As GEN went to press, a federal grand jury indicted Elizabeth Holmes and Sunny Balwani, charging them with nine counts of wire fraud and two counts of conspiracy to commit wire fraud. The charges stem from allegations Holmes and Balwani engaged in a multimillion dollar scheme to defraud investors, and a separate scheme to defraud doctors and patients.
Holmes reportedly has quit her position as the CEO of Theranos but is keeping her seat on the board.
The rise and fall of Theranos, the blood-testing company founded and led by Stanford University dropout Elizabeth Holmes, doesn’t qualify as tragedy, for tragedy requires the ruin of a noble character.
Instead, as a newly released best-selling book suggests, the Theranos story is a cautionary tale.
The book, Bad Blood: Secrets and Lies in a Silicon Valley Startup, is by investigative reporter John Carreyrou, who broke the Theranos story for the Wall Street Journal back in 2015. Besides detailing the questionable goings-on at Theranos, Bad Blood warns that Silicon Valley–style hype—which is hardly unique to Theranos—can result in harm beyond the rhetorical. It can waste enormous amounts of time and money. Even worse, it can take a sinister turn and threaten people’s lives—especially if it impacts the world of biotechnology.
The story begins with Elizabeth Holmes. She managed to convince many powerful people that she had created a way to run hundreds of laboratory tests on a finger prick’s amount of blood. She was so persuasive that the Theranos blood-testing technology was used on blood samples collected in a consumer setting. And Theranos attained a market valuation in excess of $9 billion.
But the technology she claimed to possess never existed.
So how did she do it? How did she convince so many people into believing her claims? To answer that question, Carreyrou interviewed more than 150 people, including more than 60 former Theranos employees.
Lies, Damned Lies, and Business Development
Like any entrepreneur, Holmes was optimistic about her technology. But while bottomless optimism may serve well in the Silicon Valley world of software tech startups, such optimism in the biotech universe can cause the most profound harm if it is backed by lies.
“All entrepreneurs are optimists,” Rodrigo Martinez, chief marketing and design officer at Veritas Genetics, tells GEN after reading Bad Blood. “Otherwise, why would they think they would be able to do something that is very difficult to do?”
Nonetheless, he stresses that there is a line between projecting a positive image (also known as putting your best foot forward) and spreading lies.
As Carreyrou shows throughout Bad Blood, Holmes did more than indulge in optimism, she also projected a positive image that depended on secrecy. She never revealed the true state of her company’s technology.
When she flew to Switzerland in 2006 to demonstrate her blood-testing system for pharmaceutical manufacturer Novartis, the test result was obtained by rigging the system to display a previously recorded result. She pulled this sham demonstration on more than one occasion.
At one point, prospective investors came to believe that the Theranos blood-testing system was being used by the U.S. military, which was not the case. The investors saw the relationship as proof that the Theranos technology worked, so they bought in.
While courting a major drug store chain for a business deal, Theranos stated in an email that the company had a commercially ready laboratory and a blood-testing system that could perform nearly 200 blood tests, neither of which was true. Even when the pharmacy chain began offering Theranos blood tests to patients in 2013, it was unaware that no device existed that could perform hundreds of blood tests on a drop of blood. In truth, the blood samples were being shipped back to the Theranos lab in Palo Alto, CA, and analyzed on either the company’s faulty, proprietary blood-testing system or modified commercial blood analyzers.
Holmes also skirted regulations by enlisting the help of Sunny Balwani, her top senior executive. For example, during a lab inspection, Balwani made sure the state inspector never saw the area of the lab that held the proprietary blood-testing devices. Theranos also played loose with proficiency tests, which regulators use to verify the accuracy and reliability of a lab’s testing.
“If you lie about an app that people download to play on your phone or lie about an app that allows you to order pizza three minutes faster than the other one, fine. The market will make a correction for that,” says Martinez. “By doing that, you don’t play with people’s lives.” In contrast, Martinez continues, Holmes really did play with people’s lives, because she was promoting a nonexistent healthcare technology.
