Blood extraction is uncomfortable for some people. Processing it is also tedious. Hence, when Theranos was founded in 2003, it promised an almost pain-free and simple solution for extracting and analyzing blood samples. Elizabeth Holmes, the founder and former chief executive of the health technology company, received critical acclaim from media organizations and the healthcare and tech industries for this supposed innovative proposition.
Theranos was a promising startup set to revolutionize blood testing and medical diagnosis. Holmes became a rising star in Silicon Valley and one of the most revered American entrepreneurs and corporate executives. She was even named the next Steve Jobs because of the potential of her company to disrupt and modernize the healthcare sector the same way Apple revolutionized the tech and consumer electronics industries.
However, 15 years after its founding, the company ceased to exist in 2018. Holmes was later convicted and sentenced for fraud in 2022. The purported promises of Theranos and Elizabeth Holmes later exploded into one of the most sensational scandals that shook the very foundation of the American business and investment community. Their downfall uprooted stories of corporate greed, media hype, and failure to perform due diligence.
Explaining The Rise and Fall of Elizabeth Holmes and Theranos: The Story of a High-Profile Tech Scandal
1. Beginnings: The Rise of Elizabeth Holmes and Theranos
Reimagining Blood Testing
In 2002, Elizabeth Holmes enrolled in the School of Engineering at Stanford University with the goal of earning an undergraduate degree in chemical engineering.
She also worked as a student researcher and lab assistant at the same school.
An idea to reimagine blood extraction and blood sample processing emerged during her time at Stanford. She began working on a lab-on-a-chip technology aimed at making blood testing cheaper and more convenient for individuals.
The technology promised fast and real-time testing using a single drop of blood to provide information that could aid medical diagnoses and treatment planning.
Holmes could not resist the pull of entrepreneurship and dropped out of Stanford.
She launched Real-Time Cures in 2003 in Palo Alto using her education trust. She was 19 around this time. Her goal was to capitalize on her idea and raise needed funds to turn her blood testing technology, still in development, into a commercial reality.
Holmes renamed Real-Time Cures to Theranos in the same year. She thought that the word “cure” might rouse skepticism from the public.
She pitched her idea to medical professor Phyllis Gardner and also sought counsel from other medical professors at Stanford. However, considering the scope and entire merits of her proposition, the experts were unconvinced.
The aspiring entrepreneur did not waver. She believed in her idea.
Her persistence paid off. Channing Robertson, a respected professor and dean at Stanford School of Engineering at that time, backed her idea.
Robertson became the first board member of Theranos. He introduced Holmes to his powerful connections, thus immersing her in a network of influential people, while also providing guidance to the early decision-making processes of the company.
Holmes was all set to drive the expansion of Theranos.
The Business Strategy of Theranos
Theranos, a portmanteau of the words “therapy” and “diagnosis,” was positioned as a health technology company. Its mission and vision centered on banking on technology to develop and commercialize next-generation medical testing devices.
At its forefront is the revolutionary blood testing idea of Holmes.
The blood testing is a multi-billion dollar industry. It is populated by thousands of firms from around the world focusing on the different requirements or processes involving the collection and analysis of blood samples for medical purposes.
Holmes aimed to consolidate these processes under a single technology.
The specific product strategy centered on the development of a portable blood testing machine called the Edison. It was supposed to perform immunoassays on a single blood drop to look for biomarkers and perform hundreds of tests.
Edison was intended to become a multi-purpose and one-stop device that could provide patients with relevant and life-saving health information using a small sample of their blood.
Holmes successfully raised USD6 million in December 2004 to fund her startup. She ran her startup under the radar of the greater business and investment community and away from the prying eyes of mainstream media during its initial years.
Sunny Balwani joined Theranos in 2009 as its president and chief operating officer.
The company secured further investments from different sources. It had more than USD92 million in venture capital by the end of 2010.
George Schultz, former secretary of state, joined Theranos in 2011. More prominent individuals such as Richard Kovacevich joined the fold. Holmes was recognized for forming the most illustrious board of directors in the history of corporate America.
Expansion was directed at a distribution strategy involving partnerships with retail chain operators. The goal was to make its Edison devices accessible to the public.
One of its initial partnerships was with the American supermarket chain Safeway. The retailer spent USD350 million to retrofit its 800 stores into clinics that could offer in-store blood testing. The deal folded in 2015 due to missed deadlines and unmet terms.
Theranos also partnered with the pharmacy store chain Walgreens in 2013.
Cleveland Clinic announced its partnership with the company in March 2015 to test its technology and reduce the cost of lab tests. Pennsylvania insurers AmeriHealth Caritas and Capital BlueCross also entered into a contract with Theranos in July 2015.
An iteration to the Edison devices called the MiniLab was revealed to the public in 2016. This marked its further push to dominate the blood testing industry.
More groups were starting to revere Theranos and its potential.
