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An Uncertain Future Awaits Theranos and CEO Elizabeth Holmes

Federal regulators have banned Theranos CEO Elizabeth Holmes from owning or operating a lab for at least two years. The announcement has big implications for the executive and a once well-respected tech company that has been become embattled in regulatory probes.

GettyImages-505658023-compressorThe Centers for Medicare & Medicaid Services (CMMS) said in a public letter on July 7 that it would impose sanctions on Theranos as its Newark, California lab was not in compliance with the Clinical Laboratory Improvement Amendments of 1988 (CLIA). CMMS conducted a survey at Theranos in 2015 and noted the company was out of compliance with five CLIA Condition-level requirements and numerous CLIA Standard-level requirements. As a result, CMMS said in the letter that it was revoking the lab’s CLIA certificate, limiting the lab’s certification for hematology, and suspending the approval to receive Medicare or Medicaid payments.

Theranos responded in a web statement that it is working closely with CMMS to resolve the sanctions and noted that the CMS review pertains to its lab and “not its technologies.” Theranos also said that “the company will continue to carry out its mission” under Holmes as CEO.

“Holmes was slow to disclose problems and she continued to put a positive spin on the company even as Theranos’ regulatory and legal troubles mount[ed].”

The company has the right to appeal and the sanctions as they will not take full effect until September. Starting on July 12, Theranos will also be fined $10,000 for every day it is out of compliance with the recommendations on how to run the labs. In the meantime, Theranos said it will not conduct any patient testing at the lab until further notice. It said it will shut down and rebuild the lab “from the ground up” with quality systems, experienced leadership and enhance the quality and training procedures. In the meantime, Theranos said it will provide services to customers through its lab in Arizona which still holds a CLIA certificate of compliance.

As most CEOs step down when they are a risk to the company, it remains to be seen exactly how Holmes will continue to run the company if Theranos doesn’t win the appeal.

Holmes was slow to disclose problems and she “continued to put a positive spin” on the company “even as Theranos’ regulatory and legal troubles mount[ed],” The Wall Street Journal reported. In April, federal prosecutors launched a criminal investigation into whether the company misled investors about its operations and technology. Theranos also faces at least eight consumer lawsuits seeking class-action status. Walgreens also left a partnership with the company to provide collection centers at its stores in Phoenix.

David Nichols, president of consulting group Nichols Management Group said in an article at the New York Times that such sanctions are “virtually unheard-of” in the industry and that he “doesn’t see a path forward for the company.”

Even if Holmes were to step aside, it’s uncertain who would take her place. Jondavid Klipp, publisher of Laboratory Economics, told the New York Times that the company was so “tightly controlled” by Holmes and former chief operating officer Sunny Balwani that there likely isn’t an executive to take over for the next two years. Holmes was noted for her strong culture secrecy that some compared to Steve Jobs at Apple. Vox.com noted that the company’s secrecy, as well as not bringing products to market soon enough, is what ultimately led to its demise.

Balwani departed the company in May among rising regulatory probes. Even if a new CEO came in, the reputation damage alone is already significant. “It’s hard to imagine why a physician would send a patient to a Theranos lab when there are established, reputable choices,” said Klipp.

To better understand how to handle a crisis should you find yourself in the middle of one, here are some additional articles you might also like to read:

Lessons for CEOs from Mary Barra’s Ordeal

Grading VW’s Mathias Müeller: 6 Takeaways for All CEOs in Handling a Crisis

How to Survive an Ethics Crisis

 

 

About Craig Guillot

Craig Guillot
Craig Guillot is a business writer based in New Orleans, La. His work has appeared in Wall Street Journal, Entrepreneur, CNNMoney.com and CNBC.com. You can read more about his work at www.craigdguillot.com.