What Biotech CEOs (and Their Funders) Learned From the Theranos Debacle

The collapse of the diagnostic company Theranos shook the world of venture-funded biotechnology. Theranos was a “unicorn,” valued by its investors at $9 billion at one point. That made its founder, Elizabeth Holmes, the youngest woman billionaire in the world for inventing a technology that, she said, allowed pharmacies and doctors’ offices to do a bunch of medical diagnostic tests on a single drop of a person’s blood.

Crushing investigative journalism, led by the Wall Street Journal’s John Carreyou, showed that Theranos’ enabling technology didn’t work. The company’s value zeroed out and the Centers for Medicare and Medicaid Services banned Holmes from laboratory work. The rise-fall narrative rang loudly in the worlds of health care, medical device technology, and the investment firms increasingly funding hunts for nominally disruptive, Silicon Valley-style solutions to longstanding medical problems.

Like the Wizard said: What did you learn, Dorothy? At the Innovation Pipeline conference on Tuesday—put on by The Atlantic in San Francisco—a panel of biotech investors and executives sounded like they were still stunned, but hellbent on making sure they don’t get burned again.

There, one of the panelists was Cary Gunn, the president, CEO, and founder of Genalyte, a company that says it can do 128 diagnostic blood tests on just one drop of blood in just a few minutes. That’s an elevator pitch that you might think would raise some red flags in light of well, you know. And it did. But it also garnered a $36 million investment from, among other places, Khosla Ventures.

So Gunn bravely set out to defend Theranos—to a point. “Decentralizing diagnosis and getting the data into doctors’ hands a lot faster” is still a good idea, he said. “We’re just going to do it right.” Genalyte researchers have presented initial data at conferences and announced plans to carry out more human studies and publish the results. Theranos was notoriously cagey with its data.

That seems to have been at least one takeaway: VCs are asking to see results first. “We haven’t done a single financing round without having to show data on our assay,” said Gabe Otte, CEO and co-founder of Freenome, another diagnostics company. “That’s largely been because of Theranos. They were able to raise hundreds of millions of dollars without showing data.” The company didn’t have to, regulatorily speaking. And if future companies do, it’ll be because of economic incentives like funding, unless the laws change.

(Otte has run into his own speed bumps; a Buzzfeed investigation earlier this year suggested either he or his company had at times claimed Otte had a PhD when in fact he left his program before getting a degree.)

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Lynn Seely, president and CEO of Myovant Sciences—currently in phase III trials of a drug for heavy menstrual bleeding and uterine fibroid pain, with what Forbes called the biggest biotech IPO of 2016—suggested that whatever changed in venture capital and biotech, Theranos had tarred the field. “Two out of three times on a plane, when I tell someone what I do, the next comment is, ‘Theranos’,” Seely said. She added that it was “sad” that the scandal happened to a woman. The implication was that Holmes’ gender might make it even less likely for woman-led companies to get funding.

Absent data, maybe investors and the media should’ve showed more skepticism from the start. People have touted the concept of a single-drop blood test for years. “The idea that maybe some people working on a problem in a garage have been able to do it overnight may not be true,” said Sean Harper, the executive VP of research and development at the drug giant Amgen.

If due diligence wasn’t the norm at venture capital companies, maybe now it will be—if there's a return on that investment. Diagnostics, as a field, is a money-saver in terms of public health, but looks a lot less profitable without the kind of business model Theranos promised. Expensive, high-tech drugs, though? “There’s no multi-billion-dollar exits in diagnostics,” Gunn said. “There are in therapeutics.” Maybe what Theranos really revealed was a structural flaw in the way medical tech gets funded. Self-awareness about that company’s collapse was on display at the conference, but whether Silicon Valley will change is still in play.

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