Bad Blood by John Carreyrou— Notes
By: Martin Z Thomas
Tags: Investors, Technology, Silicon Valley, Theranos, Healthcare

Outline

Elizabeth Holmes dropped out of her Stanford undergraduate programme and started Theranos at the age of 19. The company claimed to revolutionise blood testing by taking very small amounts of blood from patients using a fingerprick and perform a large variety of tests. She claimed the results would be instantaneous instead of the traditional approach where it usually takes days. This technology is very useful for pharmaceutical companies as it will help them to speed up drug trial tests helping them to instantly change the dosage for the patient. It also has huge implications for doctors as more than 70% of their decisions are based on blood tests.

In 2015, the company had a more than $9 Billion valuation and Elizabeth was the youngest self-made woman billionaire. She was an inspiration to a lot of young women in the field of medicine and was all over the media for creating a huge technological shift in the field of medicine. But very soon the reality came out and Theranos became a defunct healthcare company and soon Holmes net worth became almost zero. To know-how let’s go deeper and understand the story from different angles.

Family and Loyalists

Elizabeth was a straight-A student at a young age. Her family was very well known and her dad ensured that she got the best private school education. From her childhood, she wanted to do something different and was very much inspired by the stories from Silicon Valley. Her parents wanted her to do a PhD in basic science but Elizabeth always knew that she wanted to start a company and make money.

One of the main characters in the story was the Fuisz family. Elizabeth’s mother and Lorraine Fuisz were very good friends. Lorraine’s husband Richard Fuisz, a doctor by profession was an extremely proud and wealthy investor known for filing patents which he then licenses it to make profits out of it. He came to know about Theranos after his wife told a conversation he had with Mrs Holmes and was really annoyed on the fact that even though they knew each other very well they didn’t consult him before starting the company. He patented a process which later became very crucial for Theranos. They later filed a lawsuit against him to revoke his patent which he had to do finally. Theranos’ legal team well very known and feared and was one of the primary reasons they were able to go undercover without any public scrutiny. Richard Fuisz later grouped together with ex-employees of the company to go against Theranos and their malpractices which I will go in detail in the next section.

The right hand of Elizabeth was Sunny Balwani, an Indian who became extremely wealthy during the dot-com bubble. It was also said that Elizabeth and Sunny were romantically involved with each other, something which they kept it as a secret with their employees and board members. He was extremely bossy and tried to create an atmosphere of fear so that everyone knew that it was their privilege they worked in such a great startup. He tried to monitor everyone’s dedication by seeing their computer activity and the number of hours they dedicated every day. He was one of the primary reasons why people left the company. Even though he did not understand the field properly he always boasted regarding the same and was notorious for not giving even a proper farewell to most of his employees when they resigned.

Theranos Employees

Elizabeth Holmes energy and charisma attracted a lot of good employees who were quite driven by her mission to solve the healthcare problem. Since she always had the backing of professors from her alma mater they were able to recommend some of the best students from Stanford to Theranos.

She started the company with Shaunak Roy whom she met at Stanford. Very soon she recruited the first engineering team who were responsible for building ‘Edison’ company’s first commercial product. She was greatly inspired by Steve Jobs and tried to emulate him as much as possible. She wore black turtlenecks something which Steve Jobs was famous for wearing during product announcements. Her vision was just like Apple that everyone should have an Edison at their home, an extremely easy to use, portable and versatile device. She was able to attract a lot of employees from Apple like Ana Arriola who became the Product Design head for Edison.

The company never allowed inter compartment communication and she pushed to have information as siloed as possible. This often led to miscommunication and did not allow anyone to have a full picture of what’s happening in the company. This led to many employees leaving the company as there was an atmosphere of constant fear and intimidation. Once the board even decided to remove her as CEO because of the complaints from the Sales and Legal team as she was trying to sell products which were not even tested and gave false projections to clients which were impossible to achieve. Throughout the board meeting, she convinced the members that it was a mistake and will try to compensate for it. They gave her a second chance and she used this opportunity to fire anyone who was up against her. Employees regularly came and left the company within a very short period of time but this was all done secretly to raise no suspicions within the company or outside. In fact, her employees were not allowed to write the company’s name in their Linkedin profile.

Edison was only able to conduct immunoassays which was just a small part of all the tests which Theranos pitched. Soon, they started building MiniLab where the idea was that all the test could be conducted by this machine. They code-named it ‘4S’ a tribute to Apple’s iPhone. Soon Sunny started hiring more Indians to the companies as they all had H1-B visas and were more likely to stay within the company. He knew all of them wanted the company experience to stay in the U.S and showed more loyalty to him as compared to the American counterparts.

Things took a severe turn when Ian Gibbons joined the microbiology team from the Dean of Stanford’s recommendation but soon came to know that things were not being done ethically in the company. He had constant fights with the engineering team and slowly felt that no one was listening to him in the company. Because of his old age, he felt more desperate about the job and soon committed suicide. The company officials still were more worried about whether there were any company trade secrets left with him.

