Walgreen and the Biggest Biotech Startup You've Never Heard Of

A potential blockbuster partnership between Walgreen  (NYSE: WAG  ) and stealth lab diagnostic biotechnology firm Theranos recently went quietly under the radar as retail pharmacy chains continue to expand their service offerings into new territories.

Walgreen, alongside national pharmacy cousins CVS (NYSE: CVS  ) and Rite Aid (NYSE: RAD  ) , has made big strides in adding services aimed at filling in the widening primary care gap. Innovations like in-store medical clinics, expanded immunization programs, and other care services  have paid off significantly for investors as share prices of all three major chains continue to see robust gains since the start of the year.

While the positive impact of these innovative services is likely to continue, it appears for the moment that the competing pharmacy chains have reached an equilibrium on new programs. Walgreens, CVS, and Rite Aid each performing similar services in an effort to match competitors in the fight over market share.

The billion-dollar question going into the future for this space is now: Who will roll out the next big thing in pharmacy?

Pharmacy or health clinic?
I believe the largely unnoticed Theranos-Walgreen partnership could provide a major opportunity for Walgreen to break away from the rest of the pack and change how pharmacies integrate into the health care model.

While the line between physicians' clinics and pharmacies has blurred significantly in the last five years, pharmacies still lack a critical component in the clinical assessment of their patients: the ability to run blood tests to track health metrics and progress. Without this important piece of the puzzle, pharmacies ultimately rely on external sources and follow-up calls to piece together a patient's story.

Enter Theranos. Led by 29-year-old, Stanford University dropout Elizabeth Holmes, Theranos' exact intentions are intentionally shrouded in mystery. Very little public information is available concerning company specifics and goals. What is known is that Theranos claims its handheld blood analysis device can process a wide range of lab tests in a matter of hours with only drops of blood.

In short: The Walgreen-Theranos partnership could produce faster, less-invasive, and easily accessed blood tests in a large number of Walgreen drug stores.

These advantages (if true) would be huge news for Walgreen, transforming its pharmacies into disease management centers rather than solely medication dispensaries by eliminating many of the barriers that prevent pharmacies from performing diagnostic activities at scale.

A patient could potentially have lab tests performed at their local Walgreen pharmacy with a relatively complete picture of his/her health ready to be passed on in short order to their doctor as needed without need for a separate appointment. The same data could also be used for decision-making by in-store nurse practitioners and pharmacists or circumvent the need for a physician entirely in some cases.

Low hanging fruit
Most interestingly, in-store lab testing would open the door for Walgreen to dip into the lucrative lab diagnostic arena and contend with lab giants Laboratory Corp. of America  (NYSE: LH  ) and Quest Diagnostics (NYSE: DGX  ) . Even in the face of savings-driven reimbursement challenges, LabCorp produced more than $5.6 billion in 2012 revenue with third-quarter year-over-year net earnings climbing 3% between 2012 and 2013. Similarly, Quest Diagnostics posted 2012 revenues of $7.4 billion as Medicare plans continue to push over reductions in costs associated with lab testing.

Given the positioning and visibility of Walgreen's more than 8,000 pharmacies across the country, the ability to perform lab tests in even a relatively small group of Walgreen pharmacies could mean great news for Walgreen and potential competition for established companies.

Additionally, access to lab results could give Walgreen an opportunity to reach out to more patients for further engagement with other Walgreen products including increased prescription sales.

These are the obvious plays for Walgreens and Theranos that may jointly discover additional ways to leverage this highly unique relationship.

The future: Keeping eyes open
The only Theranos Wellness Center has been open for less than a month in the Palo Alto, Calif., area -- stay tuned, results are pending. 

While the opportunity for both companies is tremendous, it is yet to be seen how Walgreens intends to initially roll out its new partnered services or how it will integrate these services with existing products. If successful, it is likely we will see me-too efforts on the part of CVS and Rite Aid looking to match services for their patients. This development should remain a point of interest for investors following primary care and pharmacy market places.

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