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"Silicon Valley's Greatest Disaster": Elizabeth Holmes and the Theranos Trial, Explained

Sep 7, 2021 12:01 PM 6 min read

The criminal trial of Elizabeth Holmes began last week.

The Founder and CEO of now-defunct healthtech startup Theranos, Holmes was once hailed as the “world’s youngest self-made female billionaire” and even acclaimed as the “next Steve Jobs”.

However, since a media exposé on Theranos and the launch of numerous regulatory investigations into Holmes’s claims, her net worth has fallen to practically zero, she is facing multiple charges of wire fraud and a 20-year jail sentence, and she has earned the unfortunate moniker of being “Silicon Valley’s greatest disaster”.

What happened? Let’s begin at the beginning…

From Stanford to Infinity

A chemical engineering student, Holmes dropped out of Stanford University at 19 to start a medical diagnostics company in 2004. Her idea was a simple one: devising a machine that needed only a pinprick of blood to run dozens of tests for early diagnosis of life-threatening conditions.

The machine was initially called a "nanotainer" and the company initially named Real Time Cures. Holmes later changed this to Theranos (a portmanteau of “therapy” and “diagnosis”).

Theranos’s idea quickly drew the interest of an array of powerful investors, from businessmen to Marine generals to politicians. This luminous list included big names like Rupert Murdock, Larry Ellison, the Walton Family, Betsy Davos, George Schultz and James Mattis. Then Vice President Joe Biden even visited the company HQ and toured their facility. He called it an “inspiration to me” and hailed it as “the laboratory of the future”.

Holmes’s media-savvy personality further added to Theranos’s growing clout. She gave a series of highly-publicised speeches and interviews and adorned the covers of several magazines. She even appeared alongside Bill Clinton and Jack Ma. Her charismatic personality - and status as a successful woman in a heavily male-dominated tech industry - elicited more attention.

Then there was Holmes herself - a young and charismatic speaker with more than a few idiosyncrasies. She allegedly faked a deep baritone to sound more “authoritative”. She was borderline paranoid about security, driving around in cars with bulletproof windows and almost always being escorted by security guards. And she was obsessed with Steve Jobs. She reportedly even adopted his signature attire - the typical black turtlenecks - and his stringent work ethic.

By 2013-14, Theranos had grown into a vast company with 800 employees and a $9bn valuation - half of which was owned by Holmes. It seemed as if the sky was the limit for the startup.


From Infinity to Beyond Belief

Let’s revisit what Theranos was trying to do. Think about that idea for a second. Early detection of diseases like cancer, diabetes or cholesterol at a fraction of the cost, and using less than 1% of the blood required by most conventional devices while being more efficient. Early-stage detection is the difference between life and death when it comes to fatal diseases, which are easier to be treated when diagnosed ASAP. This is why Theranos was touted as a major disruptor of the healthcare industry, let alone the healthtech sector.

Its pitch was a revolutionary one, to put it mildly. It seemed too good to be true. And it was.

As early as in 2010, the company’s chief scientist Ian Gibbons began complaining that the blood tests used inaccurate technology and were not ready for public use. They simply didn’t work, he said. He was also growing increasingly frustrated with Holmes’s “lies” to the public and to clients about the tech. Later that year, he was fired.

In the coming years, even as the firm’s stature grew and it became the star of Silicon Valley, complaints started emerging. 


The Miracle that Never Was

The company’s flagship product - the nanotainer aka “Edison” began entering the market in November 2013. In the next two years, it would be used to provide results for “millions of patients referred by thousands of doctors”. These tests reportedly used flawed technology and thus gave incorrect results. Moreover, the company mishandled many complaints it received, failed to audit suppliers, and often reverted with updated test results months too late.

One Arizona woman was told she has a hemoglobin A1c level of 5.7%. Diabetes is diagnosed at a 6.5% level. A few months later, a follow-up test showed a 6.4% level. She took two more tests back-to-back. The readings were 5.8% and 5.3%.

