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Disruption and Execution in Health Care—Learning From Theranos

A conveyer belt of bad news has ceaselessly flowed toward Palo Alto–based Theranos over the past month. If you’ve lost track of the story, the company aims to disrupt the staid world of diagnostic laboratory testing through proprietary technology that requires only a few drops of blood. With its promise of a low-cost, high-speed, high-touch, consumer-focused revolution in a part of the health care system in desperate need of innovation, Theranos is/was a darling of Silicon Valley…present or past tense to be determined. Its $9 billion value also qualifies it as a unicorn, a term for any start-up valued beyond $1 billion.

In the wake of mounting scrutiny, Theranos has ceased using its proprietary technology while the technology undergoes FDA review. It has paused its highly touted relationship with Walgreens and promised a reconstituted board of directors. It also has put out a help wanted sign for a new laboratory director.

Were Theranos’s audacious claims too good to be true? Is there still hope for a revolution in diagnostic testing and the role of the consumer? Does health care simply hate disruptive innovation? Should we believe in unicorns?

Perhaps we should have expected the pushback that has played out on the front page of the Wall Street Journal since October 15. Although a loophole exists that allows testing companies to avoid premarket verification, the scope and scale of Theranos’s business model probably put it on a collision course with the FDA. A similar high-speed collision involved a company called 23 and Me. (More on them a bit later.) The cumbersome FDA approval process has its critics and flaws. But the principles of peer review and transparent evaluation of safety and efficacy have their place, even as our industry seeks to disrupt itself.

Theranos has been remarkably guarded in disclosing details about its technology platform and testing techniques. In broad terms, however, the company is making a bold play in the burgeoning field of microfluidics. If you use an ink-jet printhead, you depend on this field—the study of moving and controlling tiny quantities of fluids.

The staggering potential of microfluidics in health care draws heaps of both public research support and private investment funding. Indeed, 2 companies—DMI and Genalyte—are seeking FDA approval right now for their own breakthrough diagnostic testing platforms. Unlike Theranos, both have produced extensive paper trails describing their research, intentionally shunning the “black box” approach Theranos has favored.

With little knowledge of what Theranos is actually doing, industry observers speculate the company is having some challenges with its science. It turns out that developing a microfluidics test for detecting herpes (Theranos’s one FDA-approved test) is a lot easier than developing a test that diagnoses anemia. The former requires a yes/no answer; the latter requires high precision and reliability, especially when all you have is a few microliters of blood. That tells us that disruption for Theranos and for others is bound to be a bit more incremental than the effusively positive press stories of recent years indicated.

What, however, does any of this have to do with your own approach to innovation? The short answer is “plenty.”

First, no matter what happens to Theranos, it’s important to remember that there are rules to innovation in health care. In an increasingly value-driven industry, it’s hard to take short cuts. Whether it be in bundled payment, stroke care, virtual health or something else altogether, the innovations you adopt must be measured against a set of transparent goals—clinical, financial, operational and/or strategic.

Second, innovation is messy work. Many a chief innovation officer has told us that the hardest part of their work today is overcoming a cultural aversion to failure. One measure of your progress should be the number of projects your organization takes on that don’t succeed but that set the stage for some other breakthrough.

Third, deliberate, focused execution is key. How do you translate your strategy or innovation into action? What market cues do you need to consider? In the zeal and excitement of releasing a new product, did Theranos take the necessary steps to ensure product reliability and share it with the key stakeholders in the government/market? Or did the combination of scale and focus promote a culture of “let’s get it out at all costs, the sooner the better”?

This all leads me back to the story of 23 and Me, the much-hyped company that promised and promoted a personal genome evaluation test. Two years ago, it received what amounted to a scathing cease and desist letter from the FDA. Now, it’s back. Over the course of 2015, 23 and Me has relaunched its genetic testing business with FDA approval, refocused its business model on a more incremental approach to diagnostics, announced new partnerships with Genentech and Pfizer and raised an additional $115 million in capital. Its valuation is again at $1 billion. The unicorn has returned.

Innovation and disruption are possible in an industry as scientifically rigorous as ours. But to be successful, it is essential to measure your innovation against a set of transparent goals and share your results with key stakeholders before you execute. You may choose to aggressively disrupt your own business model, play the role of fast follower or wait for consensus adoption. There will always be disbelievers that you will have to convert, whether or not you arrive by unicorn.

Whatever the outcome of the FDA review of Theranos’s technology, Theranos CEO Elizabeth Holmes has made an impact on our industry and raised the hopes of health care consumers everywhere. She’s challenged the status quo and ushered in disruption that will change the lab testing landscape forever (either by Theranos or a fast follower duplicating its approach).

In the months ahead, you can expect more from Sg2 on disruption and innovation. My colleague Chris Cornue has just returned from this year’s Exponential Medicine conference in San Diego. Microfluidics were on the agenda as were topics like chronic disease, sensors, 3D printing, genetics, crowd sourcing and, yes, results.

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As of February 11, 2016, Vizient, Inc. has completed its purchase of MedAssets Sg2 and spend and clinical resource management segments from Pamplona Capital Management, LLC. MedAssets revenue cycle business will continue to operate as a wholly-owned subsidiary of Pamplona Capital Management LLP.

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