Theranos and Walgreens: the Wellness Center partnership and its end

analysisThe counterparty in the Theranos agreements and lawsuits is Walgreen Co., an Illinois corporation based in Deerfield, Illinois (SEC Central Index Key 0000104207), which in a July 2018 filing named Walgreens Boots Alliance, Inc. as its corporate parent. Two companies listed as its subsidiaries in 2012 appear in the record: WVC Investments, LLC, a Delaware company that bought the Theranos convertible note, and Walgreen Arizona Drug Co., an Arizona company that was later sued with Walgreens Boots Alliance by Arizona patients; the Walgreens defendants denied the patients' allegations when they settled. Wade Miquelon, as WVC's President, signed the documents by which WVC purchased the note, and in the 2016 lawsuit Theranos argued that it owed the note obligation to WVC rather than to Walgreen Co. ^{1 2 3 4 5}

analysisThe partnership began with meetings in 2010 between Holmes, Balwani and Walgreens executives, which Wade Miquelon, Walgreens' former chief financial officer, described at Holmes's trial, saying Walgreens was very excited about the partnership, and Holmes testified that Balwani and some lawyers were involved in the negotiations, according to business news coverage of the trial; and Balwani told the SEC, in testimony quoted by the Ninth Circuit, that he built the company's financial model with Safeway and Walgreens from around 2010. According to Walgreens' complaint, as summarised by the Delaware court in 2017, Theranos sent Walgreens a Regulatory Summary on May 7, 2010 stating that its finger-stick technology had been approved for launch in clinical studies; relying on this and its own due diligence, Walgreens signed an initial Master Services Agreement on July 30, 2010, aimed at a blood-testing service in its stores nationwide. The HHS Departmental Appeals Board later found that the 2010 agreement said Theranos had developed devices that could run any blood test in real time, and that Theranos presented Walgreens with a "Medicaid/Medicare Opportunity". ^{1 2 3 4 5}

analysisThe June 5, 2012 Master Services Agreement provided for Theranos Wellness Centers inside Walgreens stores, where technicians would collect blood to be tested at one of two CLIA-certified laboratories owned and operated by Theranos. Walgreens agreed to pay an Innovation Fee of up to $100 million, paid in full under a December 2013 amendment, and to provide $40 million for a convertible note. The SEC's complaint, which does not name the chain, describes the same arrangement at a national pharmacy chain in 2012: after the chain raised concerns, the contract became a two-phase roll-out in which samples went to central Theranos laboratories until its analysers obtained regulatory approval. ^{4 6}

analysisThe pilot opened on March 20, 2013 in a Phoenix store, and on September 9, 2013 Theranos announced the roll-out; from late 2013 tests were sold to the public in Walgreens stores in Palo Alto and the Phoenix area, where, according to the indictment, patients paid Theranos, or Walgreens on its behalf; on the patient counts the jury acquitted Holmes and convicted Balwani. By the fall of 2015 there were 41 centres (40 in Arizona and one in California, according to trial reporting). A former Walgreens executive, Nimesh Jhaveri, testified about the roll-out; according to business news coverage of his testimony, Walgreens cut its roll-out goal from 500 centres to 200 in August 2014, and he said he had told Balwani that a plan to improve the patient experience was needed before any expansion. ^{1 2 3 4 5}

analysisWhat investors were told about the partnership is part of the fraud cases. The Justice Department said trial evidence showed representations that the centres would grow from a few dozen to 900 while Holmes and Balwani knew the relationship was stagnating, and the SEC alleged that Balwani, who managed the relationship with the pharmacy chain it calls "Pharmacy A", drafted projections assuming 800 or 900 of its stores by the end of 2015. After Balwani's conviction the prosecutor also said he had conspired to induce Walgreens to invest on the strength of false pharmaceutical endorsements and revenue projections. Arizona patients alleged that Walgreens itself promoted Theranos's "CLIA-certified laboratory services" in 2013; Walgreens did not admit liability when it settled their suit. ^{6 7 8}

analysisOn January 28, 2016, three days after CMS notified Theranos of immediate jeopardy at the Newark laboratory, Walgreens sent a notice of breach, according to the Delaware court's summary of Walgreens' complaint. Theranos replied on February 4 that many of the violations had been corrected and that the deficiencies were curable, and accused Walgreens of breaching the agreement by closing the California centre before the cure period expired. Walgreens terminated the agreement for cause on June 12, 2016 and closed all the centres. In May 2016 Theranos had issued corrected reports for every test run on its proprietary technology in 2014 and 2015. ^{1 2}

analysisWalgreen Co. sued in the District of Delaware on November 8, 2016, seeking repayment of the $100 million Innovation Fee and the $40 million paid for the note. In July 2017 a magistrate judge recommended denying Theranos's motion to dismiss the counts on the note and on the implied covenant of good faith. Theranos announced on August 1, 2017 that Walgreens would dismiss the suit with no finding or implication of liability; the terms were confidential, although a national newspaper had reported that the settlement was for less than $30 million. A second suit, filed under seal on July 2, 2018, ended on October 1, 2018 with a $5,000,000 judgment for Walgreens; a 2023 settlement document describes it as a judgment for payment arising from a settlement agreement, but the sealed complaint was not retrieved. ^{1 3 4 5 6}

analysisAfter Theranos assigned its assets for the benefit of creditors, Walgreens filed a claim on March 11, 2019, based on a promissory note and the judgment, which a 2023 settlement allowed at $45,000,000 for pro rata distribution. In the Arizona patients' class action, Walgreens Boots Alliance and Walgreen Arizona Drug Co. agreed to pay $44 million into a settlement fund, approved on February 6, 2024, while denying the allegations; the fund was intended to repay consumers about double what they had paid for Theranos tests. ^{6 7 8}

analysisAccounts of what Walgreens put into Theranos differ, partly because they measure different things: the court record shows the $100 million fee and the $40 million note, together $140 million, the figure in trial reporting; a start-up data publisher, citing a national newspaper, reports a $50 million investment, which does not match the note, and $140 million spent on the partnership; and in the criminal case the court awarded Walgreens $40,000,000 in restitution, the loss it found on the investment. ^{5 9 10}