Over the past year, Elizabeth Holmes, founder and CEO of Theranos, has proven impressively tenacious. She stood her ground as her once-promising biotech company faced scandal after scandal — from the revelation that her “revolutionary” blood-testing technology didn’t work and her lab was putting patients’ health at risk, to federal sanctions that closed the company’s labs and banned Holmes from business altogether. Equally tenacious, it seemed, were Theranos investors. In the midst of the blows they stood quietly or professed their faith in Holmes and her warring company.
That has all changed. According to the Wall Street Journal, one of Theranos’ largest investors, a California-based hedge fund called Partner Fund Management LP, filed a lawsuit against the company Monday afternoon. The lawsuit, filed under seal in Delaware, alleges Theranos tricked PFM into withdrawing a nearly $100 million investment from the hedge fund in 2014.
In a letter to its own investors that was reviewed by the WSJwrote the hedge fund:
Through a series of lies, material misstatements and omissions, the defendants have committed securities fraud and other offenses by fraudulently inducing PFM to invest and retain its investment in the company.
The letter goes on to say that Holmes and her colleagues assured PFM that Theranos’ blood testing technology was working and was about to receive approval from federal regulators. PFM, a 12-year-old fund that manages $4 billion, said it had never been involved in a lawsuit before and had only filed a lawsuit to protect its investors.
In a statement on its website, Theranos fired back: “The lawsuit is baseless, the allegations are baseless, and the prosecution is engaged in revisionist history.”
Whether Theranos committed fraud is for the court to determine, but it’s clear that PFM’s complaints about the flaws of the company’s technology are accurate. Media reports and federal inspections released late last year revealed that Theranos had stopped using its proprietary technology due to accuracy issues and only received FDA approval for one of the more than 200 tests it advertised. In May of this year, the company corrected or destroyed tens of thousands of old blood test results in an effort to appease federal regulators.
However, the move was not enough; Theranos is still reeling from the hefty sanctions imposed against it by the Centers for Medicare and Medicaid in July. The company is currently seeking an appeal, but appears to be expecting to fail. Last week, Holmes announced that Theranos is closing all of its laboratories and will focus all of its efforts on manufacturing commercial blood testing equipment.
In an open letter to investors announcing the company’s pivot, Holmes noted, “We are fortunate to have supporters and investors who believe deeply in our mission of affordable, less invasive lab testing, and that we have the runway to deliver our vision.”
However, Theranos’ new technology, the miniLab, has much more modest goals than the company’s previous devices. In fact, the miniLab aims to miniaturize standard laboratory testing methods and combine them into one portable device – convenient but not revolutionary. While Theranos made a name for itself and attracted investors by claiming that its technology could perform dozens of tests with just a drop of blood from a finger prick. The claim attracted approximately $800 million in investment, including $96.1 million from PFM. Around the same time, Theranos earned a whopping $9 billion valuation from investors, which has since dropped to just $800 million.
In addition to PFM’s lawsuit, Theranos is under investigation by the Securities and Exchange Commission. The WSJ also points out that another major investor, Lucas Venture Group, has removed all references to its investment in Theranos from its website.