Reporter Who Broke Theranos Scandal Maintains Disgraced Clinical Laboratory Testing Company Could Have Returned Funds to Defrauded Investors Instead of Fighting Lawsuits

Former CEO Elizabeth Holmes now awaits March 9 court date on federal fraud charges that include reporting false medical laboratory test results on some patients

Clinical laboratory leaders have watched with keen interest the federal criminal proceedings against disgraced Theranos founder and former CEO Elizabeth Holmes, whose blood-testing company lost nearly $1 billion of investors’ money before dissolving in 2018.

In a recent CNBC interview, John Carreyrou, the Wall Street Journal (WSJ) investigative journalist who first broke the Theranos story in 2015, contended that the once-high-flying Silicon Valley startup could have paid back investors on a pro-rata basis, but that the company opted to use its dwindling cash to challenge lawsuits.

“If you rewind to October 2015, when I finished, when I published my first investigative story on Theranos, the company still had $400 million in the bank and it could have called it quits then,” Carreyrou said in the interview. “And Elizabeth Holmes could have apologized to investors, to patients, to everyone she had misled and returned that money to shareholders on a pro-rata basis.”

Theranos Scandal Breaks Wide Open

Carreyrou’s nearly year-long Wall Street Journal investigation into Theranos helped bring down the venture capital darling that had achieved a $9 billion private valuation before crumbling under the weight of fraud allegations. Dark Daily and our sister publication The Dark Report (TDR) covered in detail the allegations against and investigation into the embattled blood test company in dozens of e-briefings and TDR articles starting in 2015.

In fact, The Dark Report was first to publish the news that Theranos had ceased using its finger-stick collection method in Phoenix as early as April 2015. (See TDR, “Theranos: Many Questions, But Very Few Answers,” April 20, 2015.) At that time, Theranos declined to respond to The Dark Report’s requests for comments.

Theranos had built its superstar reputation on the backs of a revolutionary finger-prick blood testing system, which Holmes promised could diagnosis diseases ranging from diabetes to cancer with just a few drops of blood. But an in-depth investigation into hoopla surrounding the company’s breakthrough technology by Carreyrou and other reporters at the Wall Street Journal revealed it was based on false test results and phony claims to investors and companies, such as Walgreens, which had planned to feature the technology in their retail clinics. 

Elizabeth Holmes former CEO of Theranos
Elizabeth Holmes (above), founder and former CEO of now defunct Theranos, was considered a wunderkind when, as a 19-year-old Stanford University dropout, she founded Theranos in 2003. Early on, she attracted high-profile members to the Theranos board, including former US Secretary of State George Schultz, and cultivated comparisons to legendary Apple CEO Steve Jobs. But once the accuracy of Theranos’ capillary blood-test device fell under suspicion, Holmes’ fall from grace was swift, as clinical laboratories learned from multiple Dark Daily e-briefings and articles in The Dark Report going back to 2015. (Photo copyright: The New York Times.)

In 2016, Theranos received sanctions from the Centers for Medicare and Medicaid Services (CMS), which included revocation of the company’s CLIA certificate and sanctions against Holmes and other company officials that prohibited them from owning or operating a medical laboratory for two years. Soon afterward, Theranos laid off 340 workers, closed its laboratory operations, and shuttered its wellness centers to “focus on an initiative to create miniature medical testing machines,” the New York Times reported.

When Theranos was finally dissolved in September 2018, Carreyrou reported that the company had an estimated $5 million in cash to distribute to unsecured creditors. All told, Carreyrou estimates Theranos’ investors, which included such big names as News Corp Executive Chairman Rupert Murdoch, Bechtel Group Chairman Riley Bechtel, and US Education Secretary Betsy DeVos, lost nearly $1 billion.

While Holmes’ star was fading, Carreyrou’s fame was rising with the 2018 publication of his best-selling book on Theranos’ downfall, titled, “Bad Blood: Secrets and Lies in a Silicon Valley Startup.”

Theranos’ Final Chapter

Today, Holmes is preparing to stand trial on a dozen federal wire fraud and conspiracy to commit wire fraud charges at the US District Court in San Jose, Calif., where jury selection is slated to start on March 9, 2021, amid COVID-19 pandemic safety precautions.

According to the Mercury News, Holmes faces maximum penalties of 20 years in prison and a $2.75 million fine, plus possible restitution. Carreyrou does not expect Holmes to seek a plea deal.

“I think that the chances of that are pretty unlikely. From what I hear, she’s telling her friends and her entourage that she’s actually looking forward to her day in court and she thinks that the real story—her version of the story—will come out at trial,” he told CNBC. “And so, she’s actually putting on a cheerful face with people she knows, and people have seen her recently and are saying that she’s looking forward to see this go to a jury.”

While the final chapter of this story will be written by a federal court jury, clinical laboratory leaders likely will want Holmes to face maximum penalties if found guilty of all charges. The deceptive scientific and business practices Theranos allegedly engaged in caused many headaches for the clinical lab directors of hospitals and health networks as their CEOs asked why the “cheap and fast” Theranos testing system could not be used instead of traditional, more expensive testing methods.

