Actg312 Bitter Blood: The Rise and Fall of Theranos

Bitter Blood: The Rise and Fall of Theranos

Angela Avalos

Golden Gate University

ACTG 312.C1

December 10, 2018

Healthcare is one of the largest growing industries in the world. The industry is a multifaceted complex powerhouse that generates trillions of dollars in revenue each year. One of the driving forces behind this growth is technology. Through innovations in technology, healthcare has evolved to change the world and how we live in it. The evolution continues today with major tech companies crossing over and wanting to develop the next great idea. One of those companies included Theranos, a diagnostic medical startup based in Silicon Valley. They claimed that they were able to provide a comprehensive analysis using significantly less blood than used for the traditional tests. They were able to raise $700 million from venture capitalists and private investors, and debuted their product in one of the largest pharmacy drugstores. Unfortunately, the company’s success was built on false claims and insufficient technology. For over a decade, they were able to deceive the public, their investors and most importantly, their customers.

Theranos was founded in Palo Alto in 2003 by a young Elizabeth Holmes. Holmes always had dreams of becoming of a billionaire and overachieved throughout her life. She started her first business in high school, which was selling computer programs that translated code to Chinese schools. She went on to study chemical engineering at Stanford, and in her second year she started, “Real-Time Cures” which was later change to “Theranos”, which is the mixture of both words- therapy and diagnosis. The company initially started as the idea of a wearable patch that could test blood as well as administer the correct dosage for the identified ailment. It would also notify any variables or concerns to the patients’ doctor. The scientific advances at that time were not sophisticated to operate as initially planned, but her vision evolved into- “Edison”. The Edison would draw a couple drops of blood from just a finger prick which was collected in a “nanotainer”, and sent to the lab for analysis. The testing would use a pinprick of blood and be used for 70 different blood tests as comprehensive enough to test for a range of conditions from diabetes to some kind of cancers. Holmes dropped out of Stanford when she was just 19 to focus on building the future for Theranos, with the mission of modernizing the future of healthcare.

Theranos raised more than $700 million from venture capitalists and private investors. The funding came from an array of investors, the high donors including: The Walton Family (heirs to Walmart), Rupert Murdoch (chairman of News Corp), and Betsy DeVos (Secretary of Education). Even with the variety of donors, the group lacked the medical expertise but were eager to be a part of medical technology history. It was the charm and allure of founder, Elizabeth Holmes that allowed the investors to accept her truth at face value without asking the right questions or for more details about proving the success of the technology.  Theranos reached a valuation of $9 billion in 2013 making Holmes the youngest female self-made millionaire with unique attributes that sold everyone on her perceived success. Holmes was obsessed with Steve Jobs; founder of Apple and it was apparent in many aspects of her professional and personal life.  She was often wearing a signature black turtleneck, and was known to mimic his management styles and techniques, she often referred to Theranos’ blood testing as the “iPod of healthcare”. Holmes also had an uncharacteristically deep voice that attributed to her sense of success and confidence. It was with these features, Holmes was able to manipulate and influence the support that brought Theranos into existence.

At the height of their success, Theranos partnered with Walgreens in 2013. Walgreens is the second largest pharmacy drugstore chain in the US with almost 10,000 locations, operating for over a decade. The collaboration would have brought cutting edge technology to a familiar institution that many of us have grown up with. Theranos offered in-store blood tests at 40 Walgreen locations with plans to expand to wellness centers all over the US. Their blood testing technology could have revolutionized the medical industry- if it was true. The deal with Walgreens went live without any validation to ensure Theranos’ test results were accurate. At that time, Theranos hadn’t published any data on its technology and kept a secretive position on their methods. This should have been a concern for Walgreens, however it overlooked the lack of information in order to keep the deal from being moved to another drugstore chain.