Federal inspectors later said some of Theranos's practices put patients in “immediate jeopardy.” An example cited was the blood-coagulation test (that Theranos ran despite flunking quality-control checks). This is used to prescribe warfarin, a blood thinner used to treat clots. Too much of the thinner can cause dangerous bleeding. Ergo, an incorrect diagnosis can be fatal.

There are many other stories. Some people had been incorrectly told they were HIV-positive. One woman, who was pregnant at the time, was incorrectly told she had miscarried her baby.

Now, incorrect testing is not a rarity in the healthcare industry. But Theranos's technology was so faulty that most of the tests run by Edison were erroneous. The improper readings were also not promptly followed up on. For example, it took the company nearly two months to warn a California man’s doctor not to rely on the blood-coagulation test result he had gotten earlier.


House of Cards

By 2015, patients across the US had begun filing lawsuits against the company. Clients began getting worried. Regulators started to ask questions. Investors started pulling out. Retail partners like Walgreens and Safeway began to analyse the Theranos devices and cancel their deals.

The final nail in the Theranos coffin was an article in The Wall Street Journal in October 2015. It used the accounts of whistleblower Tyler Schultz, a former employee at the company who reported the faulty tech to Holmes but was admonished.

More revelations followed. It was reported that the Edison machine never actually worked, that the technology Theranos claimed to have pioneered did not exist. In fact, by the end of 2014, many of the tests the company sold to consumers weren’t even Edison-based; they were conventional tests available in the market.

Soon, regulators and lawsuits piled on. The SEC, FDA, Medicare, attorneys-general, patients, former business partners, all sued. Clients cut deals. Investors jump ship. Some sued Holmes for making false claims to get $700m in funding.

By September 2018, Theranos was shut down. As abruptly as it had emerged, the company disappeared like a house of cards in an earthquake.


How Elizabeth Holmes Fooled the World

But health is a highly regulated industry. So how could officials have turned a blind eye for so long, or even have approved these tests in the first place?

In the US, tests used in labs and clinical establishments are subject to regulatory assessments. But a third category - Laboratory-Developed Tests (LDTs) involves independent labs using proprietary equipment to develop their own tests. Holmes successfully argued that Theranos's devices constituted LDTs, and thus didn't require inspection from FDA or Medicare officials.

Holmes was also a champion for deregulation in the diagnostics space. In Arizona, she successfully lobbied for a law that allowed labs to provide blood tests directly to patients without the involvement of doctors.

As for the medical community, they did smell a rat. Articles came up in scientific journals - well before the WSJ exposé - expressing skepticism about Theranos’s claims (which were, crucially, not peer-reviewed by other researchers). But these remained in circulation within a limited and niche audience.

Then there was the company’s highly secretive culture. For the longest time, Holmes refused to disclose details, even to investors, about how Edison worked, citing IPR issues and “trade secrets”. In fact, all visitors to Theranos facilities were required to sign NDAs and be escorted by bodyguards all the time - even to bathrooms!


Great (Unmet) Expectations

One may think - most tech startups anyway fail. VCs are used to over-hyped pitches and products that don’t work. The startup sector is rife with stories of unmet expectations. Why, then, has the tale of Theranos - “an epic of Silicon Valley hubris”, as The Economist put it - captivated so many?

Perhaps because it dabbled in healthcare which, unlike software or edtech, has direct implications on the lives of patients. Or perhaps because of the cult of personality Holmes had cultivated for herself. Or because even today, six years after the truth came out, it’s hard to believe that such a scam, which fooled the who’s-who of Palo Alto and Washington, could have been perpetuated for that long.

Or maybe it’s just the abject disappointment over Theranos’s downfall, because its promise had been so invigorating: cheap, efficient and ubiquitous testing could really have saved countless lives and revolutionised health as we know it.

To borrow from The Usual Suspects:

The greatest trick Theranos ever pulled was convincing the world it did exist.”


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