Case study Theranos PDF

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Theranos Case

THERANOS

Figure 1: https://raisonbrands.com/healthcare-startups-win-more-investors-with-branding/

Elizabeth Holmes and the beginnings of Theranos Elizabeth Holmes always wanted to be rich. At age nine, one of her relatives asked, "What do you want to do when you grow up?" "I want to be a billionaire" she replied. "Wouldn't you rather be president?" she was asked. "No, the president will marry me" she countered, "because I'll have a billion dollars." Holmes always had a sense of determination and ambition, qualities that were nurtured by her parents. Their family history was distinguished: her father was descended from Charles Louis Fleischmann, a Hungarian immigrant who started a massively successful yeast company in 1868. This business was so prosperous that by the turn of the twentieth century the family became one of America’s wealthiest. Elizabeth’s great-great grandfather, Dr. Christian Holmes, established Cincinnati General Hospital and the University of Cincinnati Medical School. Holmes often referred to her family history when answering questions about Theranos, citing this legacy shaping her learning and outlook. Subsequent generations, however, had squandered much of the family fortune, living as Holmes’s father Chris stated, ‘large but flawed lives’. Chris Holmes ensured his children understood that undertaking a successful, yet purposeful life was important. Holmes’s parents pushed Elizabeth to achieve in all areas. Despite being a ‘fair student with average grades’ her parents encouraged her to study Mandarin though the Stanford University languages program, as this was known as a ‘backdoor entry’ into the prestigious university. 1

Theranos Case After high school, Holmes was offered a place at Stanford. For a student with interests in science and technology, it was an obvious choice, given its proximity to Silicon Valley and close connections with many technology organisations. As she was finishing high school, two Stanford PhD students were beginning to gain significant attention for their start-up with a funny name - Google. At Stanford, Holmes met professor Channing Robertson, a prominent leader in the chemical engineering department who had been teaching since the 1970s. He became her mentor and one of her earliest supporters describing her as a ‘natural storyteller': "She has somehow been able to take and synthesize these pieces of science and engineering and technology in ways I had never thought of." In 2003, at age 19, Holmes dropped out of Stanford,to start Theranos. By 2005 Theranos had its first prototype, Theranos 1.0, and over two dozen employees. Holmes was driven by two ideas. The first was people’s fear (including her own) of needles. She told a TEDMED audience that that between forty and sixty per cent of people who are ordered by their doctor to get a blood test do not because of fear. The second was the relatively high cost of blood testing. Holmes believed diabetes, sexually transmitted diseases, and other common medical conditions could be diagnosed and treated earlier if the tests were less onerous and more accessible. “We see a world in which no one ever has to say, ‘If only I’d known sooner.’ A world in which no one ever has to say goodbye too soon.” From the very beginning Holmes presented herself, and her company, as trying to change the world for the better. Holmes wanted to transform the medical industry, and as a result, save lives. Former U.S. Secretary of state George Schulz was one of the most outspoken supporters of Elizabeth Holmes and Theranos. "Everywhere you look with this young lady, there's a purity of motivation," Shultz said. "I mean she really is trying to make the world better, and this is her way of doing it." Theranos’s strategy Theranos aimed to disrupt, healthcare and medical diagnostics in similar ways to how companies like Apple, AirBnb or Uber have shaken up music, technology, hospitality or transport. Holmes recognised a potential gap in the market and set out to capitalise on it. Theranos (a mashup of "therapy" and "diagnosis") aimed to revolutionise blood testing technology. While the original idea patented by Holmes was to create a wrist-based antibiotic delivery system, early research showed that this was akin to ‘science fiction’ given the delivery of minute amounts of antibiotics in this way was medically ineffective. Instead Theranos started to explore the creation of a handheld diagnostic system that combined microfluidics and biochemistry. Theranos focused on developing a cartridge reader system, where patients could prick their finger and a drop of blood would be ‘read' using sophisticated digital technology. This blood-testing technique was not new, it had been used since the 1980s, but the idea that it could be housed in a toaster-sized machine placed in stores, homes, medical transport or on the battlefield would completely transform medical testing. 2

