Let us ‘Democratize’ healthcare! Forget about your fear of needles- because massive amounts of data are now just a prick away from the tip of your finger! Say hello to Theranos!
Founded by Elizabeth Holmes in 2003, Theranos was a private American corporation. Holmes dropped out of Stanford at the age of 19 and launched Theranos. The company claimed to have revolutionized blood testing by developing testing methods that would require surprisingly small volumes of blood, such as that from a finger prick. Holmes’ concept would never have come to life without the machine that Theranos employees designed to run the blood tests called ‘The Edison’. These blood tests, as the company declared, could then detect diseases such as cancer, high cholesterol and diabetes with the help of the Edison. Holmes rose to fame in Silicon Valley after incorporating Theranos in 2003. The next few years were triumphant for Theranos. Even though the company wasn’t well known in its early days, Holmes raised $6.9 million in funding and Theranos achieved a valuation of $30 million by 2004. By 2007, Theranos had received another $43.2 million and Theranos was thus valued at $197 million- and in 2010 Theranos was valued at $1 billion. After a decade of working silently, the world was introduced to Theranos in 2013 through its website and press appearances. At the peak of her fame, Holmes was lauded as the world’s youngest female self-made billionaire worth $4.5 billion in 2014 due to her share in Theranos which was roughly valued at $10 billion.
Image courtesy: Forbes cover featuring Elizabeth Holmes
However, the question arises. How did Elizabeth Holmes manage to raise the huge amount of funds? Theranos’s notable investors included high profile people like Rupert Murdoch, the media mogul, and the billionaire families of DeVos and Waltons. These prominent investors allured by Theranos’s apparently ‘pathbreaking’ technology gave the company just the right amount of credibility required to attract several other investors. Holmes used this “borrowed credibility” to raise up to $945 million.
But the real reason for the short-lived success of Theranos wasn’t its revolutionary Edison Technology. In fact, it was Elizabeth Holmes.
She ticked off all the boxes in the checklists of Silicon Valley venture capitalists. She met the requirements of being a young entrepreneur who had dropped out of a prestigious university. By stating to the press that she had designed her whole life for Theranos and mentioning the fact that she only takes breaks to go for seven mile runs, she also satisfied the requirements of being obsessed with work and having an almost non-existent personal life.
Holmes also imitated her idol, Steve Jobs, and her obsession with him dictated a lot of her decisions. This affected her business decisions as well. She copied his turtlenecks and spoke in a low baritone which was different from her real voice. She also rode in a black Audi with no number plates — similar to Jobs who used to lease a new Mercedes every 6 months to avoid using number plates. She chose the advertising agency Chiat/Day as it was the same agency that Apple had used.
If all was so well and Theranos was successfully minting billions of dollars, what went wrong?
Well, as pathbreaking as the Edison technology may sound, the actual working of it was never made public, neither was the technology published for peer-reviewing in any medical journal. Holmes and Theranos’s PR teams conveniently deflected such claims by stating intellectual property concerns. On December 8, 2014, Ken Auletta of The New Yorker wrote in an article “What exactly happens in the machines is treated as a state secret, and Holmes’s description of the process was comically vague: “A chemistry is performed so that a chemical reaction occurs and generates a signal from the chemical interaction with the sample, which is translated into a result, which is then reviewed by certified laboratory personnel”.
A major development occurred in October 2015, when Wall Street Journal’s reporter John Carreyrou published an investigative report on Theranos. He discovered that the bulk of the tests at Theranos was done using older technology already developed by its competitors. The Edison Technology through which Holmes had enticed investors was used for just 15 out of the 240 tests claimed by the company in December 2014. Citing former employees and internal emails, Carreyrou wrote that the Edison machines were not as accurate as they claimed to be. One former employee accused Theranos of “failing to report test results that raised questions about the precision of the Edison system.”.
In response to this, she appeared on CNBC’s Mad Money and said that she was ‘shocked’ by the article and that Theranos had submitted over 1000 pages of statements and documents to refute their ‘false allegations’, but ‘the reporter’ still went forward with the story. When asked about doing the majority of the tests using regular machines, she replied that in 2015 they made a decision to extend their test menu to include all the speciality and esoteric tests, done on traditional machines which run very infrequently but cost a huge amount of money and so, Theranos made these tests available at an extremely low cost of just $2.99 instead of $10,000. The question that arises now is what she said in this interview was all about extending the range of tests, but what about doing just 15 out of the 240 tests that Theranos initially claimed to do on its Edison machines? In the video she never actually provides relevant facts to counter allegations, instead, she just elongates irrelevant points.