Eventual Rise to Stardom
The partnership with Walgreens launched Theranos into the spotlight, drawing the attention of both media and investors. Capitalizing on this momentum, it raised a staggering USD400 million in venture capital and achieved a valuation of USD9 billion in 2014.
Holmes became a superstar scientist and a powerful businesswoman.
Forbes included her in its 30 Under 30 list in 2014 and Time named her one of the 100 Most Influential People in 2015. Bloomberg also included her in its 50 Most Influential list in 2015 while Glamour named her Woman of the Year.
The Horatio Alger Association of Distinguished Americans gave her the 2015 Horatio Alger Award, Fortune named her Businessperson of the Year, and the Harvard Medical School Bard of Fellow appointed her as its member in the same year.
She appeared in different interviews and graced several speaking engagements.
The media regarded her the next Steve Jobs and hailed the youngest woman to become a self-made billionaire with a net worth of USD4.5 billion.
At the height of her popularity and power, Holmes was viewed as a visionary entrepreneur and a symbol of female empowerment. Many people regarded her as a role model and an inspiration. She was admired for her ambition and drive.
Theranos gained further momentum as Holmes gained further prominence. Its billion-dollar valuation was based on its potential to disrupt the healthcare industry with its groundbreaking blood testing technology.
But the meteoric rise of Elizabeth Holmes and Theranos was disruptive in itself.
2. Endings: The Fall of Elizabeth Holmes and Theranos
Concerns and Eventual Exposure
John Ioannidis, a physician-scientist and Stanford professor, wrote a piece in the Journal of the American Medical Association that was published in February 2015. He argued that no peer-reviewed research from Theranos had been published in the medical research literature.
Canadian biochemist and University of Toronto professor Eleftherios Diamandis also analyzed the blood testing technology of Theranos. His findings were published in the Clinical Chemistry and Laboratory Medicine in May 2015.
Diamandis fundamentally concluded that most of the claims were exaggerated.
Note that the concerns about the capabilities of Theranos were not new. The folded deal with Safeway also stemmed from testing inaccuracies.
Pulitzer Prize-winning journalist John Carreyrou started to look into Holmes and her Edison devices after receiving a tip from a medical expert who raised concerns about the feasibility and accuracy of the Edison devices.
He initiated a secret investigation that lasted for several months and involved talking to former employees and obtaining company documents.
Holmes got wind of the investigation. She tasked her lawyer David Boies to bar whistleblowers from providing statements or information and prevent Carreyrou from publishing his article through legal threats and strong-arm tactics.
The journalist went on to complete his damning investigation of Theranos.
In October 2015, The Wall Street Journal published the Carreyrou article. It exposed how Theranos was using traditional blood testing machines instead of its Edison devices to run tests, accommodate testing volumes, and resolve inaccuracies.
The media was abuzz and journalists had a field day. Holmes appeared on the CNBC show “Mad Money” hosted by Jim Cramer. She discredited the Carreyrou article and promised that her company would publish data on the accuracy of its tests.
It was also revealed that Holmes and Balwani met in Beijing in 2002 while on a Mandarin immersion program. The two had a secret romantic affair while running Theranos.
Carreyrou sparked the beginning of the end for both Holmes and Balwani, and Theranos.
The Problem with Edison Devices
Immunoassays are biochemical tests that use antibodies to detect and measure the presence or concentration of a specific molecule or substance in a sample.
There are different applications of immunoassays. These include medical diagnosis and treatment planning, medical research, drug discovery and drug testing, environmental testing, and food safety, among others.
Holmes envisioned developing a portable device that could perform a range of immunoassays using a drop of blood to test for hormone and drug levels, medical conditions and their risk factors, certain cancer markers, and other biomarkers.
Theranos and its Edison devices were purported to have achieved this vision.
Note that Holmes was reported to name the device after the famous inventor Thomas Edison. She explained that this was a reference to the well-known Edison quote about finding thousands of ways a particular invention would not work.
Experts weighed in on the blood-testing technology of Theranos. A 2016 study published in the Journal of Clinical Investigation and authored by 13 scientists highlighted several inaccuracies in the blood test results of the company.
These discrepancies include results outside the normal ranges, significant interservice variability of some lab measurements, and comparative nonequivalence.
Carreyrou also revealed that Theranos used traditional blood testing machines rather than its proprietary Edison devices to run most of its tests. His article also noted that the company lied about the accuracy and capabilities of its tech using manipulated data.
It is possible to perform immunoassays using a small amount of blood. However, in some cases, larger amounts of blood are needed in specific immunoassays. The accuracy of results from using a small amount of blood samples hangs on different factors.
The exact problem with the Edison devices is undetermined. Some pinned it down to poor validation and calibration while others believe that these devices did not have the needed capabilities to run a large volume of tests.
