Theranos founder Elizabeth Holmes and her lawyer leave the courthouse in San Jose, California, on 3 January.Credit: David Odisho/Getty
Elizabeth Holmes, the infamous biotech chief executive who promised to revolutionize blood testing, has been found guilty of fraud. The Theranos founder intentionally deceived investors, a US federal jury concluded yesterday after a nearly four-month trial. Holmes probably faces up to 20 years in prison and a hefty fine. She has not yet been sentenced.
The case will no doubt shape how biotechnology entrepreneurs approach investors, say researchers who spoke to Nature — and it makes abundantly clear the importance of validating early research through peer review.
“It’s a great teaching moment,” says Eleftherios Diamandis, head of clinical biochemistry at Mount Sinai Hospital in Toronto, Canada, who in 2015 publicly called out Theranos for exaggerating claims. “It’s an example of how a supposedly huge company with a US$9-billion valuation went down the drain because of a series of mistakes.”
‘A fundamental flaw’
Holmes founded Theranos in 2003 at the age of 19, shortly before dropping out of Stanford University in California. Her goal was to build a company that would make blood tests available directly to consumers. She wanted to eliminate the large needles and tubes of blood required to operate standard diagnostic devices. To that end, she claimed to have developed a machine that could run more than 200 tests on just a few drops of blood taken from a finger prick.
Captivating and ambitious, Holmes attracted more media attention to laboratory diagnostics than ever before. She also brought in high-profile advisers and investors. Former US secretaries of state Henry Kissinger and George Shultz, and former US secretaries of defence James Mattis and William Perry, all joined Theranos’s board of directors. Investors included media mogul Rupert Murdoch and the family of former US education secretary Betsy DeVos.
The company, based in Palo Alto, California, raised about $945 million and grew to more than 800 employees. It also inked deals with a couple of big retailers. In 2013, pharmacy chain Walgreens began putting Theranos ‘wellness centres’ in its stores in Arizona, eventually setting up 40 sites. The aim was to enable consumers to go to a local pharmacist at their convenience and order a panel of blood tests from a few drops of blood.
Investors and the public believed that Theranos was using its novel machines to analyse the blood samples it received. But in reality, the company could run only a few tests on its platform. The rest went through conventional blood-testing equipment developed by other companies. To meet the specifications of those instruments, the finger-prick samples had to be diluted to increase their volume, and the results proved unreliable.
“There was a fundamental flaw in the idea of getting everything from a drop of blood, because there just aren’t enough molecules there” for detection, says Paul Yager, a diagnostics developer and researcher at the University of Washington in Seattle.
In 2015, Holmes’s ruse began to fall apart. After Diamandis called out Theranos, The Wall Street Journal reporter John Carreyrou exposed the shortcomings of Theranos’s machines in a splashy series of news stories. The US Centers for Medicare and Medicaid Services investigated, and banned Holmes from operating a medical lab for two years. Walgreens sued Theranos. And the US Securities and Exchange Commission charged Holmes and former Theranos president Sunny Balwani with massive fraud, and barred Holmes from serving as a director or officer of a public company for a decade.
On 3 January, a federal court in San Jose, California, found Holmes guilty on 4 of the 11 charges brought against her by prosecutors: 3 for wire fraud — a scheme intended to obtain money under false pretences using a method of remote communication such as e-mail — against investors and one for conspiracy to commit wire fraud against investors. The jury acquitted Holmes on four charges related to defrauding patients and could not reach a decision on three further charges related to defrauding investors.
A hearing next week will address how to handle the three unresolved charges, says Steven Clark, a lawyer in private practice in San Jose and a former district attorney in the region. Balwani will be tried separately in federal court proceedings scheduled to begin in February.
Cautionary tale
The Theranos scandal has provided salacious fodder for books, films and podcasts. But perhaps more importantly, the story has become a cautionary tale for blood-diagnostics companies and scientists with entrepreneurial interests. In particular, it reminds executives at start-up firms to share their data early on, and to participate in some kind of peer-review process, say diagnostics researchers interviewed by Nature, who have been observing the Theranos fallout.
“We are definitely going to see more pressure to produce technologies the right way,” says James Nichols, a clinical chemist at Vanderbilt University Medical Center in Nashville, Tennessee. Part of Holmes’s downfall was that she “held Theranos’s technology as proprietary, didn’t publish it and didn’t want to share it with the community”, he says.
Had Holmes participated in peer review, the problems with the technology could have been spotted before she defrauded investors, experts say. That might have forced Holmes to change direction or shut down her company, but it might also have kept her from committing a crime. It’s the self-correction of science that has “saved our butts” time and time again, Yager says.
For Holmes — whose scientific vision drove the company — having a more solid background in the scientific method might have helped, too, researchers suggest. The work required to get a degree in most sciences tends to instil in students the importance of vetting and publishing experiments, Yager says. “You learn that you have to line up your ducks and have credible data.”
The precedent set by the jury’s verdict in the Holmes case might ultimately compel biotech entrepreneurs to be more cautious — and honest — in their approach to investors. The four charges on which Holmes was found guilty centre on how she exaggerated the company’s involvement with potential partners. For example, Holmes added the logos of pharmaceutical giants Pfizer and Schering-Plough to lab reports that she used in her presentations to investors and Walgreens executives. The manoeuvre made it look as if the pharmaceutical companies had validated Theranos’s system, when they had not.
These lessons are likely to inform a generation of researchers, scientists say. “This is probably the biggest story in laboratory medicine, and it ended in disaster,” Diamandis says. “The question is: what can we learn about it so that it doesn’t happen again?”
