Theranos tapped $ 96 million from an experienced investor – plus some blood

Brian Grossman had 20 years of experience in healthcare – but his firm, PFM Health Sciences, invested $ 96 million in Theranos anyway. At the booth, he explained that his company had relied on Elizabeth Holmes’ information about Theranos, as well as financial models provided by the company, to call.

Taken as a whole, Grossman’s testimony in the US v Elizabeth Holmes was judgmental. Unlike the investors from the family offices, he had visited Theranos’ facilities, had his blood drawn and sent e-mails with extensive questions about due diligence. He had experience from the health service. He had checked out Walgreens̵[ads1]7; public statements about the company. But because he had relied on Theranos’ representations of technology, he was misled – and he cited Holmes as the source of much of the misleading information.

Holmes told him that Theranos could match everything its much larger competitors, Quest Diagnostics and Labcorp, could do. It was “a really big statement” about how much the company had achieved, Grossman said.

Grossman, like other investors who testified before him, had been impressed by Theranos’ work with the military; he was told that Theranos’ technology was used on the battlefield and in medivacs. And when he heard that Theranos’ tests were being used by drug companies to validate experimental products, he was also blinded. He knew that getting drugs through the pipeline for approval was crucial for the pharmaceutical companies ‘businesses – so for Theranos’ technology to be used for that, there was a high degree of approval. The financial estimates Theranos gave him had an estimated $ 30 million from pharmaceutical companies in 2014.

Of course, none of these things were true. Theranos devices were not used on medivacs or on the battlefield. And while Theranos had worked with pharmaceutical companies, none of them chose to use the tests to validate experimental products, mainly because preliminary studies showed that the tests were poor. The income forecast was strange, partly because Theranos had it no income, from pharmaceutical companies or otherwise, in 2012 or 2013.

Grossman says that Holmes, former CEO of Theranos, and her co-defendant, Sunny Balwani, who is being tried separately, told him that Theranos tests took only four hours to give a result. In a slide stick, a graphic specifically pointed to the consistency of Theranos’ vitamin D tests – which was one of the tests warnings Erika Cheung had worried about were not accurate.

And Holmes spoke most at their meetings, Grossman testified. (This was consistent with other investor testimonies.) This is bad news for Holmes’ defense, which has tried to argue that Holmes naively trusted Balwani and that he was the real villain on Theranos.

Grossman followed up after the meeting with a long list of questions about due diligence. For example, he wanted to know what the limitations of the technology were. Holmes and Balwani were “oppressive” that their units were laboratories shrunk to the size of a box, he said. Holmes was “very clear that this technology was not a nursing test, not a platform for nursing testing, it was a miniaturized laboratory,” he said.

It was very exciting – a hugely disruptive technology. Grossman was told that the entire Phoenix market for Theranos could be supported in a 200-square-foot laboratory; a competitor’s laboratory at Quest Diagnostics, on which he had toured, was hundreds of thousands of square feet.

During the meetings and e-mail exchanges, neither Holmes nor Balwani mentioned that Theranos technology was used for only a handful of tests. No one mentioned that they used third-party equipment.

The Walgreens agreement also strengthened Grossman’s confidence, although Balwani was squirrely when Grossman wanted to speak to Walgreens representatives. He told Grossman it would not look good, and he was “uncomfortable with it,” Grossman testified.

He was also told that there was an agreement with UnitedHealthcare, which indicated legitimacy to Grossman. He wanted to talk to them about the Theranos partnership. “We greatly appreciate their ability to explore technology and new companies,” said Grossman. But Balwani rejected that idea as well.

These denials “forced us to trust the representations they gave us,” Grossman said.

Grossman went and talked to Channing Robertson, a Stanford professor who had helped Holmes start Theranos. Robertson told Grossman that there was no technical risk associated with the company – the only risk was to ensure that consumers had a good experience. He also said that the technology was so advanced that even if it fell into the hands of competitors, it would take them years to catch up.

Grossman toured headquarters. He visited the clinical laboratory, where he only saw Theranos analyzers and none of the modified third-party devices the company actually used. He visited the production plant. He even went to a Palo Alto Walgreens to get his blood drawn – a venous draw, one that took more than a day to get results. Balwani told Grossman it was because his doctor ordered an unusual test.

Grossman’s blood test gave us a look behind the curtain on Theranos. Prosecutors sent an e-mail to Theranos whistleblower Adam Rosendorff and some other workers in Theranos’ lab, asking them to speed up work on a “VIP” test – Grossmans. “This is on Immulite, right?” replied an employee, referring to a competitor’s machine. This was confirmed by another employee. (Grossman said in court that if he had known that competitors’ devices were being used, he would have asked Theranos even more questions.)

So Grossman decided to invest. Sure, Theranos had been strangely secretive and security-focused when he was visiting, but Grossman shrugged. Yes, it was strange that he had been discouraged from talking to Theranos’ partners, but he shrugged as well – had not a professor from Stanford told him that the technology was fantastic? Weren’t Walgreens hinting at that in their quarterly revenue talks?

And now, of course, one of his investments underpins a count of wire scams against Holmes.

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