Theranos Trouble: A First Person Account | Hacker News Reader

Theranos Trouble: A First Person Account

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133 pointsjackgavigan45 comments

I manage money for a living and I always get fascinated with frauds and "bullshit businesses" for shorting. This whole flap is so funny to me because about a year ago after reading a few things about Theranos and hearing a few anecdotes from people in the lab business, I thought to myself, "Man, I wish this company was public so I could short it." There were just so many of these little red flags.

Anyway, in these situations the response from the company often gives the best indication of how genuinely dire things are. In my experience, Theranos' response has been really, really worrisome. The hasty Cramer appearance (Mad Money??? Uhhh, this isn't a public company). The lawyered-up non-denials and general evasiveness. The editing of the website. The world's most expensive attorneys. The threats to the now-deceased co-founder (realize this was not a response to the WSJ, but still). The reluctant bending to FDA requests.

If this company was public it would be my largest short.

This is why I think shorts provide a valuable service to the economy. They have an incentive to snuff out fraud and deception in publicly traded companies and act as a bulwark against that sort of behavior.

Sadly we don't have an equivalent for privately traded firms.

Why is it not enough when all private investors just loose their money if it turns out this company is worth much less that they hoped and payed for? What would it add when a short-seller makes a profit on the loss of the investors who took on the risk trying to create a business. Who would pay the shortseller's profit?

In general, I think all derivatives should be taxed the equivalent of casino tax, because that's what it is: betting in a zero-sum game for society. Of couse we know that betting provides very good predictive information, but that does not seem like a good reason to treat financial betting different from other form of gambling.

The profit for shorts provides an incentive to correct the market regarding overvalued or fraudulently valued companies. That's a good thing.

To your question of "Who would pay the shortseller's profit?": in most cases, shorting a stock isn't causing more cumulative loss[1]. There's no additional "payment" or transferred gain. Shorting lets the market incorporate the collective doubt earlier than it could otherwise, but it's the same "payment" (share price change).

One could make a strong argument that shorting prevents some shareholders from taking a much bigger loss. Some shareholders would have purchased in this hypothetical run-up that short sales would soften. When "it turns out this company is worth much less that they hoped and payed for," those shareholders would lose more because the difference between what they paid and what it's worth would be larger.

That's particularly true for the quintessential long-term retail investor who fundamentally believes in the company. That person is likely going to own it until the company's product is proven or disproven, and the fluctuations in between aren't going to affect them (other than as above, if they bought at an inflated price).

Shorting also creates an incentive for skepticism. One could argue that, if Theranos' technology doesn't work, making it harder and more expensive (dilutive) for them to raise money is a service to society.

[1]: an arguable exception is shorting solely to make other investors lose confidence (rather than due to a negative view of the company). However (a) that's not the case here, (b) often it's actually the undiscovered seed of a real issue (someone has to be first..), and (c) shorting enough of a stock to meaningfully depress it is much, much tougher to do than it sounds, since the short investor will need to purchase/repay shares at some point, the possible exposure when they do is unbounded, and they'll need capital to cover their unrealized loss in the interim. This is not a trade anyone takes lightly.

Insider trading would be even more useful (assuming that the trades are all visible). Once you see the insiders selling up ...

Are/were insider trading laws ever effective? It seems like they create an incentive for secrecy.

There's a pretty good chance Goldman has sold when-traded OTC contracts on a lot of these hyped up private companies, in effect making themselves short the stock. Hence the WSJ article. Actually when you think of it this way and realize they have probably fleeced a lot of dumb third world money, the whole Theranos board setup makes more sense.

This Theranos story just keeps getting more and more bizarre. George Church publicly criticized its board in a remark to the WaPo (http://www.washingtonpost.com/news/wonkblog/wp/2015/10/15/th...). Considering that Holmes is on the Harvard Medical School Board of Fellows, while Church is one of its most prominent researchers, why is he suddenly speaking out? If someone like him was concerned about Theranos, how did she end up on the Board of Fellows in the first place?

Then Michael Moritz of Sequoia specifically pointed to Theranos as an example of the 'subprime unicorn' boom (http://www.ft.com/cms/s/0/91063628-73f5-11e5-bdb1-e6e4767162...), which is a pretty odd choice, considering the vast majority of unicorns are software companies with very different risks from what Theranos faces. DFJ is one of Theranos's investors (https://www.facebook.com/dfj/posts/10101511622019206), and I can't imagine Moritz would want to publicly antagonize them.

And why did the Murdoch-owned Journal publish the original article anyway, despite the Theranos board being stacked with Republican heavyweights? What's the point of having Henry Kissinger and George Shultz on your board, if not to prevent these sorts of incidents?

> Considering that Holmes is on the Harvard Medical School Board of Fellows, while Church is one of its most prominent researchers, why is he suddenly speaking out?

