Theranos Inc.’s fall underscores the need for medical startups to be transparent in their dealings with investors and to publish data supporting their technology to gain credibility, venture capitalists and entrepreneurs said.
Theranos, formed in 2003, climbed to a valuation of more than $9 billion, partly by telling investors it had developed a portable blood analyzer that could conduct the full range of laboratory tests using only finger drops of blood. Along the way, the company enforced what some former employees described as a culture of secrecy, and some employees were leery about the accuracy of its technology, The Wall Street Journal has reported.
Founded by Elizabeth Holmes, Theranos has been under scrutiny since the Journal reported in October 2015 that the company relied heavily on other companies’ instruments and used its linchpin lab machine in only a small portion of the tests sold to consumers. Regulators began investigating soon after, and on Wednesday, the Securities and Exchange Commission said it had filed civil fraud charges against Ms. Holmes,
Theranos and its former president. The SEC accused them of raising more than $700 million from investors through “an elaborate, yearslong fraud in which they exaggerated or made false statements about the company’s technology, business, and financial performance.” To settle the charges, Ms. Holmes has agreed to pay a $500,000 fine and has been stripped of voting control over the company. She is also barred from being an officer or director of a public company for 10 years.
The SEC settled charges with Theranos and Ms. Holmes but not with Theranos’s former president, Ramesh “Sunny” Balwani. Mr. Balwani’s lawyer, Jeffrey B. Coopersmith, said in a statement: “Sunny Balwani accurately represented Theranos to investors to the best of his ability. He believed in the potential and mission of the company and its technology to promote transparency and benefit people by empowering them with access to their own health care information at a low cost.” The Newark, Calif., company and Ms. Holmes neither admitted nor denied the SEC allegations, the agency said.
“The company is pleased to be bringing this matter to a close and looks forward to advancing its technology,” Theranos’s independent directors said in a statement. Investors and entrepreneurs said cases of alleged fraud must have consequences. Successful life-sciences entrepreneurs, they said, usually have significant clinical, research or corporate expertise, and medical startups must publish their research data to establish themselves. In hindsight, Theranos’s business proposition might have been more solid had Ms. Holmes first worked at a large blood-testing company where she was tasked with finding and developing new technology, said Kevin Kinsella, founder of technology and biopharma investor Avalon Ventures, which didn’t invest in Theranos. He said Theranos’s claims about its technology seemed outlandish from the start. “This was fraud from the get-go,” Mr. Kinsella said. When backing entrepreneurs, he added, “We look for someone who’s done it before with someone else’s money.” Some entrepreneurs said too much hype for unproven technology can hurt budding sectors by creating unrealistic expectations.
“There should not be any shortcuts when it comes to bringing a product to market in medicine,” Atul Sharan, chief executive of cancer-diagnostics startup CellMax Life, said in an email. “Our eye has to always be on the patient, not the dollar sign.” CellMax pursues an emerging approach to cancer testing that involves scanning for markers in the blood known as circulating tumors cells and circulating tumor DNA.
Tom Rodgers, who leads McKesson Ventures, which didn’t invest in Theranos, said via an email that his firm isn’t doing anything different in the wake of the Theranos fallout,adding that most traditional, early-stage health-care-only venture capitalists already perform fairly robust diligence. Added Mr. Rodgers: “It would be a big red flag if a CEO said, ‘We can’t show you our secret sauce.’”