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Article link: http://www.wsj.com/articles/u-s-regulator-bans-theranos-ceo-elizabeth-holmes-from-operating-labs-for-two-years-1467956064

The July 7, 2016 Centers for Medicare and Medicaid Services ruling imposing sanctions on Theranos capped only one of its many pending woes, and obviously not in its favor. Theranos has 60 days from the date of the letter to appeal the CMS sanction decision in front of an Administrative law judge of the Departmental Appeals Board. No guarantee such an appeal will go in its favor. Based on data available at the CMS web-site (1), it looks like only a handful of sanction cases end up in appeal anyway (ranging from a low of 0 to a max of 4 per year from 1994 to 2010), and none of them seemed to have resolved in favor of the petitioner, i.e., ALJs tend to uphold CMS sanctions. So that approach doesn’t appear fruitful though that may not stop Theranos from going down that road. If it does, we’d have to wait for the outcome, which will take a minimum of at least a few months.

Meantime Theranos is facing a whole host of other problems, namely,

  • Class Action lawsuits: According to John Carreyrou, as of June 29, 2016, Theranos was facing a total of 8 potential class action lawsuits (see below from 2).
  • At least one of these lawsuits includes Theranos’ former partner, Walgreens (3), which may none too pleased to be dragged into a legal mess that it may well feel is of Theranos’ making. Could it itself file a lawsuit against Theranos on the grounds it was misled about the partnership? We don’t know at this moment but this may well be another major headache waiting in the wings.
  • Criminal and Civil probes, respectively, by the United States Attorney office in San Francisco and the U.S. Securities and Exchange Commission about whether or not it misled investors and regulators about its technology (4, 5, 6).
  • A US Congressional inquiry (see below from 7).

Currently, the lawsuits will likely cost a few thousand dollars for discovery, document preparations, filing motions, and sundry other paperwork. The probes and inquiry, while inconvenient and embarrassing, are unlikely to cost…at least initially.

On the other hand, with the CMS sanctions and the partnership termination by Walgreens that preceded it, Theranos currently has no revenue and this scenario looks unlikely to change for the foreseeable future. How long can it continue to pay out salaries and benefits to its purported >1000 employees? Whatever investor money it currently has is likely to run out fast. What work would most of those employees have anyway at this point when Theranos can’t operate as a clinical blood testing lab, given CMS’ sanction, and given it no longer has access to patients’ blood since Walgreen terminated their partnership? Carreyrou’s most recent article in the Wall Street Journal suggests employees had still been willing to give Elizabeth Holmes the benefit of the doubt until quite recently but even that faded when they heard the news of the voiding of two years of test results, a decision which apparently hadn’t been broadly shared with employees until they read about it in the news (8).

How long will investors wait patiently by the sidelines? What can investors recoup anyway? What assets does Theranos have? As things stand at present, outcome looks like a messy and costly end to Theranos.


1. https://www.cms.gov/Regulations-…

2. John Carreyrou (@JohnCarreyrou) | Twitter

3. Northern California Record, Wadi Reformado, July 4, 2016. Suit filed against Walgreens, Theranos over blood test results

4. Business Insider, Alexei Oreskovic, April 18, 2016. Theranos is now facing a criminal investigation

5. The New York Times, Reed Abelson, Andrew Pollack, April 18, 2016. Theranos Under Federal Criminal Investigation, Adding to Its Woes

6. The Wall Street Journal, Christopher Weaver, John Carreyrou, Michael Siconolfi, April 18, 2016. Theranos Is Subject of Criminal Probe by U.S.

7. Letter from the US House of Representatives, Committee on Energy and Commerce, dated June 30, 2016. http://democrats-energycommerce….

8. The Wall Street Journal, John Carreyrou, July 10, 2016. Under Fire, Theranos CEO Stifled Bad News