Walgreens freezes partnership with Theranos amid testing fallout

Theranos' Palo Alto, CA, headquarters--Courtesy of Theranos

Theranos is standing at the bottom of a slippery slope after The Wall Street Journal published articles last week questioning the company's testing methods, sparking backlash from consumers and lab experts. But the news also set off red flags in the minds of Theranos' partners, as drugstore chain Walgreens Boots Alliance ($WBA) says it won't open any new Theranos blood-testing centers until the startup clears up questions surrounding its technology.

Although talks between Theranos and Walgreens are still underway, the Deerfield, IL-based drugstore chain has "no concrete plans at this stage" to expand its partnership beyond the 41 stores in Arizona and California that include Theranos' "wellness centers," a Walgreens official told the WSJ. A team from Walgreens requested to meet with senior Theranos execs including founder and CEO Elizabeth Holmes at Theranos' Palo Alto, CA, headquarters in light of a WSJ article showing that the company's proprietary lab instrument only handled a small portion of tests sold to consumers at the end of 2014.

Walgreens officials were also spooked by a follow-up story in the newspaper that said that Theranos had stopped collecting tiny vials of blood drawn from finger pricks for all but one of its more than 200 tests after the FDA paid the company a surprise visit in August and September. The agency found that "nanocontainers" manufactured and used by the company to collect samples were unapproved medical devices, and told Theranos that the company must have the devices officially approved before use. Walgreens had no idea that the FDA even paid Theranos a visit, people familiar with the matter told the WSJ.

Now, the drugstore giant is forming a small team to investigate the matter and look at legal and scientific questions raised by the two WSJ stories. "We're trying to figure out where we are and what we do going forward. We need to understand the truth," the Walgreens official said, as quoted by the WSJ.

Theranos is remaining characteristically elusive about the talks, with the company's general counsel, Heather King, telling the newspaper that "Walgreens is our business partner and we meet with them regularly. … Our partnership with Walgreens has been a positive one, realized through our program in Arizona, and we are continuing to work with them on future opportunities and arrangements." Walgreens and Theranos teamed up in 2013, allowing Theranos to open its blood-test centers in Walgreens pharmacies in Arizona and California.

Theranos CEO Elizabeth Holmes

Still, the move could deal Theranos a crushing blow as it attempts to forge on with business even in light of the recent fallout. If Walgreens doesn't expand its partnership with Theranos, the company would have to "start selling in physicians' offices or establish a separate collection network," a move that would "likely need a lot more capital," Piper Jaffray analyst William Quirk told the WSJ.

Theranos relies on deals with partners to get its tests to consumers, although it's pushing for a direct-to-consumer model that would allow individuals to order tests without a doctor's permission. In July, the company won FDA clearance for its herpes test, a win as it attempts to unseat business models laid out by rivals such as Quest Diagnostics ($DGX) and LabCorp ($LH).

Meanwhile, Theranos continues to strike back at the WSJ stories, with Holmes last week calling the publication a "tabloid magazine." But the newspaper is standing by its reports, saying that "nothing said at the conference by Ms. Holmes refutes the accuracy of the reporting done by John Carreyrou or of the articles, which were subject to the Journal's rigorous and careful editing process."

- read the WSJ story (sub. req.)

Special Reports: Top women in medical devices 2014 - Elizabeth Holmes, Theranos | Top 10 Medical Device Venture Capital Deals of 2010 - Theranos