Thursday, October 6, 2016

Theranos Admit Critics Were Right, Closes Blood Testing Service


One week shy of the year anniversary of John Carreyrou's article on Theranos that began to raise the awareness of what was going on at the company, Theranos have finally admitted that their lab testing business is not viable and are shutting it down. I've covered Theranos' history in the past, not just their shameless attempt to ignore the historical failings of the company, but to pull a 'bait and switch' and pivot to a product that has none of the amazing features claimed that enabled the company to raise $700 million. Ordinarily the failings of a tech startup would not have received this level of attention, however when that company's product affects medical diagnoses and they have to withdraw years of tests due to errors (and some say fraud), then it falls into a new category and cannot be ignored. The SEC, FDA, and FBI are all said to be investigating Holmes and Theranos, and the company is facing multiple lawsuits for its actions.

Theranos followed the time-honoured tradition of denying any problems, threatening lawsuits against those who speak out, until the weight of evidence became so strong that it could not be denied any longer. As recently as April, members of the board were continuing the Big Lie approach, and claiming Holmes would lead them to success. It seems however that the ban handed to Holmes by the CMS, preventing her from running a company that carried out lab tests for the next 2 years, is a blow they can't recover from, and the lab testing components of the company are being shut down.

In a sane world, when the CEO of a company is subject to a legal ban that prevents the company performing the only service which results in revenue, that CEO is removed from their position, or has the good grace to resign knowing they are unfit for the role. Not so in the case of Theranos - despite having raised $700 million, Holmes personally was reported to hold over 50% of the stock and had full control of the board, effectively making her immune to Board action. In an act of hubris that only in the closeted world of Silicon Valley elite startups could be considered rational or ethical, Holmes chose not to resign, but instead to shut down the lab testing services and put 340 Theranos employees out of work.

In her open letter, Holmes makes a brief statement which I'll selectively highlight and translate:

"we have moved to structure our company around the model best aligned with our core values and mission. We have decided to close our clinical labs and Theranos Wellness Centers, which will impact approximately 340 employees... We are profoundly grateful to these team members, many of whom have devoted years to Theranos and our mission..."

Translation: Our core values and mission are to protect the CEO regardless of the cost to the company bottom line or its employees. You were all led to believe this would change the world, and worked incredibly hard and well at an impossible task, but we really don't care, and thanks for all the uncompensated hours you put in. One CEO under investigation by the SEC, FDA, and FBI is more valuable than the 340 of you, so you're all fired.

"We are fortunate to have supporters and investors who believe deeply in our mission of affordable, less invasive lab testing, and to have the runway to realize our vision."

Translation: Since we have raised $700 million and the investors can't take it back, we have years of runway to continue to try to make the founder's dream a reality, despite no peer reviewed scientific evidence known to exist to support it. And now that we've fired half of you, we can keep things going for twice as long.

"I look forward to sharing more with you as we progress along the way."

Translation: We'll go on a press blackout from here, you won't be hearing much from us beyond the minimum, and certainly no uninhibited access to our miniLab system to run independent tests. (It's a bit of a staple for companies with no released product to "peek their heads out" with an open letter from the founder that end with promises of more to come, such as with uBeam's latest announcement)

The letter is par-for-the-course these days, full of doubletalk to hide the fact it's a massive climb down from the past claims, no ability to point to a product or market even approaching the scale of the original company goal, and the firing (I'm sorry, they weren't fired, but "impacted") of near half the staff who until yesterday thought that they were part of the "core mission". As with many company press releases it's not what is said but what is not said - in this case it's an admission that the capability of Theranos to run hundreds of tests on a few drops of blood is a fiction, and that they have no expectation of that changing. The claims of Carreyrou and others, derided for so long as "bitter" or "disgruntled", or threatened with lawsuits for speaking the truth, are vindicated.

Now to be fair, the company is in a very tricky position - anyone brought in to save the them at this point has a Herculean task. The blood analysis side of the company is now simply one of many in a low margin market, coming from behind stronger incumbents with a tarnished reputation - a difficult task with minor rewards at best - and not one that the numbers can likely justify continuing in.

One could imagine spinning them off into their own low margin business, with a new CEO not encumbered with a federal ban, however that not even that is happening shows they have nothing. This, however, is likely the elephant in the room at any Theranos board meeting - that the Founder and CEO is the single biggest liability to the company, and any hope of salvaging anything involves her removal - yet it is the only option not on the table.

The promise of simple and ubiquitous blood testing was really what drove the monster valuation of Theranos until earlier this year. What is left is the gamble that the company can produce a table top blood testing system superior to those already in existence, and providing enough of a business to justify a $700 million investment, which means a multi-billion dollar valuation. If anyone knows of a comparable blood testing equipment company with a single product and that kind of market cap, please point me to it.

This isn't to say there is not likely to be useful technology somewhere in the company - there are no doubt talented engineers and scientists at the company who have developed useful techniques and equipment, but in isolation and nothing for a product that is world changing. This smacks more of a situation where that IP could be licensed to other companies to recoup some money.

Without the lab testing, or a new system that massively outperforms the existing methods, Theranos are unlikely to ever show a profit and on a financial basis may simply be better off closing down and returning the money to investors. While Michael Dell said that of Apple in 1997 and was proven slightly wrong, Apple had actual products and weren't facing multiple federal investigations. Given the lawsuit ridden future of the company, this may be the simplest of many complex options.

This is a victory for a variety of groups - patients, investigative journalism, and government regulation - but a black eye for the tech press, venture capital, and boards of directors. John Carreyrou in particular can feel great pride in what he did in breaking this story at the WSJ, as not only did his work save patients from bad bloodtests, he's lifted the lid on some of the dubious practices in Silicon Valley and the billions of dollars invested there. The work he did does not come easy or cheap, and is a reminder to support those journalists who do so - I've made a point of subscribing to outlets such as the WSJ because of this. Without their work, we'd never see this type of story, and (selfishly) bloggers like myself would have no primary material with which to work.

There are now many journalists looking for "the next Theranos", and 'unicorns' are under more scrutiny to validate their claims and ensure their products are safe and effective before moving into truly important fields such as healthcare. Without doubt, there are other Theranos-like companies out there, and perhaps now they'll take the chance to pivot and moderate their claims in the hope they'll not receive the same attention - but if the founders are anything like Holmes, you can expect the "true believers" to continue to the bitter end despite reality.

The story of Theranos is far from over, there are no doubt years of stories to come - however its legacy may ultimately be in helping "clean up" tech investment now it is such a huge part of our economy. Boards of Directors may now actually scrutinise the companies they oversee, and perhaps may be inclined to resign when they cannot make an impact on poor behaviour. The federal government has made it clear that all its regulatory agencies that once turned a blind eye to private tech startups will not be doing so any longer. The FDA, SEC, FCC, and other agencies are not just unnecessary red tape but a real safety check necessary for our health and financial wellbeing - and despite their issues, we're much better off with them than without.

1 comment:

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