politics in Saskatchewan, I migrated west to Alberta where I began to hang out with some crazy guys doing something called “the Internet” which led to me being the CFO of a publicly-traded company.  After selling the company, I crossed over to the VC side and during a meeting with a vaccine company I had the epiphany of “I can make money and help people at the same time? Awesome!” and I have been working for or financing healthcare companies ever since.

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