Last night, Holmes' company, Theranos, announced that the Centers for Medicare & Medicaid Services will impose a raft of sanctions based on an inspection of Theranos' Newark, California, laboratory last year. The most striking penalty: a prohibition on owners and operators of the lab from owning, operating or directing a lab for at least two years. That would seem to indicate that Holmes herself can no longer own and operate either the Newark laboratory or Theranos' other laboratory in Arizona.
Yet Theranos' release contains no details regarding how Theranos would comply with this sanction, or how Holmes' role with the company will change. It certainly indicates that she's not stepping down. A Theranos spokeswoman did not immediately respond to an email or call for comment. A Theranos spokeswoman had no comment beyond the press release.
“We accept full responsibility for the issues at our laboratory in Newark, California, and have already worked to undertake comprehensive remedial actions," Holmes said in a prepared 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. 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 Centers for Medicaid & Medicaid Services sanctions had been previously telegraphed. The bad news for the Theranos is that the company does not seem to have been able to moderate their severity at all. In addition to some sanctions specific to hematology tests, they include:
- Revocation of the laboratory's certificate under the Clinical Laboratory Improvement Amendments, a 1988 set of regulatory standards. This automatically means owners and operators of the lab are banned from owning, operating, or directing a lab for at least two years.
- A civil money penalty (Theranos does not say how much).
- A plan of correction
- Suspension of the laboratory's approval to receive any payments from Medicare and Medicaid.
That's a sweeping rebuke of Theranos' competence at running a laboratory, and a major setback to its ambitions of providing cheaper and more convenient blood tests. One big question is whether any of the restrictions will spill over into the running of the company's Arizona laboratory, which is still serving patients. The other, of course, is whether Holmes can keep running Theranos, of which she has a controlling stake (although, as explained below, this gets complicated.)
Sources close to the company say Theranos does not expect Holmes role to change. One potential path forward would be for Holmes to remain in control of the company, but to firewall herself off from day-to-day operations of the laboratory, instead focusing on research and development efforts that her supporters say are her first calling. The question is whether this would fully satisfy the requirements of the ban. Who is the "owner" here? Is it Holmes, Theranos' controlling shareholder? Is it Theranos? I don't know. Past experience with Theranos would indicate that the company and government regulators will probably have different readings of the sanctions. It's also possible Theranos could appeal the sanctions, although Theranos announced no plans to do so in its release. In fact, although the sanctions don't take effect for 60 days, Theranos says that it will stop all testing at the Newark laboratory immediately.
One thing the news doesn't alter: Forbes' estimate of Holmes net worth, which we lowered from $4.5 billion to zero on June 1. We reasoned that Theranos, which its investors valued at $9 billion, was likely worth less than one-tenth that much, and that Holmes' investors have preferred shares for which they get paid first. That means she might net nothing in a sale of the company.
One piece of bad news after another has battered Theranos over the past year. The Securities and Exchange Commission and the Department of Justice are looking into the company. Theranos has announced no progress in getting more approvals from the Food and Drug Administration for its technology, leaving it approved only to use it to perform a test for herpes. All the while, Theranos has not done the one thing that would alleviate some of the heat: make its data public in a way that would allow doctors and scientists to scrutinize it.
It's tough to see how this story could be spun. Brooke Buchanan, a crisis PR person and former John McCain press secretary, was brought on board late last year to help control the public relations mess, reporting directly to Holmes. She left Theranos three weeks ago.
Holmes herself plans to make a presentation about the company's technology at the annual meeting of the American Association for Clinical Chemistry in August. This in itself is highly unusual -- usually companies recruit outside scientists to make such presentations based on independent data analyses. But despite this, the world will be watching for clues about the big question about Theranos' technology: what is actually there?
