Lab Marketplace Update

Theranos Ends Patient Testing, Sued for Deceiving Investors

As it shuts down its patient testing business, Theranos says it will manufacture IVD systems

IN THE EARLY 1960S, the great bluesman Albert King wrote, “Born Under a Bad Sign,” which contained the unforgettable lyric, “If it wasn’t for bad luck, I wouldn’t have no luck at all.”

That lyric almost describes what’s happened to Theranos Inc. since October 2015. Although some would argue that Theranos brought this misfortune upon itself, it is, nonetheless, a long string of bad luck or at least bad news.

In recent weeks, Theranos has again been in the news for two reasons. First, it announced that it had ceased clinical testing. Second, it was sued by a hedge fund that had invested $100 million in Theranos.

On Oct. 5, Theranos posted a letter on its website stating that it had stopped doing testing for patients. The troubled company also said that it would exit the clinical laboratory testing business, shut down its CLIA-certified labs, and lay off 340 workers in its labs in Newark, Calif., and Scottsdale, Ariz.

The fact that Medicare officials have issued sanctions that would bar Theranos CEO Elizabeth Holmes from owning a lab or working in the lab industry for two years might be one factor in why the company decided to exit the clinical lab business. Also, leaving the lab business could be a way to avoid the most onerous penalties that CMS could impose.

On Oct. 10, just five days later, Partner Fund Management LP, a hedge fund in San Francisco, sued Theranos in Delaware Court of Chancery, The Wall Street Journal reported. In the suit, the fund charged that Theranos’ officials lied to attract an investment from the fund of almost $100 million, making the fund the most significant financial backer of the beleaguered lab company, the journal reported.

Filed under seal, the suit was unavailable for scrutiny. The Journal obtained a copy of a letter the fund sent to its investors. In the letter, the fund wrote, “Through a series of lies, material misstatements, and omissions, the defendants engaged in securities fraud and other violations by fraudulently inducing PFM to invest and maintain its investment in the company,” wrote Journal reporter Christopher Weaver. Investors have put about $800 million into the company, Weaver added.

Theranos Issued a response

In response to the hedge fund’s suit, Theranos posted a notice saying, in part, “The suit is without merit, the assertions are baseless, and the plaintiff is engaging in revisionist history. Most of the company statements the plaintiff has cited in its suit were made after the time the plaintiff invested, and could not possibly have been the original basis for investment. This wholesale reliance on post-investment statements, therefore, negates the claim that the plaintiff was misled.” [Editor: Theranos added the italics.]

It is believed that the hedge fund invested sometime after Sept. 8, 2013, when the Journal published a mostly flattering interview with Theranos CEO Elizabeth Holmes, and before June 12, 2014, when Fortune magazine published an article touting the ideas and technology that Theranos planned to use to disrupt the clinical lab industry. In October 2015, the Journal was first to report a number of failings in the operations and technology Theranos has used. Two months later, in December 2015, the Fortune writer followed up the earlier story with one that carried this headline: “How Theranos Misled Me.”

Until then, the company’s future had looked promising, meaning investors might have a strong case against the com- pany now. The investors could claim that Theranos failed to disclose a number of material defects in its technology and processes.

Consumer Class action Cases

Theranos also faces a number of class action suits from consumers who make many claims against the company and against its former partner, Walgreens Boots Alliance, which allowed Theranos to draw patients’ blood for testing in its wellness centers in Arizona, California, and other states.

In one suit, plaintiffs charged, “Walgreens and Theranos misled consumers and induced them to purchase Theranos tests with false claims and material omissions,” and that, “Theranos’ labs were negligently maintained and operated and did not follow proper procedures and policies,” among other charges.

Most of Theranos’ problems began on Oct. 16, 2015, when Journal reporter John Carreyrou wrote that the lab company could not accurately perform dozens of tests using only a few drops of blood. The idea that it could run many tests with small samples of blood taken with only a finger prick had helped to drive Theranos’ stock to a self-declared valuation of $9 billion in 2014.

However, an investigation by Carreyrou, Weaver, and other journal reporters showed the company used its small-sample technology for only a few tests, that it used testing devices that conventional manufacturers made, and that it released questionable test results to patients.

Since then, Theranos has voided thousands of test results and faces federal civil and criminal investigations, the journal reported. Also, it has appealed a decision by the federal Centers for Medicare & Medicaid Services to revoke the license at its California clinical labo-ratory. In response to questions about the CMS action, the company has said it is cooperating with investigators and working closely with CMS to resolve the problems the agency cited in an inspection last fall. (See TDR, July 25, 2016.)

Elizabeth Holmes: A Case of ‘Never Say Die’

HOPE SPRINGS ETERNAL with Theranos CEO Elizabeth Holmes. Her lab testing company faces severe CLIA sanctions, a criminal investigation by the U.S. Department of Justice and a civil probe by the U.S. Securities and Exchange Commission, along with multiple class action and investor lawsuits. Despite these circumstances, Holmes paints a rosy future for her company.

In the Oct. 5 letter to Theranos’ stakeholders, Holmes wrote, “We have decided to close our clinical labs and Theranos Wellness Centers, which will impact approximately 340 employees in Arizona, California, and Pennsylvania. We will return our undivided attention to our miniLab platform. Our ultimate goal is to commercialize miniaturized, automated laboratories capable of small-volume sample testing, with an emphasis on vulnerable patient populations, including oncology, pediatrics, and intensive care. We have a new executive team leading our work toward obtaining FDA clearances, building commercial partnerships, and pursuing publications in scientific journals.”

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