I think Dr.Church's lab is very prominent in the field of synthetic biology; if I have to guess, his lab's work funding comes from lots of federal research grants outside of Harvard Medical school. So financially and politically, I don't think his hands are tied at all.

Also on principle, as a tenured faculty in academia, I don't think he is bound by the same rules/expectations as a FTE at a regular company.

I'm not saying that I'm surprised that he spoke out - I mean the timing of it is unusual. Why didn't he say something when Holmes was appointed to the Board of Fellows, or when the company first started its PR blitz in late 2013? Theranos's unusual board has been in the news for a long time: http://fortune.com/2014/06/12/theranos-board-directors/

I am only responding to your last paragraph: the point of having those people on your board is to navigate the government bureaucracy.

As someone that's used Theranos a few times, I too have wondered about the accuracy and contemplated doing something similar.

However, if one is going to make comparisons, I think it's better to use the same draw of blood for both lab companies. Or at least within an hour of each other.

There are too many variables at play, and numbers can change between morning and afternoon even on the same day depending on the test.

Repeated tests and obtaining standard deviations would also be a good idea.

> Or at least within an hour of each other.

"Taken one hour apart, the Stanford and Theranos HCT numbers differ by about 7%: 44.1 Theranos vs. Stanford 41.1."

He was comparing the draws of the same day mainly

Everyone seems to criticize Theranos but I'm 99% sure other labs have similar variances in results without a WSJ story. The FDA should investigate Quest and the other labs. With the Electronic Health Records, relying on a single lab result could be problematic.

It appears that most tests done by Theranos are using the same techniques as any other lab, so naturally the variances would be similar. The only test their Edison machine is FDA approved for is herpes simplex. They have caught some flak, however, for allegedly diluting blood samples before standard analysis.

What ends would diluting it achieve?

They take smaller blood draws from finger tip pricks that aren't large enough in volume to run on a standard machine from Siemens et al.

To get around this, they supposedly dilute the samples to a point where the concentrations of analytes are well below the machines minimum operating specifications.

Theranos responded that they use the exact manufacturer dilution protocol on their volumes. I don't know of any fact-based article saying they were operating the machines below their minimum specs.

My understanding is that only the Edison machine uses finger prick amounts. However, it sounds like since these machines don't work they are using standard instruments. For these they take venous blood draws, just using a child-sized vacuum tube instead of an adult-sized vacuum tube. She talked about using the child-sized vacuum tubes in an interview. Not really a big differentiator in my opinion.

Basically, the story is this: 1) The founder of Theranos is afraid of blood

2) Theranos invents a new low volume blood draw technology and test mechanism (which contains many subtests)

3) The test they use to augment their limited test is a commercial product that works on larger volumes of blood

4) because their test doesn't actually work all that well (I actually don't know enough about this part, as their work is mostly secret) they have to pivot a bunch of of their tests to using a different company's test machine

5) Those other commercial products actually do work with smaller volumes of blood, diluted to larger volumes, in case you can't get a large volume from a patient

There isn't anything wrong with Theranos diluting blood to make their tests work with another commercial product (this is a legitimate use). However, it does seem to suggest that the technology that hyped Theranos up to a multibillion value isn't as good as was claimed; instead, Theranos is mostly just another conventional provider of diagnostic tests. If they're just another conventional provider, it sort of kills the whole startup story and investment, because why would you invest in a disruptor if you can make money from the establishment?

That said, it's common to see startups start with a really ambitious goal, fail, then pivot to become more conventional companies with decent but not spectacular revenue streams.

> because their test doesn't actually work all that well (I actually don't know enough about this part, as their work is mostly secret) they have to pivot a bunch of of their tests to using a different company's test machine

This is like if every time you fetched an Uber, a yellow cab showed up! Except for one market out of 200, where they run five black cars, in a small SF neighborhood.

yes, that is how 95% of startups that don't go out of business end up. also, the yellow cab has a little black hoodie that makes it look like a limo.

One of the complaints against Theranos is that they've published very little peer-review research about their results, nevermind their methodology and technology. [1] [2]

Since you 99% sure that other labs have problems, are you suggesting that all the other labs rely on technology that also have a dearth of peer-review published results?

[1] http://jama.jamanetwork.com/article.aspx?articleid=2110977

> As of January 5, 2015, a search in PubMed using Theranos as a search term identified affiliations for only 2 unrelated articles coauthored by Theranos Inc employees, although these 2 reports do not offer insights about their company.

