Theranos: The $9 billion Health Scandal
Theranos was a private health technology start-up founded in 2003 by Elizabeth Holmes. The company was once valued at $9 billion and now the company is worth nothing. The company built a device called the Edison that was a desktop printer sized blood test machine that could perform hundreds of tests from a microdose of blood rather than a tube of blood in traditional blood test methods. The idea was that users would be able to perform blood tests within the comfort of their own home and the results sent to a lab for analysis. A user-friendly report will be compiled and sent back to the user suggesting possible actions.
How did Theranos gain a $9 billion valuation?
Elizabeth Holmes dropped out of Stanford to start the company Theranos which the word combines “therapy” and “diagnosis” in 2003. Elizabeth was able to secure high-profile investors such as Henry Kissinger and Rupert Murdoch. Within a year, Theranos managed to raise $6.9 million and the company gained a $30 million valuation. In 2007 the company managed to get more funding and the company received a valuation of $197 million. By 2010, Theranos managed to raise $45 million by selling equity, options, warrants and other security rights which raised the company’s valuation to $1 billion. In 2013, the company announced itself to the public and announced a deal with Walgreens to commercialise tests and make the test available to consumers. At this point, the profile of the company skyrocketed seeing the founder make a number of high profile media interviews and appearances. Fortunes announced that the company had raised $400 million in equity sales and now valued at $9 billion. This made Elizabeth Holmes a multi-billionaire due to her 50% stake.
How did it all go wrong for Theranos and Elizabeth Holmes?
Elizabeth Holmes surrounded herself with high profile board members and manipulated them at will by convincing them that the product works through dummy labs. She based herself on Steve Jobs from management styles to clothing styles, even adopted turtle necks as part of her attire, Elizabeth also made her voice deeper to make herself more trustworthy to investors and the public. Elizabeth started adopting a harsh management style that involved firing employees that no longer followed her values and decisions. Elizabeth made them sign non-disclosure agreements and threatened them if there were hints that the company failings were leaked to media outlets or journalists.
The major turning point for the company was when The Wall Street Journal (owned by Rupert Murdock who was an investor in Theranos) published John Carreyrou’s in-depth exposé on the company. His exposé interviewed an ex-employee who claimed mismanagement of the company, exaggeration of the capability of the technology and deceiving the public with the use of third-party devices to get results rather than use their own product. The exposé placed the company under a spotlight and questioned the company’s product and the validity of its results and findings. In 2015, the FDA published a partly redacted report from the ongoing investigation of Theranos equipment and claimed that Theranos used an uncleared medical device, which’s design was not validated under actual or simulated use conditions. Within the same year, their $350 million deal with Safeway fell through due to the speculations. The following year, Theranos Lab in California was found to be a threat to patient health as it was found that the facility did not comply with certification requirements and performance standards. Walgreen then suspended tests at their Theranos Wellness Center.
The final blow for Theranos
In 2017, one of their largest investors sued and accused them of securities fraud. Theranos offered a financial settlement to Partner Fund Management. 2018 marked the final year for the company. In March 2018, the U.S Securities and Exchange Commission charged Holmes and former Theranos president Ramesh Balwani accusing them of raising more than $700 million from investors through an elaborate, years-long fraud which involved them making exaggerated or false statements about the company’s technology, business and financial performance. In the wake of the charges, Holmes had her control stripped and forced to return millions of shares to back Theranos. Elizabeth Holmes was also barred from serving as an officer or director of any public company for ten years. Holmes and Balwani indicted on two counts of conspiracy and nine counts of wire fraud, finding that the pair engaged in a multi-million dollar scheme to defraud investors and a separate scheme to defraud doctors and patients. On 5th September 2018, Theranos was forced to close and employees laid off as a result.