Medtech Reacts to the Theranos Story


Why should the medical device industry care about Theranos’ epic demise? John Carreyrou answers medtech execs’ questions.

One of the highlights of MedTech Strategist’s Innovation Summit San Francisco, held last November, was the keynote address by John Carreyrou, author of Bad Blood, the best-seller about the rise and fall of now-infamous Theranos. Carreyrou is the Wall Street Journal reporter whose investigation into the fraudulent activities of the diagnostics company eventually led to its downfall and the filing of criminal charges against founder and former CEO Elizabeth Holmes and former president Sunny Balwani.


A Theranos-like fate is unlikely to befall anyone in attendance at our Innovation Summit, but Carreyrou explained its relevance to the audience in terms of culture, not crime. Hi-tech giants are increasingly interested in healthcare companies and the trillion-dollar markets they command.  Much of their focus is on pharma and consumer health, but medtechs are becoming more deal-active with digital and other hi-tech firms.  Carreyrou cautioned the audience about classic Silicon Valley culture, with its mantras of “Fake it ‘til you make it” and “Disrupt now, apologize later.” That particular culture may have served Silicon Valley well but is, Carreyrou said, “ill-suited to healthcare,” where “patients’ lives are at stake.”

As our Co-Editor-in-Chief David Cassak concluded in his recent article, Was Theranos a Cautionary Tale for Medtech?  [MedTech Strategist, January 30, 2019], “Certainly, I’m not arguing that the advent of digital technology will lead naturally to more Theranos-like stories. But, among all of the enthusiasm, it is worth pausing to ask a larger question: can medtech embrace the technology of high tech while avoiding the cultural pitfalls?”

Following his talk, Carreyrou entertained questions from our audience of medtech executives. The following is a lightly edited version of that back and forth.

Question: When your first piece on Theranos was published, you weren’t at that time charging the company with fraud or deception, you were just saying the company was running into technology problems. What was the general reaction to that first story? You noted that some of the angel investors had already begun to express doubts.


Carreyrou: Actually, the response was very divided. A lot of people thought that this story blew the [whistle] on what was likely to be a big scandal. But there were also voices in Silicon Valley, some of them VC voices, saying, Why is the Wall Street Journal going to town on this small start-up? All start-ups have growing pains and stumble. Yet others didn’t know what to think because Theranos was putting out statements denying the facts that we reported in our story and claiming that we had gotten the story completely wrong. And in fact, their denial tactics continued for months and months, as I continued reporting. After that first story, I published many more over the course of the next year, and with each story that I published, Heather King, the general counsel of Theranos would send us a letter demanding that we retract each story, and giving us 30 days to do so. They were clearly going under the California statute under which you have to first seek a retraction from the offending publication if you feel you’ve been libeled, and then once that delay has gone by, you can sue. So they were clearly on the cusp of suing, but I think what made them not sue in the end is that in January of 2016, about three or four months after my first story was published, two regulatory agencies went in and inspected, and both of them found myriad problems. One in particular, the Centers for Medicare and Medicaid Services, put out a huge inspection report, a hundred and something pages long that bore out much of my reporting. At that point the company didn’t really have a leg to stand on anymore.

Question: A lot of the Silicon Valley leaders that you cited as part of the culture are or were incredibly charismatic personalities. You were deep in your reporting before you got to talk to anyone at Theranos. Did you ever meet Elizabeth Holmes? Did she have the same kind of charisma? And how do you explain how she pulled it off? It seems to me that you came to the conclusion that she wasn’t a naïve person; you think this was a scam from the beginning. Or am I wrong about that?

Carreyrou: Well, I wouldn't liken her to Bernie Madoff who at some point in the 1980’s woke up one morning and said, ‘From here on out I’m running a Ponzi scheme.’ That's a very black and white fraud, and he continued to run his Ponzi scheme until he was exposed in 2009. Elizabeth Holmes didn’t drop out of Stanford in 2003 premeditating a long con. She really did want to be a successful Silicon Valley entrepreneur. She really did idolize Steve Jobs. She did want fame and riches, but she also wanted to execute on her vision. I think it’s more likely this became a fraud as she went along because she refused to acknowledge her setbacks to investors and to her board of directors. And she kept on papering over the problems until they got to a point where the gap between what she claimed she’d achieved and what they had really achieved behind the scenes was so huge that it was de facto a massive fraud.

Elizabeth Holmes didn’t drop out of Stanford in 2003 premeditating a long con. She really did want to be a successful Silicon Valley entrepreneur.

John Carreyrou

Question: Do you have a sense of when that realization struck? Lots of companies start with a vision: they think their technology is going to work and it’s only later that they have to wake up to reality. But she had raised a tremendous amount of money, realized a tremendous valuation and personally got very rich. Do you think there was an inflection point where she realized this wasn’t going to work and she could have stopped and not eventually face federal charges?

Carreyrou:  There was a key moment, a seminal moment when she faces the choice of going live with these blood tests that are jerry-rigged, most of which aren't even done on Theranos technology, but the way that they modified the commercial analyzers presents accuracy issues or not going ahead. And she decides to cross that bright red line and to go live with the test. A big part of what makes this a securities fraud is that Theranos was running out of money in the summer and fall of 2013, and so she used the fact that they commercialized the technology to solicit new funding. It’s only after they went live with the blood tests in Walgreens stores in September of 2013 that she was able to raise most of the money that Theranos raised over its lifespan. It raised $750 million out of the total billion that it raised over its lifespan after going live with the technology.


