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The Resignation of Theranos's COO Is a Major Bid for Atonement Ramesh 'Sunny' Balwani has long been a key figure at the company and one of the closest confidants of the company's founder and CEO, Elizabeth Holmes.

By Roger Parloff

This story originally appeared on Fortune Magazine

Kris Tripplaar — Sipa USA / AP

As Theranos fights for its life, under intense regulatory pressure in the wake of devastating Wall Street Journal articles that have questioned its integrity and competence, it made its most dramatic bid for expiation on Thursday.

As part of a broader restructuring, it announced the departure of its president and chief operating officer, Ramesh "Sunny" Balwani, who has long been a key figure at the company and one of the closest confidants of the company's founder and CEO, Elizabeth Holmes. It's as if Holmes were cutting off her own right arm.

The move comes as Theranos is attempting to persuade one of its regulators not to close down its labs and, as the company has acknowledged, while federal prosecutors and the Securities and Exchange Commission probe the company, reportedly looking for possible misleading statements to investors or regulators about its technology or operations. The company has said it has done nothing wrong and is cooperating with all authorities.

The Theranos press release said that Balwani, who will turn 51 in June, was retiring. Balwani has been the company's president, COO, and a board member since 2009, and he and Holmes, 32, have acted as the board's two-person executive committee since at least late last year.

Theranos told the New York Times on Thursday that Balwani's departure was unrelated to its current regulatory difficulties, but the assertion is difficult to credit.

In March, one of the company's regulators, the Centers for Medicare and Medicaid Services (CMS), had threatened to not only shut down the company's two labs but to effectively ban Balwani and Holmes from the industry for two years as a sanction for the deplorable findings of an inspection conducted last November at its lab in Newark, Calif.

Until Wednesday, the company had largely tried to blame the shocking inspection results on a lab director, since replaced, who was a dermatologist who had been working only part-time for Theranos. CMS inspectors found, among other things, that the Newark lab's hematology operations posed "immediate jeopardy to patient health and safety." It also found major deficiencies in its use and oversight of analytic systems and in the basic qualifications of the lab director, the technical supervisor, and the testing personnel.

But faulting the former lab director, without also faulting the COO who had permitted the lab to descend to such levels, was not plausible, and CMS signaled its rejection of the company's stance in its 45-page letter of March 18, threatening to ban Holmes and Balwani. (Theranos has replied to that letter, and it is not known when CMS will decide what final action to take. If the ultimate decision is adverse, Theranos could challenge it in administrative proceedings and, later, in court.)

In other changes announced Thursday, the company expanded its board from five to eight members (after paring it back from 12 to five members shortly after the Journal articles). Two of the three "new" directors are actually old directors, from the pre-October reshuffling -- Dick Kovacevich, the former Wells Fargo CEO; and Bill Foege, an epidemiologist and former director of the Centers for Disease Prevention and Control.

The third face is truly new, however, and potentially significant: Fabrizio Bonnani, a former senior officer at Amgen and Baxter Healthcare. Most notably, given the dire circumstances under which Bonanni is arriving, he was senior vice president for quality and compliance at Amgen before rising to become that company's executive vice president, operations, the position from which he retired in 2013.

But the departure of Balwani is clearly the most striking, surprising, and potentially weighty part of Thursday's news -- at least from the likely perspective of CMS.

Some of the most disturbing parts of the Journal"s first story about Theranos last October concerned email conversations between Balwani and a former lab employee, which the former employee believed showed problems with the accuracy of Theranos' proprietary technologies and possible impropriety in the way Theranos was handling proficiency tests it was required to perform to keep its regulatory license. The company responded at the time that both the employee and the Journal misunderstood the pertinent science and rules, and that regulators were kept fully apprised of how Theranos was handling the proficiency tests.

In my own conversations with former Theranos lab employees, after the Journal story broke, several bridled at having had to answer to Balwani who, they stressed, had no background in lab science, having spent his earlier career in the software industry. (A Theranos spokesperson said Balwani was unavailable for an interview.)

I interviewed Balwani in April 2014 in preparation for a cover story about Theranos and Holmes that was published that June. (That story is here; a protracted correction is here; and Theranos's response to the correction is here.)

Balwani met Holmes at Beijing University during a summer in the early 2000s, Balwani told me, where both were studying Mandarin. (Holmes was in a far more advanced course.)

Holmes had been admitted to Stanford as an undergraduate, where she would study chemical engineering, while he was already in the middle of his career, having launched and sold an early business-to-business cloud-services company to CommerceOne, a pioneering ecommerce company. Before that, Balwani had worked at Microsoft for six years -- as a developer at first, but later rising to sales manager of Internet Explorer for the Bay Area -- and, prior to that, at Lotus Development.

After Beijing, Balwani kept in touch with Holmes, at first by email and, later, in person after he enrolled in graduate studies at Stanford in 2004, about the same time Holmes was dropping out to start Theranos (famously, at age 19).

At Stanford, Balwani was studying machine learning. Machine learning is a branch of artificial intelligence that involves pattern recognition, massively parallel computing, and processing enormous data sets.

"When I saw what they were doing at Theranos," Balwani told me in 2014, "I thought this will be a really good application for machine learning, because we are going to generate a lot of data, and we'll be able to do some interesting work around that. That will be very beneficial to the healthcare system."

In 2009, when the company had between 30 and 50 employees, Balwani joined Theranos as its president. (The company now has about 1,000 employees.)

Balwani's admiration for Holmes at the time of my interview was evident.

"She's probably the most important inventor of our time," he told me then, speaking at low volume but with white-hot intensity. "She has an amazingly creative mind to solve problems … take some complex problems and really simplify them so they become practical to solve. So that is her gift."

In Theranos' official announcement Thursday, the company thanked Balwani for his "invaluable contributions," and he was quoted making reciprocally positive statements.

"I am deeply grateful for the opportunity to contribute to Theranos' mission to make healthcare accessible through its technology and products," he said in the press release. "I will continue to be the company's biggest advocate and look forward to seeing Theranos' innovations reach the world."

It is significant that Theranos and Balwani are apparently parting on good terms. If there should prove to be any skeletons in Theranos' closets, no one would know better where to find them than Balwani.

Senior Editor (Legal Affairs) Fortune Magazine

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