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The Keckley Report

Theranos: The Lessons to be Learned

By June 18, 2018March 1st, 2023No Comments

Theranos was touted as a high-flying disruptor in the $75 billion U.S. blood testing market dominated by incumbents like Abbott, Quest Diagnostics, LabCorp, Roche, Thermo-Fisher, Becton Dickinson and other big names. It’s secret sauce: a blood draw device capable of diagnosing nearly 200 diseases from a small amount of blood.

By 2014, it had achieved a market value of $9 billion and attracted an A list board including Secretary of State Henry Kissinger, former Secretary of Defense Bill Perry, former Secretary of State George Shultz, former Senators Sam Nunn and 7 others of similar pedigree. (“Theranos’ board: Plenty of political connections, little relevant expertise” Fortune October 15, 2015). In the process, its founder, a 22-year old Stanford-dropout Elizabeth Holmes, gained celebrity status for herself and her 2003 start-up.

But the company’s secret sauce was bogus. Theranos’ technology could only perform about 12 of the tests and the SEC claimed the company tricked investors by “hosting misleading technology demonstrations and overstating the extent of Theranos’ relationships with commercial partners.” Friday, June 15, the headlines for Theranos were these:

·        “Elizabeth Holmes steps down as Theranos CEO” CNBC
·        “Theranos Founder Holmes Indicted for Criminal Fraud” Reuters
·        “Holmes indicted on wire fraud charges, steps down from Theranos” CNN

The recognition Theranos gets today is quite different. It is a case study in business failure. It has laid off its 800 employees, announced plans to liquidate and suspend its operations, agreed to pay damages to CMS, the Securities and Exchange Commission (SEC) and others, and faces a litany of civil and criminal lawsuits alleging fraud. And, along the way, it burned through $600 million provided by its investors starting with $6 million from angel investors in 2004 to the Walton’s, founders of Walmart, with ($150 million); Rupert Murdoch, ($125 million) the DeVos family, including Education Secretary Betsy DeVos, ($100 million) and others.

The lingering question is this: how could so many get it so wrong and what lessons can be learned? John Carreyrou’s new book, Bad Blood: Secrets and Lies in a Silicon Valley Start-Up, offers an important perspective. It was Carreyrou’s reporting for the Wall Street Journal that led to the demise of Theranos. It’s a must read.

Theranos, a name intended to connote the marriage of “therapy” and “diagnosis,” was expertly marketed. It boldly promoted its breakthrough technology for blood testing to its board, investors and trading partners like Walgreens. It was a David v. Goliath drama: an upstart akin to Uber, Zappos and others in a sector dominated daring by powerful incumbents with big names and deep pockets.

Carreyrou attributes the company’s demise to several themes widely associated with business failures: a culture that fired executives who challenged the veracity of the company’s claims and financial projections.  A board that failed its fiduciary responsibility. Investors who failed to do adequate due diligence, especially validating the claims about the company’s unique blood-draw technology. It’s a storyline frequently recounted in epitaphs of failed ventures.

This is a new era in the healthcare industry: every organization large and small faces intensified visibility about our business relationships and performance; intense pressure to hit financial projections from activist investors, lenders and strategic partners and a competitive landscape requiring companies to go big or get out. Last week’s announcement of KKR’s proposed $9.9 billion acquisition of Envision is yet another illustration of the significant role played by investment banks, private equity and hedge funds who seek to unlock unrealized value across every sector in our industry.

In my 40-year career in healthcare, I’ve observed meltdowns and overnight successes. It’s the nature of industries like healthcare that are large, growing, technology-driven and capital intense. Thus, the spate of mega-deals—Optum & Davita Medical Group, Amazon & Berkshire Hathaway & JP Morgan, Cigna & Express Scripts and others—that reflect the reality that healthcare’s prominence for investors and riskiness for incumbents who can’t or don’t adapt. But scale and scope alone do not assure success.

