The trial of Elizabeth Holmes on fraud charges over hundreds of millions of dollars in investments to defunct healthcare technology start-up Theranos has reignited debate on this high-risk sector.
The trial of US v Elizabeth Holmes, et al started on 31 August. It will be closely watched. Holmes is facing 12 charges of fraud, involving allegedly defrauded investments of more than $150m. If found guilty, she could face up to 20 years in prison.
Holmes has pleaded not guilty to the charges.
The rise and fall of Elizabeth Holmes
How did one of America’s richest self-made women in 2015 become a defendant facing criminal charges? At age 19, Holmes dropped out of Stanford University to found diagnostic service start-up Theranos in 2003. The company was officially launched a decade later. Holmes marketed Theranos’ blood-test technology that, according to reports, was able to provide fast, accurate diagnosis with a few drops of blood, compared with the conventional tests requiring vials of blood drawn from the arm.
Holmes, who owned 50% of Theranos, was given an estimated personal worth of $4.5bn by Forbes magazine in 2015. In October 2015, a Wall Street Journal report questioned Theranos’s blood testing technology, claiming that the majority of the 240 blood tests for various conditions, ranging from cholesterol to cancer, were performed with the traditional method of blood drawn from the arm and not a “few drops'' from a finger prick.
Things began to unravel in 2016 as the Federal regulator Centers for Medicare and Medicaid Services (CMS) cautioned Theranos, accusing the laboratory of failing to comply with federal standards and that patients were in “immediate jeopardy”. CMS gave Theranos ten days to resolve the issues. In July 2016, CMS revoked Theranos’s laboratory licence in California and banned Holmes from running a blood-testing lab for two years.
In October 2016, Theranos investor Partner Fund Management accused the company of securities fraud and sued for $96.1m, the fund’s investment plus damages. Theranos’s retail partnership with America’s second-largest pharmacy store chain, Walgreens (WBA), also ended the same year as the pharmacy group sued Theranos for breach of contract in November 2016 and sought to recover its $140m investment. Theranos settled with both investors in 2017.
In March 2018, the US Securities and Exchange Commission (SEC) charged Holmes and the former President Ramesh “Sunny” Balwani with allegedly “raising more than $700m from investors through an elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business, and financial performance”.
Stephanie Avakian, co-director of the SEC’s Enforcement Division, said: “As a result of Holmes’ alleged fraudulent conduct, she is being stripped of control of the company she founded, is returning millions of shares to Theranos, and is barred from serving as an officer or director of a public company for 10 years.”
What is the Theranos scandal?
Elizabeth Holmes was the founder of Theranos, a start-up which developed the blood testing device known as “Edison” or “minilab”. Holmes and Theranos’s chief operating officer, Balwani, allegedly falsely claimed that these devices could provide accurate, fast, reliable and cheap blood tests and test results with only a few drops of blood from a finger prick. The device was marketed as a revolutionary technology, but it was alleged that Theranos’s tech had accuracy and reliability problems, and was slower than some competing devices.
Holmes and Balwani allegedly also made numerous misrepresentations to investors that Theranos would generate over $100m in revenues and breakeven in 2014, and revenue would jump to approximately $1bn in 2015. Both allegedly knew Theranos would generate only negligible or modest revenue in 2014 and 2015.
Both also claimed that Theranos’ products were deployed by the US Department of Defense on the battlefield in Afghanistan and on medevac helicopters. But the products were, reportedly, never deployed by the US Department of Defense.
How much did Theranos investors lose?
Both Holmes and Balwani are alleged to have made misrepresentations to investors and solicited investments for Theranos. According to court documents, Theranos received more than $150m investments from investors in the US. High-profile investors, such as former US Secretary of State Henry Kissinger and media tycoon Rupert Murdoch, are on the list of possible witnesses for the trial.
The scale of the Theranos company scandal has caused some investors to reassess health tech investment. Ahead of the trial, emerging tech research company PitchBook has reported that venture capitalists’ (VC) investment in healthcare technology has dropped sequentially in the second quarter.
VC companies closed 92 deals valued at more than $3.5bn in Q2 2021 compared to 153 deals valued at $4.3bn in Q1. The data shows the primary contributor to the overall decline was a nearly 60% decrease in funding in the personalised medicine and testing sector.
Although, this could be coincidental as the overall investment in healthcare technology in the first six months has increased compared to the same time last year. According to Silicon Valley Bank (SVB)’s healthcare investment mid-year report, the total investment in healthcare technology in the first half of 2021 has jumped year-on-year.
SVB said: “1H 2021 has rewritten healthtech records set just last year. Invested capital in 1H 2021 has already exceeded full-year 2020 numbers by 27%. Alternative care led all subsectors in invested capital, continuing a three-year trend.”
The global COVID-19 pandemic has overshadowed the Theranos scandal, as the market focused on the demand for urgent remote healthcare access and increased efficiency. This has pushed venture capital funding in the sector higher in the first half of this year.
Where are the healthcare technology trends heading in 2021?
Despite the caution and uncertainty, the COVID-19 pandemic and the need for remote access has further highlighted the importance of utilising technology in the healthcare sector.
RBC Capital Markets said in a report:
According to the RBC Capital research, the near-term opportunities for healthcare technology may reach $92bn in 2025. The opportunities will be in drug research and development, digital medicine, devices, diagnostics and disease management, and virtual care and access.
Tech market intelligence data provider CB Insights said in its ‘The State of Healthcare: Q2 2021 Global Report’:
Therefore, investors will likely continue to have a keen interest in healthcare technology startups.
The Healthcare Technology Report published in August 2021, announced the Top 100 Healthcare Technology Companies of 2021. According to the award organisation, the awardees were nominated and selected “among the key criteria considered were product or service quality, customer adoption, management team caliber, organisational effectiveness, and company growth among other factors”.
Below are the top ten awardees. These healthcare technology stocks are all listed on US exchanges.