Elizabeth Holmes is on trial for fraud, but don’t forget about her VC enablers

0
1

On its surface, the Elizabeth Holmes trial comes across as a matter of protecting public health — her company Theranos cynically attempted to commercialize shoddy blood tests. But don’t be fooled. This case is just as much about protecting greedy and incompetent venture capitalists and investors.

We now know that Theranos’ technology didn’t work as promised. This shouldn’t be a surprise. Most medical device and diagnostic startups fail. This dismal success rate is why venture capitalists historically have rarely invested in these companies.

So why then did they collectively put $1.3 billion in Theranos?

Greed. They were knowingly partaking in a high-risk and potentially high-reward game known as the LDT loophole.

LDT stands for lab-developed test. Also called “home brews,” these tests are developed by clinical labs and can be sold without FDA review. The intent behind LDT regulation was to give clinical labs a way to rapidly develop a test in the interest of public health. For instance, a test to measure coronavirus antibodies amid a pandemic could be created by a lab in a matter of weeks, not the years it would take under FDA scrutiny. Clinical labs are not regulated by the FDA, but fall under a far less arduous regulation known as Clinical Laboratory Improvement Amendments, or CLIA.

Many diagnostic startup companies use this loophole to bypass the FDA’s rigorous clinical study and validation requirements which, on average, take three to seven years. It was a popular game in the mid-2000s. I worked and consulted for a half-dozen such companies.

Bay Area companies like Tethys Bioscience, CardioDx, Crescendo and even 23andMe all brought tests to the market through the same loophole Theranos used. I participated in meetings where some of these companies discussed the strategy and risks around whether or not to submit a test to the FDA for review. To be clear, these tactics were neither illegal nor subversive. They were merely business-as-usual, given the regulatory goalposts set by the FDA and CLIA. Some of the companies had very sound tests that have gone on to be quite beneficial. Yet what I saw repeatedly was an unchecked exuberance and lack of diligence by the venture capitalists — most of whom were prominent due to their dot-com and tech portfolios but completely lacking any comprehension of regulated health-care companies.

In the case of Theranos, it has been astonishing to see witness after witness for the prosecution claim they were misled regarding the data and performance of the technology. Each and every investor and partner had ample opportunity to perform their due diligence, prior to and at any point along their investment — yet it appears they willfully ignored this responsibility. Why didn’t any of the investors simply require Theranos to submit all their tests and the hardware platform to the FDA?

Why didn’t Safeway and Walgreens perform their own regulatory risk analysis? Doing so would certainly have revealed that regulators would take action against them if they offered testing to consumers in their stores. Two months after Theranos announced its partnership with Walgreens, the FDA forced 23andMe to remove its tests from stores under the same premise.

Why didn’t any of the investors hire an independent regulatory auditor or other subject matter experts to review the company’s technology, clinical data and quality systems? It’s been known for decades that finger-stick blood is not reliable for many analytes.

Not all venture capitalists were this ignorant. At one of the companies I worked for, an investor was savvy enough to perform a simple yet highly effective experiment. He, unbeknownst to our company, ordered his own blood tested on our platform and simultaneously had his blood tested via an existing lab test. Wildly divergent data in his own results, for instance, could have clued in investors, like former Defense Secretary Jim Mattis, on the problems with Theranos’ platform.

Perhaps Holmes was a snake-oil seller — but I think we’ve come to accept that as a feature, not a bug, in American capitalism. What entrepreneur ever pitches the risk and downside of a product with equal force as the upside? What is clear is that the charges against Holmes have nothing to do with the integrity of American health care. She isn’t being charged with actually harming or putting lives at risk (though perhaps she should be) but rather with wire fraud, a flimsy charge more appropriate for email scammers, not gluttonous Silicon Valley venture capitalists who had Holmes blow on their dice but now want to scapegoat her for their ill-advised bets.

Chirag Asaravala is a biotech consultant based in Alamo.

Source

LEAVE A REPLY

Please enter your comment!
Please enter your name here