What do we learn from Theranos’ fall from grace?

Published at Jul 7, 2016, in Features

The Theranos Saga is emerging as one of the more curious cases in recent years – and its downfall is a classic example of when you try to apply a west coast mentality to an east coast industry.

Theranos, for those of you not aware, is a med-tech company which promised to be able to test for 70 different biomarkers in a single drop of blood instead of taking vials of blood for simple testing.

The company had been promising to conduct up to 200 tests on a sample before it scaled this back.

The proposition was compelling: here was a way for blood tests to become more accessible – in fact, Theranos kits were at one stage being sold in Walgreens, a US-based pharmaceutical chain until fairly recently.

Founder Elizabeth Holmes was able to raise a lot of cash on the back of the promise, and at one stage the company was worth $9 billion on a valuation business.

She talked the talk too – even pulling out a black turtleneck for excited presentations.

For a while there, it was a start-up darling – now, not so much.

It’s a long story and you can catch up on a timeline of Theranos’ fall from grace here – but these days the company is being investigated by authorities for dodgy practices and for fundamentally not being able to do what the company had promised.

There have also been doubts around the company not having its data peer reviewed, and concerns around its testing methods.

The Securities Exchange Commission and the Department of Justice have both issued subpoenas to the company – along with official enquiries from the Food and Drug Administration.

There was a school of thought that Theranos was able to exploit loopholes in the regulatory system, but according to business development officer at Universal BioSensors, Pierre Nathie, that argument is nonsense.

“There’s no such thing as a loophole in this tightly-regulated industry, but what we see is consistent ways of getting around regulations,” he said.

“It is evasion, it is fraud – you call it what you want, but it is quite shocking.”

Nathie was speaking at a BioMelbourne Network event earlier this week – where a raft of experts in the field tried to unpack just what went wrong with the Theranos story.

‘Well, I don’t really believe it’

The key claim of Theranos was that it was able to test for 70 types of biomarkers from a pinprick instead of the usual vials of blood.

That assertion immediately caused alarm bells to start ringing in the biotechnology world.

According to Nathie, there’s a pretty simple way to think about regular blood testing.

To find cholesterol in the blood stream using a standard sample, it’s like dumping a 1kg bag of sugar into a fish tank and then trying to pinpoint the sugar.

For iron, it’s like trying to find the sugar after you’ve poured 13 1kg bags of sugar into an Olympic swimming pool.

For C-reactive protein, it’s 10 1kg packs of sugar in Albert Park Lake.

For troponin, it’s 9 1kg bags in Port Phillip Bay.

So for Theranos to claim that it could test for a range of biomarkers in a sample the fraction of the size of regular blood testing drew some incredulous reactions.

“I remember my CEO at the time came to me and said ‘why can’t we do this? This is brilliant! Why do you keep on telling me that we can’t do this?’,” Universal BioSensors chief scientific officer Dr Alastair Hodges said.

“I said ‘well, I don’t really believe it’.”

It was a classic case of making an unbelievable claim in the market and then expecting people to somehow believe you.

Theranos’ nanotainer collected about 25-50 microlitres of blood – a standard blood test may draw between 3000 to 10,000 microlitres (or 3-10 millilitres).

So, trying to find a biomarker in such a small amount drew scepticism.

According to Dr Hodges, a standard blood test will also strip out red cells – meaning the amount Theranos was theoretically playing with was even smaller.

“You can miniaturise things down, and you can do a single test or two to three tests perhaps off that sort of volume of blood but it’s going to take you a long time to develop those sorts of things,” Dr Hodges said.

“Doing those things at small volume increases the complexity of it.”

It’s this reason why Dr Hodges was sceptical.

“So that was my response at the time. I didn’t know how she was doing it and I never said never, but I was sceptical,” he said.

With the technical feasibility of Theranos’ technology very much in doubt, what made the company and Holmes think it would able to launch a consumer-facing technology?

“But she never listened to them”

Dr David Lester is the current CEO of NIESM Pty Ltd, but was previously the VP of Human Health Solutions at Theranos – and was able to witness the company up close.

He joined the company from Pfizer, after being part of a funding round for Theranos in the early days.

“The first deal they got was through Pfizer and I was there – she came through me. I thought ‘this is a 21 year old with a great idea and needing a two to three million dollar contract’, which is peanuts for a company such as Pfizer,” Dr Lester said.

