Theranos Lab License Yanked, Elizabeth Holmes Suspended

Theranos founder Elizabeth Holmes in 2015. (Stuart Isett/Fortune Global Forum)

The feds finally lowered the boom on Theranos.

The Centers for Medicare & Medicaid Services has revoked the blood-testing company's license to operate its Newark, California lab and barred founder and CEO Elizabeth Holmes from owning, operating or directing a lab for at least two years. CMS also cancelled the Newark lab's approval to receive payments from Medicare and Medicaid. (The news first broke when Theranos released a statement last night announcing the sanctions.)

The harsh, even crippling federal sanctions resulted from an inspection of the lab last November. That inspection found numerous deficiencies in the lab's operations, including problems with a blood-clotting test that were potentially life-threatening.

CMS had threatened the penalties in April but gave Theranos a chance to respond. In the interim, Theranos voided or corrected tens of thousands of blood tests, sending notices to doctors and patients in May.

“We accept full responsibility for the issues at our laboratory in Newark, California, and have already worked to undertake comprehensive remedial actions," said Holmes in a statement. "Those actions include shutting down and subsequently rebuilding the Newark lab from the ground up, rebuilding quality systems, adding highly experienced leadership, personnel and experts, and implementing enhanced quality and training procedures.

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"While we are disappointed by CMS’ decision, we take these matters very seriously and are committed to fully resolving all outstanding issues with CMS and to demonstrating our dedication to the highest standards of quality and compliance.”

The tone of CMS' 33-page missive detailing Theranos' failure to mitigate the inadequacies of its lab reads like a school administrator's report to the parents of a kid about to get kicked out of school. Despite five separate submissions containing what Theranos said were proof of corrections, CMS asserted that response was "not credible." Among the problems CMS found with Theranos' filings was a lack of proof of the company's claims that patients were unaffected by tests not meeting quality control standards. CMS also dinged the firm for not finding the cause of quality control failures and for making "contradictory statements in the submissions (that) call into question the reliability of the information contained in the submission."

CMS spokesman Aaron Albright said in an email that Theranos could "begin negotiations" with the agency. Any agreement would be based on the ability of Theranos to "remove immediate jeopardy," he said, as well as other factors like the severity of the stipulated deficiencies and "the overall compliance history of the laboratory."

That does not sound particularly hopeful for Theranos, but it does have two rounds of administrative appeals available to it, which could delay some of the penalties, including the revocation of the Newark lab's license. The company has 60 days before the revocation takes effect, to decide whether to appeal.

Theranos has ceased operations at the problematic Newark lab but still operates a testing facility in Arizona. However, that may also be in jeopardy, according to the Journal, which reported Theranos could potentially be barred from operating any labs. If and when sanctions are imposed, the Journal said, "Holmes could no longer own shares of any private company operating laboratories. ... . If she remains with the company, Theranos could be forced to shut down the Arizona lab, lawyers say. "

Speaking to the paper, Geoffrey Baird, associate professor in the University of Washington's department of laboratory medicine, said CMS' action is especially harsh.

"I can't think of anything this severe ever happening to a clinical laboratory of this size and scale," Baird said. "I think the company will have to show [Holmes] the door somehow, which might not be possible under the current governance. This is so rare, and essentially unprecedented in a company of this size, that it is hard to know exactly how they will proceed. Personally, I believe she is obligated to step down immediately.”

Dr. Norman Paradis,  a professor of medicine at Dartmouth, who has consulted for both diagnostic startups and biomed investors, agreed that the magnitude of the penalty could be one-of-a-kind.

"I've never heard of a penalty this severe," he said in an email. "I'm surprised that they could not have avoided this in light of the new involvement of experienced people and renowned attorneys."

In April, Theranos hired a number of experts for its medical advisory board. High-powered lawyer David Boies represents the company and also serves on its board.

Rapid Fall

It's hard to believe that, at this time last year, Theranos was riding high, having raised as much as $750 million, with its latest round of funding valuing the company at around $9 billion. Holmes herself was estimated to be worth $4.5 billion, putting her at the very top of Forbes' list of "richest self-made women." (Besting even Oprah.)

Holmes and the company she founded in 2003 had risen to prominence on its claim of having devised groundbreaking technology that required only a finger-prick's worth of blood to test for an array of diseases and conditions, all at an extremely low cost. Holmes frequently used the language of patient self-empowerment to portray her company as a disruptor of the highly profitable diagnostic-testing industry.

But in late October, The Wall Street Journal published a pair of investigative articles citing anonymous former employees who claimed Theranos' technology, which the company dubbed "Edison," did not work as advertised, and that Theranos may have cheated on required proficiency testing. That was followed in January by the partial release of the CMS report, which stated the situation at the Newark lab could cause "serious injury or harm, or death, to individuals served by the laboratory or to the health and safety of the general public.”

That assessment seemed to buttress the opinion of some scientists who had complained about Theranos' failure to publish evidence that its technology actually worked, which is the usual route to acceptance by the scientific community. And the bad news just kept coming:

  • Negative reaction caused Hillary Clinton to move a scheduled fundraiser hosted by Holmes at Theranos headquarters.
  • A published study said some of Theranos' test results were significantly off.
  • Federal prosecutors and the SEC launched investigations into the company.
  • A flurry of consumer lawsuits were filed.
  • Spokeswoman Brooke Buchanan, who had helmed press relations for John McCain's 2008 presidential campaign, left the firm.
  • Walgreens shut down all Theranos centers within its stores.
  • Forbes said Holmes' net worth had dropped to zero.

Coming up next: a scheduled appearance by Holmes at the American Association for Clinical Chemistry's annual meeting, Aug. 1 in Philadelphia. There, Holmes is slated to present "Reproducibility and correlation data for various tests comparing Theranos’ capillary collection and storage device with traditional venipuncture methods." In attendance will be hundreds of laboratory medicine experts and academics, well-qualified to endorse or debunk whatever Holmes presents. From Kimberly Weiseul of Inc. last month:

[Holmes] may actually face a somewhat sympathetic audience, says Dr. Patricia Jones, the president of the AACC and the clinical director of chemistry for the Children's Medical Center in Dallas.

"I've talked to all sorts of members of our organization since we announced that she's speaking," says Jones. "There's some real excitement that we're going to get to see what she's doing, and there are some who say it's all smoke and mirrors, and she's not going to show us anything."

While "everyone is concerned," Jones also says, "I think for the most part people are willing to give her the benefit of the doubt, even at this point."

Well that was last month's "this point." Next month's "this point" may be a whole other story.

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