Theranos: A Fallen Unicorn

What Is Theranos?

Theranos Inc., a consumer healthcare technology startup, was once valued at $10 billion, and its leadership claimed it would revolutionize the blood-testing industry.

However, the technological breakthrough that CEO Elizabeth Holmes and former company president Ramesh Balwani touted was never demonstrated, and the assertions of Holmes and Balwani amounted to outright deceit. Holmes and Balwani were ultimately charged by the SEC for massive fraud. The two executives agreed to settle subject to court approval.

On June 15, 2018, Holmes and Balwani were charged with wire fraud according to a release by the U.S. Attorney’s Office, North District of California. Holmes stepped down as the CEO of the company on the same day.

Understanding Theranos

Theranos was a privately held healthcare technology company founded by then 19-year-old Elizabeth Holmes in 2003.

Using a “nanotainer” (a small device designed to draw, retain, and analyze a droplet of blood from a patient’s fingertip) and its proprietary “Edison” testing technology, Theranos claimed the device could run a multitude of tests on a patient’s physiology within minutes and at a fraction of the cost of current technology.

After more than ten years of fundraising and reaching a peak valuation of roughly $10 billion, the tide started to turn in 2015 thanks to skepticism from the press.

A New Yorker profile termed Holmes’ explanations of Theranos’ technology “comically vague,” citing as one example Holmes’s statement that “a chemistry is performed so that a chemical reaction occurs and generates a signal from the chemical interaction with the sample, which is translated into a result, which is then reviewed by certified laboratory personnel.”

The Wall Street Journal then followed with a highly critical report on Theranos. Based on interviews with ex-employees, the newspaper alleged rampant management incompetence and claimed that Theranos had grossly exaggerated the capabilities of its proprietary technology.

One former senior employee stated that only a small fraction of all the tests were conducted on the “Edison machines,” and the majority of tests were handled on competitors’ equipment despite Theranos’s claims to the contrary. If true, this would have been a violation of the U.S. Food and Drug Administration (FDA) rules.

The FDA then released two reports from its ongoing investigation into Theranos. They were less than favorable and claimed that Theranos had “uncleared medical device(s),” poor records, was mishandling complaints, and had failed to conduct audits and produce supplier qualifications. In regard to an unspecified medical device, an investigator noted: “the design was not validated under actual or simulated use conditions.” Further, Theranos failed to “ensure the device conforms to defined user needs and intended uses.”

At the beginning of 2016, a letter released by the Centers for Medicare & Medicaid Services (CMS) stated that a California-based lab used by Theranos posed “immediate jeopardy to patient health and safety.” CMS gave the company 10 days to correct the deficiencies or face daily fines and/or loss of CMS approval for Medicare payments.

After a couple of years of settled lawsuits, dissolved relationships with big partners such as Walgreens, and broken deals with the likes of Safeway, the US Securities and Exchange Commission (SEC) formally charged Theranos, Holmes, and former company president Ramesh “Sunny” Balwani with “massive fraud.”

The complaint alleged that the company raised more than $700 million by deceiving investors for years about the company’s performance.

Both Theranos and Holmes agreed to settle the fraud charges pending court approval. Holmes lost control of the company, returned millions of shares, and was barred from serving as an officer or director of a public company for 10 years. 

A Timeline of Theranos’s Rise and Fall

2003: Nineteen-year-old Stanford chemical and electrical engineering drop-out Elizabeth Holmes founded Theranos with the aim of revolutionizing blood testing.

2004: Theranos raised $6.9 million in early funding gaining a $30 million valuation.

2007: The company’s valuation hit $197 million after it raised another $43.2 million in early-round funding.

2010: After further rounds of funding, Theranos was valued at $1 billion.

2013: After a decade working “in the dark,” Holmes introduced Theranos to the world via press appearances and unveiled a website.

2014: With over $400 million in funding, Theranos was valued at nearly $9 billion. Holmes effectively became a multi-billionaire thanks to her 50% stake.

December 2014: Despite her company’s hefty valuation, Holmes remained tight-lipped on how exactly Theranos’s technology worked. It turned out that the technology had never been submitted for peer review in medical journals.

July 8, 2015: Capital BlueCross, a Pennsylvania insurer with 725,000 customers, chose Theranos as its preferred lab work provider. Theranos was valued at $10 billion. 

October 15, 2015: The Wall Street Journal ran a scathing article criticizing Theranos.

Holmes appeared on “Mad Money” and other media outlets to do damage control. She was “shocked” by the Wall Street Journal article and claimed that Theranos supplied over 1,000 pages of documentation to refute the allegations. The Wall Street Journal stood by its reporting.

October 16, 2015: A follow-up article in the Wall Street Journal stated that Theranos was forced to suspend the use of its unapproved nanotainer for all but one type of blood test.  

October 27, 2015: The FDA released two partially-redacted Form 483 reports from an ongoing investigation into Theranos.

October 28, 2015: Fortune reported that Theranos had sought to raise an additional $200 million in Series C-3 funding just days before the initial Wall Street Journal article was published.

November 10, 2015: A $350 million deal with Safeway fizzled out after Theranos failed to meet key deadlines for rollouts and Safeway executives questioned the validity of the test results.

December 27, 2015: The Wall Street Journal ran another article alleging management ineptitude at Theranos and test rigging to produce better results for its Edison machines.

January 27, 2016: The Centers for Medicare & Medicaid Services (CMS) releases its damming report on Theranos’ California-based lab.

January 28, 2016: Following the CMS report, Walgreens Boots Alliance Inc. (WBA) decided to temporarily close the Theranos Wellness Center in its Palo Alto store and suspend its use of Theranos’s Newark, Calif. lab.

May 1, 2017: Theranos settled a lawsuit with Partner Fund Management, one of its largest investors, after the hedge fund accused the company of securities fraud. Theranos had previously settled proceedings with the Centers for Medicare & Medicaid Services and the Arizona Attorney General.

March 14, 2018: The SEC charged Theranos, its founder and CEO Elizabeth Holmes, and its former President Ramesh “Sunny” Balwani with massive fraud.

June 15, 2018: A federal grand jury indicted both Holmes and Balwani on nine counts of wire fraud and two counts of conspiracy to commit wire fraud.

The press release from the U.S. Attorney’s Office stated that in order to promote Theranos, both Holmes and Balwani “engaged in a multi-million dollar scheme to defraud investors and a separate scheme to defraud doctors and patients.”

Holmes had stepped down as Theranos CEO earlier in the day although she continues to be the chair of the company’s board.

Theranos FAQs

Was Theranos Publicly Traded?

No. Theranos was a privately held corporation until it was shut down and liquidated in September of 2018.

Is Theranos Still Open?

Theranos started shutting down its clinical labs and wellness centers in late 2016, finally ceasing operations in September of 2018.

What Did Theranos Do Wrong?

Theranos claimed to have developed blood tests that required only small amounts of blood and devices that could quickly perform the tests. Based largely on those claims, Theranos reportedly raised roughly $724 million of capital from venture capitalists and private investors.

How Much Did Walgreens Invest in Theranos?

Walgreens reportedly invested $140 million in its partnership with Theranos.

Is Elizabeth Holmes Still Wealthy?

According to Forbes, by June 2016, Elizabeth Holmes’ net worth dropped from $4.5 billion to “nothing.”

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