Tough times for Silicon Valley’s diagnostic wunderkind and her multi-billion dollar company, Theranos

The company is under scrutiny from the Securities and Exchange Commission and the Food and Drug Administration, largely due to reporting that began last October, by the Wall Street Journal’s investigative reporter John Carreyrou. 

It has been a bad couple of months for the Silicon Valley company Theranos.

Founded by a 19-year old college dropout, the startup aimed to revolutionize the blood testing industry. Its top-secret technology was billed as being able to perform hundreds of medical tests – all using just a few drops of blood, secured through a pin prick.

At its peak, Theranos was worth $9 billion.

But today, the company is under scrutiny from the Securities and Exchange Commission and the Food and Drug Administration. That’s largely due to reporting that began last October, by the Wall Street Journal‘s investigative reporter John Carreyrou.

Carreyrou explained the mythology surrounding Theranos’ founder, Elizabeth Holmes: “She dropped out of Stanford University in late 2003, about a year-and-a-half into her undergraduate studies.”

“She decided at that young age that she had a vision for a medical product, and that she was going to found a company, and turn that vision into reality,” Carreyrou adds.

Holmes has been labeled “the next Steve Jobs,” even adopting the Apple icon’s trademark black turtleneck.

After years of development and top-secret testing, in late 2013, Theranos began rolling out its blood testing services to the public.

But it turns out the firm wasn’t performing the vast majority of tests using its own proprietary device, the Edison machine.

“Their menu had about 247 blood tests,” explained Carreyrou. “And if you read the glowing profiles of Elizabeth Holmes in magazines like Fortune and the New Yorker, you were led to believe all these blood tests were done with a pin prick.”

Carreyrou elaborated, “What I learned, by talking to quite a few former employees, was the vast majority of those blood tests were being performed with Siemen machines, just like any other lab.”

The Wall Street Journal also questioned the accuracy of Theranos’ special Edison machine.

“Federal inspectors […] went into Theranos’ Newark, California lab last fall and found quality control data there that indicated that the Edison failed these quality control tests upwards of 30 percent of the time,” said Carreyrou. “Based on Theranos’ own data from it’s own lab, it doesn’t look like the Edison in that lab was reliable and accurate.”

Theranos pushed back strongly against the Wall Street Journal’s story. Holmes appeared on CNBC, claiming they had provided the paper with over 1,000 pages of documentation, disproving Carreyrou’s report.

Holmes told CNBC’s Jim Cramer, “This is what happens when you work to change things. […] First they think you’re crazy. Then they fight you. And then, all of a sudden, you change the world.”

Holmes added that Theranos had evidence that the Edison was an accurate device. So why the mismatch between Theranos’ and the Journal’s versions of events?

“For about six months before we published that first story, they were in counter-attack mode, trying to intimidate sources of mine with litigation threats. […] trying to get them to recant what they had told me,” said Carreyrou.

He adds, “When Theranos came out swinging after we published our story, it wasn’t at all surprising to us. Because they had done nothing but try to suppress the story.”

Drug-store chain Walgreens signed a $50 million deal to provide Theranos testing services in its stores. That deal is now on hold.

But Carreyrou said Walgreens felt pressure to continue the arrangement, despite months of concerns. “They held off on actually making the split official until just a few weeks ago because, on the other side, Theranos had David Boies, who’s one of the most powerful and feared litigators in the country.”

Theranos’ board makeup also raised flags – all white men, with no science background. Their members included ex-Secretaries of State George Schulz and Henry Kissinger.

“I think two of them could claim to have any sort of background in medicine,” said Carreyrou. “So you had ten people who had no background whatsoever in medicine, not to mention laboratory science and diagnostics.”

Shortly after the Journal’s October 2015 report, Theranos made changes to its board.

So is there a culture of Silicon Valley hubris at work here? Companies like Uber and Airbnb, have largely got away with regulatory lapses, because they offer something people want. Does Carreyrou draw a parallel with Theranos?

“Being cavalier about taxi rules is different [from] being cavalier when it comes to medicine. And I think that’s an enormous difference.”

You can find John Carreyrou’s reporting for the Wall Street Journal here.