The lessons from the Theranos debacle are relevant to every organization in healthcare:

  1. Media Scrutiny is Necessary and Healthy: Journalists who cover healthcare are invaluable to keeping us honest. Their investigative methods coupled with widely accessible data are significant to their trade. Healthcare is ripe for stories focused on conflicts of interest, business judgement that disqualifies leaders, fraudulent behavior, toxic cultures in organizations or simply poor performance. Media scrutiny is a reality. The October 16, 2015 front page story in the Wall Street Journal about Theranos’ questionable blood draw technology was the beginning of the end for the company.
  2. Boards Must be Competent & Exercise Independent Judgment: In healthcare, many of our boards are rubber-stamps for management. Directors trust their CEOs and exercise lax judgment in evaluating strategies and forecasts they assert. The lesson applies equally to publicly traded organizations with global operations and community-based not-for-profits. Boards are ultimately owners of an organization’s success or failure.
  3. Access to Capital is not a Guarantee of Success: Theranos raised enough money from its investors to be successful but it failed. ‘Fail early, fail often’ is a theme understood by active investors. Smart money follows great management who adapt to changing market conditions and innovations that deliver more value to their customers. Theranos had plenty of capital but failed to do both.
  4. Celebrity CEOs should be Avoided: Per Carreyrou, Holmes had a dream to be rich and famous. In 2014, she was named one of the richest women in America by Forbes. She reveled in the spotlight. But the company’s technology breakthrough was bogus and its financial forecasts baseless. Her attention to the performance of the company took a backseat to her personal need for recognition. Celebrity status is not the end-game for effective CEOs; it’s organizational performance, customer relationships, respect from peers and colleagues and the sustainability of the enterprise that matter most.

Blood testing plays a pivotal role in healthcare: 70% of the information used by clinicians to make medical judgments and by drug company researchers who study how their drugs work are derived from blood tests. (Abbott US, PubMed).  There are more than 100 blood tests available in the U.S. market today with prices that vary as much as a 1000% for the same test depending on who’s paying and where the test is done. (“Variation in charges for 10 common blood tests in California hospitals: a cross-sectional analysis” BMJ Open. 2014; 4(8): e005482). It’s a sector in transition: hospitals are 60% of the market but entrepreneurs and their investors are betting a burgeoning direct to consumer opportunity as upstarts like 23 and Me, Any Lab Test Now and others will gain traction (Kalorama).

Like so much in healthcare, it’s a sector ripe for disruption: the big names like LapCorp, Quest and others recognize that disruptors are part of their landscape. That means there will be winners who deliver innovations that alter the fundamentals of their businesses and losers that fail to gain market acceptance. And all recognize there are no shortcuts to success.

Friday, the U.S. Department of Justice charged Holmes and Sunny Balwani, the former president and chief operating officer, with two counts of conspiracy to commit wire fraud and 9 counts of wire fraud. If convicted, they face fines of $250,000 per count, plus restitution of over $100 million, and decades in prison. The Theranos shortcut appears to be a dead-end for the company’s investors and might prove to be harmful patients who depended on the results from their tests. That’s the Theranos story.


P.S. Major Enhancement to Medicare Advantage Plans:  Since the 1970s, Medicare beneficiaries have had the option to receive their benefits through private health insurance plans as an alternative to the federally administered traditional Medicare program. In 1997, the Balanced Budget Act (BBA) named the option “Medicare+Choice” and the Medicare Modernization Act (MMA) of 2003 renamed it “Medicare Advantage.(MA)” Today, MA plans cover 33% of Medicare enrollees (19 million) and represents 30% of the federal spending for Medicare. Despite public antipathy toward the concept of managed care), MA is a significant and growing option for seniors.

By any measure, it’s a successful program: it is popular among enrollees, profitable to most MA plan sponsors, and a key to the federal government’s efforts to reduce Medicare spending. Last week, a new rule kicked in for MA plans that gives them more flexibility in managing enrollees with chronic conditions. They’re now allowed to provide ride-hailing services, home visits, nutritional support, air conditioners for people with asthma, home renovations and other accommodations traditionally not covered. Medicare Advantage seems to be working for seniors. It might offer the key to better care and lower costs for other populations. Integrating social determinants into care coordination makes sense.