The Cautionary Tale of Theranos
Picture this: A belligerent CEO of a technology company whose wardrobe consists of black turtlenecks and jeans. No, I am not talking about Steve Jobs. I am talking about Elizabeth Holmes, the former CEO of a now defunct health technology company called Theranos. Holmes is responsible for 700 million dollars worth of investment for a product that does not work. You could argue that it is the fault of the company itself for failing to reinforce the legitimacy of their product. However, when nearly half of a billion dollars is at stake, we might need to push the blame on an organization larger than just the company.
The technology involved two devices: the nanotainer and the Edison. The nanotainer was used to collect blood from a finger prick, the blood would then be tested by a device called the Edison. Theranos claimed that the Edison could perform a wide range of tests such as “measuring glucose levels, detecting different types of antibodies, or even marijuana and opiates'' (Rutchman 2021). In a perfect world, medical devices would be among the most highly regulated products in the modern economy, as they seek to improve people's health conditions.
However, and this may seem surprising to you, we are not living in a perfect world.
The Edison was first made available for patients in 2013. Medical technology companies had been exploiting loopholes in the Food and Drug Administration (FDA) approval process for years. Lab diagnostic tests (LDT) are diagnostic tests that are developed and conducted by companies in their own laboratory. FDA approval of LDTs is not required because research hospitals often modify their tests towards patients' needs and academic researchers publish their results anyway. In the medical field, secrecy of intellectual property is a major component of obtaining an advantage over competitors. Companies that use the LDT loophole can operate with less oversight, more efficiency, and faster access to patients than companies that do not. Enter Theranos.
The FDA has a long track record of complacency when dealing with regulatory loopholes. Most of the insufficient regulation lies in the discrepancy between what is classified as a high-risk, medium-risk, and low-risk medical device. Medium-risk devices include devices like surgical stitches and, in the case of Theranos, the Edison. These classifications were established with the Medical Device Amendments of 1976, which sought to align FDA supervision of medical devices closer to their regulations. However, it left loopholes. The FDA decided that medium risk devices need not to be tested on people before reaching consumers implying that the device was already “substantially equivalent to one already on the market” (Rising 2013). For high risk devices, like pacemakers, testing is required. In 1976, the law allowed devices that were already on the market to be classified as medium risk devices until the FDA officially classified them. Consequently, some high-risk devices have been approved without being tested first. “This interim solution was not supposed to last 37 years. Yet, it has been nearly four decades since Congress passed the Medical Device Amendments, and the FDA still has not classified some of the temporarily "grandfathered" devices. As a result, potentially high-risk devices are continuing to reach the market without ever being tested in people.” (Rising 2013) The FDA needs to impose stricter regulations on medium and high-risk devices. There cannot be any lack of testing when dealing with our citizen’s health, particularly the long-term health, or else we will be getting ourselves into a bigger mess than we are already in.
Theranos never proved that their tests actually worked. Yet, investors still poured 700 million dollars into the company, and most of them have not received their money back (more on that later). One former employee “accused [Theranos] of failing to report test results that raised concerns about the accuracy of the Edison. Theranos also claimed that the Edison could administer up to 240 tests with just a single drop of blood,” while another reported that “Theranos was routinely using the device, named Edison after the prolific inventor, for only 15 tests in December 2014” (Carreyrou 2015). These were not just on-off situations, as a review of companies emails conducted by The Wall Street Journal revealed that some former employees “were leery about the machine’s accuracy” (Carreyrou 2015). On top of everything, “Theranos also hasn’t disclosed publicly that it does the vast majority of its tests with traditional machines bought from companies like Siemens AG” (Carreyrou 2015).
So how did Theranos finally get caught? A series of reports by former employees of the company may be one reason, but the catalyst that kickstarted the downfall of Theranos is attributed to one Wall Street Journal reporter: John Carreyrou.
Carreyrou received his initial tip about the company through a Missouri-based pathologist who had doubted Theranos’ technology in 2015. Carreyrou’s first report on the matter led to a series of reports degrading the legitimacy of the company. The first report included testimony from former employees on the company’s illegitimacy, such as the use of third-party testing kits and the controversial testing practices of Theranos. He later published a book on Theranos titled Bad Blood: Secrets and Lies in a Silicon Valley Startup. During an interview with John Carreyrou, he described Theranos as having “a culture of intimidation and fear that they had lived through” (Knibbs 2018). The culture of secrecy inherited by Elizabeth Holmes and Theranos is something very common within Silicon Valley companies. The idea was first inspired by Apple, whose founder is the idol of Elizabeth Holmes. The concept worked, too, since many employees of Theranos stayed silent when asked about their opinions on the quality of their technology and the legitimacy of the company. Carreyrou tried to interview employees in 2016 for his book, but the fear instilled by Theranos executives kept the employees from telling their history of the company: “When I went on book leave in the fall of 2016, it was still very hard to convince people to speak to me. They were still very afraid of the company” (Knibbs 2018). While Elizabeth Holmes receives most of the blame for Therano’s faulty tests, the flaws in the company culture can be attributed to Holmes’s ex-boyfriend and former president of Theranos, Sunny Balwani. Known by former employees as “the enforcer” (Pflanzer 2019), Balwani remained a mystery when the company was under attack in 2015. While Holmes addressed interviewers and news networks, Balwani handled most of the day-to-day life at Theranos. “In one encounter, Balwani brought up security footage that showed a software engineer only working an eight-hour day. He told the employee, "’ I'm going to fix you.’" The engineer promptly resigned and left the building, even as Balwani sent a security officer to try and stop him. Balwani then called the police on the employee” (Pflanzer 2019).
