Ramesh Balwani, the chief operating officer of Theranos, was sentenced on Wednesday to nearly 13 years in prison for defrauding investors and patients about the company’s technology. Elizabeth Holmes, his boss, co-conspirator, and former girlfriend, was earlier found guilty of one count of conspiracy to defraud investors, as well as three wire fraud counts tied to specific investors. In addition to the 135-month prison term meted out — which Holmes is challenging — a future hearing will determine how much restitution she will have to pay.
I can’t speak to the appropriateness of the prison time. But I believe that no financial award could come close to equivalency for the irreparable harm the Theranos debacle has done to individual patients, the health care system in general, and support for innovation in the field of diagnostics. The damage could not have been greater had they intentionally sought to sabotage health care progress.
In 2016, I wrote a First Opinion essay about the damage Theranos would wreak on innovation in the diagnostic industry. Now, a pandemic later, I’m seeing that my assessment woefully underestimated the problem.
The transgressions committed by Holmes and her associates extend well beyond white-collar fraud as evidenced by the grinding to a halt of the already slow adoption of real-time diagnostics. It is impossible to separate the Theranos effect from general market trends, but I see the abrupt decline in funding health care diagnostics as due in large part to an erosion of trust in the integrity of the analytical and therapeutic innovation system.
In this age of SARS-CoV-2, RSV, influenza, and sepsis, as well as the growth in antimicrobial-resistant pathogens, The U.S. — and the world — need better diagnostics. Yet the capital markets have been reluctant to invest in health tech investing, fueling market uncertainty that is likely to persist for the foreseeable future.
At the public level, lost trust manifests itself differently. Patients may be hesitant to obtain bloodwork if laboratory trustworthiness is questioned. Clinicians, on learning that their local pharmacy (in this case Walgreens) partnered with a fraudulent blood-testing company, may be skeptical of pharmacies and pharmacists in general.
It is difficult to muster much sympathy for those who threw their money at Theranos without carefully and critically validating its technology. The Theranos saga is a perfect example of applying the Silicon Valley “fake it until you make it” strategy to health care; arrogance and hubris led Holmes and Balwani to think they could pull off the scam. They failed to appreciate that a software scam is different from a health care scam. When the former fails, investors suffer. But when a health care scam collapses, the suffering goes far beyond investors and affects the entire health care industry — patients, practitioners, hospitals, and more.
For Theranos, neither lives saved nor health care improvement mattered. Instead, it was the allure of a Facebook-type of return that allowed Theranos to raise $1.3 billion.
Theranos executives described their innovation as the ability to diagnose everything from cancer to heart disease or herpes from extremely small amounts of blood. But the diagnostic information generated by the blood tests was incidental. The real innovation was in a complete overhaul of the commercial assumptions in the diagnostic business. Instead of attracting investors with promises of better or faster diagnostic information, Holmes and Balwani were turning patient access into a commodity.
The lure of increased reimbursable patient delivery was irresistible to a mass marketer like Walgreens, for which more customers equals more revenue. Walgreens bought the Theranos concept because it, like investors and regulators, were deceived by the illusion that Theranos was a viable commercial, scientific enterprise.
The deception has caused the federal government to curtail investment in diagnostic access and innovation. Think about the disorganized rejoinder from former White House press secretary Jen Psaki when she was confronted with questions about the administrative response to Covid-19 in December of 2021. She glibly responded, “Should we just send a diagnostic to every American?” The answer, in fact, should have been a resounding “Yes!”
Psaki’s response exemplifies today’s poor understanding of the role played by diagnostics in everyday health care. It may seem mundane, but the ability to detect an illness in its early stages affords the best chance of appropriate intervention, treatment, and, hopefully, prevention of serious outcomes.
During the Theranos’s fraudulent run, tens of thousands of patients experienced agony, alarm, and anger as a result of inaccurate blood testing obtained through Theranos clinics or their local Walgreens. People relied on their test results to determine the presence or absence of disease or determine the efficacy of drug treatment. Consequently, some treatments were unnecessarily initiated while other needed treatments were altered or stopped. For still others, a delay in receiving results not only generated anxiety, it delayed diagnosis and treatment. One particularly egregious example is the case of a pregnant woman whose Theranos blood test erroneously reported she had miscarried.
It is an understatement to say that, in the U.S., health care priorities are misaligned. Unless the country invests in research and development leading to improved diagnostics and therapeutics, it will find itself trapped in a March 2020 world. As with any important system, it takes years to build trust in a relationship, only seconds to destroy it, and forever to repair it.
The diagnostic industry was an incidental participant during of the Covid-19 pandemic. Instead of leading the way, it was handcuffed by government caution and investor hesitancy following the fallout from the Theranos narrative.
It’s time to start working on the forever task of repairing that.
Steve Brozak is CEO of WBB Securities, an independent research and investment bank that specializes in the pharmaceutical, biotechnology, and medical device business segments and the founder of the WBB Research Institute.
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