Coverage: Theranos-Walgreens deal crumbling

Things continue to get worse for Elizabeth Holmes and her team at Theranos with major partner Walgreens now threatening to break its contract with the struggling blood-testing firm.

Theranos has been under a microscope since the Wall Street Journal reported problems with the way the company does its specialized blood testing.

Parikshit Mishra of Reuters had the day’s news:

Walgreens Boots Alliance Inc (WBA.O), the largest U.S. drugstore chain, threatened to terminate its relationship with Theranos Inc unless the blood-testing company quickly fixes the problems found by federal inspectors at its laboratory in California, the Wall Street Journal reported.

The drugstore chain gave the warning in a letter to Theranos late last month, the Journal said, citing people familiar with the matter.

A spokesman for Walgreens declined to comment.

Walgreen had suspended laboratory services by Theranos on Jan. 28 after the U.S. Centers for Medicare & Medicaid Services said that Theranos’ deficient practices at its Newark lab posed “immediate jeopardy to patient health and safety”.

Theranos has been in the spotlight after reports in the Wall Street Journal suggested that its blood-testing devices were flawed and had problems with accuracy.

The 40 Theranos “wellness centers” at Walgreens stores in Arizona are the primary source of revenue for the blood-testing company and its conduit to consumers, the newspaper said.

Lydia Ramsey of Business Insider looked at the ramifications of Walgreens’ possibly pulling out of its Theranos deal:

Last month, the Centers for Medicare and Medicaid Services sent a letter saying it found problems with Theranos’ northern California lab, saying some of its practices “pose immediate jeopardy to patient health and safety.”

Other possible violations included analytic systems and three instances of laboratory-personnel problems. Theranos has until Friday to respond to the agency, which has oversight over clinical laboratories.

Most of Theranos’ blood tests are run out of its Arizona lab, which was not involved in the CMS warning. Theranos says it runs about 95% of all Walgreens wellness center lab tests out of its Arizona lab.

The wellness centers in Arizona were part of a pilot program between Walgreens and Theranos, and Walgreens has not said it has any immediate plans to expand that partnership. Theranos has also partnered with a healthcare company in Pennsylvania, which has suspended Theranos tests until the issues cited in the CMS warning are resolved.

Should this partnership dissolve, Theranos is at risk of losing the majority of its retail blood-testing space.

Christopher Weaver, Michael Siconolfi and John Carreyrou of The Wall Street Journal explained what led Walgreens’ to its decision:

Walgreens issued its warning letter to Theranos after discussions on Jan. 28 with the blood-testing company’s founder and chief executive, Elizabeth Holmes.

In a telephone call that day, Walgreens officials told Ms. Holmes the drugstore chain would continue working with Theranos if she agreed to suspend all blood testing and certain other operations until the problems identified by federal inspectors were resolved, according to the people familiar with the matter.

Ms. Holmes declined, the people said. She also suggested Walgreens might be in breach of its contract with Theranos for suggesting the suspension.

Ms. Holmes, 32 years old, started Theranos in 2003 and steered it to a valuation of about $9 billion in a funding round in 2014.

The discussions with Ms. Holmes occurred during a regularly scheduled Walgreens board meeting at the Park Hyatt hotel in New York City.

Walgreens executives shuffled between the phone call with Ms. Holmes, briefing directors on the matter and preparing a news release about the decision to stop for now sending samples to Theranos’s lab in California, according to the people familiar with the situation. The drugstore chain also announced the temporary closure of the wellness center in its Palo Alto store.

The contract with Theranos hasn’t generated revenue for Walgreens, and the drugstore chain lent Theranos at least $50 million in the form of debt that is convertible to equity, people familiar with the matter said.