Former wunderkind Elizabeth Holmes.

Photographer: David Paul Morris/Bloomberg

Theranos Could Have Used a Few Short Sellers

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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In October, a few days after John Carreyrou’s first bombshell article in the Wall Street Journal about problems at the blood-testing startup Theranos, the Silicon Valley veteran Jean-Louis Gassée  told a little story in the widely read newsletter the Monday Note.

Gassée has a hereditary condition that puts him at high risk for blood clots, so he pays regular visits to the hematology clinic at Stanford Hospital to get his blood tested. One day last summer, while walking back from the clinic to his office in downtown Palo Alto, he thought it might be interesting to see how the results from the Theranos clinic in the nearby University Avenue Walgreens compared.

He walked back to the hematology clinic to get a prescription (it’s about a mile and a half from the clinic to the Walgreens; this is how a 71-year-old stays young), then got one of the signature Theranos pinpricks. The platelet count and hematocrit  that Theranos reported were significantly different from -- and significantly more alarming than -- the numbers from Stanford. So Gassée went back to Theranos the next day for another test; this time, the results were less frightening, but the platelet count was still much higher than what Stanford had reported. He went back to Stanford the day after that for yet another test, which delivered results more or less in line with the original ones.

Gassée then wrote a letter to Theranos founder and Chief Executive Officer Elizabeth Holmes, introducing himself as a long-time techie sympathetic to the company and describing the issues with his test results. He concluded:

I’m curious to hear more about your methodology, standards and quality controls and would like to give you an opportunity to respond before I write a Monday Note on the broader topic of lab exams and other healthcare mysteries.

Holmes never responded. Nor did anyone else from Theranos. And Gassée didn’t get around to writing his Monday Note on the topic until after Carreyrou had broken the story.

Failing to respond to difficult questions seems to have been a kind of corporate policy at Theranos -- and for a long time it seemed to pay off. Even when company executives did talk to journalists, they could be “exasperatingly opaque,” my friend Roger Parloff wrote in a December mea culpa about the laudatory Fortune cover story he wrote on Holmes and Theranos in 2014. If nothing else, he wrote, he wished he had included more of Holmes’s answers-that-weren’t-really answers in his original article.

It was one of those non-answers in a December 2014 New Yorker profile of Holmes by Ken Auletta that first got Carreyrou interested in the story, Vanity Fair’s Nick Bilton reported earlier this month. Holmes described the workings of Theranos’s “Edison” testing machine to Auletta like this:

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.

That word salad intrigued Carreyrou, an investigative reporter who shared a 2015 Pulitzer Prize for a series on Medicare billing practices. After months of asking questions -- and being stonewalled by the company -- he was able to report that Theranos was performing its special chemistry on only some of its tests; the majority relied on the same machines from Siemens and other manufacturers that were used by conventional blood labs. In his latest bombshell, on Wednesday, he reported that Theranos had voided all test results from its Edison devices for the years 2014 and 2015.

It has taken a lot of shoe-leather reporting (and help from disgruntled former employees) for Carreyrou to find out what he has. But the basic truth that Gassée sussed out and that the company has finally acknowledged -- that its proprietary tests weren’t very reliable -- wasn’t so hard to get at.

No, most people aren’t as knowledgeable about their platelet counts as a guy with a hereditary blood condition. But surely the No. 1 question for everyone involved with the company, from its partner Walgreens to its outside investors to its board of directors, should have been: How well do the tests work? Theranos has been criticized for having a board made up of famous old men with no medical expertise  -- but old men need lots of blood tests, don’t they? Henry Kissinger or George Shultz could easily have done the same comparison of test results that Gassée did.

It seems no one did -- or, on the remote chance that they did, they didn’t make a public stink about it -- because causing trouble like that is generally not what board members do. It is also, apparently, not what investors do.  I guess it’s not what the Food and Drug Administration does, either, at least not at first (the FDA began to crack down on Theranos late last summer).

I can think of one group that would have loved to evaluate the accuracy of Theranos’s tests -- but only if it had been a publicly traded corporation. This is the kind of thing that short sellers are put on earth to do. They wouldn’t have needed inside sources at the company, just some people willing to have their fingers pricked. The short sellers would have nagged journalists to write about the problems they found. They would have had an incentive to raise hell.

As a privately held company, even one with a proclaimed valuation ($9 billion) bigger than the market capitalization of all but about 450 publicly traded U.S. corporations, Theranos wasn’t subjected to that kind of scrutiny until Carreyrou got on the case. The company stayed under the radar for years (Holmes founded it in 2003, when she was 19), only beginning to court publicity after opening its first clinic in that University Avenue Walgreens in Palo Alto in September 2013. And the early publicity was all of the “hey, look at this cool startup” variety.

There are lots of good reasons to stay under the radar, and to raise money privately instead of subjecting your company to the glare and sometimes the short-termism of public markets. But when that means you never come up with good answers to the most basic questions about your company’s signature technology, you have a big problem. I’m actually still willing to believe that Edison really is a promising device, and that Holmes really is a visionary. But it may be too late for both of them now. 

  1. He was a top executive at Apple in the 1980s, then founded Be Inc., a beloved if never entirely successful computer and software maker.

  2. The proportion of one’s blood that is composed of red blood cells.

  3. It has shaken things up a little since the bad press started.

  4. It is interesting, as Bilton notes in his Vanity Fair piece, that since its seed round Theranos does not appear to have gotten money from any of the prominent Silicon Valley venture capital firms. Instead, investors have included Walgreens and, Dan Primack reported in Fortune last year, BlueCross BlueShield Venture Partners, Continental Properties Co., Esoom Enterprise (Taiwan), Jupiter Partners, Palmieri Trust, Partner Fund Management, Dixon Doll, Ray Bingham and B.J. Cassin.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net