Theranos Case Theranos’s path to success was far from open and transparent. As a privately-owned company, Theranos was under no obligation to share financial records or company information with the public. Theranos kept information about its technology and blood tests secret from both investors and many staff. Channing Roberston told The New Yorker, “For a long time, I couldn’t even tell my wife what I was working on.” Some noted Holmes operated in “the Steve Jobs way of keeping everything secret until the iPhone was released.” Lakshman Ramamurthy, a molecular biologist and a former associate director at the Food and Drug Administration (FDA) recognised, however, “a health test is more consequential than a consumer product. It needs to be clinically valid and provide useful information.” Theranos largely failed to engage with the scientific community in any real way. Over the life of the company Theranos did not publish information on its work in peer-reviewed biomedical literature, with Holmes listed as a coauthor on only one article in an online-only fee-paying journal (Toy v Theranos, 2016). In April 2005, Holmes said on the public-radio program “BioTech Nation” that she had created a hand-held device that would help drug companies tell in real time how well their drugs worked on patients using “a little tiny needle that pulls a little tiny drop of blood” from an arm or the hand. No evidence of this initial device was shown to investors or the public. In 2007 Theranos struck a deal with pharmaceutical company Pfizer to test Theranos 1.0 in a cancer-patient trial. Under this agreement devices were to be placed in patient’s homes and they would use them to test their blood daily. Results were to be wirelessly sent to Theranos’s California headquarters for analysis then forwarded to Pfizer. This study was ended in 2009 as Pfizer claimed they were “underwhelmed” with the clinical outcomes. Final reports showed glaring inconsistencies in results, high mechanical failures and significant issues with wireless transmission of data. Another prototype was created by 2007. Slightly larger than a toaster, the Edison was a sleek box with an iPod-like screen that aimed to read and diagnose blood samples almost instantly. It was named for the famous inventor Thomas Edison who claimed "I have not failed. I've just found 10,000 ways that won't work." Theranos asserted that the Edison could diagnose up to 200 conditions in only a few minutes from a single drop of blood. Patients would no longer need to be stuck with needles drawing multiple test tubes of blood, addressing a significant fear that many people have, including Holmes. The Edison would also provide almost instantaneous medical data allowing for increased responsiveness to healthcare needs. Silicon Valley and the rise of the ‘unicorns’ By 2010 Silicon Valley was booming. While it had always been synonymous with innovation, the beginnings of companies such as Tesla, Uber, Lyft saw the rise of the ‘unicorn’ or the privately held company worth more than $1 billon. In this world ingenuity was rewarded and growth the ultimate goal.

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Theranos Case To be competitive pushing into new markets and developing new products is essential, yet questions can be raised about the behaviors that are allowed and accepted in the name of ‘innovation’. Questions about privacy and use of data, the role of social media and tech companies in functioning democracies, the treatment of workers and contractors and managerial misconduct have all cast a shadow over the progress of these economic giants. Outsiders, and some within the industry, have begun to suggest that Silicon Valley has an ‘ethics problem’, walking a fine line between what is actually illegal and what constitutes bad behavior and there have been calls for big companies to instill an ‘Chief Ethics Officer’. In the broader community, however, companies are now being pressured to take a stand on global issues. There’s increased demand for ethical leadership and employees are willing to take a stand when they disagree with the internal culture of their workplaces. In 2019 Google employees staged mass walkouts to protest the companies lack of action in terms of diversity. Employees want to work for organisations that contri bute to the global good, but also want a positive, supportive and fair work culture. Companies that last a long time align their business practices with their values and their values align with what works for customers, employees and partners. What makes Silicon Valley so interesting, for many outsiders, is the coexistence of a sincere belief in wanting to make the world better and ethically dubious decision making for the sake of achieving organizational aims. Theranos's clients While there was significant early interest in Theranos's offering. The blood testing market had been dominated by a small number of large companies, and there was potential for rapid growth in not only the hospital and medical environment but into areas such as retail. Early on Theranos met with a number of pharmaceutical companies, however many did not want to pay for the high costs of validation testing. Another challenge was that in client demonstrations the Edison performed inconsistently. In a 2006 test with Novartis in Switzerland, the device reader had multiple issues and failures in preliminary testing, and Holmes had fake results electronically sent to the system from the US without the client being aware. Upon return to headquarters in Palo Alto a number of employees who’d been on the trip seemed to lack enthusiasm and appeared downcast despite Holmes’s claim that the trip had been a success. Chief Financial Officer, Henry Mosley, questioned Holmes on what had occurred and raised concern over some of the financial forecasting that had been used. He was told by Holmes that he wasn’t “a team player” and fired. None of the other employees knew what occurred, Mosley simply ‘disappeared' and wasn't replaced. Employee rumour was he had been caught embezzling funds. The lack of a consistently working product did not stop Holmes and the Theranos team from targeting clients. In 2010 Theranos approached Walgreens (the second-largest pharmacy group in the US) to consider installing the Edison in pharmacies across America. Holmes and her team met with executives and presented a compelling PowerPoint presentation claiming that the Edison was "viable and consumer-ready" and validated under the FDA system. During the initial partnership discussions, a Walgreens lab consultant, Kevin Hunter, expressed trepidation about 4

