With the preview of HBOs new documentary ‘The Inventor’ at Sundance film festival earlier this month, talk of failed digital health start-up Theranos has reached new heights. It seems the downfall of Elizabeth Holmes and her blood-based diagnostic company has seriously gripped the attention of those in the digital health space, and well beyond. John Carreyrou’s best selling book ‘Bad Blood - Secrets and Lies in a Silicon Valley Startup’, which analyses the rise and monumental fall of Theranos, has been critically acclaimed and is flying off bookshelves around the world.

In this weeks blog, we take a look at how the unprecedented public interest in the Theranos case has impacted the digital health space, sparking questions around digital health valuations, due diligence, and clinical evidence.

Overpromise and Underdeliver

In case you’ve missed it, here's a quick overview of the Theranos story:

Theranos was founded in 2003 by Elizabeth Holmes when she was just 19 years old. Holmes claimed that Theranos had developed a blood-based diagnostic device that only required microscopic blood volumes (significantly lower than any similar products on the market) to run a full range of laboratory tests and committed to delivering results in a day - some tests take way longer in current practice. The tests ranged from basic CBC (complete blood count) to infectious disease to oncology diagnosis - quite a wide range for one small device and one drop of blood to accomplish. Theranos lured in investors, who collectively invested a staggering $700 million. It wasn’t just the investors that were fooled, large pharmaceutical companies GSK and Pfizer also saw huge potential in the solution, as well as Cleveland Clinic and Walgreens, who trialled the Theranos ‘device’. Holmes managed to form a high profile board of directors which included George Shultz and Henry Kissinger. In 2015, John Carreyrou, who was then reporting for the Wall Street Journal, suggested that the Theranos technology had never actually worked as they claimed, and this report triggered investigations from the FDA, CMS and SEC, ultimately leading to the downfall of Theranos and their official closing in 2018. Elizabeth Holmes is currently facing fraud charges.

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So, just how did Theranos manage to get into the hands of patients long before anyone realised that the technology didn't actually work? And what can we learn from this?

1.The entrepreneur hero syndrome. Holmes, who was dubbed ‘the next Steve Jobs’, sold her daring vision of what her company could be so well that what it actually was was majorly overlooked. She also managed to get an esteemed board of directors which included former cabinet secretaries and senators, and while these people are highly revered, none of them actually have any experience in the healthcare space, let alone in home-diagnostic technology. Perhaps if they had, red flags would have been raised a lot earlier? Holmes also attempted to pit people and teams against each other in order to speed up the production process, creating an environment that was not conducive to collaboration. For the most part, employees who challenged the veracity of Theranos claims were let go, and potential whistleblowers were threatened with lawsuits.

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2. Raising capital ≠ success. The Silicon Valley mantra of ‘Fail fast. Fail hard’ fosters an environment in which huge amounts of capital can be pumped into promising startups with the expectation that failures will happen along the road as these solutions adapt to find their niche in the market. This led to Theranos raising $700M, without ever pausing to reassess where the money was going, why there was such a high cash burn rate, and why they hadn’t demonstrated robust clinical evidence to validate Holmes’ claims of the products capabilities. (See Juicero for another example of why capital should not equate to guaranteed success…)

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3.Fear Of Missing Out - Are the likes of Walgreens really to be blamed for wanting in on the action, particularly with the public interest, esteemed board members, and industry hype that Theranos had? As John Carreyrou references, the fear of missing out on the next big opportunity to a competitor is a major driver for those in the healthcare industry, and is seemingly what drove Walgreens to roll out the Theranos device in their stores.

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Clinical Validation

Popularity does not validate a solution.

Typically, blood samples undergo a somewhat complicated journey that involves first collecting adequate amounts of blood from a patient, then transporting them to a facility, where they are either mixed with chemicals or put through various pieces of equipment to be examined. It's during this dilution and transfer of liquids that errors occur. Potential complications can arise if the sample's freshness isn't properly maintained during transit or while manually centrifuging samples to separate plasma and red and white blood cells. The risk of an error is compounded by the fact that labs use equipment from different vendors, which aren't always properly/ regularly calibrated. Follow-up tests also tend to make the process even more time-consuming, error-prone and expensive.