Investors and Clients

Elizabeth got a lot of support in the beginning from the Dean of Stanford, Channing Robertson, Larry Elison founder of Oracle and Tim Draper founder of a prominent VC firm. They were one of the first few investors in the company.

When Elizabeth introduced the device to the military, General Mattis (Secretary of Defense under the Trump administration) was very impressed by it as it had immense potential on the battlefield for all the soldiers as this would help soldiers to recover quickly. He soon joined as the board member of the company and was followed by Henry Kissinger, George Schultz who was former Secretary of State of the country. All these investors added a lot of credibility to the company. She mainly targeted government officials as it gave more public credibility and helped her to avoid scrutinies from public agencies. But no one noticed all the board members were from the non-medical field and didn’t really understand the product or the field. All of them thought that Elizabeth was the next Jobs and really wanted to be part of it. Since she always had the majority shares she took the majority of the decisions in the company and considered board members nothing equivalent to placeholders.

Some of the biggest deals Theranos had with was Walgreens and Safeway. Walgreens was seeing stagnation in their revenues and wanted to pivot out from their primary source which was from drugstore sales. They upgraded their stores to have Theranos clinics which took blood tests of visiting customers. She convinced both the companies that their device Edison was able to perform to a wide variety of tests using a fingerstick. The company received combined more than $200 million in investments and spent even more in upgrading their stores. Theranos didn’t conduct the majority of the tests on their devices rather they took the blood samples from the stores and tested on modified machines they bought from Siemens and other third-party devices. Most of the result showed false values as they regularly diluted the blood samples and tests were conducted by certified lab professionals.

Whistleblowers, Author and the Lawyers

Deceased Ian Gibbon’s wife, Richard Fuisz and Alan Beam who was heading the laboratory department in Theranos initially reached out to the author who is a Wall Street Journal journalist regarding the company’s false claims. The author then tried to find out more employees to corroborate their story. He reached out to Erika and Tyler who left the company because they knew that what was happening in the labs were not ethically right. Cherry-picking test results, hiding actual test devices when authorities came for checking, using false approval claims of FDA and using competitor’s devices for testing the blood while being given a completely different picture to the investors.

The author tried to set up meetings with the doctors in Walgreens and Safeway who used Theranos products and it was true that even their patients got false results when comparing with other traditional means. Most of the wellness centre used both intra-venous and finger stick method which was not being told to the board members and there was enough evidence that a story could be made.

But very soon the lawyers came to know about the whistleblowers, David Boies one of the most feared lawyers was taking up Theranos’ case. His firm was known for its aggressive tactics and using private investigators to hunt and intimidate people. Many wondered how the company were able to pay the legal fees associated with it, they didn’t as Boies was given some % of shares of the company. All the employees were told to sign a non-disclosure agreement while leaving which prevented them from sharing any info of the company to the public so Tyler, Erika and Alan were threatened with a lawsuit of sharing this info to a journalist.

The story is out…

The story was published on the Journal’s front page on Thursday, October 15th, 2015. The headline, “ A Prized Startup’s Struggles”, was understated but the article itself was devastating. Prior to releasing the story the legal team of David Boies regularly contacted the author to return back all the content which was against the company rules as it was going against the non-disclosure agreements of the employees. They used a lot of threatening approaches even after the first article was released but the damage was already done. FDA and other medical agencies made secret visits to the labs and found a lot of unauthorized devices and banned them from using it again.

On March 14, 2018, the Securities and Exchange Commission charged Theranos, Holmes and Balwani with conducting “an elaborate, years-long fraud.” To resolve the agency’s civil charges, Holmes was forced to relinquish her voting control over the company, give back a big chunk of her stock and pay a $500,000 penalty. She also agreed to be barred from being an officer or director in a public company for ten years.

Favourite quotes and terminologies

Folie a deux: delusion or mental illness shared by two people in close association. A classic example which Sunny and Elizabeth share among each other.

La mattanza: It was an ancient Sicilian ritual in which fishermen waded into the Mediterranean Sea up to their waist with clubs and spears and then stood still for hours on end until the fish no longer noticed their presence. Eventually, when enough fish had gathered around them, someone gave an imperceptible signal and in a split second the scene went from preternatural quiet to a gory bloodbath as the fishermen struck viciously at their unsuspecting quarry. Mike, editor of WSJ gave this example to the author as an analogy where they patiently waited until they were ready to publish.

Vaporware: It was used to describe a new computer software or hardware that was announced with a lot of fanfare only to take years to materialize. It was a reflection of the computer industry’s tendency to play it fast and loose when it came to marketing. A similar strategy was used by Theranos but they were in the medical industry which was highly regulated and a lot of patients life were at risk.