A Healthcare Revolution Could Be Brewing At Your Local Drugstore

How a small California company and the nation's largest drugstore chain plan to turn the lab testing industry upside down.

May 4, 2014 at 1:00PM

Revolution is an overused word. But in this case, it's entirely appropriate.

Although you might not be familiar with Theranos yet, you likely will hear plenty about the company over the next few years. Theranos has developed a revolutionary new technology that could turn the diagnostics industry upside down – and this revolution is picking up steam thanks to the company's partnership with giant drugstore chain Walgreen (NASDAQ:WBA).

Elizabeth

Theranos CEO Elizabeth Holmes. Source: Theranos

Reinventing the lab test
What is this great new product? Theranos says that it has reinvented the lab test. That's no exaggeration.

In today's world when lab work is needed, you'll typically face one of two scenarios. Your blood could be drawn at your doctor's office then sent to a diagnostic lab. Alternatively, your doctor might send you to a nearby lab, where they'll draw your blood. Either option usually includes needles, a vial of blood, several days of waiting for the results to be sent to your doctor, and a not insignificant amount of money.

Theranos developed a process where diagnostic testing can be done on as little as one-thousandth of the amount of blood needed for standard lab tests. No big needles are necessary – just a pin-prick does the trick. The small drop of blood is placed into what the company calls a "nanotainer".

Analysis of the blood sample can be completed within hours rather than days. Theranos sends results to the doctor within minutes of finishing the diagnostic process. Patients also can view those results online.

More patient-friendly, more physician-friendly – but more costly? Not at all. Actually, Theranos charges less than 50% of regular Medicare and Medicaid reimbursement rates. Lab test costs are quite transparent. They're all listed on the company's website, from $1.55 for a urine analysis test to over $358 for a panel of respiratory virus tests.

Coming to a city near you
While Theranos' technology is impressive, the quick turnaround hits speed bumps when the company's labs aren't located nearby for patients. That's where Walgreen comes into play.

Walgreen Store

Source: FoolEditorial on Flickr 

The two companies announced plans in September to roll out Theranos' lab testing centers to Walgreen drugstores across the U.S. Palo Alto, California, became the first location for the new centers. Over the past few months, Walgreen has launched the Theranos centers in 10 additional stores in Arizona.

This is just the start. Walgreen plans to ultimately expand the labs to more stores across the nation. The chain currently counts over 8,100 neighborhood drugstores. Walgreens executive Kermit Crawford said that the partnership helps the company in its "efforts to transform community pharmacy". 

Opportunity knocks?
You say you want a revolution -- or at least a piece of one? Unfortunately, ordinary investors can't scoop up shares of Theranos – at least, not yet. However, buying shares of Walgreen stock could present an opportunity to profit as the new lab tests catch on.

Walgreen has already integrated health care clinics into 400 of its stores and plans to add another 100 locations this year. The partnership with Theranos should complement this strategy and help attract even more customers. Don't expect any near-term catalyst in Walgreen's stock, though. It will likely take a while to incorporate Theranos centers into a large number of the pharmacy chain's drugstores.

Some investors might think that short-selling the current big players in lab testing could be another way to play the growth of Theranos' tests. Quest Diagnostics (NYSE:DGX) and LabCorp (NYSE:LH) command 12% and 10% of the overall lab testing market, which totals around $60 billion annually. Theranos might eventually knock these two giants off their perches, but there are several reasons that short-selling these two stocks looks like a good way to come up short.

First, there's the matter of the length of time for Walgreen to roll out Theranos centers. Second, neither Quest nor LabCorp sport high valuations that short-sellers prefer. Third, many doctors could continue using Quest and LabCorp simply because they always have done so – regardless of the lower costs and quicker turnarounds.

Of course, payers could push doctors to use Theranos because of those lower costs. Private insurers would probably be the first to move, but Medicare and Medicaid could ultimately change reimbursement policies that result in a disruption to the industry. These payer-initiated efforts might not happen quickly, though.

For now, investors hoping to win from Theranos' great new technology should probably stick with the Walgreen approach. Just remember that revolutions sometimes brew longer than the revolutionaries would like.

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Keith Speights has no position in any stocks mentioned. The Motley Fool recommends Quest Diagnostics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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