A solution that could address many of the pain points above is obviously welcome. The idea that one singular drop of blood could be analysed and used to run the full range of laboratory tests to deliver accurate results was highly ambitious. But it is an idea that deserves layers of proof - in the form of clinical trials, real world/ post marketing data, and compliance with guidelines from regulatory bodies like the CLIA and FDA. Failing to produce this should mean we do not accept such a solution into our practice.

Digital health valuations - too good to be true?

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At its peak, Theranos had a valuation of $9B. Their story is a cautionary tale of how hype surrounding digital health solutions and their valuations can rapidly spiral out of control. The potential opportunity for finding and investing in the elusive ‘panacea’ for all that is wrong with our current healthcare system seemingly blinded those in the healthcare space to the many red flags of Theranos.

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A review published in January 2019 titled ‘Stealth Research - Lack of peer-reviewed evidence from healthcare unicorns’ highlights how over half of current unicorns and almost 40% of exit unicorns have no highly cited papers. One example from the review highlights how Outcome Health, a healthcare unicorn that raised $500M and was valued at $5B, had no published literature or documented RWE as proof of concept. Should this have served as a predictor to their subsequent failure? (Outcome Health investors sued the company and its founders for fraud after allegations that it had overcharged clients and misled them about their campaigns.) Their product was a monitor that was placed in the physician's office to educate patients on their condition and also act as a marketing device for pharmaceutical products. While this is a low risk intervention, the lack of any sort of third-party validation should have been a red flag. As noted in the review:

"Startups are key purveyors of innovation: Holding them to a minimum standard of evaluation is essential’’

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Show me the evidence

With scepticism high, others saw an opportunity to take the interest in the home diagnostic space and use it to their advantage. Recognising the growing interest in blood based diagnostics, and the potential for a solution that actually worked, this industry is booming.

The story of Theranos hasn’t deterred investors from similar solutions either. Athelas, 1Drop Diagnostics, Genalyte, Osler Diagnostics, Orphidia, Sight Diagnostics, and NowDiagnostics, have all developed similar products to Theranos, and collectively have raised over $225M.

Osler Diagnostics was developed under Oxford Sciences Innovation, and claim to be working on a handheld diagnostic device that enables the detection of biomarkers present in cancers, cardiovascular and neurological diseases from a drop of blood. Interestingly, they just closed a $35M fundraising round from a solo investor, and yet their website doesn’t contain any information and they have no published research. It is understandable that people are not jumping to share their ideas and IPs in such a competitive market, but making judgements in the absence on information is a risky business.

Athelas, who have raised $3M, have developed a portable diagnostic device leveraging deep learning and machine vision to rapidly measure white blood cell count to identify leukemia, infections, and  inflammation. Its 60-second at-home blood test is reportedly capable of testing for diseases such as the flu, bacterial infections and even cancer. Currently, the device is being used for cancer patients to monitor white blood cell counts for chemotherapy. Contrary to Theranos, Athelas tries to differentiate itself with a data-oriented approach and it’s working closely with regulatory agencies in a number of capacities including the design of its trials.

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Conclusion

The story of Theranos should lead to intensified visibility and transparency into digital health solutions, however it does not appear to have had caused a tidal shift in the digital health space.

For investors and potential partners, this story highlights how important due diligence is, and how the competition to get in on the action can often lead to important factors being overlooked.

HealthXL advisor and friend Lisa Suennen, who has extensive experience in the VC and digital health space, aptly said that:

‘’Digital health success cannot be defined by investment statistics. We must see evidence of efficacy, both clinical and financial, in order to declare a company a possible success.  And in the end, these companies will have to produce material returns for their investors - given the amount of money that has poured into the sector, we have yet to see more than handful of superior financial outcomes.’’

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For those who tackle head on the areas Theranos fell down, there is a hopeful future. DTC blood testing companies who want to play in this space will need to be transparent with their evidence of efficacy, work closely with regulators to address unprecedented market pathways, and respect pre-existing regulations.

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