Theranos also financially damaged investors who might otherwise have gained capital and continued to invest in more credible startups of diagnostic companies and clinical laboratories.

—Andrea Downing Peck

Related Information:

Theranos Could Have Paid Back Investors Years Ago, But Used Money to Ward Off Lawsuits: Experts

Theranos Founder Elizabeth Holmes May Seek ‘Mental Disease’ Defense in Trial, Document Shows

Theranos to Close Labs and Lay Off 340 Workers

Blood-Testing Firm Theranos to Dissolve

Theranos Founder Holmes’ Trial to Go Ahead with Socially Distanced Jury: Judge

Elizabeth Holmes Wants to Block Jurors from Hearing About Her Luxurious Lifestyle as Theranos CEO

Internationally-respected Experts in Clinical Pathology and Laboratory Medicine Ask: Why Don’t We Know More about Theranos’ Technology?

WSJ ‘Sticks’ Theranos, Raises Serious Questions: Two Front-Page Stories Describe Problems with Lab Test Technology and Issues with the FDA

Blackstone Buys Stake in Ancestry for $4.7 Billion, While Interest in Direct-to-Consumer Genealogy Genetic Tests May Be Fading Among Consumers

Though gene sequencing is touted as a key component of precision medicine, the medical value of direct-to-consumer testing has yet to show up in improved health outcomes, nor have clinical laboratories benefitted

In a recent example that the market for genetic genealogy testing may have peaked and the days of spectacular growth in the number of direct-to-consumer (DTC) genetic test orders and revenue is over, private-equity firm Blackstone—in a $4.7 billion deal—announced it will acquire a majority stake in Ancestry, which also does some clinical laboratory genetic testing as well.

Blackstone (NYSE:BX) acquired Ancestry of Lehi, Utah, one of the two largest genealogy testing companies (the other being 23andMe of Sunnyvale, Calif.), from a group of equity holders led by investment firms Silver Lake, GIC, Spectrum Equity, and Permira, noted a press release. GIC will retain a “significant minority stake” in Ancestry.

“We are very excited to partner with Ancestry and its management team. We believe Ancestry has significant runway for further growth as people of all ages and backgrounds become increasingly interested in learning more about their family histories and themselves,” David Kestnbaum, a Senior Managing Director at Blackstone, said in the press release. “We look forward to investing behind further data, functionality, and product development across Ancestry’s market leading platform to continue to provide a differentiated service.”

Is Genetic Testing for Genealogy Still a Growth Industry?

Ancestry is the global leader in digital family history services, operating in more than 30 countries with more than three million paying subscribers across its Ancestry online properties and more than $1 billion in annual revenue.

However, some experts say the road ahead may not be smooth for Ancestry or its major competitor, 23andMe.

“The business landscape fell off a cliff last year,” Laura Hercher, Director of Human Genetics Research at Sarah Lawrence College in New York, told STAT. “Fads pass,” she added.

Hercher points out that Ancestry has “this enormous database, which inherently has a lot of value hidden in it—potential energy. But they have not figured out how to get that information out in the way 23andMe has.”

23andMe’s pivot into medical research gained steam in 2018 when pharmaceutical giant GlaxoSmithKline (NYSE:GSK) purchased a $300 million stake in the company with the aim of using 23andMe’s resources to develop new medicines. That collaboration began bearing fruit earlier this year when GlaxoSmithKline started human trials of the first medicine (a cancer drug) to emerge from the partnership, STAT reported.

The public’s declining interest in at-home genealogy, however, has caused both companies to reduce staffing. 23andMe began the year by laying off about 100 employees—an estimated 14% of its workers—and Ancestry followed suit in February, letting go a similar number of employees, representing roughly 6% of its workforce.

According to MIT Technology Review, direct-to-consumer genetic genealogy testing reached its zenith in 2018 when consumers purchased as many DNA tests in one year as they had in all previous years combined, propelling total sales from Ancestry, 21andMe, and other DTC gene testing companies to roughly $26 million.

Mr. Greg Yap

In 2019, CNBC reported that, market-wide, roughly 30 million tests had been sold across the globe. However, in recent years, sales have fallen short of expectations as the number of people willing to pay $99 to learn about their ancestry has dwindled. “I suspect those that are curious about this information are thinning out and there’s less people to go around to grow,” Greg Yap (above), Partner at Menlo Ventures, told CNBC. “I think there’s a broader issue, which is that the ultimate medical value is still really unproven,” Yap added. “There’s lots of research being done, but value for mass market consumer isn’t there yet, so it keeps a ceiling on the size of that market.” (Photo copyright: VentureBeat.)

Privacy Still a Concern

Ancestry has begun to insert itself into the genetic testing healthcare arena. In a press release, the company announced the launch of AncestryHealth, a $179 DNA testing kit that uses next generation sequencing (aka, high-throughput or massive parallel sequencing), aimed at providing adult consumers information on their inherited health risks.

