Notes for TWiST ep.617 — WSJ journalist John Carreyrou shares year-long Theranos investigation & breaks latest, stunning news

John Carreyrou, The Wall Street Journal

On today’s ThisWeekInStartups episode (links: video, audio) host Jason is joined from New York by John Carreyrou, a two times Pulitzer prize winner and Wall Street Journal investigative reporter who has broken the Theranos story.

Enjoy this behind the scenes of this David against Goliath story unfolding. If you haven’t read anything about it, these notes will get you up to speed quickly on the issues Theranos is being questioned for and still have to answer to.

Subscribe to the podcast on Itunes and listen or watch to the episode or read these notes.

Theranos CEO reticence to answer to the Wall Street Journal

• John Carreyrou from the Wall Street Journal is the journalist reporting on Theranos
• The first story was published in October 2015
• He first became aware of issues in mid-January 2015 when he received a tip, decided to look into it and after 3–4 weeks of research he was convinced there was something interesting
• 10 months lead up to the story: carefully vetting had to be done; it’s a difficult and complex since the company hasn’t been open to discuss and answer the Journal’s questions
• Elizabeth Holmes, CEO and founder of Theranos has been willing to speak to anybody but the Journal
• She has appeared countless times at speaking events, done photoshoots for covers of magazines many of which were comparing her to Steve Jobs
• She’s been doing it, engaging the public for a while (since end of 2013) and talking to anybody but John: he asked for a first interview in April and he was ignored
• He continued to ask for interviews with Elizabeth and her number 2, Sunny Balwany, COO of Theranos, in person but they have kept declining
• The company didn’t address the issues raised by the Journal but was attacking him and the journal saying they are liars, they are jealous
• As a response to the story, they said they would release their data to the public but they haven’t released nothing so far and it’s been months

Theranos Nanotainers

• Their main products were the “nanotainers”, tiny tubes that would prick your finger and test if you have HIV, hepatitis and much more (if they works properly, which is what’s being questioned)
• On their site,they claim “full range”, hundreds of tests from just a few drops of blood
• The only test they are doing with their proprietary technology is the herpes test that the FDA approved last year in July (scientists working in the field say it’s a pretty easy test)
• There’s a contrast between what they are doing and what they say they can do

The Halt from the Centers for Medicare and Medicaid Services

• The Centers for Medicare and Medicaid Services, the agency also responsible for overseeing labs in the US released to the public a letter previously sent to Theranos, informing they had found grave infractions at his Newark, California lab
• These infractions were “putting patients in immediate jeopardy” —
• if the tests are inaccurate you may make a medical decision that could lead you to overlook an illness or having a procedure for an illness you don’t have

Walgreens-Theranos relationship

• Walgreens, the biggest pharmacy chain operator in the country and Theranos retail partner has been closing down the Theranos Wellness center in its Walgreens in Palo Alto and suspended Theranos ability to test any patient sample collected in Wallgreen stores
• Actions are effective immediately and will be in effect until the issues pointed about by the Centers for Medicare and Medicaid Services are resolved
• Wallgreens is still letting them at their Wellness Center in Arizona — not yeat a complete cut of the ties

Why they wouldn’t cut the ties

• Why would Wallgreen risk their brand and reputation with a company that refuses to let investors to see the actual technology, refuse peer review of their actual technology and whose long-lasting Chief Scientific Officer committed suicide (while the wife said the suicide was related to the failure of the technology)
• These 2 companies are binded by contract: it was negotiated by the former CFO of Wallgreens who was asked to leave Wallgreens about a year and half ago after making a major prediction error in a Medicare advantage contract that cost the company a billion dollars
• The same guy negotiated the contract with Elizabeth Holmes in person
• Sources tell that it’s not a contract favorable to Wallgreen’s, it has put the company at disadvantage and makes it hard for Wallgreens to get out of that contract
• Theranos is defended by David Boies, one of America’s most famous and powerful attorneys, who has defended high profile people and is highly respected for his ability to defend his customers — if you are in trouble, he’s the guy
• They have been careful because if they don’t get their legals docs in a row they are facing David Boies on the other side
• If you are a partner of a company he’s representing and you’re bound by a contract you’re considering ending it then, the fact he’s their laywer is not to be trifled with

Hurdles at the Wall Street Journal to get over to publish this story

• The vetting process at the WSJ is unique, so rigorous and thorough
• he has an editor, a Standard and Etics team made of long time journalists and editors and they have a legal department working hand in hand to vet any word he writes
• He’s spent countless of hours in meetings with them
• They thread extremely carefully and never post anything they are not 100% sure it’s factual and fair

The human cost of this story

• Elizabeth Holmes dropped out of Stanford in 2003, founded Theranos in late 2003 and in the following 18 months she hired Ian Gibbons as Chief Scientific Officer a well-respected British biochemist
• He was there 8 years in a company with a very high turnover — he was a founding team member, he was a senior scientist from the moment he was hired
• He killed himself
• The sucide is relevant to the story — Rochelle Gibbons, Ian’s widow told John that Ian told her on numerous occasions before his death that things were now working “Nothing is working” (her quote)
• The wife must have some stocks of Theranos and by going against Theranos she would go against her own financial interest
• He found her credible
• Last round of investing they know for sure, February 2014, 17 dollars per share with a 9 billion dollars evaluation
• The company also authorized a series C round of shares, 3 days before the story was released in October — if they were sold, the company would be evaluated at 10–11 billion dollars (20 dollar per share)
• The company didn’t say what happened to those shares
• If his husband had 0.25 to 1% of the company at the beginning, his wife shares worth is in the millions
• She received a letter from Theranos telling her to stop talking

