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Theranos: The Rise and Fall of an Empire of Lies

It’s one of the most absurd things I’ve ever read.

“But no scientist could credibly vouch for Theranos,” writes Nick Bilton in a Vanity Fair piece published September 6, 2016. “Under Holmes’ direction, the secretive company had barred other scientists from writing peer-review papers on its technology.”1

The emphasis is mine.

By now, you may be acquainted with the rise and fall of Elizabeth Holmes and Theranos, the blood-testing company she founded as a 19-year-old Stanford University dropout.

It’s the little things in this story that continue to confound.

Holmes, as Bilton reveals, is a carefully crafted caricature of her hero, Steve Jobs — from the “vision” and the secrecy right down to the black turtleneck.

But the pupil lacked one major component that defined Jobs’ genius: the dash of substance that comes from actual, usable, useful products with viable markets.

Start with the fact that a life sciences unicorn could be valued at approximately $9 billion without the slightest bit of third-party verification of the efficacy of its groundbreaking, “world-changing” technology.

So who funded Theranos?

According to startup data tracker CrunchBase, Holmes’ creation churned up $686.3 million in total equity funding across eight rounds from six investors.2

Only one of the investors – Draper Fisher Jurvetson, which participated in the “seed” round – is actually based in Silicon Valley.

And Tako Ventures, a subsidiary of Lawrence Investments, which includes Oracle Corp.’s (ORCL) Larry Ellison as a partner, was in on the Series C round.

But most of the Valley’s heavy hitters were loath to invest without some evidence that the technology was sound.1

However, Theranos’ story — a blood test that requires “a finger prick instead of a needle” and “only a few drops of blood to get results that normally take vials full” — did attract partners such as the Walgreens Boots Alliance (WBA), which operates the second-largest pharmacy chain in the United States.

It hoped to deploy its revolutionarily simple blood testing device – “Edison” – to screen for hundreds of diseases and conditions at more than 8,000 Walgreens across all 50 states.

The red flag that sent The Wall Street Journal healthcare reporter John Carreyrou on a quest for answers was Holmes’ inability to adequately explain, with any specificity, what her company’s primary product actually did and how it actually did it.1

In a previous profile published by The New Yorker during Holmes’ halcyon days3, Ken Auletta wrote:

What exactly happens in the machines is treated as a state secret, and Holmes’ description of the process was comically vague: “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.” She added that, thanks to “miniaturization and automation, we are able to handle these tiny samples.”

“Comically vague,” indeed.

We like to read companies’ and executives’ explanations of how their tech works – they’re important indicators of reliability and possibility. That’s why, for example, we quoted an extensive explanation of Virtual Incision Corp.’s robotic surgery system in yesterday’s Wall Street Daily.

We try to cover a lot of ground here. We consume a lot of written material, much of it highly technical, including peer-reviewed articles for scientific journals, pieces from specialized magazines and websites, and niche blogs focused on science, technology, and innovation.

It’s one of the reasons we’ve begun to include footnotes to identify our sources, so you can have some faith that we’ve done some due diligence.

It’s why we’re on guard today after seeing headline after headline from British news outlets touting a “smoke detector” blood test described by researchers from Swansea University at the British Science Festival on September 7, 2016.

The red flag that sent The Wall Street Journal healthcare reporter John Carreyrou on a quest for answers was Holmes’ inability to adequately explain, with any specificity, what her company’s primary product actually did and how it actually did it.

The Independent went with “Cancer Breakthrough: Scientists Develop ‘Smoke Detector’ Test That Can Spot Disease Before Symptoms Are Noticeable.”4

For The Telegraph, it’s “Cancer ‘Smoke Detector’ Test Can Spot the Disease 10 Years Before Symptoms Appear.”5

The Daily Mail invoked the cup of Jesus, Arthurian legend and all caps: “Is This the Holy Grail for Cancer Diagnosis? Simple Blood Test ‘Finds Disease BEFORE the Symptoms Start.'”

Sure, that’s exciting. My first thought was, Where there’s smoke, there’s fire.

By that logic, isn’t smoke a “symptom” of fire?

At any rate, we’ll get back to you once some peer-reviewed papers address the science behind the Swansea University breakthrough.

Katharine Hobson of FiveThirtyEight.com raised another compelling line of inquiry about Holmes’/Theranos’ quest to “democratize” health care and thus “make the world a better place”: Were it actually viable, would we even need such technology?6

That also applies to the Swansea University news.

Hobson breaks out a key set of lines Holmes delivered during a 2014 TEDMED talk (the video of which is “no longer available” at tedmed.com), the punchline of which is: “If only I’d known sooner.”6

At the same time, the ultimate goal is not to fight the disease. It’s to fight for the patient. And that’s a far more complex equation.

It stands to both basic common reason and strict scientific scrutiny that when it comes to disease, earlier detection is better.

