How Walgreens enabled Theranos

The growth virus can infect century-old corporations the same as SV startups

Ranjan here, and I’d like to talk to you about Theranos.

I’ve long been obsessed with this story, to the point of a borderline creepy fascination with Sunny Balwani back in 2016. John Carreyrou's Bad Blood was one of the best books from last year, and I just started listening to ABC's The Dropout podcast. There is still one part of the story where the explanation is thoroughly unsatisfying:

How did Walgreens miss this?

There was every possible red flag for Walgreens. They hired multiple 3rd parties who cautioned against proceeding. The ABC podcast tells a great story about a meeting at Theranos HQ with the Walgreens' team, where they were never allowed to speak to a scientist, see a lab, and Balwani even accompanied people to the bathroom. They never saw a machine in action, yet committed tens of millions and put people's lives at risk. How does a $60 billion corporation miss something this glaring?

Walgreens and Flu Vaccines

The question triggered the memory of a recent discussion with some high school friends. Yes, this chat took place in a WhatsApp Group, and I will preface this by saying we are not Anti-Vaxxers, but we were indeed discussing the flu vaccine. One of the guys had gotten the flu even after getting a flu shot, and a doctor in the group explained the vaccine's efficacy is ~50%, but that percentage plays a huge role in preventing outbreaks.

Naturally, the MBA types in the group gravitated to the question of "who is making money off of this", and after a few Google searches, we were all self-proclaimed experts in the business of healthcare. It turned out Walgreens discovered the lucrative idea of having pharmacists, who are already present at the stores, administer certain procedures and tests, starting with the flu vaccine in 2009. It worked really well. From a 2013 piece:

Earlier this week, Walgreen reported January sales rose more than 6 percent to $6.15 billion thanks in part to a 25 percent increase to 6.9 million the number of flu shots stores have administered since January of 2012. Meanwhile, CVS’ fourth-quarter 2012 earnings released earlier this week also benefited from increased flu vaccinations during the epidemic.

Much of the growth can be attributed to the ability of pharmacists to administer flu shots. That was generally not possible until fall of 2009 when several states issued special waivers to allow pharmacists - rather than just doctors and other health professionals - to administer seasonal and H1N1 vaccines amid fears of a pandemic.

Walgreen and CVS took advantage of the crisis to convince a growing number of state regulators that pharmacists should be allowed to have the expanded role as a way to save lives and potentially money by getting more Americans flu shots from an army of pharmacists.

It was a perfect illustration of how a tiny regulatory change, resulting from a lot of lobbying, combined with a healthy dose of business acumen, can open up a whole new profit center.

So what does this have to do with Theranos?

That point above kept coming back to me while listening to the almost unbelievable nature of how Walgreens got scammed. They started making money on flu vaccines in 2009 and as that business grew, they began exploring the Theranos partnership in 2011, pushing it live in 2013. Blood-testing seemed like a perfect followup market to execute the same playbook. Push the regulatory envelope and allow for your pharmacists to engage in procedures previously restricted to doctors:

It turns out Carreyrou had alluded to this connection in a 2016 piece:

After quickly building a fast-growing vaccinations operation, Walgreens saw potential in the medical-lab business, where lab-focused companies generated more than $30 billion in revenue in 2014, according to Census Bureau estimates. Walgreens believed it could upend the industry by combining its store network with Ms. Holmes’s technology.

The Theranos partnership took root in 2010 after a chance meeting at a health-technology conference between Ms. Holmes and Jay Rosan, an executive in Walgreens’ health-innovations unit, people who worked on the deal say. Serious talks between the companies were under way by early 2011.

Walgreens' first attempt at this model worked so well, they jumped headstrong into the next market where they could replicate this strategy. They threw aside every naysayer and obvious warning in pursuit of growth, even though there was real human cost, like a woman's bloodwork having her mistakenly diagnosed with a cancer remission and a patient given diabetes treatment for a non-existent condition.

Also, remember, it was the Walgreens partnership that really launched the Theranos rocketship. The company had raised $80 million through 2010, but in interviews in the ABC podcast, investors involved in the massive $200 and $350 million rounds in 2014 and 2015 were sold because of the partnership. Holmes is a villain, but it was Walgreens that took her from a Techcrunch feature to a TIME magazine cover. It should never have happened.

Transformational growth is a helluva drug

Venture-backed startups need to grow fast, and we've collectively allowed a lot of leeway in the traditional tech startup world. The Theranos saga already raised questions about how this becomes more dangerous when it comes to healthcare startups and people's lives are on the line. But it's important to remember that the same growth-at-all-costs mindset can just as easily permeate a corporate giant, where we assume there are hundreds of checks and balances in place to prevent these disasters. We often view growth that’s incremental on a percentage basis is somehow safer than the exponential kind. This is a good reminder that's not always true. Maybe it's good to look at the absolute, where it’s still billions of dollars in revenue being chased.

A big part of this was also a non-traditional healthcare provider getting involved in the space. As Americans all look to the Bezos-Dimon-Buffett trifecta to save us, we need to remind ourselves that for all the inefficiencies and frustrations of the current U.S. healthcare system, the business motivations underlying these transformative efforts should be thoroughly questioned. It's our lives at risk. Health initiatives where the true innovation is regulatory arbitrage should be questioned even more so.

HBO's The Inventor is next up my queue. I still can't get enough of this story and think it's because it serves as a perfect reminder that even the most rich and powerful among us can be kind of stupid. But, as you marvel at the absurd behavior in Silicon Valley, remember that very similar motivations drove Deerfield, Illinois to play a pretty important role in this story too.

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What I’m Reading

Sticking to the theme of healthcare this week, these are two articles definitely investing some time into.

The Death of the Calorie: From 1843 (the Economist's bi-monthly magazine) on the history of the calorie, which introduced me to my new favorite term: "Bomb Calorimeter":

In the 18th century Antoine Lavoisier, a French aristocrat, worked out that burning a candle required a gas from the air – which he named oxygen – to fuel the flame and release heat and other gases. He applied the same principle to food, concluding that it fuels the body like a slow-burning fire. He built a calorimeter, a device big enough to hold a guinea pig, and measured the heat the creature generated to estimate how much energy it was producing. Unfortunately the French revolution – specifically the guillotine – cut short his thinking on the subject. But he had started something. Other scientists later constructed “bomb calori­meters” in which they burned food to measure the heat – and thus the potential energy – released from it.

Death by a Thousand Clicks: Where Electronic Health Records Went Wrong: This Fortune article is the most comprehensive piece since the 2013 Steven Brill TIME classic that changes how I think about the American healthcare system, as well as utopian tech dreams gone wrong:

Today, 96% of hospitals have adopted EHRs, up from just 9% in 2008. But on most other counts, the newly installed technology has fallen well short. Physicians complain about clumsy, unintuitive systems and the number of hours spent clicking, typing, and trying to navigate them—which is more than the hours they spend with patients. Unlike, say, with the global network of ATMs, the proprietary EHR systems made by more than 700 vendors routinely don’t talk to one another, meaning that doctors still resort to transferring medical data via fax and CD-ROM. ­Patients, meanwhile, still struggle to access their own records—and, sometimes, just plain can’t.