Why the Theranos saga and Holmes’ trial is good for innovation

The criminal trial of Theranos CEO Elizabeth Holmes will help entrepreneurs see the legal ramifications of hyping and under-delivering presumed medical advances and be ultimately be good for innovation.

“Fake it until you make it” is an oft-repeated phrase among entrepreneurs promising to revolutionize, disrupt or transform.  It can, however, have severe consequences for the healthcare sector when doctors and patients place their trust in the new or evolving venture.  The criminal trial of Elizabeth Holmes, who faces a 20-year prison sentence, will help healthcare entrepreneurs see the legal ramifications of over-promising and under-delivering presumed medical advances.

This trial will generate headlines. More importantly, it will be a teachable moment for all of us trying to innovate our way through a deeply complicated and entrenched healthcare system – especially regarding patient-empowering technology. Holmes, and the company she founded, Theranos, marketed a means to disrupt traditional diagnostic business models where two large companies dominate a $54 billion market.  The idea was to put patients in control of blood testing, using less amounts and creating a faster, lower-cost alternative.   The business model envisioned consumers using Theranos equipment at retail locations including drug stores and supermarkets.  As the marketing phrase goes, that was the “steak,” or substance to her pitch, but there was also “sizzle.”

The young, telegenic, and articulate Holmes became the widely-known public face of the company. Wearing black turtlenecks to draw comparisons to Steve Jobs and calling one of her blood-test devices “Edison” to align herself with the famous inventor, the media could not resist the story.  That part worked: Theranos at one point was valued at $9 billion.  Holmes declared her lab-test device was “the most important thing humanity ever built.”  Much of the narrative she created about Theranos will now be used as evidence in her criminal trial just as it was in a separate Securities and Exchange civil fraud case in March.

Here is something we already know from the federal indictment handed down last month: prosecutors will cite Theranos press releases, media interviews, and promotional materials to support allegations that Holmes knowingly committed criminal fraud.  In one example, the U.S. Attorney’s office for the Northern District of California cites a specific interview in which Holmes told a media outlet that Theranos could run “any combination of tests” from a single small blood sample.  The indictment goes on to list public statements such as one on the company’s website that, “one tiny drop changes everything.”

In the Securities and Exchange Commission civil case, which Holmes settled, media interviews with the business press, which in turn were said to solicit investors, are likewise cited as evidence of financial fraud.  The SEC’s civil complaint states that in 2013, “Holmes and Theranos began publicly touting Theranos’ proprietary analyzers in interviews with the media, notwithstanding Theranos’ use of commercially-available analyzers for patient testing.”  Here too, several interviews with financial media outlets were used as examples including an e-mail exchange between Holmes and a reporter in which she tried to shape the story.   As is widely known, the generally favorable media coverage that accelerated in 2013 abruptly ended.

Her company came under the scrutiny of The Wall Street Journal in 2015 when company whistleblowers went public raising questions about the underlying technology.  This put Holmes and her company on the government’s radar.   The narrative soon changed to actions intended to correct the company’s mistakes. Most notably, Theranos voided or corrected nearly a million blood-test results, calling into question untold numbers of health decisions made between doctors and patients.

Judges and juries take an especially harsh view of potentially harmful impacts on consumers.  The FBI agent who investigated the case described charges of misleading consumers and doctors as endangering “health and lives.”  Likely the most serious charge among the 11 counts Holmes faces is being unable to produce accurate and reliable results for numerous blood tests, including the detection of HIV, despite assertions to the contrary.

Yet Holmes is only the most recent and well-known among many healthcare practitioners who face charges or convictions of fraud.  We can go back to the patent medicine movement in the early 1900’s, where a popular advertising slogan at the time was “a cure for what ails you.”  In the late 1800’s there was actually a real-life snake oil salesman who traveled the country and gave demonstrations with live reptiles on how he made his product.  Such antics with fake medicine led to the passage of the Pure Food and Drug Act in 1906.  So, a century later, why does this keep happening?

One recurring theme leading to healthcare fraud is what medical scholars have labeled “eminence-based” medicine.  Simply put, this is an over-reliance on personality and stature from the individual believed to have authority on a particular medical subject.  The term is a play on the words “evidence-based” medicine, where facts are supposed to be used to evaluate medical advances.

Some lessons are already being learned. Early stage and start-up blood-testing companies are emphasizing peer-reviewed data and clinical trials.  One telling insight from an entrepreneur, as reported in Marketwatch, describes Theranos as a “big crater in the industry.”  The founder of privately-held Athelas, a blood-testing firm, said Theranos, if executed correctly, “would make a massive impact in a really old, archaic industry.”

Faking it until you make it may work to a certain point and allow entrepreneurs a limited degree of latitude among investors as they develop technical approaches to support business models.  As an entrepreneur myself, I am well aware of the need to convincingly show the promise of an invention – even before it is fully finished. However, it becomes financial fraud — potentially criminal activity — when you are not honest about the risk.  Medical and consumer fraud, when patients are sucked into the hype and subsequently misled, becomes exponentially more serious. Neither is acceptable. The bottom line: Holmes’ trial will offer insight leading to less hype and more high-quality innovation.