Fooled investors flooded Theranos with cash.
By Andrew May, a FINRA attorney at May Law in Chicago:
In the early 2000’s, the world was gripped by the SARS epidemic unfolding in Southeast Asia. Mankind was yet again battling a deadly disease, and at the forefront of this battle was the Genome Institute in Singapore.
At the time, Elizabeth Holmes, a young volunteer from Stanford traveled to help the team work on their software. Holmes left Stanford a few years later and decided she wanted to get into medicine and help save lives.
The only problem was that she hated the sight of blood and needles. Assuming that there were a lot of other people who hated needles and blood as much as she did, she decided to tackle the most basic health care service on the planet – blood tests.
Her company, Theranos, was based on the design for handheld blood testing instrument that could instantly give results with just a few drops of blood. It was meant to work just like the diabetes self-test kits, but detect a lot more than just blood sugar levels. A tiny drop of blood could be used for more than 70 different tests at the Theranos labs. The company started selling kits at Walgreens and testing at more than 41 locations in the country.
Investors flooded the inspiring company with cash, with some of the most prominent Silicon Valley names getting seats on the board and shares in the firm. After the last round of funding, the company was valued at over $9 billion. Since Holmes held more than 50% of the stake, she was labeled the youngest female billionaire on the planet.
If that story sounds a bit too good to be true, that’s because it now seems like it probably is. The revolutionary health tech company has been dogged by controversy right from the get go. The problems really hit the spotlight in October of last year when some former employees accused the company’s testing kits of yielding inaccurate results.
The flagship handheld testing kit, named Edison by now, was using a dilution solution that made the test results inaccurate. Because of this, the FDA intervened and a formal complaint was lodged with the New York State Department of Health. Medicare and Medicaid got involved soon after.
But it gets worse than a critical blood test giving the wrong results – it turns out a vast majority of the tests conducted on blood samples at the Theranos labs were done using regular machines from companies like Siemens. Nine out of ten of the tests the company conducted on blood samples were done using the same machines your local pathology lab used. That’s a troubling statistic for a company that promised pain-free blood-testing people could do at home.
Over the past few months, the company has come under attack from all angles because of these controversies. Many of their ties with partners like Walgreens have been threatened and the media has lost confidence in the company’s statements altogether.
Just in the last few weeks, the SEC and Justice Department launched investigations into the company’s operations. The authorities have threatened to shut down all testing facilities and revoke the federal license for the company. Chief Executive Elizabeth Holmes and President Sunny Balwani are also threatened with a ban on conducting any business in the blood testing market for over two years if the charges stick.
Part of the problem was always the company’s lack of transparency.
The press was given access to the startup back in 2013, but many of the reporters who visited came away with quick blood tests without having seen the testing machine at work. Ever since the company gained media attention, observers have been waiting for peer-reviewed studies on the new technology to be published in scientific journals. Peer-reviewed studies are a sort of seal-scientific-approval, and for the company to delay such publications for so long was already pretty suspicious.
When the Wall Street Journal accused the company of spinning gold out of pure startup hype, the company attacked the WSJ but didn’t refute any of the allegations.
Whether or not the Silicon Valley newcomer can survive this storm of regulatory pressure is yet to be seen. But the damage to the brand is already done. And even if the investors haven’t lost confidence, these investigations could result in serious action that would force them to reconsider.
As things stand now, the authorities haven’t charged the company formally with anything and investigations are still ongoing. What still needs to be determined is if the technology actually works the way it was supposed to, whether the company lied to potential investors about the testing kit’s abilities, and if the company can continue doing business in this highly regulated and competitive industry. By Andrew May, a FINRA attorney and founding member of May Law in Chicago.
The consequences of misconduct by financial advisors cost middle-class and working families about $17 billion every year. Read… “Economy-Wide Misconduct” among Financial Advisers