Beleaguered Theranos to dissolve

November 2018 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

November 2018 Issue

Following a series of high-profile legal, regulatory and publicity troubles, beleaguered blood-testing company Theranos has bowed to the inevitable and formally dissolved – a move confirmed by chief executive David Taylor in an email to investors.

A once heralded biotech start-up, Theranos claimed to have devised a blood testing machine that could accomplish multiple physiological tests on just a single drop of blood – a claim that was fatally undermined due to the fact that the machine simply did not work as promised.

Before the subterfuge came to light, however, many high-profile investors – including Rupert Murdoch, US education secretary Betsy DeVos, and the billionaire Cox, Walton and Oppenheimer families, presumably likely buoyed by the patronage of the likes of Henry Kissinger, co-opted as a Theranos board director – had pumped hundreds of millions of dollars into the start-up, making its founder, Elizabeth Holmes, a 19-year-old billionaire in the process.

Allegations as to the accuracy of Theranos’s blood-testing technologies have been made since 2013, but only gained significant traction in October 2015 when the Wall Street Journal questioned the accuracy of the tests and the risk of patients having their conditions either misdiagnosed or even ignored. The WSJ alleged that Theranos used its blood testing device for just a fraction of the tests it offered to consumers, and that the majority of the tests were actually performed with commercial analysers purchased from other companies.

Then, in June 2018, Ms Holmes had criminal charges filed against her by federal prosecutors following a two-and-a-half year investigation by the US attorney’s office in San Francisco. Ms Holmes, along with Theranos’s former president, Ramesh Balwani, was charged with two counts of conspiracy to commit wire fraud and nine counts of wire fraud. Prior to the charges, Theranos announced that Ms Holmes had stepped down as chief executive, handing over the reins to Mr Taylor.

If convicted, they face a maximum sentence of 20 years in prison and a fine of $250,000, plus restitution to the investors, doctors and patients they defrauded out of hundreds of millions of dollars. Both Ms Holmes and Mr Balwani have been declared bankrupt.

“This indictment alleges a corporate conspiracy to defraud financial investors,” said John F. Bennett, special agent in charge of the Federal Bureau of Investigation in San Francisco. “More egregiously, this conspiracy misled doctors and patients about the reliability of medical tests that endangered health and lives.”

One question not being addressed by authorities is the extent to which the downfall of Theranos is likely to damage the credibility of other companies pursuing the concept of single-drop testing, 1Drop Diagnostics, Genalyte and Kalorama among them. “There are two major in vitro diagnostic (IVD) companies that have models and there are several companies aiming at the concept of single-drop capillary or fingerstick,” said Bruce Carlson, Kalorama’s information publisher. “You can bet they will all be following a different model, however. More open, more evidence-forward, looking to medical societies for peer review.”

While Theranos has been unable to find a buyer, the scandal-ridden company has stated that it aims to pay unsecured creditors its remaining cash of $5m. That said, investors who poured money into Theranos, most having done so after the company’s rollout in Walgreens stores in 2013, are facing huge losses: collectively, almost $1bn.

Fraser Tennant