Los Angeles, CA October 29th 2014 – DeciBio is proud to announce the release of its 1st edition Theranos Due Diligence report. This report is the first comprehensive look at the disruptive Silicon Valley health company, Theranos, and its broader market opportunity.

Since our initial coverage of Theranos in late June and subsequent commentary in both USA Today and the San Jose Mercury, a number of people have asked me to divulge the secrets behind the stealthy start-up’s success. For a company that has received so much publicity in recent months, very little is known beyond the delicately-crafted story Theranos is willing to release. With feature articles focusing on Elizabeth Holmes, her newfound fortune, and her grand vision for the future of healthcare, the obvious question remains unanswered: What is the company’s big secret and how is it worth $9 billion? Having reviewed everything from patents and financial filings to early website iterations and historical documents, it is evident to me that Theranos does have the potential to prove disruptive to a number of industries — just not in the way you might imagine. Below is just one of the insights gained from our in-depth analysis.

Theranos is Apple vending in an orange market.

There is no shortage of parallels one can draw between Apple and Theranos. Both companies, founded by college dropouts with visionary aspirations, are fundamentally data-driven and technology-based with a strong emphasis on the consumer experience. However, despite its efforts to emulate Apple, Theranos is competing in an inherently different industry, the implications of which are far-reaching.

Unlike the business-to-consumer (B2C) model of the consumer electronics industry, healthcare, particularly lab testing, has historically operated as a business-to-business (B2B) industry. Leading reference labs, like Quest and LabCorp, rely on partnerships with private insurers and healthcare providers to bring lab testing services to patients nationally. These dominant players leverage expansive infrastructures and discriminatory pricing practices to incentivize exclusive partnerships and access millions of patients. Counter to these traditional practices, Theranos has chosen to market to the emotions of consumers directly, rather than the logic-based sales enlisted by B2B competitors. Essentially, Theranos is selling Apple in a market full of oranges.  While this insight seems obvious, the unique challenges presented by taking a consumer-focused approach to clinical lab testing are less apparent.

As highlighted in DeciBio’s report, a number of competitive advantages differentiate Theranos’ testing services, ranging from its less-invasive finger stick to its transparent low-cost test menu. Nonetheless, lab selection remains predominantly in the hands of physicians and insurers with patient’s out-of-pocket payment accounting for less than 10% of all lab testing. Thus, the extent to which patient-focused benefits will prove disruptive remains questionable.

Founded in 2003 and first commercializing its systems in 2006, Theranos has spent the vast majority of its corporate history refining its technology in collaboration with pharmaceutical companies through clinical trials. It was not until very recently, in early 2013, that the company shifted its focus to general patient testing and began re-branding its corporate identity. Despite its recent public exposure and successful marketing campaigns, Theranos is still largely in an “awkward teenage phase”. As the company begins to address the countless barriers it will face expanding within this new market, its microfluidics-based platform (currently pending FDA clearance) and software support provide a tremendous upside for its future potential. Ultimately, while Theranos may serve as a catalyst in the overall shift towards consumerized healthcare, the company will likely face great opposition overcoming regulatory barriers and B2B dogma (e.g., Tesla’s direct sales). As John Henry states in Moneyball: The first one through the wall always gets bloody.

For more information on Theranos, read our full report here.

Author: Eric Lakin, Analyst at DeciBio Consulting, LLC
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