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4.13.16 | STAT News

By Steve Brozak

To read the entire article on STAT News, please click here.

Now that Theranos faces the prospect of a crippling ban on its operations by federal officials, let’s get past its implosion and talk about the real implications for the rest of the diagnostic sector.

Diagnostic technology, which is often at the center of medical care, has traditionally received little attention from investors. The Theranos debacle threatens to make investors even less likely to support diagnostic companies in the future, slowing innovation and delaying the introduction of life-saving tests.

The promise of the Theranos technology — to deliver the results of blood tests in minutes, not days — was a game-changer for medicine and the health care industry. Had it been realized, it would have revolutionized the diagnosis and treatment of many conditions.

Take infection as an example. When an individual develops a serious infection that may cost life or limb, blood, and other bodily fluids are tested. As doctors wait, sometimes for days, for results to come back, they begin treatment by guessing what might be causing the infection and starting an indiscriminate array of infection-fighting drugs. If they started an antibiotic to fight a bacterial infection, then later learn from a blood culture that a fungus is causing the infection, precious days have been lost.

Tests that can rapidly make accurate, specific diagnoses would transform the practice of medicine. And even though diagnostic testing is at the heart of many medical encounters, investors have traditionally been hesitant to seek out and invest in companies that focus on diagnostic tests. This is largely due to the fact that diagnostics aren’t as lucrative an investment as therapeutics.  Once approved, diagnostics also face countless hurdles and risks, from slow commercial adoption to fierce and sudden competition from larger players.  There are also fewer opportunities for diagnostic development.  In the past three months, for example, our firm has looked at approximately 30 companies developing therapeutics, but just four that are developing diagnostic technologies.

Theranos defied convention as an early-stage company. It attracted far more investment and media attention than its peers, because of its potential to disrupt an entire industry and its compelling origin story.

Such stories matter, even in business. The American Dream mythos is rooted in the works of Horatio Alger, a writer of popular rags-to-riches stories in the post-Civil War era. These were sagas of everyday people rising to great wealth through hard work, self-reliance, and determination.

The Theranos story fits this mold, albeit Silicon Valley style. Founder and CEO Elizabeth Holmes dropped out of Stanford at 19. She has several patents under her belt. She founded Theranos and ran it in stealth mode for almost a decade. Holmes said her new technology had the ability to diagnose illness by testing drops of blood pricked from a finger and run through a computer at warp speed. It would shave days off standard blood testing, calm patients terrified of needles, be accessible everywhere, including pharmacies such as Walgreens, and cost a fraction of the price of current lab tests.

Holmes was heralded as an iconoclast who would upend entrenched companies. Her story captivated the investor community, and her private company was quickly valued at several billion dollars.  She claimed Theranos technology was too proprietary to reveal, but a simple search of the US patent database reveals that what is on file is rudimentary.  The Wall Street Journal and other media organizations poked holes in claims that the Theranos technology was being widely used by her company for tests, cited inconsistent testing results when the equipment was used, and suggested that her secrecy was more protective of possible flaws in the system than her stylistic conceit.

The media attention lavished on Theranos obscures the fact that other companies are actually executing on the promise of faster diagnostic tests. Take, for example, T2 Biosystems, a small company based in Lexington, Mass., that has been quietly delivering better, faster testing.

The company makes a test that uses magnetic resonance imaging to detect the signatures fungal pathogens. The results are back in four hours; standard blood cultures take several days. This lets physicians identify almost on the spot the specific fungus causing an infection and determine the correct therapy from the beginning. This really matters for individuals who have fungal-induced sepsis, which is often fatal. It also means that doctors can use fewer and more specific drugs, potentially decreasing antibiotic and antifungal resistance. This technology might also be used to detect bacterial infections.

T2’s device is already being used in hospitals around the country. Thanks to its consistent results and the critical need for real-time diagnosis, the company is trying to expand distribution of the device. To do that, it must defy the institutional inertia of our medical system.

T2 Biosystems is fortunate for getting as far as it has with no fanfare. Other diagnostic companies may not fare so well in a post-Theranos world. It’s a shame that the fallout from Theranos will almost certainly make it difficult for diagnostic companies to raise capital long after we stop talking about its enigmatic founder’s fall from grace.

Steve Brozak is president of WBB Securities, an independent research and investment bank that specializes in the pharmaceutical, biotechnology, and medical device business segments. Neither the author nor WBB Securities have ever held any investments in T2 Biosystems.