Los Angeles, CA July 8th 2014 – In today’s issue of USA Today, culture and technology writer Marco della Cava sits down with Elizabeth Holmes and examines her highly disruptive start-up, Theranos. DeciBio and I are excited to be mentioned for our ongoing coverage of the Silicon Valley company and analysis of its future opportunity in the lab diagnostic industry. Read the article here: Change Agents: Elizabeth Holmes wants your blood.While I fundamentally believe that Theranos has the potential to revolutionize lab testing, my previous DeciBio article began to articulate key hurdles Theranos will face in its future endeavors to rollout nationally and justify a $9 billion valuation. Below I have summarized topics from my conversation with USA Today, including the “list of next step hurdles” referenced in the article. As a disruptive medical technology enthusiast, I have highlighted my reflections on Theranos, informed by my current research on the company, experience as a Theranos patient, and prior work with leading medical diagnostics companies. DeciBio’s in-depth profile of Theranos, analyzing the company and its market opportunity, will be available in the fall of 2014.While it is easy to see the advantages publicized by the company and highlighted in many positive articles, it is important to get an objective evaluation to truly understand this company’s future prospects. With a valuation of $9 billion the potential value must be understood in the context of the opportunities and barriers relative to Theranos rather than it’s geographic or non-industry peersIn the context of industry peers, such as Quest Diagnostics ($8.5B) and LabCorp ($8.6B) this valuation implies that Theranos, with only early beta-testing sales, is potentially worth more than either. You'll note that each of these two top players have revenues in the $6 - 7 billion range; their low revenue multiples are driven by low profit margins, especially for routine testing. Also worth considering is that compared to its partner Walgreens, this implies that Theranos’ burgeoning lab service business is worth ~13% of that of Walgreens, the largest drugstore chain in the world ($72.2B in 2013 sales).Ultimately, however, the lab diagnostic testing market is highly fragmented, presenting a substantial opportunity for an innovative company such as Theranos to gain market penetration within the ~$60 billion industry. Within the lab diagnostics market two main segments exist, provider based testing and reference lab testing. Theranos is currently restricted to only the reference lab market, where samples are sent out of the provider network to a third party (company) who conducts the tests at its own lab facilities. In order to truly access the entire market, Theranos will need to overcome some crucial barriers to scale from its modest foundation.One of the largest hurdles Theranos will have to address is the massive infrastructure requirement necessary for a national expansion. Currently relying on a single high-complexity CLIA lab in Palo Alto, the company will likely face infrastructure pressures similar to that of Quest and LabCorp to transport its samples. While Theranos’ partnership with Walgreens presents a large opportunity for patient service centers, aligning with Walgreens’ “Well Experience” initiative, the infrastructure to handle massive sample logistics remains a significant concern.Although Theranos’ key value add is the small sample size requirements, this advantage from a business model perspective faces several hurdles, including: technical challenges to make its “nanotainer” menu all encompassing, specialized labor requirements to draw blood in a clinical setting (even for a finger prick), and various state regulations for clinical testing. Additionally, expanding this infrastructure may present challenges without FDA approval for Theranos assays. While the fact that Theranos tests are classified as LDTs has allowed the company to circumvent certain government oversight and gain early market access, this may serve as a restriction in their national rollout strategy.Theranos, despite all of this, has the potential to be a highly disruptive company in the lab diagnostics market, especially if their pricing transparency leads to dramatic changes in lab diagnostic reimbursements. The company has done a tremendous job at gaining exposure with patients and spreading awareness, but there are still a number of barriers to be overcome before the company can make healthcare truly accessible to patients. With current efforts to realize the dream of “personalized medicine”, Theranos may play a critical piece in this puzzle. Recent advancements in genetic sequencing, which allow individuals to gain new insights about their biological underpinnings, is another exciting piece in building the holistic image of patient health. But, as with all puzzles, it often takes time to collect these pieces and put them together in a meaningful way.Check-back in September to read DeciBio’s full report on Theranos.---Author: Eric Lakin, Analyst at DeciBio Consulting, LLClakin@decibio.comConnect with Eric Lakin on Google+https://plus.google.com/+EricLakin