Theranos Revisited - How did it get to this stage?
I'm trying to understand what I'm looking at here, as the observations appear to contradict each other, so I'm clearly missing something.
Overview from my understanding (and feel free to correct anything I get wrong), is new blood test that is super accurate and cheap to do revolutionises blood test industry, opening up new possibilities to everything. Holmes was a genuine inspiration for me so I wanted to believe.
So far, so good.
Influential board members (check)
Investments flooding in (check)
actual sales and big name customers (check)
and now a warning from CMS that one lab was inadequately (quality) staffed. Ok fair enough, possible. They made changes and that doesnt seem to have made anything happier (if you're threatened with closure you go beyond the extra mile to rectify these complaints surely?) a criminal investigation just launched about misleading investors about its technology, accuracy of its tests.
What I don't get, is there's big money behind this. There's big names. How have they been duped so badly? and how has it been able to go on for so long if it doesnt work? and if it does, how come they're not passing these tests with flying colours.
IT starting to look a bit iffy:
secretive technology: fair enough in this day and age, but science is collaborative.
continuing from the above: i could understand the secretive nature, but if I was EH, then I would do a very public trial where someone (x100)donates an armful of blood, and then she takes a thimbleful, and gets the same results as the other guys do from the armful. Real results, impossible to cheat on. However this hasn't been done (to the best of my knowledge).
an unusual Board of directors (state secs. def secs, ex military).
So ultimately, there's 3 possible situations we're looking at.
1) The tech works, it's just been poorly managed.
2) The tech kinda works, needs a bit of tweaking, and they're trying to get it done before they get too far down the rabbithole, and have too many big names invested in to make this information known, the typical, fix it before they suspect it.
3) The tech doesn't work and she's duped a very convincing list of names and companies, who are going to have to save face somehow on this.
I'd like to believe it's 1, but my head is telling me its closer to 2 or 3.
Appears to be completely fraudulent.
As to why people were duped, it's pretty simple. It's a combination of several factors. First, she had an enormous board comprised of names that appear to have been selected for "prestige" rather than them knowing jack shit about business...let alone that technically advanced a line of business. Second is that there's a huge cult of personality around her. Half the press was fawning over her desperate to find their "female Steve Jobs" to idolize and no small number of VC's wanted to screw her.
Hell you said it yourself:
JFC she promised that nanodrops could be used to measure everything under the sun and they found that standard blood draws are many fold more accurate
Who woulda thunk
Definitely something wacky going on there...Holmes' behavior makes me suspect that she's hiding something.
From Bloomberg: “We’ve taken the approach of saying, ‘Let’s rebuild this entire laboratory from scratch so that we can ensure it never happens again,’” Holmes said on the show. “I feel devastated that we did not catch and fix these issues faster.”
That was before the SEC announced their investigation. Why didn't they rush to fix the issues, even after negative reports were published in the WSJ?
The board was the first red flag, tottaly crazy to have those kind of outsiders and that number on a Vc owned company. Clear attempt to get some kind of fraudulent cachet
The vast majority of the revenue and tests that were being conducted weren't even using the proprietary technology. It was using third party technology and procedures already in existence. The goal, I'd imagine, was to do so while the core tech was fully commercialized. This was highly misleading and not novel.
Not to be the Monday morning quarterback, but I never liked Elizabeth Holmes the moment I watched her being interviewed.. and it wasn't because she was a woman or anything else - something was just off about her, all I could think was what sort of sociopath is she?
I kind of agree with you. She just seemed to be trying a bit too hard to be the female Steve Jobs.
I didn't watch the interview, but the moment CMS gets involved, it should be evident that there are significant problems. Although I questioned the tech from the get go, the CMS involvement is really what makes this entire matter look like it fits in the third category. I found a copy of the letter CMS sent to Theranos and the allegations are not indicative of number 1 and 2. Getting hit one one violation is a pain in the ass. Getting hit with all 5 is a severe breach of CLIA guidelines; the odds of that are astronomically low. And these are not minor charges - we're talking charges that there was incompetent management in charge of the lab, there were problems with the hematology systems (which is any lab's bread and butter. The fact that there were problems with the hematology systems should really sound the alarm as to whether or not Theranos had any real new tech or was using industry standards), and testing problems. If these were issued as a result of the magic box that Theranos has, this would be one thing and correctable without causing such a commotion, but I doubt it is as I'm sure these guys have a robust lab with all sorts of blood testing equipment (any equipment from Seimens, Sysmex, Beckman Coulter, and whatnot). The more I think about it, I really do think it's fraud. Plus, now I'm kind of interested in wondering how this lab got CLIA accreditation in the first place because who ever gave them the OK definitely has egg on their face.
Look, I get it that there are bad labs out there, but this is one of those times where everything looks like it's pointing to fraud. I seriously think she stacked her board with people who wouldn't know shit and was able to use their connections to get overpriced contracts to keep her in business. Of the members of the board, only two had any ties to healthcare (Former Sen. Majority Leader Bill Frist, who is a doctor and a large stakeholder in HCA, and William Foege, the epidemiologist who helped eradicate smallpox). For most companies, this wouldn't stand, especially with tech like this.