[2] http://www.newyorker.com/magazine/2014/12/15/blood-simpler

> Clarke argues that finger-stick blood tests aren’t reliable for clinical diagnostic tests; because the blood isn’t drawn from a vein, the sample can be contaminated by lanced capillaries or damaged tissue. Holmes strongly disagrees: “We have data that show you can get a perfect correlation between a finger stick and a venipuncture for every test that we run.” When I asked for evidence, I was sent a document by Daniel P. Edlin, Theranos’s senior product manager, titled “Select Data.” It purported to show favorable results from numerous comparison tests. I asked Edlin if the tests had been conducted by an independent third party. He replied by e-mail: “The clinical tests were conducted by a combination of Theranos and external labs,” but he wouldn’t say which ones.

> When I asked Holmes for evidence that her tests were independently audited, she said that there have been “tens” of audits and “external third-party comparisons” of Theranos’s tests, including those done by the hospital groups that are adopting its finger-prick tests and the pharmaceutical companies that have contracted with Theranos for testing their products. Holmes says that Theranos is certified in forty-eight states, with two more applications pending, under the federal Clinical Laboratory Improvement Amendments of 1988. Under the amendments, laboratories like hers must be certified before they can perform tests for the general public, and their performance is evaluated three times a year by the College of American Pathologists. Holmes also pointed me to a pilot study published by Hematology Reports, an online-only peer-reviewed journal; she is listed as a co-author. The report, released in April, concluded that Theranos tests “correlated highly with values obtained” from standard lab tests.

The lack of peer-reviewed research for Theranos is a valid criticism. The method and technology used in other labs likely is peer-reviewed at some level, so not disagreeing on that point.

What I am suggesting is that other labs do have variances in results, on certain lab tests. The OP did say that there was a 7% variation in Platelet results in successive days, using the Stanford lab.

Quest Diagnostics have had previous settlements with DoJ for "inaccurate and unreliable" lab test kits. [0]

[0] http://www.justice.gov/opa/pr/quest-diagnostics-pay-us-302-m...

> There are too many variables at play, and numbers can change between morning and afternoon even on the same day depending on the test.

Respectfully, you are making a broad, inaccurate statement and assumedly without a medical background.

While it's true that some numbers can change even on the same day (Gassée specifically mentioned glucose as an example of a lab value that can fluctuate quite a bit), the concentration of red blood cells and platelets is not affected by what you had for lunch and definitely should not vary this much. Keep in mind that the difference Gassée saw was was almost enough to trigger unnecessary therapeutic phlebotomy.

> the concentration of red blood cells and platelets is not affected by what you had for lunch

Sure. Except I never said or meant to imply RBC's and platelets change on the same day. Part of the context of the comment, were my own tests.

So the question is, why wouldn't one want to remove as many confounding factors as possible?

edit: site seems to be down, here's a mirror

https://archive.is/C6arp

> I write the CEO with facts and figures (and supporting documents), and request a response...You can guess what happened: Nothing, no response. I shrugged it off and went on to other topics, but the question nagged at me.

If a former Apple executive who works down the road from Theranos can't get a reasonable response, makes me wonder if Theranos ever addressed customer/client concerns?

even if Theranos doesn't have to get FDA approval for their devices, there are likely regulatory concerns with responding directly to customers. They could send a contentless form letter, but the safest thing legally is not to respond.

Jean-Louis Gassée is also the founder of Be Inc, the company which created BeOS.

https://en.wikipedia.org/wiki/Jean-Louis_Gass%C3%A9e

Although BeOS no longer exists, there is the open source compatible OS Haiku:

https://en.wikipedia.org/wiki/Haiku_%28operating_system%29

When I first saw Mr. Gassée's name in the byline, I immediately recognized him as being the Apple exec behind this quip about Steve Jobs, according to Andy Hertzfeld:

http://www.folklore.org/StoryView.py?project=Macintosh&story...

> Whenever you saw a big Mercedes parked in a handicapped space, you could be sure that it was Steve's car (actually, it was hard to be sure otherwise, since he also had a habit of removing his license plates). This sometimes caused him trouble, since unknown parties would occasionally retaliate by scratching the car with their keys.

> Anyway, the story is that one day Apple executive Jean-Louis Gassee, who had recently transferred to Cupertino from Paris, had just parked his car and was walking toward the entrance of the main office at Apple when Steve buzzed by him in his silver Mercedes and pulled into the handicapped space near the front of the building.

As Steve walked brusquely past him, Jean-Louis was heard to declare, to no one in particular - "Oh, I never realized that those spaces were for the emotionally handicapped...".

"If a former Apple executive who works down the road from Theranos can't get a reasonable response, makes me wonder if Theranos ever addressed customer/client concerns?"

A few possibilities (in all fairness to Theranos)

1) Elizabeth Holmes doesn't know who Jean-Louis Gassée is..(noting her age).

2) She gets a ton of email and didn't see who wrote the email. So it could have been from anyone and unless for some reason she had noted the name in the reply address (and it was more than "jlg@") she would have just passed on it.

3) She forwarded it for someone to handle (given 1&2 above) and they haven't acted on it yet.

