Machines don’t work, blood samples manipulated, regulators tricked, so says a damning report from The Wall Street Journal regarding a hot start-up

According to the Wall Street Journal, there are definite signs of trouble at upstart medical testing firm Theranos Inc. The WSJ’s John Carryrou reports that Theranos is struggling to turn its technology into reality. Based on comments from several former employees, the breakthrough lab instrument developed at the heart of the company only actually performed a tiny fraction of the lab tests sold to consumers.

Theranos was founded in 2003 by genius Elizabeth Holmes at the age of 19 when she dropped out of Stanford University in her sophomore year. Holmes has a net worth of over $4 billion today, based on her holdings in Theranos (valued at around $9 billion).

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Most Theranos blood tests actually performed on traditional diagnostic lab equipment

One ex-employee who spoke to the WSJ said that the new testing technology named Edison was just used to perform 15 tests in December of 2014. Other employees also expressed doubts about the accuracy of the device.

In fact, former employees of Theranos have filed a federal complaint against the firm. In the complaint, one ex-Theranos employee claimed the firm was not reporting test results that raised questions about the accuracy of the Edison system. A failure to report these results could be a violation of federal rules, the former employee noted.

The employees also point out that Theranos has not disclosed publicly that it performs nearly all of its lab tests with traditional machines bought from companies such as Siemens and Roche

The California-based company claims it follows all applicable federal lab regulations and hasn’t exaggerated any of its achievements. The firm denies that Edison can do just 15 tests in a month, but refused to provide information about how many tests it does to day or respond questions about its lab procedures, claiming that these were “trade secrets.”

David Boies, an attorney hired by Theranos, admots that the firm is not currently using Edison for all the tests the company offers. Eventually doing every test with the new technology is “a journey,” he commented.

Asked about the expansive claims on the firm’s website, Boies replied that using the device for the “full range” of blood tests is a goal Theranos will achieve over time.

Theranos notes it has publicly disclosed doing “certain esoteric and less commonly ordered tests” with traditional machines on blood drawn with small needles.

Of note, a couple of days after the conversation with Boies, Theranos deleted a sentence on its website that read: “Many of our tests require only a few drops of blood.” It also took out “usually only three tiny micro-vials” per sample, “instead of the usual six or more large ones.” Heather King, the firm’s general counsel, claimed the changes to the website were made for “marketing accuracy.”

The company notes that it has performed tests on millions of patients referred by thousands of doctors, and has received highly positive feedback with very few exceptions.

Theranos: Machines Don't Work, Blood Samples Manipulated, Regulators Tricked?

Theranos is “user-friendly”

It should be pointed out that many doctors appreciate the firm’s user-friendliness. In many cases you can get results back within 15 minutes, notess Scott Wood, a primary-care doctor in Menlo Park. “That’s exciting and could be very useful in emergency situations,” he says. When patients ask about Theranos, he typically answers: “Sure, go ahead.”

However, other doctors say they no longer send patients to Theranos because of results they no longer trust. “I don’t want my patients going there until more information and a better protocol are in place,” comments Gary Betz, an internist based in Phoenix.

Theranos responded with a press release:

Theranos is a CLIA-certified laboratory. And the first and only lab to proactively begin submitting all our Laboratory Developed Tests to the FDA for clearance and approval. We received our first FDA clearance this summer.

We realize our mission only when our tests are performed to the highest standards of quality. The performance of our tests is routinely demonstrated through multiple accredited proficiency testing programs. And despite not being required to do so, we are the first lab that has been and will continue to submit all our Laboratory Developed Tests to the more rigorous standards of the FDA.
See our press release on our FDA clearance here.
See our press release on our CLIA waiver here.
See our comment on FDA regulation of Lab Developed Tests here.

Famous value investor, Whitney Tilson does not buy it. An email sent to investors, Tilson had a keen observation:

This cover story in today’s WSJ about Thernos, which, at $9 billion, is one of the most highly valued “unicorns” in history, is: a) a great piece of journalism; b) unbelievably damning (after reading this, I think there’s a decent chance that this company is worthless and will go bankrupt); and c) raises questions about the kind of due diligence being done in Silicon Valley, which is both the most remarkable locus of innovation and entrepreneurship in the world, yet also filled with froth and foolishness (take Jet.com, for example)