I’ve seen very similar things at other science based/biotech startups. In particular, over-promising and misrepresenting the state of development. Quite often these companies are funded by traditional tech investors who don’t know how to do DD on science-based/biotech startups.
The difference with Theranos is that they messed with the FDA. They did consumer testing, and publicly raised their profile to the point where they couldn’t be ignored.
If they hadn’t started doing consumer testing with a device that essentially doesn’t work, I doubt we would have heard of them.
Most of the investors would be happy right-off the investment. Even with Theranos, I believe it’s only the smaller investors who are making a fuss now. Larger investors know the money is gone, and there’s not much point in suing.
Carreyou had two big revelations. One was that Theranos was not running blood tests on their proprietary machines, which were supposed to do finger prick draws. The other was that Theranos had submitted fraudulent validation data to the Center for Medicare and Medicaid Services (CMS) and state regulatory bodies.
They did a couple brazenly unethical and illegal things.
1) CMS subcontracts lab inspections to state regulatory bodies. When California lab inspectors visited Theranos, they physically blocked off the door leading to a floor that had the Siemens equipment, presumably to hide the fact that they were not conducting tests on their own proprietary machines. So, the inspectors never actually inspected the relevant labs.
2) Theranos violated "proficiency testing" guidelines. Proficiency testing is the practice of running tests on a sample with a known concentration/result, and comparing results. The spirit, if not the letter, of the guidelines is that you run the tests on the same equipment as would be commercially used. Thus, Theranos sent in fraudulent tests by testing using Siemens machines. This proficiency testing duping was what caused Tyler Schultz to send in an anonymous tip to the New York laboratory regulatory body, and led to his final decision to leave the company.
3) Theranos tried to claim with the FDA that its tests were "laboratory developed tests", i.e. they were unique tests that could not be compared to existing market tests. Carreyrou has a scoop in the book that Theranos benefited greatly from a bureaucratic power grab between the FDA and CMS. Both agencies claim some sort of regulatory oversight for the blood testing market.
At least initially, there were many in the FDA who were suspicious, and wanted to send inspectors. But, Theranos's seeming passing of CMS inspections allayed fears in the short term. It was after Carreyrou's first two articles (IIRC), that the FDA sent a surprise inspection.
EDIT: I also think that in the book Carreyrou mentions that a number of doctors in the Phoenix area, where Theranos was doing a test pilot of their finger prick tests, had filed complaints with the state or federal regulatory bodies. So, there were definitely people at CMS or FDA who were beginning to pay attention.
If what you meant was simply that the FDA launched enforcement action after the publication of the article, then my apologies. No argument from me there.
But if it wasn’t consumer testing, then I don’t think it would have been news, and the fallout wouldn’t have been as big.
So, we possibly agree. The fact that they started doing consumer testing with a device that didn’t work made this news.
However, similar kinds of lies/misinformation gets told to investors in biotech startups all the time. That they actually did consumer testing is what made this news.
But I don’t believe it was quite clear that the consumer testing was a fraud until just before the last round of “investment”.
I put “investment” in quotes because the last 100MUSD was kind of a loan, based by their parent portfolio... so they’ve effectively sold what assets they have.
So yea, consumer testing appears to have been fraudulent, and after that became clear publicly there wasn’t much further investment.
No, it was the other way around: the inspectors only got to see the STANDARD equipment, not the proprietary machines.
“AFTER ALL THE DELAYS, the partnership seemed to finally be getting off the ground in the early months of 2012: as a beta run before a full launch, the companies had agreed that Theranos would take over the blood testing at an employee health clinic Safeway had opened on its corporate campus in Pleasanton. The clinic was part of Burd’s strategy to curb the supermarket operator’s health-care costs by encouraging its workers to take better care of themselves.”
Carreyrou's first article was October 2015. I think the Walgreens stuff had kicked off by then too. The FDA probably took a while to deal with it. But by putting a non-working instrument in a consumer facing context they were clearly going to get involved at some point.
If they hadn’t done that, I don’t think it would have been a news story, or that legal action would have been taken.
This stuff happens relatively often, investors just right-off the investment (or otherwise try and dump it).
I think this alone would probably be illegal?
This is not to mention all the other shady stuff that Theranos did in pitching investors. E.g., falsely claiming that they had machines being used in the field with the US Army, and that Johns Hopkins had validated results from their finger prick blood tests. This would also seem to be outright securities fraud?
Carreyrou may have exposed Theranos, but the sheer amount of illegality at the company seemed to have been going on for years.
It’s not like suing the company gives them a desirable outcome. In fact it probably makes them look slightly more risky to companies looking for investment. Usually they just write off the investment and move on. Just like Rupert Murdoch did (sold it back to Theranos for 1USD).
Either that or they look for someone else to pump more money in or cash them out. I feel like that was the subtext of a lot of the conversations with board members/investors in the book. There was nothing they could do, except make the play look as good as possible and hope more money gets poured in and it either works eventually, or they get to cash out... so.. why acknowledge any of the issues?
i think it's much, much worse that customers, who relied on test results for important medical decisions were lied to.
Financial fraud is one thing, but potentially killing people for greed and profit should really land the folks, which are resonsible for such scandalous behavior in the slammer for an extended stay.