- Theranos was one of those
Silicon Valley stories
that sounded too good to be true.
It was going to revolutionize
the laboratory testing industry.
And it turns out, it
was too good to be true.
John Carreyrou of The Wall
Street Journal charted
that story about Theranos
in his new book, Bad Blood.
John, thanks for joining us.
- Thanks for having me.
- So, let's talk about
what Theranos was saying
it's technology could do
and what it was actually
doing behind the scenes.
What were they selling to
the public and investors?
- Right, so, when I started
looking into the company
in early 2015, they had already gone live
with the blood test for a year and half.
- [Steve] And this was in Walgreens?
- In Walgreens stores, they'd rolled out
in a couple Walgreens stores
in Northern California
and then another 40 or 45 Walgreens stores
in the Phoenix area.
And the claim was that
they had a technology
that could run the full
range of laboratory tests
from just a drop or two of
blood pricked from the finger,
get you very fast results
and do it at a fraction of the
cost as regular laboratories,
even cheaper than Medicare.
The reality was that
Theranos had a prototype
that was the last iteration of it's device
called the Mini Lab.
And that was a malfunctioning prototype
that it was still trying to make work.
And when they had gone
live in the fall of 2013,
they had gone live with
a previous iteration
of the technology they called the Edison,
so named after Thomas Edison,
that was actually a very limited machine.
It could only do one class of blood tests
known as immunoassays.
And it didn't do those tests well.
It was an error ridden machine.
And so for the rest of
the tests on the menu,
and they had about 250 tests on the menu,
they had hacked machines made
by the German conglomerate, Siemens.
They had modified them so that they
could accommodate small blood samples.
And then there was a third bucket of tests
that they just did the regular,
the old regular way with venous draws,
drawing the same amount
of blood as everyone else
and running it also on
commercial analyzers.
- So how does this happen?
This is a highly regulated
industry here in the US,
you would think something like this
that was mostly smoke and mirrors
wouldn't be able to get past regulators
let alone into a major
retail chain like Walgreens.
What did Elizabeth Holmes
and her colleagues do
to sway regulators and sway Walgreens
into believing that this should
actually be put to use on real patients?
- Right.
So for one thing they exploited a,
what I call a regulatory no man's land,
in the laboratory space.
You have on the one hand the FDA
which regulates reviews and improves
the laboratory instruments that labs use
that they buy off the shelf and
that they use in their labs.
And on the other hand, you have CMS,
the Centers for Medicare
and Medicaid Services,
which is the regulator
of clinical laboratories.
But, then there's this category of tests
known as laboratory developed tests
which are fashioned by
labs with their own methods
that aren't really regulated
by either of these entities.
And Elizabeth Holmes and her
boyfriend, Sunny Balwani,
were able to exploit this third category
and say we fall in this
category, what are known as LDTs,
because we're using our
own proprietary machine
within the walls of our own lab.
Therefore, we don't have
to be reviewed by the FDA
or at least our machines
don't have to be reviewed by the FDA.
And CMS which regulates labs
doesn't look closely at LDTs
so that's the loophole that
they were able to exploit.
Theranos had been doing,
had been attempting
to validate it's technology for years
with pharmaceutical companies.
All these validation studies
with big pharma companies
had failed and in early 2010
it was running out of options
so it decided to go straight to consumers.
And the way to do that was to
align with a retail partner
and so they started courting Walgreens.
And they told Walgreens, we've
got this great technology,
it's portable, it can do all these tests
off just a drop of blood and
we want to partner with you.
And Walgreens was desperate for
a new way to renewed growth.
And so it started meeting
with Elizabeth in Palo Alto
and in Chicago where Walgreens is based.
And it hired a laboratory
consultant, named Kevin Hunter
to help it do due diligence.
And this guy, Keven Hunter,
as I explained in the book,
very early on smelled a rat.
And tried to alert Walgreens
executives to his suspicions
and they just wouldn't listen to him.
- So these tests are
being done in Walgreens,
you know they're hyping the technology,
cover stories on famous
magazines and so forth.
Why weren't we hearing much
from the medical community
or if we were why did
it seem so diminished?
Why weren't there more flags
from peers in the industry
- Right.
- yelling at them?
- There were whispers in especially
the field of laboratory science.
But the bottom line is that
the company was so secretive
and very little if
anything was filtering out
of the company itself.
So, while there were
some skeptics in academia
and in the field of laboratory testing,
all they could say was
that there was this company
that was getting a lot of hype,
who's founder was becoming
a Silicon Valley celebrity,
at the same time wasn't doing
what you usually do in medicine,
which is that you publish
studies about your innovation
and you publish them in
peer reviewed publications
and you have your peers
check what you're doing
and verify it.
So there were a couple
laboratory scientists
who actually wrote op-eds
in scientific journals.
One of them was Dr. Ioannidis at Stanford
who came out with a gen op-ed
in, I believe it was 2015.
I'd already started digging
into the company at that point.
A couple months later,
a laboratory scientist
at the University of Toronto, I believe,
had another op-ed in
another scientific journal.
- Which no one reads these by the way,
it's not like The Wall Street Journal
where everyone's going to see it.
It's like these nerdy guys
just talking about it.
- And you know, they
started raising alarm bells
about the secrecy, about the,
they called it the stealth research.
- Which doesn't happen in this industry,
it should be peer reviewed right?
- Right, it should be, it
certainly hasn't been the way
medical science has unfolded
for the past century.
And so, to their credit,
they were on the right track.
They didn't have the
goods in terms of knowing
what was actually going
on behind the scenes.
But, they had the right intuition.
- This story sounds a
lot like what we hear
from Silicon Valley, the
overpromise and under deliver.
- Right.
- You know, we're going to put
out this really cool phone,
turns out to be faberware.
How does that relate to
what happened with Theranos?
- In this case, I think
Elizabeth lost sight of the fact
that her company wasn't a
computer software company.
- Even though she was
running it like that.
- She was running it like that.
She lost sight of the fact
that it was first and foremost
a health care company.
A medical technology company who's product
doctors and patients were going to rely on
to make crucial health decisions.
- And if that new iPhone doesn't come out
it's not going to effect your health.
- And that's a big part of
what went wrong with this story
is by really draping herself
in the modus operandi
of Silicon Valley, instead
of modeling herself after
say the biotech industry or another corner
of the healthcare industry.
She ended up behaving that way
and while it's OK most
of the time to behave
that way in traditional
tech, it isn't in healthcare.