However, as MedCity News points out, the sale to Blackstone has increased privacy concerns around the direct-to-consumer DNA testing market. Ancestry’s consumer privacy and data protections remain unchanged under the new ownership, but Alan Butler, Interim Executive Director at Electronic Privacy Information Center (EPIC), told MedCity News, “This is one example of a very troubling trend. It’s something regulatory agencies are not up to date to deal with. It’s one of the reasons we need comprehensive privacy law in the US.”

As genealogy companies such as 23andMe and Ancestry shift their focus from providing genetic histories to improving consumers’ health through genetic testing, clinical laboratories should be mindful of the logical next step, which is predicted to be genetic tests where the consumer collects the sample at home and the test is used to aid in diagnosing and treating patients.

—Andrea Downing Peck

Related Information:

Blackstone Agrees to Buy Ancestry in $4.7 Billion Deal

Blackstone to Acquire Ancestry, Leading Online Family History Business, for $4.7 Billion

Cancer Drug Is First Potential Therapy to Emerge from 23andMe and GlaxoSmithKline Collaboration

More than 26 Million People Have Taken an At-Home Ancestry Test

Ancestry Launches AncestryHealth Powered by Next Generation Sequencing

Consumer DNA Testing Has Hit a Lull—Here’s How It Could Capture the Next Wave of Users

Blackstone $4.7 Billion Acquisition of Ancestry Raises Privacy Questions

Pathology Groups and Clinical Laboratories Have Unique Opportunity to Take Leadership Role in Healthcare Consumerism

Medical laboratories are in key position to advise and guide other healthcare organizations to implementing strategies and technologies that support consumerism in healthcare

Dark Daily has regularly alerted our readers to the fact that employers and healthcare policymakers are seeking ways for consumers to take more active roles in their healthcare. That includes requiring more out-of-pocket payments from patients to control prices, and quality metrics, so patients can select hospitals, doctors, and clinical laboratories based on price and performance.

Capitalizing on such consumerism in healthcare is not only an area where pathology groups and medical laboratories can play a key role, but also a trend where they hold a commanding lead over many healthcare organizations.

Because appointment setting and the ability to review test results has long been in demand by consumers of clinical laboratory services, many blood labs have already implemented easy-to-understand but highly functional patient portals,. Two examples that have attracted national attention are Kaiser Permanente’s “My Health Manager” and Quest Diagnostics’ (NYSE:DGX)” patient portal. (more…)

Consumerism among Healthcare Patients with High-Deductibles Has Not Yet Altered How Most Hospitals and Healthcare Systems Operate

New study shows most hospitals now recognize that patients are becoming more cost-conscious and customer-service driven due to the high cost of healthcare, but few have strategies in place to attract a more-engaged consumer

High-deductible health plans (HDHPs) are forcing consumers to be more cost-conscious when making healthcare decisions. This trend toward consumerism could be beneficial for clinical laboratories and pathology groups, whose patients would have multiple choices in where to purchase medical laboratory testing services and are looking for labs with good quality and competitive prices.

Greater numbers of patients must pay more out-of-pocket for their healthcare, but are also gaining access to increasing amounts of information about doctors and hospitals. As this happens, patients are “demanding straightforward information on prices, proof of value, and excellent customer service,” according to an article in Trustee, a publication of the American Hospital Association (AHA).

However, hospitals have been slow to react to this new interest by patients in transparency in prices and quality by developing a consumer strategy. That’s according to the “2016 State of Consumerism in Healthcare” report prepared by consulting firms Kaufman Hall and Cadent Consulting Group. (more…)

UCLA Health Pilot Program Looks to Integrate Genomic Patient Data into Epic EHRs: Currently Clinical Pathology Laboratories Store This Data

Use of genomic data collector could mean competition for medical laboratories that now store, analyze, and interpret genetic data

UCLA Health is working to integrate genomic patient data into its Epic electronic health record (EHR) system. This pilot project could signal potential competition for pathology groups and clinical laboratories that currently are the main repositories for the storage, analysis, and interpretation of genetic data.

Pilot Program Designed to Support Precision Medicine Research

As it becomes faster, cheaper, and easier to sequence human exomes and genomes, the challenge is how to store a patient’s gene data and make it available at the time care is provided.

UCLA Health is teaming with Seattle-based startup ActX in an effort to solve this problem. ActX represents a relatively new type of company—a genomic data collector (GDC)—and it is developing a critical solution—EHR Integration. The emergence of GDCs could affect clinical laboratories that currently provide most of the storage, analysis, and interpretation of genetic data.

ActX Founder and CEO Andrew Ury, MD, told MedCity News that, “While genetics can’t predict everything, genetics can predict more and more and whether a patient has a side effect. We think this is the future.”

ActX currently provides genomic decision support to physicians using Allscripts and Greenway Health ambulatory EHRs. A patient’s genetic information is collected through a saliva sample and then analyzed in real-time. Using a patient’s genetic code, the ActX application alerts physicians to possible medication adverse reactions and efficacy as well as actionable medical risks and patients’ carrier status. (more…)