Theranos Case Theranos technology and was told by one his executive team “we can’t risk a scenario where (competitor) CVS had a deal with them in six months and it ends up being real.”

Figure 2: Walgreen Wellness Centre offering

The Walgreens deal went ahead in exchange for a $100 million "innovation fee" and an additional $40 million loan. By 2012 Walgreens was told that the project was on track for a 2013 launch and that Theranos had all the regulatory approval necessary. The Edison would, according to Holmes, require 99.9% less blood than traditional testing and help make Walgreens the nation's lowest cost, highest quality laboratory provider. In 2013, they started rolling out "wellness centers" that offered over the counter lab testing in pharmacies, and within two years there were 41 across California and Arizona.

Figure 3: Walgreens Wellness Centre: https://finance.yahoo.com/news/drugstore-test-startup-shakingmedical-220206225.html

Despite Theranos's claims of being able to test a single drop of blood and provide almost instant results, the process within Walgreens' wellness centers involved traditional blood removal, via a needle, and the transport of the blood via FedEx back to Theranos's headquarters for testing on commercially bought machines. Even if the Edison or other Theranos designed devices could

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Theranos Case run diagnostic testing onsite, they did not actually have FDA approval to use them. One way Theranos built credibility with clients was by stressing their links to the US military. Holmes had met James Mattis, head of U.S. Central Command at the Marines’ Memorial Club in San Francisco. He went out of his way to stress Holmes's integrity. "She has probably one of the most mature and well-honed senses of ethics—personal ethics, managerial ethics, business ethics, medical ethics that I've ever heard articulated.” In 2011, a military delegation visited Theranos Headquarters to discuss plans to deploy their devices to Afghanistan. This delegation was headed by Lieutenant Colonel David Shoemaker of the army’s medical department. Shoemaker had experience with many who thought the military was exempt from civilian regulation, and pushed back when Holmes told the delegation that they wanted to deploy the devices without going through the FDA approval process. He noted that Holmes didn’t seem to listen to any ideas that contradicted her point of view. Shoemaker advised Theranos that the military would only consider deploying their technology if that has advice from the FDA that they had appropriate regulatory approval. After nearly a year of back and forth, Shoemaker contacted the FDA himself to enquire about Theranos’s compliance with federal regulations. This led to not only an FDA compliance review at Theranos, but a rather stern email sent by Holmes to General Mattis suggesting Shoemaker gave “blatantly false information” to the FDA. After much debate and compromise, Theranos gained approval for limited, de-identified testing of their product in Afghanistan. However, they never actually commenced the project. What became apparent was that Theranos leaders seemed to be unable to distinguish between a prototype and a consumer-ready product. A pattern of criticism was emerging, as mid-level workers, compliance officers, and outsiders began to question the efficacy and ethics of Theranos’s practices—only to be overruled and second guessed by those at the top. One employee said "It was as if Boeing built one plane and, without doing a single flight test, told airline passengers, "Hop aboard." To still be working on minor issues in the product was one thing when you were in R&D mode, but going live in Walgreens stores meant exposing the general population to what was essentially a huge, unauthorized research experiment. Theranos's supporters and investors Between 2003 and 2013 Elizabeth Holmes raised nearly $900 million from investors. At its peak, Theranos was valued at almost $10 billion, and Holmes became the youngest-ever selfmade billionaire in her 20s, owning more than half of the company. From early in the company's history a number of well-connected people publicly praised Holmes' vision and lent their support to Theranos. One of the first investors was a family friend of Elizabeth's, Tim Draper who invested $1million. The Draper name carried a lot of weight and helped give Elizabeth credibility: Tim's grandfather had founded Silicon Valley's first venture capital firm in the late 1950s, and Tim's firm, DFJ, was known for lucrative early investments in companies like the web-based email service Hotmail.