There was no way she would have gotten that funding without going live and saying to people like Rupert Murdoch, ‘Obviously not only is our product for real, but the proof is that patients are using it in Walgreens stores. Should people like Murdoch and Betsy DeVos’ family and other family offices and one hedge fund, actually in San Francisco have done more due diligence? Absolutely. But the fact that the blood tests were commercialized and were available in Walgreens stores made them think that surely Walgreens must have done its due diligence. There was a credibility laundering going on where she laundered Walgreens’ credibility and also laundered the credibility of all those prestigious members she had on the board. She used the credibility of David Boies as well. That was a big part of it.

Question: Do you think even in her darkest days early on that she continued to believe she could still get the technology right? Or do you think she was caught up in the myth that Elizabeth Holmes is the next Steve Jobs?

Carreyrou:  Both. I think until the end, and even after my stories exposing her were published, she still was deluded in thinking that they could get there. And had she not been exposed, I think her game was to buy time until they could get there and then once the technology finally worked, no one would be the wiser. Except that even if they had gotten it to work, it still wouldn’t have delivered on the promise of hundreds of tests off a tiny pinprick of blood. At the same time, yes, I think that she for sure got caught up in the myth of the Silicon Valley billionaire and loved that lifestyle.

Question:  And that’s part of your point, that there is a culture out here that fosters that.

Carreyrou:  Yes. There may be some VCs in the audience who say the story of Theranos was an outlier and has nothing really to do with Silicon Valley because no sophisticated VCs gave her money, especially not medical technology VCs who wouldn’t go near that company with a barge pole, and so how is this a Silicon Valley story? My response is that what made Elizabeth Holmes exist and thrive is a culture, the culture of the brilliant, young college dropout who becomes an entrepreneur and a tech founder and sees around corners. This is a myth that mostly we have Steve Jobs to thank for. He’s a figure who’s been so lionized and turned into such a god of American capitalism that it’s popularized this notion that there can be other Steve Jobs, I think you see that dynamic at play to some extent even with Elon Musk to this day. I think Elizabeth Holmes fashioned herself in the mold of the genius founder who saw around corners, and people bought it.

Question: Can you speak to the role that Rupert Murdoch played—or didn’t play as Holmes petitioned him to block the story?

Carreyrou:  I don’t know to this day what his motivations were, but I can speculate. He doesn’t really know me well. But I can imagine that if he had a reporter who had spent almost a year on a story only to have it killed, he’d anticipate that the reporter would eventually learn why and would not stay quiet about it. I think that would have metastasized into a big journalistic scandal, and then, what you're putting at risk is not just $125 million, but the Wall Street Journal franchise, which he paid $5 billion for ten years ago. He paid $5 billion for Dow Jones and later had to write the investment down by $3 billion, but that’s still $2 billion that he spent essentially to buy the Wall Street Journal franchise. I have to think that entered his mind.

Question: Where was the Theranos board during all of this?

Carreyrou: Since the book was published, I’ve seen more email communication between her and the board, and there really isn't anything that suggests that the board had any clue about what was going on or what she and Sunny were up to and all the corners that were cut.

Question:  What was their response to your reporting?

Carreyrou:  In the days and weeks after my first story was published, they kept on sending her emails asking her to come out with a very clear and unequivocal statement that Theranos used no analyzers other than its own machines, and she would put them off.  They’ve of course since seen the civil charges filed by the SEC and the criminal charges from the DOJ, and I’m sure a lot of them realize now that there were a lot of things that they didn’t know. But the short answer to your question is that they weren't in the know about the wrongdoing. Does that discharge them from the fiduciary responsibility that they had as board members? I don’t know. They should have known what was going on. They should have known a lot more. It’s a catastrophe in corporate governance.

I think Holmes’ grave error was to frame herself in the traditional Silicon Valley, as opposed to choosing to frame herself in the tradition of the great entrepreneurs and scientists in the biotech cluster as her role models. ”

John Carreyrou

Question: I think there’s an argument that the companies you cited to provide the back story for Theranos are an anomaly in our industry. There are 10,000 companies that no one has ever heard about that don’t rely on charisma to be successful. Many will be presenting at this meeting. And their culture is much more science-oriented, much more focused on the patient. The companies you cited as models are really the exceptions.

Carreyrou: The point I was making is that, as I see it, the traditional Silicon Valley industry is the microprocessor industry of the ‘50s and ‘60s that became the personal computer industry of the ‘80s - and then the Internet boom of the late ‘90s and early 2000s - is not the smart phone and wireless and mobile computing industry. There’s another cluster here in South San Francisco, the biotech and medical technology cluster, which isn’t part of the traditional Silicon Valley industry. I think Holmes’ grave error was to frame herself in the tradition of the traditional Silicon Valley, as opposed to choosing to frame herself in the tradition of the great entrepreneurs and scientists in the biotech cluster as her role models. That’s what I’m trying to say there. At the same time, I do think that there's going to be more and more convergence between the traditional Silicon Valley and the Silicon Valley that you're from, the medical technology/diagnostics/biotech Silicon Valley. They're in close geographic proximity and increasingly we see people who have done really well in the traditional Silicon Valley who see healthcare as the biggest industry in the country, see that the system is broken, and believe that they’re the ones to fix healthcare. They’re going to bring bold thinking to this space. I think that convergence is inevitable, and I hope that the Theranos story is a cautionary tale that people will bear in mind going forward.


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