“Let’s just see what happens.”

A short while later, he transplanted onto the west coast to work directly for Theranos – a big transition from the east coast where the traditional pharmaceutical and banking world is.

“The west coast is all about really cool technologies and companies who have no idea what their valuations are or what they mean.” Dr Lester said.

“Elizabeth was part of that scene and part of that energy.

“On my second day my office was next door to the boardroom and you had Larry Ellison walking in, you had Don Lucas who I knew of very well, I thought ‘this is going to be great!’.”

Only, it soon became clear that Holmes was locked into a particular vision of the company as a healthcare company – despite it clearly, to Dr Lester, being a technology company.

Those two industries are very different – with the healthcare industry being a complex web of regulations and slow progress, a world away from what the technology space is.

“I said to her over and over again ‘the grey hairs, I’ve earned them they weren’t given to me’. I think this is different about healthcare.

“On the west coast I’d go to these events where I felt like a grandfather with all these young, brilliant CEOs in IT that were making a lot of money.

“The realities of healthcare is that it’s not like that because it’s such a complex industry.”

Only, she didn’t particularly want to hear about roadblocks.

“I will say when I was at Theranos my colleagues of chief technology officer and chief medical officer were phenomenal, they were brilliant — but she never listened to them,” Dr Lester said.

“She didn’t listen to those grey hairs – these were highly experienced people. She had a great board there and she didn’t listen to them so in a lot of ways she had great pieces.”

If the outrageous claims and questions over internal culture weren’t enough, there was the loose relationship Theranos had with regulators which had the potential to ring alarm bells.

‘Where on earth is the regulator?’

LBT Innovations is currently developing a technology solution to analyse culture plates in infectious disease labs — with an algorithm able to analyse an image of a culture plate instead of a microbiologist doing so.

When CEO Luisa Guthrie heard the FDA had inspected Thernaos’ lab last year, her first reaction was simply to ask why it took so long.

“When I read that it took until quite a long way down the track that the FDA came and audited Theranos I was very surprised at that,” she said.

“I thought ‘Where on earth is the regulator?’.”

She made the point as a lot of companies in the biotechnology space – even if a tech play, engage with the regulator early and often.

“In companies like ours, regulatory strategy is right at the front of our business strategy and product development,” Guthrie said.

“The regulatory strategy guides how you go about your product development. Very early in the piece we engaged with the FDA as we started our product development process.”

She described an exhaustive process over a five to six year period where the company had engaged with the FDA from the very start – letting their feedback guide their product development.

“I’m not afraid of the FDA…I’ve watched people engage with the FDA and the trick is to bring them along with you,” Guthrie said.

“We have had interesting tussles with them…sometimes you have to point out quite respectfully to the FDA that they’re not always correct, but we have been interacting with them in a very successful way.

“Our whole regulatory strategy is linked to our product development strategy.”

She made the point that the regulatory system is so complex that early engagement with the FDA – even at the product development stage, is increasingly vital for biotech companies.

So, what does it say that Theranos didn’t engage with the FDA?

If Theranos had been engaging with the FDA from a product development stage, then would it be in the trouble it’s in now – or was the FDA simply asleep at the wheel?

With investigations currently underway, a lot more will come out in the wash.

It’s quite possible Theranos will come away from the current round of scrutiny totally validated and emerge as one of the biotech superstars – but from the outside at least it would seem that there were a number of factors at play which led to its current predicament.

S3 Consortium Pty Ltd (CAR No.433913) is a corporate authorised representative of Maven Capital Pty Ltd (AFSL No. 418504). The information contained in this article is general information only. Any advice is general advice only. Neither your personal objectives, financial situation nor needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice.

Conflict of Interest Notice

S3 Consortium Pty Ltd does and seeks to do business with companies featured in its articles. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this article. Investors should consider this article as only a single factor in making any investment decision. The publishers of this article also wish to disclose that they may hold this stock in their portfolios and that any decision to purchase this stock should be done so after the purchaser has made their own inquires as to the validity of any information in this article.

Publishers Notice

The information contained in this article is current at the finalised date. The information contained in this article is based on sources reasonably considered to be reliable by S3 Consortium Pty Ltd, and available in the public domain. No “insider information” is ever sourced, disclosed or used by S3 Consortium.

Facebook
Twitter
LinkedIn