Theranos: One of Many Healthcare Cautionary Tales

Startup Investing Should Follow Many Basic Rules
By Paul Keckley

California-based Theranos raised $900 million from investors and achieved a market capitalization of nearly $9 billion. Today, its investors may have lost most of their money and the company is pursuing a new strategy. It’s a familiar story to lenders and investors and likely to be hallway chatter as the 35th Annual J. P. Morgan Healthcare Conference convenes in San Francisco.

Theranos targeted the lucrative blood testing market offering a new technology that allowed labs to do 30 blood tests almost instantly with a single drop of blood. The company began its operations in 2003 with a $5.8 million investment from Draper, Fisher, Jurvetson and other venture funds. By 2010, it had raised $83.4 million more in three follow-on rounds and then scored a reported $633 million investment in 2014 increasing its market value to $9 billion. In those 11 years, the company operated in relative secrecy: its 60-plus patent filings gave clues about its activities while its CEO, Stanford drop-out Elizabeth Holmes, shunned the spotlight.

The company used its capital to hire 800 and open labs in Arizona and California. By 2015, it had developed collaborative deals with Capital Blue Cross (PA), Walgreens, Cleveland Clinic and others, built a blue-chip board including former Senators Bill Frist and Sam Nunn and incoming Secretary of Defense James “Mad Dog” Mattis and received approvals from the FDA for its HSV-1 test and CLIA for labs to use its devices. Forbes named Holmes among its richest in 2014, with an estimated net worth of $4.5 billion and media attention followed. In a February 2015 Stanford Business School profile, she told the interviewer that she had no Plan B for her company, characterizing contingency planning as an “act of failure.” But things changed.

By the spring of 2016, the company faced questions about its Edison technology, cease and desist orders and an array of lawsuits. Media coverage followed. A critical piece in the Wall Street Journal by John Carreyrou observed “Hot Startup Theranos Has Struggled with Its Blood-Test Technology.” Then followed a stream of articles by a trio of WSJ business journalists exposing the company to more scrutiny: “Agony, Alarm and Anger for People Hurt by Theranos Botched Blood Tests” (WSJ October 20, 2016), Coverage in the New York Times, Forbes, and other business media followed suit. Theranos is now pursuing Plan B, a new mini-lab concept, having laid off all but 200 of its workforce.

Stories like Theranos are familiar to every investor and lender gathered in San Francisco. All of them have had disappointing results because an organization where they’ve parked capital as debt or equity has failed to meet expectations due to poor execution, or changing market conditions derailed their plan.

As JPM attendees listen to CEOs and CFOs tell their stories this week, they’ll filter their business propositions through imperatives for investing or lending, regardless of the sexiness of their pitches:

1. GROWTH IS ESSENTIAL.

2. FOCUSED EXECUTION IS KEY.

3. AN EFFECTIVE CEO IS VITAL.

4. BOARDS MUST BE INDEPENDENT AND OBJECTIVE.

5. THE ORGANIZATION’S VALUE PROPOSITION MUST BE CLEAR.

They understand the importance of an organization’s reputation and solicit insight from former colleagues about the organization’s culture and the capability of its management.

So as attendees flood the lobby of the St. Francis Hotel this week, it’s certain they’ll compare notes about what’s next in healthcare and make bets on the next winners and losers. They’ll ruminate about the plights of companies like Theranos, the big consolidation plays on the landscape and game-changing innovations in how care is delivered and financed.

The JP Morgan conference is Woodstock for lenders and investors who want to make money with their money. At the end of the day, healthcare is a big business. Organizations, whether not for profit or investor owned, need funds to innovate and grow. That’s the reality of our industry and why everyone can learn from Theranos.

Keckley is a healthcare author and policy expert. A version of this article originally appeared on his blog, The Keckley Report.