Investors, board members, reporters, and others believed the falsehoods for a variety of reasons, one of which was the charisma and charm Holmes exuded. From the perspective of Holmes’ close college friend, Carreyrou writes, “she had this intense way of looking at you while she spoke that made you believe in her and want to follow her.” At one point, the board of directors was inclined to remove Holmes as CEO, but then she reversed the board’s decision by using “just the right mix of contrition and charm.”
Holmes created an illusion of success by surrounding herself with powerful, successful people, even in the early days of Theranos. Aside from the fact that no one on the board had relevant industry or scientific expertise, the board did not serve the function of a true board. Case in point, when a board member brought up a concern, he was asked to resign rather than communicate the concern to the rest of the board.
Another reason the Theranos charade went on for so long was Holmes would silence anyone who raised concerns. For example, chief financial officer Henry Mosley was fired on the spot when he pointed out to Holmes that they were deceiving investors. When Balwani joined Theranos, he helped Holmes quash anyone who raised red flags by marginalizing or firing them.
Red Flags Waving
While Holmes had many people duped or silenced, there were other corners of the industry that saw the red flags waving vigorously. “We all talked about it, like how weird was it to have a board where you don’t have one single person that actually has experience in the business that you’re trying to disrupt?” Martinez says. “I mean, it’s completely nonsensical.”
For Martinez, the role of the board is one of the biggest lessons learned from the Theranos saga. “It definitely made me think more deeply about how I could do a better job as a board member,” he insists.
For David G. Grenache, Ph.D., chief scientific officer at TriCore Reference Laboratories, the claims themselves were a red flag. “I read about what they were doing, or claimed that they could do, and the first words that came out of my mouth were, ‘That’s impossible,’” Dr. Grenache tells GEN. “Most people who have made a career in laboratory medicine had to have had the same reaction,” and they must have doubted the “fantastical claims about doing hundreds of tests off one drop of blood.”
“That’s not achievable with our current technology, so either she invented some really amazing device, or it was nonsense,” Dr. Grenache adds. “I was just stunned at the claims that they were making, at the prices that they could charge, and that she was getting all of this attention without any science or data to back it up.”
The lack of peer-reviewed studies was a clear warning that Theranos’ claims were dubious. Noted in Bad Blood, Theranos had only one peer-reviewed paper, which was published in Hematology Reports, but the data was for “just one blood test from a grand total of six patients.” Dr. Grenache describes the data as “underwhelming.”
One group of researchers did evaluate the Theranos blood-testing technology. The researchers published a rigorous peer-reviewed study, but only because they wanted to use the Theranos methodology.
“We loved Theranos,” Eric Schadt, Ph.D., who was one of the study co-authors, tells GEN. He is the founder and CEO of Sema4, a health information company. “When we first noticed that there weren’t any publications, we did think that it was very odd, and then we sort of thought, you know, why don’t we just do this.”
So, Dr. Schadt and his colleagues conducted a head-to-head study comparing the Theranos technology to standard-of-care laboratories LabCorp and Quest. They found that Theranos test results were 1.6 times more likely to be outside the normal range compared with the other laboratories [Kidd, B.A. et al. “Evaluation of direct-to-consumer low-volume lab tests in healthy adults.” J. Clin. Invest. 2016; 126(5): 1734–1744].
“A lot of decisions are made based on what those test results are, and the fact that the Theranos tests were biased in this direction of making you fall outside of the range was definitely troubling because it would trigger all sorts of potentially unnecessary interventions,” Dr. Schadt points out. He adds that the need to do such a study was, in hindsight, a red flag. “From the Wall Street Journal story, it did become strikingly clear that this should have been flagged by somebody long before we even wanted to do this study.”
A Cautionary Tale
The truth about Theranos came out in 2015 through a series of Wall Street Journal articles by Carreyrou. Theranos, Holmes, and Balwani have since been charged with fraud by the U.S. Securities and Exchange Commission. The tale of Theranos now serves as a cautionary one for investors, the media, and anyone else eyeing a biotech startup.