Theranos investors and board of directors

• Some VCs passed on Theranos cause they weren’t allowed to vet the technology, including Google Venture
• They tried Theranos tests and they weren’t impressed
• The savvy healthcare VCs didn’t invest (Tim Draper, Larry Ellison has invested)
• The board of directors was made up of non technically savvy people
• After the WSJ published the story, they changed it
• Initially in the board there were lots of old white government people who never did anything in technology (former secretary of State Henry Kissinger, former secretary of Defense Bill Perry, former secretary of State George Shultz, former senators Sam Nun and Bill Frist, a former Navy admiral, a Marine Corps General)
• 12 people were in the original board, 2 of them with previous experience in medicine and healthcare
• After the heat the story brought up, a new board was created and these guys went on the board of advisors

Theranos CEO-COO Affair?

• People are saying there’s some sort of romantic, personal relationship between Elizabeth Holmes and Sunny Balwani, president and COO of Theranos
• If it is true, it should be disclosed to investors and employees, even if by law as a private company they don’t have to

Jason’s opinion on Theranos

• Jason believes that Theranos will come apart and will eventually go to zero, there’s nothing there
• Companies that have the technology keep it as a secret for some time to have an advantage but at some point they put up and show the goods: here’s what we have and what we do, how we do it and why you should pay attention to it
• That becomes a strength
• If you circle the wagon while your company is under assault and public scrutiny, you attack journalists and publications — it means they have nothing to show for
• If they did have anything, they would have shown it by now
• They said several time after the release of his story they would release data, do peer-reviews studies and publish them on medical journals and it’s been months but nothing has happened yet
• Highly unusual in medicine not to have peer reviews: once your idea is patented, you are protected
• You want to go and prove that what you’ve built actually work with studies and send them on prestigious medical journals for peers to validate and review your work

Sources

• John has sources coming from different places (inside the company and outside, most likely, he can’t say) but none of it is coming from competitors
• Lots of the work is triangulating and corroborating
• As the story will develop, more and more people will realize the import of this

Why we need more investigative journalism

• This is about the public health, not just a tech startup that could be overvalued or too optimistic about their technology
• Patients were put at risk
• There’s less of this investing reporting work than in 70–80–90 but hopefully this story will start a renaissance
• Investing reporting should be about matters affecting the public, like public health, protecting society from these dangers, it’s a public service
• The equivalent of Theranos and their implications for public safety are driving cars are self-driving cars
• If they don’t work, it’s a big deal

“She’s deranged” (Jason)

• Jean-Louis Gassée, Apple former technologist tried Theranos and the tests were so wrong compared to Stanford tests and when emailed to Elizabeth Holmes, he got no response
• Imagine if a Google self-driven car flew out of the road and Google CEO didn’t say anything
• You are under a moral obligation to address when your product fails
• Elizabeth refuses to address specifically her own product failing

Class actions lawsuits

• Stories like this have a cycle, they develop along the way, sometimes they develop faster or slower than you expect — class actions lawsuits may be filed sooner or later
• Investors are likely to be asking questions but can’t do much
• The founder controls half of the equity with voting super-rights, hard to unseat
• There was a photo of her holding up a nanotainer, displayed on the website and used a lot in the marketing
• After a week or so after the publication of the story, it was taken down and disappeared

How they may be playing this

• Jason believes Elizabeth feels she’s at 50% of figuring it all out and believe that with another 6 months, a year or so she will be able to come out with the 100% ready product and show the world she was right all along
• David Boies describes it as a “journey”, they want to get there but they are not there yet
• It could be the beginning of a defense, it’s 50 years journey and they are working on solving a tough problem
• If that’s the case, you don’t go live with a product that’s not ready and validated, especially in medicine
• Boing doesn’t sell planes they don’t believe and have tested to be safe to be flown

You can’t dropout from hard science

• To do biotech and medical diagnostic tool, you can’t dropout like it’s been done in software (Gates, Zuckerberg)
• Any PhD scientist will tell you that this is a field where you need to get your training: you can’t make a contribution without taking classes and doing the work
• There’s a reason why scientists get the Nobel prize when they are in their 50–60

What other scientists think of all this

• Lots of scientists working on laboratory science of diagnostics are angry at her because they put so much integrity in what they do to get things right in their work
• When something like this happens, they feel it’s their field that gets tainted by that
• Lots of frustration in the scientific community, although that community isn’t as vocal as VCs are
• There should be a Hippocratic oath for scientists and engineers working in the medical field (i.e. “Don’t do harm”)

Why don’t employees leave Theranos

• The company has raised a lots of money and it pays well, they have lots of stock to vest and they need to find another gig before leaving the current one
• Jason believes it’s going to be an Enron-like implosion

How long will it take

• We need to keep an eye on Wallgreens: it’s their path to consumers and what they’ll do
• They have raised tons of money, at least 700+ millions and have 50 millions loans from Wallgreens and 10–50 from Safeway — it’s a lot of time and it will take a while to burn through all that cash

East Coast Journalism vs Silicon Valley Journalists

• Journalists in Silicon Valley are too tied to the ecosystem and bought and sold by tech companies
• They wouldn’t have the guts to investigate like the journalists in the East Coast
• They don’t want to inimicate nobody
• When Jason spoke his mind criticizing Zuckerberg on his stance on privacy was told to stop, that he wasn’t going to work in SF anymore
• You need the aggressivity of the East Coast journalists, New York Times, Wall Street Journal, Boston Globe, Frontline, 60 minutes, Propublica

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