Theranos, Walgreens Reach Deal to Settle Lawsuit--Update

By Christopher Weaver Features Dow Jones Newswires

A seven-year relationship between Theranos Inc. and Walgreens that soured into a costly feud for the drugstore giant will soon come to a close.

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Theranos has told its investors it has reached an agreement in principle to settle a lawsuit by Walgreens Boots Alliance Inc. that had alleged the embattled laboratory startup breached the companies' contract, people familiar with the matter said. Walgreens' stores once hosted about 40 Theranos blood-testing centers, providing a main conduit to consumers.

The pact would mean Walgreens' alliance with Theranos cost the drug retailer well over $100 million. In its suit, Walgreens had sought to recover the full $140 million it put into the partnership, including a $40 million convertible-debt note and a separate payment as part of an effort to expand the partnership.

The tentative agreement calls for Theranos to pay Walgreens less than $30 million, according to some of the people familiar with the matter. The pact hadn't been completed as of late Tuesday and terms could change, the people said.

Representatives for Walgreens and Theranos declined to comment.

In its November 2016 suit, Walgreens alleged Theranos misled it about the state of the lab firm's technology as they formed their partnership, and about the firm's growing legal and regulatory challenges throughout 2016. Theranos has called the allegations "unfounded."

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Separately, Theranos told investors in a series of recent meetings that it had about $54 million in cash left as it sought to resolve claims, people familiar with the matter say. The Walgreens pact would further bite into that remaining supply of money. Theranos also carries insurance policies that could cover certain claims, court records show.

Theranos has been burning through its cash. In January, it had about $187 million, according to an investor document made public last month in a court filing. The firm has been spending about $10 million a month since, much of it on legal costs, as it cut staff to about 170 from around 900 late last year, according to people familiar with the matter and the court filing.

The company also spent about $5 million to settle allegations by the Arizona attorney general that it had misled consumers, and $10 million in connection with an agreement with another investor, legal records show. It settled a lawsuit by former investor Partner Fund Management for an undisclosed amount in May, the company said. People familiar with that confidential agreement said the amount was between $40 million and $50 million.

Theranos has said the lawsuits against it were without merit and it has denied the Arizona attorney general's allegations.

Theranos still faces a civil investigation by the Securities and Exchange Commission and a criminal investigation by the Justice Department, according to court filings.

In a series of meetings with investors in recent days, Theranos said it planned to ask some existing shareholders to loan it an additional $50 million, people familiar with the discussions said. As of Monday, that planned deal hadn't been completed, one of the people said.

It isn't clear which investors may have been approached about the offer or whether any had agreed to do so. Theranos also plans to seek to raise $150 million to $200 million in a funding round next year, some of the people said.

Theranos has retracted nearly one million medical-test results since regulators found problems early last year with its lab practices that they said put patients in danger, a court filing shows. After lab regulators barred Theranos from running medical labs for two years last summer, the company said it developed new blood-testing devices to sell to third-party lab operators. It hasn't yet sought regulatory approval for these devices.

Walgreens had once viewed the partnership as a key pillar of its strategy to use its brick-and-mortar footprint to diversify into more areas of health-care services. Theranos had claimed it could do dozens of tests on a few drops of blood and Walgreens hoped to one day put its devices in its stores.

Walgreens kicked off its relationship with Theranos in 2010, including with an internal party at the drugstore corporation's Deerfield, Ill., headquarters, company documents show.

At the gathering, one Walgreens executive recited, to the tune of the John Lennon song "Imagine," lyrics urging listeners to imagine a world where blood tests could be done without pain, a person who was there recalled.

The relationship became strained as both parties blamed the other for delays, and Walgreens managers became frustrated that Theranos repeatedly limited their access to its labs, data or devices, people familiar with the matter have said. The two companies finally rolled out their Phoenix-area pilot in late 2013.

After The Wall Street Journal first raised questions about Theranos's technology and capabilities in October 2015, Walgreens said it would halt the nationwide expansion of the partnership.

But it kept the Theranos testing centers at its Phoenix stores open for months and patients continued to receive blood tests there. Some Theranos patients later alleged that both Theranos and Walgreens misled them about their tests' accuracy. The cases are pending in an Arizona federal court, where a judge last week threw out some of the claims and asked the plaintiffs to amend others. The companies are fighting the suits and have said they are without merit.

In June 2016, Walgreens abruptly ended its partnership with Theranos after executives grew frustrated they were learning of regulators' concerns from news reports, according to people familiar with the matter.

Write to Christopher Weaver at christopher.weaver@wsj.com

(END) Dow Jones Newswires

June 21, 2017 13:18 ET (17:18 GMT)