In $140M lawsuit, Walgreens claims Theranos ‘failed’ on every level

Most of the contents of a $140 million lawsuit Walgreens filed against Theranos last week have been unsealed. And the charges — at least the parts that haven’t been redacted — paint a picture of incompetency and deception.

“Theranos failed to meet the most basic quality standards and legal requirements of the contract,” says the filing, obtained with significant redactions by Ars Technica.

Deerfield, Illinois-based Walgreens sued in federal court in Delaware, the state in which Palo Alto, California-based Theranos is registered.

The suit seeks $140 million in damages, which Ars Technica reported was “rumored to be” the amount Walgreens had invested in the partnership.

Like an R-rated movie shown on broadcast TV, a lot of the good parts were cut out. Here’s an example.

In stating its case, Walgreens referred to the sanctions the Centers for Medicare and Medicaid Services slapped on the Theranos in July. CMS permanently banned Theranos from receiving Medicare and Medicaid reimbursements for lab services and barred CEO Elizabeth Holmes from owning, operating or directing a clinical lab for two years starting in September.

Walgreens terminated its contract with the diagnostics startup on June 12, one day after learning the extent of the problems at Theranos. According to the suit, Theranos voided or corrected “tens of thousands of tests without telling Walgreens it was doing so.”

After repeated inquiries about those tests, the suit said, “Theranos ultimately admitted to Walgreens on June 11, 2016 that 31,000 test reports offered to Walgreens customers were voided.” That is more than 10 percent of all reports generated during the Walgreens-Theranos partnership, the pharmacy chain claimed.

The relationship lasted about 5 1/2 years. According to the suit, Holmes’ company first approached Walgreens in January 2010 “with the promise of an innovative technology that would revolutionize blood testing.”

Holmes and then-deputy Sunny Balwani presented their case to Walgreens executives in March 2010. They promised that their proprietary diagnostic device — later named Edison — had been “comprehensively validated over the course of the last seven years by ten of the fifteen largest pharmaceutical companies” and was already in use by many pharma, biotech and research organizations.

There has been no evidence that the Edison technology had been in such wide use then, or ever.

According to the Walgreens account, Holmes and Balwani claimed that Theranos technology had been “validated under FDA guidelines” and that the company had begun the process of seeking Food and Drug Administration clearance for a consumer launch.

A summary presented to Walgreens in May 2010 claimed that FDA first reviewed the Theranos technology in 2005 and that the federal agency had offered an “endorsement” to begin clinical studies.

The same summary, Walgreens said, “represented that Theranos was positioned to receive approval to introduce its technology outside the clinical field.” Such settings included retail pharmacies, physician offices and direct-to-consumer sales channels.

Based on this summary and its own due diligence, Walgreens signed its first deal with the onetime Silicon Valley darling in July 2010.

The first Theranos installation at a Walgreens store, a single location in Phoenix, had a soft launch in March 2013. Six months later, the first official Theranos Wellness Center — and the only one outside Arizona — opened at a Walgreens in Palo Alto. By 2015, there were 41 such centers in operation.

But the whole house of cards started to collapse with the October 2015 publication of the first of a series of exposés in the Wall Street Journal.

In the immediate aftermath, Walgreens asked its testing partner about the Journal report. The suit said: “Theranos explained that it had decided to transition from finger-stick blood draws to the traditional venous draws while its blood-collection device was being reviewed for FDA approval. This was the first time Walgreens learned this information.”

The pharmacy chain said it had previously been unaware a CMS inspection of a Theranos lab in Newark, California. “Theranos did not cooperate with Walgreens’ requests for information,” the suit said. It turned out that the lab director, Dr. Sunil Dhawan, was only on site once a week and had no previous experience in any non-dermatopathology lab.

Walgreens also claimed it had observed similar secrecy about a lab in Phoenix.

From that point on, the relationship unraveled. Walgreens claimed Theranos repeatedly concealed federal inspection reports from Walgreens management, and the drugstore company had to learn of further deficiencies through media reports.

Theranos has denied the allegations in the lawsuit.

Photo: Kimberly White/Getty Images for Fortune