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Theranos Case Don Lucas, Chairman of Oracle from 1980 to 1990 was another early champion, who had brunch with Holmes every Sunday. Don was introduced to Elizabeth by her father, through contacts at the IMF. In an oral history of Bay Area venture capitalists, he describes Holmes: She had no background in business, and so it's quite presumptuous for somebody to say, "I'm going to be president of the company." ....After spending a lot more time with her. I learned her great-grandfather was an entrepreneur and started Fleischmann's – packaged yeast. It was very successful. So that was one side, that's the entrepreneur side. But she was on the medical side. Ah! It turns out later, the hospital very near where they lived is named after her great uncle who was involved with medicine. She came by both of the two talents necessary here, one medicine and the other entrepreneurship, quite naturally. Lucas introduced Holmes to Larry Ellison, the founder of tech company Oracle. Ellison, like Lucas, invested in Theranos's second funding round. One of the wealthiest people in the world, Ellison was not necessarily an ideal role model. Oracle, in its early years, famously exaggerated the capability of its software. It shipped versions before they were completely consumer-ready, leaving customers to deal with a multitude of bugs. Avie Tevanian, known as "Steve Jobs righthand guy" invested $1.5 million and joined the board of Theranos in 2006. Tevanian, a wellknown technologist, worked closely with Jobs at both NeXT and Apple. The circle of investors grew to include a who’s who of American plutocrats: Rupert Murdoch, the Walton Family, and the DeVos family. As Theranos grew a veritable “who's who” of politically connected people invested and joined the board, many of whom met Holmes through former secretary of state George Schultz. Schultz met Elizabeth through his granddaughter (who moved in similar social circles) in 2011 and he became the conduit, introducing Holmes to many other politically connected people. Notably, not many had any medical expertise. By 2015 the Board included: • • • • • •

George Shultz, former US secretary of state James Mattis, a retired US Marine Corps general who went on to serve as President Donald Trump's secretary of defence Richard Kovacevich, the former CEO of Wells Fargo Henry Kissinger, former US secretary of state William Frist, a heart and lung transplant surgeon and former US senator William H. Foege, former director of the Centres for Disease Control and Prevention.

The presence of these former cabinet members, members of Congress, and military officials on the board also gave Theranos legitimacy and supported assertions that the Edison devices were being used in the field by the U.S. military. Investors too were excited about Theranos. Christopher James and Brian Grossman, who ran a hedge fund Partner Fund Management reached out to Holmes regarding a potential investment in 2013. They were impressed with the level of information security at Theranos, and the 7

Theranos Case remarkable board of directors. At a meeting with Theranos, they were shown a PowerPoint presentation containing scatter plots purporting to compare test data from Theranos's readers to data from conventional lab machines. The material indicated that Theranos's test results were almost entirely correlated with those of the conventional devices. In reality, much of the data in the charts wasn't from the Edison. It was from commercial blood analyzers Theranos had purchased. The investors were also sent financial forecasts. The documents forecast gross profits of $165 million on revenues of $261 million in 2014 and gross profits of $1.08 billion on revenues of $1.68 billion in 2015. What they were unaware of was that Theranos fabricated these numbers. Theranos hadn't had a real chief financial officer since Henry Mosley was fired in 2006. Theranos begins to brand itself to the wider public Between 2003 and 2013 Theranos operated largely under the radar in broader consumer terms. As a private company, whil...