Some CEOs in this scenario would fire their president after hearing about events like this. But Holmes may have turned a blind eye due to her passionate relationship with her former president. How passionate, you ask? Prosecutors released six pages of text messages between Holmes and Balwani after Holmes claimed, “Balwani threw ‘sharp’ objects at her and controlled how she ate and dressed, impacting her ‘state of mind’ at the time of the alleged crimes” (Peck 2021). Text messages from Holmes to Balwani consist of love notes like “Meant to be only together tiger” and my personal favorite, “You are a breeze in the desert for me” (Peck 2021). Since the two were secretly involved in an intimate relationship, disagreement between the two likely led to easier manipulation of data across the company. This was a flaw in the company that directly affected the legitimacy of their products and the quality of the company culture.
Carreyrou’s findings led to a deeper investigation into Theranos that is still developing as of writing today. Holmes took the stand two months ago, continuing to support her product and dismiss the alleged lies about her product. Within the past two months, prosecutors have played numerous videos of television interviews, shortly after Carreyrou’s initial report, of Holmes defending her faulty devices. In one of her interviews, Holmes says, “This is what happens when you work to change things. First they think you are crazy, then they fight you, then all of a sudden you change the world” (Randazzo 2021).
Holmes’s persistence in defending the name and reputation of the company she started at nineteen has remained steadfast even as the trial continues. This is astounding.
In 2018, Elizabeth Holmes and Sunny Balwani were indicted on charges of defrauding investors out of millions of dollars as well as misinforming hundreds of patients and doctors. Now, we are in the middle of what is thought to be a 13-week trial. Holmes has also been charged with 12 counts of wire fraud and conspiracy to commit wire fraud in addition to her misleading advertisements on the legitimacy of the blood tests. Of those testifying was Lisa Peterson, Equity manager and advisor to the DeVos family. Peterson represented Betsy Devos, former U.S. Education Secretary under the Trump Administration, whose family poured 100 million dollars into Theranos. Other high-profile investors, Rupert Murdoch, Warren Buffet, and Harry Kissinger, among others, are all seeking their money back as well.
Elizabeth Holmes has endured extensive criticism for her misleading product. Yet Holmes does not back down. Since the early days of her startup, Holmes has been persistent in establishing the legitimacy of her product and denies all allegations of misinformation. So, will Holmes’ unwavering attitude prevail? I think no, and we will soon learn if they make striped turtlenecks in prison.
References
Carreyrou, John. 2015. “How Startup Theranos Has Struggled With Its Blood-Test Technology.” Wall Street Journal, October 16, 2015. https://www.wsj.com/articles/theranos-has-struggled-with-blood-tests-1444881901.
Knibbs, Kate. 2018. “How John Carreyrou Exposed The Theranos Scam.” The Ringer, May 22, 2018. https://www.theringer.com/2018/5/22/17378494/bad-blood-theranos-john-carreyrou-interview.
Peck, Andrea. 2021. “Text Messages Between Theranos Founder Elizabeth Holmes and Ex-Boyfriend Ramesh “Sunny” Balwani Grab Headlines in Early Days of Fraud Trial.” Dark Daily, October 1, 2021. https://www.darkdaily.com/2021/10/01/text-messages-between-theranos-founder-elizabeth-holmes-and-ex-boyfriend-ramesh-sunny-balwani-grab-headlines-in-early-days-of-fraud-trial/.
Pflanzer, Lydia. 2019. “The mysterious story of former Theranos president Sunny Balwani, who was in a relationship with Elizabeth Holmes and now faces criminal charges.” The Insider, March 19, 2019. https://www.businessinsider.com/theranos-former-president-sunny-balwani-role-in-the-company-2018-5.
Rising, John. 2013. “A Loophole that Keeps Precarious Medical Devices in Use.” The Atlantic, February 27, 2013. https://www.theatlantic.com/health/archive/2013/02/the-loophole-that-keeps-precarious-medical-devices-in-use/273496/.
Rutchman, Ana. 2021. “How Theranos Faulty Blood Tests got to the Market - and What It Shows about Gaps in FDA Regulation.” The Conversation, October 5, 2021. https://theconversation.com/how-theranos-faulty-blood-tests-got-to-market-and-what-that-shows-about-gaps-in-fda-regulation-168050.