Theranos

Theranos was a health technology corporation founded in 2003 by Elizabeth Holmes. The company marketed itself as a pioneer in blood-testing technology and claimed to have invented devices that could conduct blood tests with minute amounts of blood at a fraction of the normal cost. This technology was supposedly designed to detect a wide range of health issues from a few drops of blood. The company raised hundreds of millions of dollars in venture capital in its early years and was valued at over $9 billion by 2015.

That same year, investigative journalists with the Wall Street Journal began questioning Theranos’s technological claims. The company soon encountered a number of challenges and criticisms from medical and financial authorities, such as the US Securities and Exchange Commission (SEC) and the Centers for Medicare and Medicaid Services (CMS). It also faced questions from legal bodies and a number of investors and patients. By the end of 2016, the company’s value had dropped to almost nothing. Theranos received sanctions from the CMS and was stripped of its Clinical Laboratory Improvement Amendments (CLIA) certificate. The SEC later charged Holmes and former company president Ramesh "Sunny" Balwani with deceiving customers through massive fraud. Theranos ceased operations in September 2018. Holmes and Balwani were indicted that year on eleven counts of criminal fraud. A California jury found Holmes guilty of four counts of defrauding investors in January 2022 and Balwani was found guilty in July of that year. By the end of 2022, both Holmes and Balwani had been sentenced to prison.

Background

Elizabeth Holmes was nineteen when she started Theranos. She dropped out of Stanford University in 2003 with an idea to revolutionize the blood-testing market by creating technology that would make such tests easy and affordable. The company’s name was derived from the words therapy and diagnosis. Holmes began shopping her idea around to investors across the country, marketing her company as an easy and affordable means of detecting health problems with just a few drops of blood. Theranos claimed to offer a large menu of blood tests that cost half of what normal testing costs. She quickly garnered high-profile investors, including Rupert Murdoch, Betsy DeVos, and Henry Kissinger.

By 2004, Holmes had raised nearly $7 million, and the company was valued at $30 million. Over the next three years, the company’s investments and value skyrocketed, and its valuation by 2007 was close to $200 million. The company kept a low profile during this period, spending this time doing research and building more investment interest. By 2010, its investment totals amounted to about $45 million through the sale of equity, options, warrants, and other security rights. The company reported this amount to the SEC in 2010.

In 2013, Theranos launched its website and began announcing its products to the public through interviews and press releases. Soon after, Theranos made a deal with Walgreens Pharmacies to begin offering its testing services at Walgreens locations throughout the country. The services would be offered through Theranos Wellness Centers inside Walgreens stores. The company touted these new services would be less invasive and more affordable than other lab testing, eliminating the need for large needles and multiple vials of blood. Theranos was now reaching consumers directly by commercializing its operations.

Overview

Theranos quickly garnered the attention of the public through numerous high-profile media platforms, with Holmes being interviewed by publications such as theNew York Times, Forbes, and theNew Yorker. By 2014, the company had raised more than $400 million in equity sales and was valued at $9 billion. Holmes had a 50 percent stake in the company, making her a multibillionaire. Theranos claims were under scrutiny within the scientific community, however. In 2015, an article in the Journal of the American Medical Association called into question Theranos’s secretive production tactics and criticized the company’s failure to have its research analyzed by peer-reviewed medical journals. Despite these criticisms, Theranos’s profile continued to rise. That same year Capital BlueCross, central Pennsylvania’s largest health insurance provider, chose Theranos to be its lab and bloodwork provider. By this time, Theranos’s valuation had reached nearly $10 billion.

The Food and Drug Administration (FDA) approved Theranos’s lab test for the herpes simplex 1 virus in July 2015, but its effectiveness was questioned shortly after. Several months later, reporters from the Wall Street Journalpublished an exposé of the company in which it interviewed former employees who stated the company’s claims were deceitful. The former employees claimed management was incompetent and the company was exaggerating its technological claims. Holmes herself went on live television following the article’s publication to deny the allegations. The Wall Street Journal published a follow-up piece standing by its story, noting that Theranos was forced to stop using an unapproved medical device for its blood tests.

Shortly after this revelation, the FDA released a report detailing its own Theranos investigation, which found the company was using an uncleared medical device that was not validated by any scientific studies. Weeks later, Theranos’s budding deal with Safeway Supermarkets fell through. The Wall Street Journal then published another story accusing Theranos of manipulating its tests to produce better results. In early 2016, the CMS released a report about its investigation of Theranos facilities in Newark, California, which found that the lab did not comply with appropriate standards and was a hazard to patient health and safety. Soon after, Walgreens announced it would stop using Theranos’s tests in its stores.

Theranos eventually settled with the CMS in 2017, agreeing to exit the blood-testing business for two years and pay a fine. That same year, the company also settled a lawsuit with one of its largest investors, Partner Fund Management, which had accused the company of securities fraud. In March of the following year, the SEC charged Holmes and Balwani with engaging in fraudulent activity and making exaggerated or false claims about the company’s technology, business, and finances. The two were later indicted on two counts of conspiracy and nine counts of wire fraud, standing accused of undertaking a multimillion-dollar scheme to defraud investors, doctors, and patients. Holmes stepped down as CEO of Theranos, and the company shut down in September 2018. The US Justice Department continued investigating the company in the wake of its closure, and noted the possibility of further charges against Holmes and others.

In January 2022, after a lengthy trial, Holmes was found guilty on three counts of fraud and one count of conspiracy to defraud private investors, out of the eleven charges she faced. She was acquitted of three of the remaining charges, US District Judge Edward Davila dismissed another charge, and the jury did not reach a unanimous verdict regarding the remaining three charges of defrauding patients. Holmes remained free on bond while awaiting sentencing; in November 2022 she was sentenced to eleven years in prison. In December Balwani, who in July had been convicted of ten counts of wire fraud and two counts of conspiracy to commit wire fraud, was sentenced to thirteen years in prison. Both defendants appealed their convictions, with hearings held in 2024.

Bibliography

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