Guess she "leaned in" too much?
Too soon?
Same as any other startup and business scam: They're selling dreams and ideas, not feasible products.
It's a textbook case of where some charismatic entrepreneur/business person (though Elisabeth Holmes is the most charismatic around) wants to build a pipe dream, and iron out those pesky technical details later. The question is; Had she any idea how difficult the technology would be? Or did she just go for the money? Ignorant or Intentional, I don't know which one is worse.
You can say what you want, but even the most hardened and cynic investors have a soft-spot where rational thinking goes out the window. It's human. And it was a perfect unicorn candidate.
There's a reason kickstarter pages are filled to the brim with snake-oil salesmen and con-men. People don't think, and they want to believe.
edit: Let's not forget Meredith Perry, founder and CEO of uBeam. Total and utterly clueless fraud that one day decided "I'm gonna make mobile charging wireless, with sound", and got over 20 million in funding from people like Mark Cuban, Marissa Meyer, etc. Even HS AP Physics pupils know that the idea of using (ultrasonic) soundwaves to generate power will be terribly, horribly inefficient. 3.5 years later, and surprise! No product, nothing. Every scientist and engineer in the EE community has debunked it application.
Go watch her TEDx talk:
She's the personification of that mentality. No need to obey any physical laws, no need to listen to those damn Engineers or Scientists. If you just want something hard enough, it can be done! Anything!
VC funds are gonna chalk up this massive loss, because I don't think Theranos is going to survive it. I also think that Elizabeth Holmes is fucked here. I wouldn't be shocked if she got jail time for this. Forgoing the consumer fraud for a moment here, I honestly think she'd get screwed just on the CMS side of things. Those reimbursement dollars are worth a lot of money and CMS always finds ways to get them back if need be. Oh well... it was a good run while it lasted. </body></html>">
Since this is the industry that I work in the things that stand out the most is the company knowing that the products did not meet their acceptance criteria, this is what is filed to the FDA, this is reviewed by the FDA and then their licence is given to them to sell their products. Most people who work in QA can spot the problems right away because a failed test is a failed test, the problem in my view is that the information is always passed up to senior management and this is where the politics of making money starts to rot the company. When one is talking to a senior managment and they use their influence to shut a person up or even demote them, this seems to be the problem, plus a large members of the board where not qualified in understand regulatory compliance, this has not been the first time that a company like this has got in trouble, Johnson and Johnson, merck, pfizer etc have had similar problems, but in this case the run for $$$$ was much higher. Now we have two years of voided tests, this will not end well for all parties.
Runaway Stories and Fairy Tale Endings: The Cautionary Tale of Theranos (Originally Posted: 11/20/2015)
I saw the new Steve Jobs movie, with the screenplay by Aaron Sorkin, over the weekend. As a long-time Apple user and investor, I must confess that I was bothered by the way in which the film played fast and loose with the facts, but I also understand that this is a movie. Sorkin clearly saw the benefit of using the launches of the Macintosh in 1984 and the iMac in 1997 as the bookends of the movie and the tortured relationship between Jobs and his daughter to create an emotional impact, and took dramatic license with the truth. As I watched the movie though, I kept thinking about Theranos, a company with a gripping narrative and a CEO who, like Steve Jobs, wears only black and who seemed headed for a biopic until a few weeks ago.
The Theranos Story: The Build Up
The Theranos story has its beginnings in March 2004, when Elizabeth Holmes, a 19-year old sophomore at Stanford, dropped out of college and started the company. The company was a Silicon Valley start-up with a non-Silicon Valley focus on an integral, but staid part, of the health care experience, the blood test. Ms. Holmes, based on work that she had been doing in a Stanford lab on testing blood for the SARS virus, concluded that she could adapt technology to allow for multiple tests to be run on much smaller quantities of blood than the conventional tests did and a quicker and more efficient turn around of results (to doctors and patients). In conjunction with her own stated distaste for the needles required for conventional blood tests, this became the basis for the Theranos Naotainer, a half-an-inch tube containing a few drops of blood that would replace the multiple blood containers used by conventional labs.
The story proved irresistible to just about everyone who heard it, her professor at Stanford who encouraged her to start the business, the venture capitalists who lined up to provide her hundreds of millions of dollars in capital and health care providers who felt that this would change a key ingredient of the health care experience, making it less painful and cheaper. The Cleveland Clinic and Walgreens, two entities at different ends of the health care spectrum, both seemed to find the technology appealing enough to adopt it. The story was irresistible to journalists, and Ms. Holmes quickly became an iconic figure, with Forbes naming her the “the youngest, self-made, female billionaire in the world” and she was the youngest winner of "The Horatio Alger award" in 2015.
