Monday, May 20, 2019

How Not To Do It: Elizabeth Holmes and Theranos

As the engineering sage Henry Petroski likes to say, we often learn more from failures than from successes, at least when it comes to ethical behavior.  And we now have a book-length record of one of the most spectacular failures in recent business history:  Theranos, a medical-equipment company founded by Elizabeth Holmes when she dropped out of Stanford at the tender age of 20.  Although the ethical misdeeds of Holmes and her close associates are many and various enough to fill a book—investigative reporter John Carreyrou's excellent Bad Blood—I would like to focus on just one aspect of wrongdoing described therein:  the falsification of test data sent to regulators.

Holmes, who is presently undergoing a federal trial in connection with her time as CEO of Theranos, began her venture with a remarkable vision:  to make all medical blood tests as simple and easy as the diabetic's pin-prick test for blood-glucose monitoring.  She based this vision on nothing more than an internship she spent at Stanford in a research lab one summer.  But she brought to the table considerable family connections (she was able to raise over six million dollars for her new company in less than two years) and a personal magnetism that convinced older and wiser persons (men, mostly) to give her whatever she wanted.   And if it had been possible to achieve her goal with enough money and talented people in the time she had, she would have achieved it.

The history of technology teaches us that there are optimum times for certain technical advances, and the key to profiting from a new technology is to try it at the right time.  Even Steve Jobs, who Holmes idolized and emulated whenever possible, could not have invented the Macintosh in 1953—the technology simply wasn't there yet.  So in retrospect, Holmes' idea of a tiny credit-card-like machine that would do everything a whole clinical blood lab currently does with a small fraction of the blood volume now required, was simply too far ahead of its time. 

The farthest her company got technically was to build some kludgy prototypes that were basically robot versions of what a human lab technician does.  When they worked, which wasn't often, their results compared to conventional blood-testing machines were unreliable and full of errors.  The only way Theranos employees could get results approaching the accuracy of standard commercially available lab testing devices already on the market was to run six of their robot machines at once on the same sample, and average the results.  Needless to say, this was not a practical solution, but as Holmes had already gone out and negotiated contracts with big retailers such as Safeway and Walgreens, and blood samples from real people were coming in to be tested, the engineers had to do something, and this was their temporary makeshift solution.

Then the question of federal certification came up.  Labs in the U. S. that are not purely research-oriented—that is, blood testing establishments that test blood for the general public—are required to meet certain standards enforced by the U. S. government under the Clinical Laboratory Improvement Amendments (CLIA), the laws governing such labs.  At Holmes's insistence, Theranos fudged on meeting these standards as long as it could.  By the time Theranos hired a young engineer named Tyler Shultz, the firm was following a home-brew procedure to certify its lab tests that looked funny to him.

The CLIA required periodic "proficiency testing" of samples to ensure that the lab was getting accurate results.  The rule was that these samples should be tested "in the same manner" as actual patient specimens "using the laboratory's routine methods."  But at Theranos, there was nothing routine about the way they were handling tests.

In order not to look completely foolish, the company had bought a number of on-the-market blood test machines that it was using along with its own units, called (regrettably for Edison) "Edisons."  The Edisons could handle some types of tests with the dodgy averaging method, but others were sent to the outsider machines and the results passed off as being done by Theranos devices.  When Tyler tried to run the proficiency tests on the Edisons and they failed, he got in hot water with management, who ordered him to report only the good results from the non-Edison machines.  After Tyler's protests proved fruitless, he contacted an outside state regulatory body to see whether his suspicions about Theranos's way of doing things was well-founded. 

It was, and Tyler decided to go to the most powerful person he knew who was associated with Theranos:  his grandfather.  This was not just any grandfather.  It was George Shultz, former U. S. Secretary of State, now in his 90s, but very much interested in Theranos as a member of the board.

Without passing judgment on the quality of relationships in the Shultz family, I can still say that Tyler's complaints to his grandfather fell on deaf ears.  Not only that, but his grandfather told on him to Theranos management, who made it so hot for Tyler that he concluded to resign, despite threats that if he quit and went public with his information, "he would lose."

Tyler turned out to be a critical source for John Carreyrou, a Wall Street Journal investigative reporter who also caught legal flak for trying to report the truth about Theranos.  But Carreyrou persisted in contacting current and former employees of the firm who gave him enough information to write a series of blockbuster articles that turned the climate of public opinion against Theranos, and led eventually to the demise of the company (it went out of existence last fall) and the indictment of Holmes and her second-in-command for fraud.

As whistleblower stories go, Tyler Shultz got off fairly easily.  He helped bring down an organization which richly deserved its fate.  But far more commonly, whistleblowers' allegations are challenged vigorously and often successfully, even if they are true.  And whatever happens ultimately to a whistleblower's career, he or she is guaranteed to undergo considerable emotional pain as the accused organization tries to defend itself, almost like an immune response to a therapy that will ultimately do a patient good, but which causes discomfort initially.

The story of Holmes and Theranos is of a noble cause gone bad, and continues to play out in the courtroom.  But we know enough already to use the story as a bad example of how startups should not handle problems with regulators.  The lesson for young engineers is, if you smell a rat, don't just hold your nose and keep on going.  Find out if it's really a rat, and if it is, deal with it, even if you get your hands dirty to do so.

Sources:  John Carreyrou's Bad Blood:  Secrets and Lies in a Silicon Valley Startup was published in 2018 by A. A. Knopf.   

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