Bad Blood Author Says Theranos Put Patients’ Lives in Harm’s Way
John Carreyrou, a two-time Pulitzer Prize-winning investigative reporter at The Wall Street Journal, is the author of Bad Blood: Secrets and Lies in a Silicon Valley Startup, published in May by Alfred A. Knopf. GEN’s editor-in-chief, John Sterling, recently interviewed him to gain some additional insights on the Theranos story.
GEN: As the Theranos debacle began to unfold, the image of Enron came to mind. Amazingly, in reading your book, I learned that Elizabeth Holmes’ father once worked at Enron. How does the downfall of Theranos compare to that of Enron?
Mr. Carreyrou: One thing I’ll clarify is that in my reporting, I found no evidence that he had anything to do with the shenanigans at Enron. He was there only for a couple of years before Enron blew up, and I don’t think he was anywhere close to the inner circle of those people involved in the bad stuff. But it is a kind of a colorful coincidence that he worked there.
How does it compare to Enron? That’s a good question. Knopf in some publicity material has called it the biggest corporate fraud since Enron, and that’s not an exaggeration in the sense that Enron was bigger. At the time, it was the seventh largest company in the United States, either by
market cap or revenues. Obviously, the market cap was larger. Theranos’ biggest market cap was in early 2015 at $10 billion. So more money was at stake with Enron. Investors lost more money and more investors lost money.
What puts Theranos on the same plane, if not on a higher plane, is that it wasn’t just a corporate fraud. It’s also a corporate fraud where the two perpetrators, Elizabeth Holmes and Sunny Balwani, were totally cavalier about the public’s health and basically didn’t hesitate to put patients in harm’s way and lives in the balance.
That’s a dimension that Enron didn’t have. Aside from losing people’s money, Enron’s biggest impact on people’s lives was contributing to some power disruptions in California. To me, in some ways, Theranos is an even bigger scandal than Enron.
GEN: I’ve been reporting on biotech since 1983, and I’ve always been struck by the hype and the hoopla and (paradoxically) the secrecy involving startups. What role did this hype culture play in helping to get Theranos as far as it did?
Mr. Carreyrou: On the jacket of my book, Theranos is referred to as a biotech. But was it really a biotech? It was a blood diagnostics company. When I think of biotech, I think of companies working on biopharma drugs, which are notoriously hit-and-miss. So biotech has always been a risky game. Theranos is different in that it’s not about a company developing a biopharma drug. It was a company that was developing a blood testing device.
This is a long way of saying I’m not sure that Theranos falls into the biotech category. At the same time, I do think that Elizabeth made a fatal mistake in modeling herself after Steve Jobs, Apple, and traditional Silicon Valley. That Silicon Valley is a descendent of the microprocessor industry from the ’50s and ’60s, which then became the personal computer industry and then the internet industry and now the smartphone revolution.
To me, the traditional Silicon Valley has not involved medicine. Elizabeth modeled herself after traditional Silicon Valley and the fake-it-’til-you-make it approach and the secrecy around Steve Jobs’ Apple. But even though Theranos wasn’t a traditional biotech, she would have done better to emulate, for example, some of the biotechs clustered in South San Francisco, like Genentech, because they’ve been doing real medical science.
She picked the wrong industry. Everyone accepted the way she framed herself as a traditional Silicon Valley tech founder. And that was her downfall because she either lost sight of (or didn’t care about) the fact that when you’re working on a medical product, the end consumer is the patient.
GEN: Was there anyone, for example, a scientist or a business executive, who raised an early red flag about Theranos and its claims?
Mr. Carreyrou: I have had people come to me before and since the book was published saying that they had suspicions from afar. Two biotech venture capitalists came to my book signing at Kepler’s Books in Menlo Park last week and said that they knocked on Theranos’ door back in 2014 and were going to have a meeting with Elizabeth, but first they were meeting with lower-ranking people. When they started asking a lot of technical questions and drilling down, they were told that the meeting with Elizabeth was cancelled. Suddenly, she couldn’t fit them in her schedule.