From the outside, the Theranos path to disrupting the business seemed smooth. The company continued to trumpet its claim that the drop of blood in the Nanotainer could run 30 lab tests and deliver them efficiently to doctors, going as far as listing prices on its website for each test that were dramatically lower (by as much as 90%) than the status quo. In venture capital rankings, Theranos consistently ranked among the most valuable private businesses with an estimated value in excess of $9 billion, making Ms. Holmes one of the richest women in the world. The world seemed truly at her feet and reading the news stories, the disruption seemed imminent.
The Theranos Story: The Let Down
The Theranos story started to come apart on October 16, when a Wall Street Journal article reported that the company was exaggerating the potential of the Nanotainer and that it was not using it for the bulk of the blood tests that it was running in house. More troubling was the article’s contention that senior lab employees at the company found that the nanotainer’s blood test results were not reliable, casting doubt on the science behind the product.
In the following days, things got worse for Theranos. It was reported that the FDA, after an inspection at Theranos, had asked the company to stop using the Nanotainer on all but one blood test (for Herpes) because it had concerns about the data that the company had supplied and the product's reliability. GlaxoSmithKline, which Ms. Holmes had claimed had used the product, asserted that it had not done business with the start up for the previous two years and the Cleveland Clinic also backed away from its adoption. Theranos initially went into bunker mode, trying to rebut the thrust of the critical articles rather than dealing with the substantial questions. It was not until October 27 that Ms. Holmes finally agreed that presenting the data that the Nanotainer worked as a reliable blood testing device would be the most “powerful thing” that the company could do. It is entirely possible that the data that the company has promised to deliver will be so conclusive that all doubts will be set aside, but it does seem like the spell has been broken.
The Lessons
Looking back at the build up and the let down on the Theranos story, the recurring question that comes up is how the smart people that funded, promoted and wrote about this company never stopped and looked beyond the claim of “30 tests from one drop of blood” that seemed to be the mantra for the company. I don’t know the answer to the question but I can offer three possible reasons that should operate as red flags on future young company narratives:
Bottom Line
I would like to believe that I would have asked some fundamental questions about the science behind the product and how it was faring in the FDA approval process, if I had been a potential investor or journalist. However, it is entirely possible that listening to the story, I too would have been tempted to go along, wanting it so much to be true that I let hope override good sense. Some of my worst mistakes in investing (and life) have been when I have fallen in love with a story so much that I have willed a happy ending to it, facts notwithstanding. The question of whether Theranos makes it back to being a valuable, going concern rests squarely on the science of its product(s). If the Nanotainer is a revolutionary breakthrough and what it needs is scientific fixes to become a reliable product, there is hope. But for that hope to become real, Theranos has to be restructured to make this the focus of the business and become much more transparent about the results of its tests, even if they are not favorable. Ms. Holmes has to scale back many of her high profile projects (virtuous and noble though they might be) and return to running the business. If the Nanotainer turns out to be an over hyped product that is unfixable, because it is scientifically flawed, Theranos has a bleak future and while it may survive, it will be as a smaller, low profile company. The investors who have put hundreds of millions in the company will lose much of that money but as I look at the list, I don’t see any of them entering the poor house as a consequence. There is a chance that the lessons about not letting runaway stories stomp the facts, never trusting CEOs who wear only black turtlenecks and caring about governance and oversight at even private businesses may be learned, but I will not hold my breath expecting them to have staying power. YouTube Versionhttps://www.youtube.com/embed/qBONKCaAyxo
Blog posts in this series 1. Divergence in the Drug Business: Pharmaceuticals and Biotechnology 2. Checkmate or Stalemate? Valeant's Fall from Grace 3. Value and Taxes: Breaking down the Pfizer- Allergan Deal 4. Runaway Stories and Fairy Tale Endings: The Theranos Lesson
Great post!
Sometimes ignorance is bliss when there's an amazing story and I think everyone has fallen victim to it at some point in their life, and will always fall victim from time to time. It's human nature in my opinion. Just some times the consequences are more expensive than other times.
Very good write-up, as per usual of Mr. Damodaran. I alway feel like there is a fine line in coming up with a story when you are trying to generate ideas and simultaneously not letting yourself get swept off by them.
former Sec of state, sec of defense, naval officer, and a CEO of a BB ......mmm i think Theranos do more than blood testing
Theranos just sounds like the faceless dystopian biotech company.
to use the full phrase from poster above: "where ignorance is bliss, 'tis folly to be wise." I'll let y'all decide if $9B should warrant ignorance hehe
Wow, I'm shocked. I can't argue with your facts or presentation, but this was genuinely my ace in the hole when it came to examples of women succeeding by doing it men's way.
Now this portion on the other hand, seems to be the selling point for their product. The low cost of blood tests offered by Theranos would work really well to lower healthcare costs globally and could potentially penetrate parts of the world (e.g. Africa, India, etc.) which have poor access to these tests.
military / intelligence gathering applications...........
+1 Read an article about some big VC (can't recall name) that didn't invest because when they went to try the blood test process themselves, it proved to be a lot more complicated than they originally thought.
Wonder what the valuation of Theranos is going to be now.
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