Several observers also noted that disastrous leadership inside the company as an important factor why it failed to advance the development of its devices.
What remains true is that Holmes and Theranos lied about their technology.
Government Response and Lawsuits
Walgreens deferred its plans to expand blood-testing centers in its stores while the Cleveland Clinic announced that it would work on confirming the tech behind the Edison devices following the publication of The Wall Street Journal article.
The Center for Medicare and Medicaid Services or CMS sent Theranos a warning letter in January 2016 after an inspection of its laboratory in Newark in California uncovered irregularities with proficiencies, procedures, and equipment.
Regulators from the CMS further announced in March 2016 that it would bar Holmes and Balwani from owning and running clinical laboratories for two years.
The periods spanning from 2016 to 2017 involved major letdowns. Theranos closed its laboratory operations and wellness centers while laying off 340 employees in October 2016 and additional 155 employees in January 2017.
Additional scrutiny from regulators made the situation a full-blown scandal.
Federal prosecutors and officials from the Securities and Exchange Commission launched a criminal investigation in April 2016. The pursuit centered on understanding how Theranos mislead its investors and government officials about its technology.
The company also faced numerous lawsuits. For example, after terminating its partnership in 2016, Walgreens sued Theranos for USD140 million. Furthermore, in 2017, the State of Arizona alleged that it sold millions of dubious blood tests to Arizonians.
In March 2018, SEC filed civil fraud charges against Theranos, Holmes, and Balwani. Holmes and Balwani were later indicted by a federal grand jury in June 2018 following an investigation by the Office of the Attorney for the Northern District of California.
Holmes and Balwani were charged with nine counts of wire fraud and two counts of conspiracy to commit wire fraud. The two pleaded not guilty.
The two were the main respondents in the United States v. Elizabeth A. Holmes, et al.
Consequences of a Massive Billion-Dollar Fraud: The Demise of Theranos and the Conviction of Holmes
It remains unclear what exactly went on inside Theranos and what was the motivation behind the decisions of Holmes and her executives. Most chalked the scandal up to plain corporate greed. Some considered it as another tale of irrational individuals and their self-serving pursuits. A few were a little bit forgiving. They believed that Holmes had good intentions but had unfounded optimism. She bit more than what she can chew.
The fact remains that the supposed revolutionary idea of Holmes was an impossible venture and the Edison device of Theranos was nothing but a sham. The company lied about its technological capabilities and made false promises about the usefulness of its particular blood testing technology. Its proposition fooled investors and the media while endangering the health and well-being of millions of individuals who availed of its services.
Dozens of witnesses that included former employees and patients helped build the case against Holmes and Balwani. Theranos suffered serious setbacks. It settled numerous lawsuits and was compelled to downsize its operations. The company eventually announced that it was in the process of shutting down the entire business in September 2018. Its remaining cash and other assets were distributed to its creditors.
Holmes was found guilty on four counts of defrauding investors, three counts of wire fraud, and one count of conspiracy to commit fraud by the U.S. District Court for the Northern District of California on 3 January 2022. She was later sentenced to 11 years and 6 months in prison on 18 November 2022. Balwani was found guilty on all 12 counts of fraud on 7 June 2022 and was sentenced to 12 years and 11 months in prison on 7 December 2022.
The rise and fall of Elizabeth Holmes and Theranos are a cautionary tale of hubris, deceit, and the dangers of hype. From her humble beginnings as a college dropout with a dream of revolutionizing healthcare, Holmes rose to the top of the business world and was celebrated as a visionary entrepreneur and a symbol of female empowerment. Her downfall serves as a reminder of the importance of integrity and accountability in business.
FURTHER READINGS AND REFERENCES
- Carreyrou, J. 2018. Bad Blood: Secrets and Lies in a Silicon Valley Startup. Penguin Random House. ISBN: 9781524731656
- Carreyrou, J. 2015. “Hot Startup Theranos Has Struggled With Its Blood-Test Technology.” The Wall Street Journal. Available online
- Diamandis, E. P. 2015. “Theranos Phenomenon: Promises and Fallacies: Clinical Chemistry and Laboratory Medicine. 53(7): DOI: 1515/cclm-2015-0356
- Ioannidis, J. 2015. “Stealth Research: Is Biomedical Innovation Happening Outside the Peer-Reviewed Literature?” JAMA: Journal of the American Medical Association. 313(7): 663. DOI: 1001/jama.2014.17662
- Kidd, B. A., Hoffman, G., Zimmerman, N., Li, L., Morgan, J. W., Glowe, P. K., Botwin, G. J., Parekh, S., Babic, N., Doust, M. W., Stock, G. B., Schadt, E. E., and Dudley, J. T. 2016. “Evaluation of Direct-to-Consumer Low-Volume Lab Tests in Healthy Adults.” Journal of Clinical Investigation. 126(5): 1734-1744. DOI: 1172/jci86318