I know also that Sequoia Capital back around 2014 put in a call and inquired if they could have a look. The response that came back from Elizabeth was that she wasn’t interested because she didn’t need any money.
There was a lot of suspicion in various quarters, but no one had any proof. In February 2015, John Ioannidis, a professor at Stanford University’s medical school, published a skeptical op-ed about Theranos in the Journal of the American Medical Association. [Editor’s Note: The article was titled “Stealth Research—Is Biomedical Innovation Happening Outside the Peer-Reviewed Literature?”]
A professor [Eleftherios Diamandis] at the University of Toronto published another skeptical piece [“Theranos phenomenon: promises and fallacies”], which appeared in Clinical Chemistry and Laboratory Medicine in May 2015. But no one had the goods. You know, no one. People were sort of whispering that they had doubts, but no one had the goods to prove it until I came along.
GEN: As recently as 2016, at the American Association of Clinical Chemistry (AACC) meeting, Holmes was still publicly defending her company. How do you explain this behavior?
Mr. Carreyrou: I think her performance at AACC was her Hail Mary attempt to restore her reputation and prove to the world that Theranos wasn’t an empty shell, that it had actually been working on something. But ultimately, what she showed, which was the latest iteration of the MiniLab, fell super-short of the claims she had made.
Eighteen months later, in January of this year, she finally came out with a paper on the MiniLab in a peer-reviewed scientific journal. As I note in the epilogue of my book, the study was done with venous blood, regular quantities of venous blood drawn from the arm, so once and for all the empress was proven to have no clothes.
As to why to this day she is still digging in her heels? She’s now accepted, as of a few weeks ago, that Theranos is going to be liquidated, but she is telling people she’s going to start a new company.
Elizabeth doesn’t realize how outraged people are by her behavior and by what the company has done. It doesn’t seem to have sunk into her that she put tens of thousands of patients’ lives at risk. She has been telling people for two years that she feels persecuted and that the press and Silicon Valley have been taking her down, and that I’m evil for having made all of this happen.
To me, it’s symptomatic of someone who is unbelievably narcissistic, who can see only the consequences on themselves and who can’t see the bigger picture of the harm they’ve wrought.
GEN: Do you think that the Theranos disaster will make it harder for female entrepreneurs to succeed in biotech and raise venture capital?
Mr. Carreyrou: I don’t think so. I don’t think it should. Elizabeth Holmes is an outlier, and most people will be smart enough to realize this. In fact, although I don’t have any empirical data to prove this, I would say that on average women are more ethical than men and less inclined to cut corners and do wrong.
Women are coming up in Silicon Valley. Inevitably, as more and more do, some of them, as is the case with men, will be bad apples. And Elizabeth was certainly a bad apple.
GEN: Can Silicon Valley entrepreneurs and investors draw any major lessons from the Theranos story?
Mr. Carreyrou: As I alluded to before, the major lesson is that there is increasingly a convergence of medical innovation in the traditional Silicon Valley. A lot of people from there are saying, “We want to disrupt healthcare.” If anything, that convergence is going to intensify.
The Theranos scandal is a warning that people in this area, which is referred to as health tech, need to remember that the end user is the patient. Your product will have an impact on patients’ lives because it will be used to make important health decisions.
The fake-it-’til-you-make-it playbook, which has been part of the DNA of Silicon Valley for 30 or 40 years, really has major limitations when it is applied to a medical product instead of the usual vaporware. In fact, I would say that playbook does not work when it comes to a medical product. And the Theranos scandal has proven that.
GEN: If you were to run into Holmes on the street, is there a question you would still like to ask her?
Mr. Carreyrou: The biggest question on my mind would be how was she able to be so immersed in her ambition and her goals as to rationalize jeopardizing the public’s health?
GEN: When a movie on the Theranos scenario comes out, which actor would you want to play you?
Mr. Carreyrou: Chris Hemsworth, the actor who plays Thor, because our biceps and calves are of similar sizes. That’s a joke. Mark Ruffalo was great in Spotlight as an investigative reporter for the Boston Globe. So maybe he could sign up for another investigative reporting role.