Other partnerships that were developed with Theranos included Capital Blue Cross, Cleveland Clinic, but most notable with Safeway. The partnership included $350 million that went into building clinics within 800 of its supermarkets. The initial phase of their relationship displayed some red flags. Safeway requested blood testing using their employees at the Theranos’ headquarters in Palo Alto. During the testing, they often had to draw the same blood twice, the first using only a finger prick and then with the traditional needle in arm.  The test results were unimpressive and varied greatly amongst the Safeway employees. For one Safeway executive it suggested prostate cancer, but thankfully the retesting result from another lab came back as normal. Due to the inconsistencies, missed deadlines and failed testing, Safeway terminated the partnership. The clinic now operates to dispense flu shots and other travel- related vaccines.

Within the Silicon Valley, the term “unicorn” is used to describe a privately held start-up company that is valued at $100 billion. According to CB Insights, as of August 2018 there were 260 “unicorns” in the world, and some of those include: Uber, Airbnb, Pinterest, and Lyft. Many investors are jumping to be a part of the early stages of these companies because they don’t want to miss out on the next revolutionary company. Tech start-up companies have the mentality of “fake it till you make it”, which preaches upcoming companies to think big and disrupt the industry.  While using the same mindset, Holmes had confidence and assertiveness, but lied and covered up the limitations of the technology used at Theranos.  

While Holmes had won over in the initial investors, there were some who were skeptical about Theranos’ ability to test for such a wide range of conditions.  There was an absence of peer reviews validating Theranos’ technology, which raised some skepticism but were brushed off by Holmes’ attempt to keep trade secrets confidential. According to American Academy of Family Physicians, a peer review is a meaningful evaluation of clinical practices, that promotes the quality of health care. The US Food and Drug Administration or FDA, is a federal agency that is responsible for “protecting and promoting public health through the control and supervision of food safety”. They also review and provide approval and clearance for medical devices. In 2015, the FDA reported numerous concerns with the Theranos’ technology, and the previously mentioned, “nanotainer” collection process. They did however, approve the finger stick blood test for herpes. This accomplishment validated the success of Theranos, but didn’t stop the accusations questioning the accuracy of the lab tests. It was later discovered that the blood testing through their device ‘Edison’ couldn’t provide reliable results so it was running its samples through traditional blood testing companies and passing it off as their own work. These allegations grew and sprouted doubt in the minds of investors and consumers and ultimately led to the downfall of Theranos.

The initial break in the case came from Wall Street Journal’s investigative reporter, John Carreyrou. Carreyrou worked gathering information with several Theranos employees who blew the whistle to state regulators. One notable employee, Tyler Shultz exposed his concerns with the blood testing to protect the health of the patients and the reputation of his grandfather, who was a highly regarded member of the Theranos’ board of directors.  He quit his job after he discovered that Theranos had failed quality-control checks and doctored research and claims for more favorable outcomes. The release of information didn’t come without a price, Shultz was accused of sharing trade secrets and violating a non-disclosure agreement to keep confidentiality. It has also led to an estranged relationship with his grandfather, who still supports and believes in the company’s practices and is good friends with Holmes. Shultz wasn’t the only one at the company to raise concerns about the quality of the tests, it was almost known as an inside joke among employees. Theranos was able to continue this way for so long is because they were a private company, and didn’t follow the same regulations as public companies. They also provided employees with limited information as they were able to keep test results concealed from the executives, software engineers and marketers. Whenever the validity was questioned, Holmes and COO Ramesh Balwani would belittle and threaten the employee.

At the beginning of 2016, Theranos was sent a letter by the Centers for Medicare & Medicaid Services (CMS), a federal agency that oversees healthcare programs. The letter indicated that the “laboratory posed immediate jeopardy to patient health and safety”. The report from the CMS states major deficiencies including unsatisfactory test performance and laboratory training.  At the time, Theranos was recorded selling 1.5 million blood tests to more than 175,000 customers in the state of Arizona from 2013 to 2016. It was later that Theranos acknowledged that the 2 of those years of results were null and void.  Apart of their settlement with CMS they were ordered to pay $4.65 million back to their customers as retribution for the faulty tests. In addition to the reimbursement, they also had to pay fines for civil penalties and attorney fees. Lastly, federal regulators banned the lab and revoked its certification for two years. It also includes the ban of founder, Elizabeth Holmes from owning or operating a laboratory for that time period as well.