How a $9 Billion Startup Deceived Silicon Valley
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John Carreyrou of The Wall Street Journal broke the original story about how Theranos, a company that pitched a revolutionary blood-testing system, was misleading investors, patients, and business partners about how its technology worked. Carreyrou's new book, Bad Blood, documents the history of Theranos and how its CEO, Elizabeth Holmes, sold a vision that was too good to be true. Carreyrou sat down with Business Insider to talk about how Theranos was able to pull off this massive deception.
Following is a transcript of the video.
Steve Kovach: Theranos was one of those Silicon Valley stories that sounded too good to be true. It was going to revolutionize the laboratory testing industry. And it turns out, it was too good to be true. John Carreyrou of The Wall Street Journal charted that story about Theranos in his new book, Bad Blood. John, thanks for joining us.
John Carreyrou: Thanks for having me.
Steve Kovach: So, let's talk about what Theranos was saying it's technology could do and what it was actually doing behind the scenes. What were they selling to the public and investors?
John Carreyrou: Right, so, when I started looking into the company in early 2015, they had already gone live with the blood test for a year and a half.
Steve Kovach: And this was in Walgreens?
John Carreyrou: In Walgreens stores, they'd rolled out in a couple Walgreens stores in Northern California and then another 40 or 45 Walgreens stores in the Phoenix area. And the claim was that they had a technology that could run the full range of laboratory tests from just a drop or two of blood pricked from the finger, get you very fast results and do it at a fraction of the cost as regular laboratories, even cheaper than Medicare. The reality was that Theranos had a prototype that was the last iteration of its device called the Mini Lab. And that was a malfunctioning prototype that it was still trying to make work. And when they had gone live in the fall of 2013, they had gone live with a previous iteration of the technology they called the Edison, so named after Thomas Edison, that was actually a very limited machine. It could only do one class of blood tests known as immunoassays. And it didn't do those tests well. It was an error-ridden machine. And so for the rest of the tests on the menu, and they had about 250 tests on the menu, they had hacked machines made by the German conglomerate, Siemens. They had modified them so that they could accommodate small blood samples. And then there was a third bucket of tests that they just did the regular, the old regular way with venous draws, drawing the same amount of blood as everyone else and running it also on commercial analyzers.
Steve Kovach: So how does this happen? This is a highly regulated industry here in the US, you would think something like this that was mostly smoke and mirrors wouldn't be able to get past regulators let alone into a major retail chain like Walgreens. What did Elizabeth Holmes and her colleagues do to sway regulators and sway Walgreens into believing that this should actually be put to use on real patients?
John Carreyrou: Right. So for one thing they exploited a, what I call a regulatory no man's land, in the laboratory space. You have on the one hand the FDA which regulates reviews and improves the laboratory instruments that labs use that they buy off the shelf and that they use in their labs. And on the other hand, you have CMS, the Centers for Medicare and Medicaid Services, which is the regulator of clinical laboratories. But, then there's this category of tests known as laboratory developed tests which are fashioned by labs with their own methods that aren't really regulated by either of these entities. And Elizabeth Holmes and her boyfriend, Sunny Balwani, were able to exploit this third category and say we fall in this category, what are known as LDTs, because we're using our own proprietary machine within the walls of our own lab. Therefore, we don't have to be reviewed by the FDA or at least our machines don't have to be reviewed by the FDA. And CMS which regulates labs doesn't look closely at LDTs so that's the loophole that they were able to exploit. Theranos had been doing, had been attempting to validate its technology for years with pharmaceutical companies. All these validation studies with big pharma companies had failed and in early 2010 it was running out of options so it decided to go straight to consumers. And the way to do that was to align with a retail partner and so they started courting Walgreens. And they told Walgreens, we've got this great technology, it's portable, it can do all these tests off just a drop of blood and we want to partner with you. And Walgreens was desperate for a new way to renewed growth. And so it started meeting with Elizabeth in Palo Alto and in Chicago where Walgreens is based. And it hired a laboratory consultant, named Kevin Hunter to help it do due diligence. And this guy, Keven Hunter, as I explained in the book, very early on smelled a rat. And tried to alert Walgreens executives to his suspicions and they just wouldn't listen to him.
Steve Kovach: So these tests are being done in Walgreens, you know they're hyping the technology, cover stories on famous magazines and so forth. Why weren't we hearing much from the medical community or if we were why did it seem so diminished? Why weren't there more flags from peers in the industry?
John Carreyrou: Right. There were whispers in especially the field of laboratory science. But the bottom line is that the company was so secretive and very little if anything was filtering out of the company itself. So, while there were some skeptics in academia and in the field of laboratory testing, all they could say was that there was this company that was getting a lot of hype, whose founder was becoming a Silicon Valley celebrity, at the same time wasn't doing what you usually do in medicine, which is that you publish studies about your innovation and you publish them in peer-reviewed publications and you have your peers check what you're doing and verify it. So there were a couple laboratory scientists who actually wrote op-eds in scientific journals. One of them was Dr. Ioannidis at Stanford who came out with a gen op-ed in, I believe it was 2015. I'd already started digging into the company at that point. A couple months later, a laboratory scientist at the University of Toronto, I believe, had another op-ed in another scientific journal.
Steve Kovach: Which no one reads these by the way, it's not like The Wall Street Journal where everyone's going to see it. It's like these nerdy guys just talking about it.
John Carreyrou: And you know, they started raising alarm bells about the secrecy, about the, they called it the stealth research.
Steve Kovach: Which doesn't happen in this industry, it should be peer reviewed right?
John Carreyrou: Right, it should be, it certainly hasn't been the way medical science has unfolded for the past century. And so, to their credit, they were on the right track. They didn't have the goods in terms of knowing what was actually going on behind the scenes. But, they had the right intuition.
Steve Kovach: This story sounds a lot like what we hear from Silicon Valley, the overpromise and under deliver. You know, we're going to put out this really cool phone, turns out to be vaporware. How does that relate to what happened with Theranos?
John Carreyrou: In this case, I think Elizabeth lost sight of the fact that her company wasn't a computer software company.
Steve Kovach: Even though she was running it like that.
John Carreyrou: She was running it like that. She lost sight of the fact that it was first and foremost a healthcare company. A medical technology company whose product doctors and patients were going to rely on to make crucial health decisions.
Steve Kovach: And if that new iPhone doesn't come out it's not going to affect your health.
John Carreyrou: And that's a big part of what went wrong with this story is by really draping herself in the modus operandi of Silicon Valley, instead of modeling herself after say the biotech industry or another corner of the healthcare industry. She ended up behaving that way and while it's OK most of the time to behave that way in traditional tech, it isn't in healthcare.