In a follow-up, The Wall Street Journal confirmed that The Food and Drug Administration has pressured Theranos to stop using its unapproved ‘nanotainer’ for all but one type of testing because of accuracy concerns, to which Holmes too admitted. On 27th October 2015, the FDA released two partially redacted Form 483 reports from a continuing investigation into Theranos which made public a few more problems with the company. As if the reputational loss wasn’t enough, Theranos suffered a major financial loss when the US supermarket chain Safeway dropped out of a deal with the company worth $350m. On January 25th, 2016, the Centers for Medicare and Medicaid Services sent a letter to Theranos stating that its Newark, California lab poses “immediate jeopardy to patient safety” and that the lab has been given 10 days to provide “acceptable evidence of correction”. It also stated that if the company doesn’t take immediate action, the lab could lose its certification (which would bar the lab from performing testing), or its approval for Medicare payments, or get fined up to $10,000 per day. The status of ‘Condition-level deficiencies’ are among the most serious CMS can make. Theranos responded by saying that the lab inspection “began months ago and does reflect the current state of the lab”. However, Walgreens, one of Theranos’s biggest investors still stopped all its testing at Theranos Wellness Center in Palo Alto only to go on terminating its relationship with the company in June. In July 2016, all the sanctions stated in the CMS letter were imposed along with banning Elizabeth Holmes from the blood-testing business for at least two years.
In October of the same year, Partner Fund Management(PFM), another one of Theranos’s largest investors sued it, accusing the MedTech giant of securities fraud “through a series of lies, material misstatements and omissions’’. In April 2017, Theranos settled with CMS by agreeing to stay out of the blood-testing business for two years in exchange for a reduction in its monetary penalty and the withdrawal of revocation of the company’s CLIA certificates. The following month, it also settled the lawsuit with PFM. However, the worst was yet to come.
On March 14, 2018, the Securities and Exchange Commission (SEC) charged Theranos, its founder and CEO Elizabeth Holmes, and its former President Ramesh “Sunny” Balwani with “raising more than $700 million from investors through an elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business, and financial performance”. Theranos and Holmes agreed to resolve the charges against them and in addition to a penalty, Holmes gave up majority voting control over the company and much of her stake in it. Balwani, however, claimed that he “accurately represented Theranos to investors to the best of his ability.”
In June the same year, Theranos announced that Holmes had stepped down as CEO but remained the chair of the company’s board. Minutes after this announcement, news came that Balwani and Holmes were indicted with 11 criminal charges: two charges of conspiracy to commit wire fraud and nine charges relating to actual wire fraud over allegedly engaging in a multi-million dollar scheme to defraud investors, as well as a scheme to defraud doctors and patients. Both pleaded not guilty. In September, following a failed bid to sell the company, new CEO David Taylor emailed shareholders saying that Theranos will dissolve.
Holmes’s trial was set to begin on July 28, 2020. But the COVID-19 pandemic worked in her favour and the trial got delayed till October 27th. In September of the same year, court documents revealed that she may seek a ‘mental disease’ defence in her trial. The trial, having already been delayed thrice till July 2021, had to be pushed further by six weeks when news of Holmes’s pregnancy surfaced in March 2021. In August, while another set of unsealed court documents revealed that Holmes was likely to accuse her ex-boyfriend and former Theranos executive Ramesh ‘Sunny’ Balwani of a decade long psychologically and sexually abusive relationship, more than 80 potential jurors were questioned for over two days in a San Jose courtroom to determine whether they would serve as fair jurors in Holmes’s trial. A jury of seven men and five women was selected, with five alternatives. Her trial began on August 31.
After 3 months, on 29th November Holmes finally told jurors about the abuse she suffered at the hands of ‘Sunny’. This severed the allegations against Balwani. After testimony from 32 witnesses, the criminal fraud case of Elizabeth Holmes made its way to the jury for deliberation for more than 50 hours.
Finally, on January 3, 2022, Elizabeth Holmes was convicted of one count of conspiracy to deceive investors and three counts of wire fraud. She was found to be innocent on three other charges of defrauding patients and one charge of conspiracy to defraud patients. The jury did not return a verdict on three additional charges concerning defrauding investors.
Holmes is scheduled to be sentenced on September 26, 2022. She remains free on a $500,000 bond until then. According to court records, while government attorneys plan to dismiss the three counts on which the jury returned no verdict, Holmes intends to urge the judge to overturn her convictions. If he does not, she is likely to file an appeal and request that her sentence be suspended until a final decision is made. With Balwani’s trial scheduled to begin in March, the fate of both Holmes and Balwani stays uncertain with them facing up to 20 years in prison, though experts say Holmes may be facing significantly fewer, given that she has no criminal history. Balwani, on the other hand, has sexual abuse allegations against him in addition to the fraud. Only time will reveal what the Theranos story has in store for us.
-Jatin Kulkarni, Mrunmayee Joshi and Siya Sharma
FY BSc. Economics