Theranos represents the promise and the pitfalls of the start-up era, as money floods into young companies with new technologies in an effort to find a “unicorn” — a billion-dollar business that transforms its industry and makes its backers rich in the process.
Theranos and Ms. Holmes in particular offered a compelling narrative: a brilliant student who dropped out of college to pursue an audacious idea that would upend the medical testing business, performing multiple tests at low prices using only a finger prick of blood. By last year, Theranos had a valuation of about $9 billion.
Ms. Holmes invited comparisons with the Apple co-founder Steve Jobs because of her youth, her tight control of the company she founded, and even her customary black turtlenecks.
The Centers for Medicare and Medicaid Services, which regulates laboratories, reviewed its practices last year and found numerous deficiencies, including one that posed “immediate jeopardy to patient health and safety.” That apparently referred to erroneous results in a test of blood clotting used for patients who take the blood thinner warfarin.
Theranos made two submissions to the agency of corrective actions. But in its letter to Theranos, dated Thursday, the regulator said the company’s second submission “again does not constitute a credible allegation of compliance” and had not “abated the immediate jeopardy.” The 33-page letter cited numerous examples of the company’s failing to demonstrate that it had corrected a problem.
Theranos said late Thursday and again on Friday that it was shutting down and rebuilding its California lab “from the ground up,” and bolstering its personnel and training there. Theranos said it would stop patient testing at the facility immediately, even before the sanctions take effect, but would continue to work with regulators to resolve the issues.
“We accept full responsibility for the issues at our laboratory in Newark, Calif., and have already worked to undertake comprehensive remedial actions,” Ms. Holmes said in a statement.
Jane Pine Wood, a lawyer specializing in the regulations of laboratories, said companies could appeal such sanctions and typically do. In most cases, that leads to a settlement that allows the laboratory to continue to operate. But this case may be unique, she said.
Ms. Wood, a partner at the firm McDonald Hopkins, said that in cases in which there was no settlement and the appeal went to a hearing before an administrative judge, laboratories “almost never win.”
But Theranos would not lose its license for the California lab, or its ability to operate the Arizona lab, until after the appeals process is exhausted, buying it some time.
Even if the company can continue to operate the Arizona lab, the business there has shrunk. Walgreens, with which Theranos had a deal to perform tests, pulled out of the partnership last month and closed the Theranos blood collection centers that were in about 40 of its drugstores in the Phoenix area. Now Theranos must rely on a handful of collection sites it owns itself.
The sanctions could put pressure on Ms. Holmes to step aside, though it was not clear if that could happen without her consent, given her control of the company. Even if she stepped aside as chief executive, the ban on Theranos operating laboratories might still apply.
It is also unclear who could or would take her job.
“The company was so tightly controlled by her and Sunny Balwani that there is no clear executive you can name who can take over while she is banned for two years,” said Jondavid Klipp, publisher of Laboratory Economics, an industry newsletter. Mr. Balwani was the chief operating officer at Theranos until he resigned in May.
Mr. Klipp said that even if Theranos continued to operate its laboratory, “it’s hard to imagine why a physician would send a patient to a Theranos lab when there are established, reputable choices.”
One option for the company would be to sell blood-testing machines to other laboratories, rather than operate its own laboratories. It hinted at this on Friday, saying the laboratory was just one of its business units and that “its research and development unit has developed many technologies that are not dependent on running a laboratory.’’
It said that the problems found by regulators were primarily in the laboratory operations, not with the company’s proprietary blood testing technology.
Still, if it wants to sell equipment to other labs, Theranos would have to prove that its technology really worked. There is great skepticism on that front because Theranos has not published data about its technology’s performance. Ms. Holmes is scheduled to present such data at a laboratory conference on Aug. 1.
Ms. Holmes began the company in 2003 after dropping out of Stanford at the age of 19. Eventually she settled on the goal of creating a new way to perform blood tests that relied on a few drops of blood rather than the larger amounts medical testing often required. Tests would be cheaper, the argument went, and more people would be inclined to get them.
In interviews focused on Theranos’s success, she said the idea came from her fear of needles.
The idea had appeal. Theranos won backing from tech luminaries like the software mogul Lawrence J. Ellison, and the company counted Henry A. Kissinger, a former secretary of state, and a former Senate majority leader, Bill Frist, among its advisers and directors.
But some people questioned the reliability of the tests, including former Theranos employees who took their concerns to federal regulators. Ms. Holmes defended the company publicly, especially after articles last year in The Wall Street Journal enumerated those concerns.
Still, federal inspectors found deficiencies in the Newark laboratory that could lead to inaccurate results, including inadequately trained employees and samples stored at the wrong temperature.
Theranos promised to overhaul the plant and bring in a new slate of experts to fix its problems. It also voided or corrected numerous results from many tests it performed in the past.
In April, Theranos said it was under criminal investigation from the Justice Department and disclosed another inquiry from the Securities and Exchange Commission.
Ms. Holmes said in the statement that the company was committed “to demonstrating our dedication to the highest standards of quality and compliance.”
An earlier version of this article misstated the results of a review last year of practices at a Theranos lab. Authorities found that all patient results from a particular blood-clotting test administered from April to September were inaccurate; they did not find that all patient test results were inaccurate.