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The Keckley Report

Lessons from Theranos for Healthcare Investors

By January 9, 2017March 1st, 2023No Comments

Lessons from Theranos for Healthcare Investors

Theranos raised $900 million from investors and achieved a market capitalization of nearly $9 billion. Today, its investors may have lost most of their money and the company is pursuing a new strategy. It’s a familiar story to lenders and investors and likely to be hallway chatter today as the 35th Annual J. P. Morgan Healthcare Conference convenes in San Francisco.

Theranos targeted the lucrative blood testing market offering a new technology that allowed labs to do 30 blood tests almost instantly with a single drop of blood. The company began its operations in 2003 with a $5.8 million investment from Draper, Fisher, Jurvetson and other venture funds. By 2010, it had raised $83.4 million more in three follow-on rounds and then scored a reported $633 million investment in 2014 increasing its market value to $9 billion. In those 11 years, the company operated in relative secrecy: its 60-plus patent filings gave clues about its activities and its CEO, Stanford drop-out Elizabeth Holmes, shunned the spotlight.

The company used its capital to hire 800 and open labs in Arizona and California. By 2015, it had developed collaborative deals with Capital Blue Cross (PA), Walgreens, Cleveland Clinic and others, built a blue-chip board including former Senators Bill Frist and Sam Nunn and incoming Secretary of Defense James “Mad Dog” Mattis and received approvals from the FDA for its HSV-1 test and CLIA for labs to use its devices. Forbes named Holmes among its richest in 2014, with an estimated net worth of $4.5 billion and media attention followed. In a Stanford Business School profile (February 2, 2015), she told the interviewer that she had no Plan B for her company, characterizing contingency planning as an “act of failure. “But things changed.

By the spring of 2016, the company faced questions about its Edison technology, cease and desist orders and an array of lawsuits. And media coverage followed. A critical piece in the Wall Street Journal (October 16, 2015) by John Carreyrou observed “Hot Startup Theranos Has Struggled with Its Blood-Test Technology.” Then followed a stream of articles by a trio of WSJ business journalists (Carreyrou, Christopher Weaver, and Michael Siconolfi) exposing the company to more scrutiny: “Agony, Alarm and Anger for People Hurt by Theranos Botched Blood Tests” (WSJ October 20, 2016), “Theranos Whistleblower Shook the Company and His Family” (WSJ November 18, 2016), “Big Names take Hit on Theranos” (WSJ November 28, 2016),  “Theranos Ties Pose Possible Obstacles for Mattis Confirmation” (WSJ December 2, 2016),“Theranos Foresaw Huge Growth in Revenues and Profits” (WSJ December 5, 2016) and “Theranos Slashes Staff, Voids more Test Results” (WSJ January 6, 2017). And coverage in the New York Times, Forbes, and other business media followed suit. Theranos is now pursuing Plan B, a new mini-lab concept, having laid off all but 200 of its workforce.

Stories like Theranos are familiar to every investor and lender gathered in San Francisco this week. All of them have had disappointing results because an organization where they’ve parked capital as debt or equity has failed to meet expectations due to poor execution or changing market conditions derailed their plan. And some have faced the enormity of challenges like those facing Theranos today in the companies/organizations they’ve funded.

As JPM attendees listen to CEOs and CFOs tell their stories this week, they’ll filter their business propositions through imperatives for investing or lending, regardless of the sexiness of their pitches: GROWTH IS ESSENTIAL. FOCUSED EXECUTION IS KEY. AN EFFECTIVE CEO IS VITAL. BOARDS MUST BE INDEPENDENT AND OBJECTIVE. THE ORGANIZATION’S VALUE PROPOSITION MUST BE CLEAR. They understand the importance of an organization’s reputation and solicit insight from former colleagues about the organization’s culture and the capability of its management.

Looming prominently at JPM this week is speculation about the Trump administration’s replacement for the Affordable Care Act. No one knows for sure what’s ahead but two core beliefs seem fundamental to its forthcoming policies and directives: 1-private sector solutions are better than “big government” and 2-getting consumers to have more skin in the game will force more accountability into the system. That bodes well for healthcare lending and investing, driving more deals and increased demand for their capital.

So as attendees flood the lobby of the St. Francis Hotel this week, it’s certain they’ll compare notes about what’s next in healthcare and make bets on the next winners and losers. They’ll ruminate about the plights of companies like Theranos, the big consolidation plays on the landscape and game-changing innovations in how care is delivered and financed.

The JP Morgan conference is Woodstock for lenders and investors who want to make money with their money. At the end of the day, healthcare is a big business. Organizations, whether not for profit or investor owned, need funds to innovate and grow. That’s the reality of our industry and why everyone can learn from Theranos.


Thursday, Esteban Santiago, a 26-year old veteran of the Iraq War, killed 5 and wounded 6 in the baggage claim area of Terminal 2 at the Fort Lauderdale Hollywood International Airport. He had undergone mental health evaluation voluntarily, having presented himself at the Anchorage AK FBI office saying he was hearing voices. He was discharged from a local mental health facility four days later and his legally-acquired handgun returned. While speculation swirls around how the troubled vet was able to carry-out his premeditated horror and maintain legal ownership of his handgun, the heroism of the Broward Health System team garnered attention from media. It’s what hospitals do every day, whether in the circumstance of a shooting or emergency room visit by an opioid-abuser. In responding to the needs of the wounded, the doctors and nurses at Broward Health did not ask their insurance status or check for their ability to pay. They did their jobs. That’s why hospitals are unique in our scheme of healthcare delivery.

The lenders and investors in San Francisco this week will hear from a few acute-care system operators who report how they’re managing increasing utilization, decreasing margins and growing bad debt. Hopefully, the Ft. Lauderdale tragedy will cause reflection about the future of the health system—how veterans’ health is managed, how hospitals are expected to provide more services with less funding, how as a society we should address the epidemic of mental health disorders, and more. We’re an industry that’s dependent on lending and investment, but we’re unique in how it’s used.