At the same time, the ultimate goal is not to fight the disease. It’s to fight for the patient. And that’s a far more complex equation.7

So do “early detection” tests even provide enough information? According to what Dr. Brenda Sirovich, co-director of the Outcomes Group at the VA Medical Center in White River Junction, Vermont, said to Hobson, the answer is no:

The reservoir of abnormalities is bottomless. And we don’t know anything about what those things mean in an asymptomatic vacuum.6

And is that information even reliable?

Not entirely. Hobson continues:

The effectiveness of screening for a given disease before signs and symptoms appear depends on a host of conditions, said Dr. John Ioannidis, director of the Stanford Prevention Research Center — including whether there’s an effective treatment for whatever is found, and whether people will fare better if they get treatment without waiting for symptoms. He added that a successful screening test needs to be accurate, without too many false positives or false negatives.

But depending on the prevalence of a disease or condition in a given population, false positives can outnumber true positives, even for a test that’s quite accurate.6

Alas, according to the “Father of Modern Medicine,”8“The good physician treats the disease; the great physician treats the patient who has the disease.”7

That’s Sir William Osler, a Canadian physician, one of the “Big Four” founders of Johns Hopkins Hospital and the first Professor of Medicine there, and of whom it was said, “The life and philosophy of William Osler continues to serve as a standard of excellence and a model for the evolution of the profession and its practitioners.”8

We’re as excited as anyone about the potential for innovation at the intersection of medicine, biotechnology, and Big Data.

But we also come at this from the perspective of investors, which means there must be some roots in reality that will enable a particular innovation to eventually establish a market.

And in our particular field of inquiry that requires verification from independent, expert sources.

The medical diagnostics market is huge, about $75 billion huge according to Haverford Healthcare Advisors.9 Hospital labs continue to command the biggest share of total industry revenue.

The independent segment is dominated by two big players, Quest Diagnostics Inc. (DGX) and Laboratory Corp. of America Holdings (LH), which generate combined annual revenue of about $17 billion. It’s still relatively fragmented following a phase of rapid consolidation.

The prospect of sparing patients the potentially invasive experience of having a needle stuck in their arms for several minutes to draw anywhere from 5–10 milliliters of blood, depending on the nature of the tests to be done, by combining expertise in biology, chemistry and software engineering was compelling.

Holmes said Theranos could “extract blood without syringes, make a diagnosis from a few drops of blood, automate the tests to minimize human error, do the test and get the results more quickly, and do this more economically.”3

It sounded so good – cloaked in pseudo-Jobsian Valley-speak – that even the head of the world-famous Cleveland Clinic, Dr. Delos M. Cosgrove, said, “I think it’s potentially a breakthrough company. It represents a major change in how we deliver healthcare.”3

It sounded so… disruptive.

I still can’t believe Holmes and Theranos got that far without a single peer-reviewed paper.

Old Things New

I first came across Thomas Pynchon during my freshman year at the University of California, San Diego, upon the release of Vineland in 1990, his fourth novel but his first since Gravity’s Rainbow in 1973.

The famously reclusive (how’s that for oxymoron?) Pynchon wrote at least one of his early novels in longhand on engineering paper, reflecting his technical background.

Vineland was a nice introduction, but it didn’t measure up to his prior work. V., his first novel (1963), is rich with historical allusion and biographical references. Gravity’s Rainbow is known as a dense, complex work that rivals Joyce’s Ulysses as a difficult read.

The Crying of Lot 49 was a joy for me because of its references to Southern California locations I knew well and for the idiosyncratic conspiracy that drives the narrative.

His recent more recent work, most notably Mason & Dixon, marked a return to his early form. And Inherent Vice was adapted by Paul Thomas Anderson into a pretty good movie, the first direct adaptation of one of Pynchon’s novels.

But when I tell people where to start with Pynchon I go with Slow Learner, a collection of short stories he wrote during the late 1950s and early 1960s.

He touches on many of the themes he returned to in his longer works, including imperialism, espionage, science, military life, racism, pop music, movies, TV, philosophy, and religion. The five stories are also loaded with cultural references, obvious and obscure.

And they’re easy to read, a great way to spend a Saturday or Sunday.

Smart Investing,

David Dittman

David Dittman
Editorial Director, Wall Street Daily

1 Exclusive: How Elizabeth Holmes’s House of Cards Came Tumbling Down

2 CrunchBase

3 Blood, Simpler

4 Cancer breakthrough: Scientists develop ‘smoke detector’ test that can spot disease before symptoms are noticeable

5 Cancer ‘smoke detector’ test can spot the disease 10 years before symptoms appear

6 Theranos Is Wrong: We Don’t Need More Blood Tests

7 To Be a Great Physician, You Must Understand the Whole Story

8 Sir William Osler & His Inspirational Words

9 Haverford Healthcare Advisors: Overview of 2013 – 2014 Laboratory Industry Transactions

David Dittman

, Contributing Writer

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