How pursuit of quick fame, fortune

and unethical practices led to the

downfall of Theranos: a blood
testing company

Presented By
Vishal Kumar (MBA/4503/17)
Deepak Singh (MBA/4521/17)
 Ethics, Values and Corporate Governance

According to Thomas Clarke, Professor

at University of Technology, Sydney,
Australia in his book “Values and Ethics
for the 21st Century”, the relationship
between Ethics, Values and Corporate
Governance is described as follows.
 Ethics, Values and Corporate Governance

• The balance of pursuing market opportunities while maintaining accountability and

ethical integrity has proved a defining challenge for business enterprise since the
arrival of the joint- stock company in the early years of industrialism.
• The accountability and responsibility of business enterprise is constantly subject to
question.
• The manifest failures of corporate governance and business ethics in the global
financial crisis has increased the urgency of the search for a better ethical
framework and governance for business.
 Ethics, Values and Corporate Governance

• A substantial increase in the range, significance and impact of corporate social and
environmental initiatives in recent years suggests the growing materiality of a
more ethically-informed approach.
• However challenging the prospects, there are growing indications of large
corporations taking their social and environmental responsibilities more seriously,
and of these issues becoming more critical in the business agenda.
Case Study
 A Company in Formation

• Elizabeth Holmes, age 34, (who is popularly known as a Stanford sophomore who
dropped out soon after inventing a medical device and forming a company in the
college basement in year 2003, at only age 19 to become a self-made Billionaire)
was the CEO and the Chairman of the company.
• Her idea circled around creating a medical diagnostic device based on a technology
that would revolutionize the conventional laboratory testing methods we use
today: an injection for every single diagnosis which in her opinion were highly
inconvenient, painful and wasteful of the volumes of blood drawn from a patient’s
body.
 Right before it all went wrong

• By year 2014, the company claimed that it can offer 200 of the traditionally
conducted tests through its minimal technology.
• Forbes declared that Holmes was:
“The youngest self-made woman billionaire” whose company could, with a painless
prick, quickly test a drop of blood at a fraction of the price of commercial labs which need
more than one vial.”
 Theranos exposed
• All was calm until Wall Street Journal posted an article in 2015, which questioned
the reliability of the technology and the integrity of its owners which were the basis
of this company.
• Later it was revealed by the Securities and Exchange Commission’s case document
filed against Theranos and it’s owner; Elizabeth Holmes that Theranos deceived the
stakeholders especially the investors; leading them to believe that it’s analyzers
were capable of conducting over a 200 typical laboratory tests without external
assistance when in reality the firm did not produce its own analyzers rather it used
external analyzers which conducted the blood sample analysis through traditional
methods.
 What Elizabeth Holmes and Theranos did
wrong, according to the SEC

CLAIM REALITY
Theranos was only using their own It used third-party machines for the
equipment to perform blood majority of its tests.
testing.
 What Elizabeth Holmes and Theranos did
wrong, according to the SEC
• The government's complaint alleges that while Theranos was representing that its
in-house machines were doing all of the blood testing undertaken by the company,
it was actually using devices built by others for most tests.
• It says Holmes directed staff to place the Theranos testing machines in locations
where blood testing was being done ahead of tours through those areas.
• It also notes that the company would provide copies of news articles that said the
company did all of its testing on its own machines even though the company knew
the articles were incorrect.
 What Elizabeth Holmes and Theranos did
wrong, according to the SEC

CLAIM REALITY
Certain pharmaceutical companies They had not.
had endorsed Theranos's
technology.
 What Elizabeth Holmes and Theranos did
wrong, according to the SEC

• Two reports on clinical studies, included in a binder given to investors, were written
by Theranos employees, according to the complaint.
• The placement of pharmaceutical company logos on the documents led investors
to believe they were written by the pharma companies.
 What Elizabeth Holmes and Theranos did
wrong, according to the SEC

CLAIM REALITY
Theranos machines are deployed Theranos was only part of a burn
on military helicopters and used on study.
the battlefield.
 What Elizabeth Holmes and Theranos did
wrong, according to the SEC

• Across three contracts with the US Department of Defense in a three-year period,