Noting JLG says "You can guess what happened: Nothing, no response." but doesn't specify if he waited 1 day or 4 weeks.

Actually he mentions that he ran Apple's Engineering directly in his email:

  I’m also a techie and, among other things in 47 years in 
  the tech industry, I once ran Apple’s Engineering in 
  Cupertino.

It's true, but we don't know to whom he addressed the email...was it the general info@theranos.com email address? To Theranos's PR team? Or to a private direct email address that JLG was able to get? I would guess it'd be the latter 2...JLG has been writing about media/tech long enough to know that sending an email to the general contact form is not adequate, and he doesn't seem the type to be out for a hit-piece (i.e. "I am publishing an exposé in 1 hour, please respond"). And Holmes and her media people obviously are reachable -- besides maintaining Twitter accounts, Holmes was doing interviews the day after the WSJ piece (nevermind all of the PR she was doing in the past two weeks).

This is why senior leaders have executive assistants. C-level execs of large companies get a lot of email and don't read all of it themselves, at least not initially, especially if the email is from someone they don't know.

Emailing a large company's leader from the outside is and should be tantamount to emailing a part of their customer service team, if you are a customer. At least, that's how they need to arrange it if they want to be responsive and are failing to be. Good customer service will also escalate complaints internally so that they're properly dealt with, not just responded to (though they might be escalated to a subordinate of the person you intended to contact, rather than the person themselves). If someone emails your CEO, it's a fair bet that they're either really happy, or really unhappy and need attention, versus contacting frontline support.

Companies that have good customer service typically have an "executive customer service" team made up of their best CS reps, who have good judgment and can handle unusual situations. Executive CS would for sure research and discover who sent the communication, and consider that fact as part of their response, and how to escalate it internally.

To summarize, if a company cares about providing customer service, they can certainly do so, and they should look at email sent to their public figureheads as an extension of their customer service responsibility, or a delegated responsibility to the CEO's assistant. There is no excuse for the lack of response.

This is also true for internal communication within a company, by the way. It's routine for assistants to respond on behalf of the person they support for matters that are within their area of responsibility. One of the marks of a higher grade executive assistant is that you can trust them with all of your communication, and can trust them to decide on their own what they can properly respond to on your behalf.

Also somewhat tangential, but completely related, I'm curious peeps in biotech, what are your guys' opinions on Oxford Nanopore MinION?

IMHO, MinION is even more exciting than Theranos in that it is a real-time USB-stick sequencer that sequence a whole complete genome or the metagenomics inside a person's blood or guts (currently < 6hrs, in matters of minutes for detecting viral genomes in blood such as ebola since you can feed the sequencing data in a real-time pipeline to a BLAST to the viral genome reference database). Due to the early access program, there are quite a few papers published on its protocol attesting its pro's and con's.

Illumnia, the current king of genome sequencing has more its stock price than 10x since it has beaten out its NGS competitors as the "sequencer de-jure".

MinION, IMO like PacBio won't beat Illumina ever in read-error rate; however, can open up a new market in sequencing patient samples in clinical settings - which may be an order of magnitude bigger than academic sequencing. However, the argument against it is that there are already RT-PCR blood tests that can detect reliably in clinical settings different viral infections; also sequencing may be real-time, but you still need technicians to do the sample prep (e.g., extract the DNA and prep it for the NGS adapters).

Would love to hear people's opinions on the viability of nanopore sequencing here.

This is like the fourth or fifth article on Theranos making the front page of HN in the last week or so.

It's kind of like living on the San Andreas Fault and noticing your dog is starting to get really nervous...

Reminds me of the rise and fall of Enron. Endless puff pieces about how amazing Ken Lay is and how they're revolutionizing the energy industry until a few reporters actually looked at their financials and published their concerns.

Enron was dead eight months later.

Substitute Lay for Holmes, financial fraud for medical concerns and that WSJ article on Theranos for Fortune's Is Enron Overpriced? and there you go.

The recent rush of bad press is mostly because of the one WSJ article which was the first mainstream, in-depth media scrutiny of Theranos...it's possible that they can overcome it if they really do have what they claim they do.

edit: grammar

Anyone know what the error bars on all these tests are?

Well this piece certainly wasn't "on the broader topic of lab exams and other healthcare mysteries". She might've replied if she knew it would be called "Theranos Trouble".

Totally tangential question, but does the "too many blood cells" translate into greater endurance and stamina for you?

In polycythaemia vera, it translated to strokes and heart attacks.

Just like it does for the Tour De France. Rob Goris was a recent example http://velonews.competitor.com/2012/07/news/goris-30-dies-of...

Yes, I understand it's primarily a health concern. I just wonder if, just like for the Tour De France, it also affects stamina. I don't intend to imply that it would a silver lining, I'm merely trying to test my understanding of some biological mechanism.

A great reminder that Theranos is not vaporware!

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