Theranos was paid about $300,000.
• The complaint says the Theranos machine was never deployed in the battlefield or
on medevac helicopters.
• The SEC says this information was important to potential investors because
overstating the company's relationships with the US military gave Theranos the
appearance of legitimacy.
 What Elizabeth Holmes and Theranos did
wrong, according to the SEC

CLAIM REALITY
Theranos was growing by utilizing It was growing by utilizing cash
the revenue from existing from investors.
contracts.
 What Elizabeth Holmes and Theranos did
wrong, according to the SEC

• The SEC says that in investor materials Holmes wrote “Theranos has grown from
cash from its contracts for some time” and made similar statements in
conversations with potential investors.
• The government says Theranos was primarily growing via outside capital
investment.
 What Elizabeth Holmes and Theranos did
wrong, according to the SEC

CLAIM REALITY
Its relationships with a major The relationships were stalled and
pharmacy and a major grocer were on the rocks.
thriving.
 What Elizabeth Holmes and Theranos did
wrong, according to the SEC

• While soliciting investment, Holmes allegedly told would-be investors that her
company's relationship with Pharmacy A were strong, when she knew that the
implementation of their agreement was stalled and pharmacy executives were
concerned with Theranos's performance.
 What Elizabeth Holmes and Theranos did
wrong, according to the SEC

CLAIM REALITY
The Theranos tests didn't need FDA They did.
approval.
 What Elizabeth Holmes and Theranos did
wrong, according to the SEC

• Not only did potential partners tell Theranos that it needed approval from US
pharmaceutical regulators, employees of the US Food and Drug Administration
(FDA) did too.
• Even after being notified by the FDA, Holmes continued to tell investors that the
company's quest for FDA approval was voluntary.
What Elizabeth Holmes and Theranos did
wrong, according to the SEC

CLAIM REALITY
Theranos had $108 million in Its 2014 revenue was around
revenue in 2014. $100,000.
 What Elizabeth Holmes and Theranos did
wrong, according to the SEC

• The complaint alleges that Holmes gave at least one potential investor financials
showing revenues in excess of $100 million, yet Theranos sent financials showing
the 1,000x lower amount to a firm hired to assess the value of Theranos's stock.
 What Elizabeth Holmes and Theranos did
wrong, according to the SEC

CLAIM REALITY
Theranos expected to have around All the factors contributing to this
$1 billion in revenue in 2015. target were falling short.
 What Elizabeth Holmes and Theranos did
wrong, according to the SEC

• The government alleges that the $1 billion projection was unreasonable

considering that the planned grocery store and pharmacy partnerships were off
track, and the other business areas were making few inroads.
• The complaint states that these projections gave the false impression to investors
that the company was rapidly growing its business.
 What Elizabeth Holmes and Theranos did
wrong, according to the SEC

CLAIM
Theranos had created a blood-
testing device that could perform a
full suite of lab tests on a small
blood sample.
REALITY
The Theranos machine could only
perform a limited number of tests.
 What Elizabeth Holmes and Theranos did
wrong, according to the SEC
• At the very base of Theranos's scandal is the simple fact that its machines did not
do what the company said they did.
• The machines that Theranos had built could only complete a fraction of the tests a
traditional lab could do.
• In instances described by the complaint, Theranos would seemingly pretend that
their machines were performing a full suite of tests in a demonstration on a
prospective investor's blood, when in fact the machines in use were not capable of
many of the tests.
• Holmes told the CEO of the grocery chain that her company had successfully
miniaturized a conventional blood lab.
 Lessons learned

• It is obvious that Theranos technology had faults and the owners were not ready to
accept it.
• The company practiced a range of unethical practices such as lying to investors
about the authenticity of the technology in order to raise capital quickly.
• The false certainty that the technology will work and the reckless behavior made
them hire over 700 employees.
• Theranos also falsely claimed to the investors that they had served the military
with their technology in order to build false trust.
 Lessons learned

• The SEC case file particularly said that either Elizabeth Holmes knew or she was
careless in not knowing about the unethical practices carried out in her company.
• In 2016, Theranos stopped receiving reimbursements from government regulatory
agency of blood testing labs for not adhering to the federal regulations and
eventually due to the case filed by the SEC, Theranos and both its managing
executives were charged with fraud.
• Elizabeth Holmes paid $500,000 in fine, gave up 19 Million shares, her company
Theranos and she was prevented from being the CEO or director of a publicly
owned company for 10 years.