Theranos and Elizabeth Holmes: A Cautionary Tale for the Medical Device Sector

Five miles from Global Strategic Solutions, LLC, here in the Silicon Valley area of California, is where Theranos was located. I rode my Cervélo carbon fiber road bike by the building many Saturdays as I was exercising. It was my time to think creatively, plan enthusiastically, and reflect thoughtfully. Little did I know that building would be the center of misfortune and heartache that would be filled with Quality Management System (QMS) leadership lessons.?

Related: Knowing These Core Elements of a Quality Management System Can Get You Promoted

If any medical device company ever wants to appreciate the need for implementing leadership and quality management principles for quality control and best practices systems, one need not look any further than the fraudulent tragedy of Elizabeth Holmes. She was the founder and former chief executive officer (CEO) of Theranos, a now-defunct health technology company.

Elizabeth Holmes led the aggressively hyped in-vitro medical device diagnostic company which claimed to have revolutionized blood testing. Her proprietary method proposed to use surprisingly small volumes of blood, such as from a fingerstick or standard finger prick, and to ultimately test dozens of specific substances, analytes, or other markers. The process could be applied to not only blood but saliva or tissue. Some have said the public could have had access to up to 240 affordable tests from a single drop of blood or small sample. The Theranos Edison machine could have changed healthcare as we know it.

Flaws Can Blind Our Views and Limit Perspectives

A fatal flaw in her business strategy was never fully vetting the innovative idea with an established “Proof of Concept” study, also known as Proof of Principle. You know, a study that would prove the concept. That it would work and provide the foundation to move forward with investors and product development engineers. Instead, the company misled investors, another fatal flaw, and the government with fancy words, innovative theories, clever photoshoots, and unproven promises.

Who needs due diligence with a Proof of Concept study when a founder and CEO has such a convincing personal story, such as being afraid of needles? Almost Everyone!

Within a few years, she went from being lauded as a business icon and medical field visionary to being stigmatized and branded as a fraud and convicted felon.?

Ms. Holmes' fraudulent business practices scandalized the medical device industry and beg the question of why her deceptions went unnoticed for so long and caused the downfall of her multi-billion-dollar company. Many employees in the trenches have better answers than me, but I’ll provide some that we should either all be able to agree on or provide a platform for discussion.

Elizabeth Holmes was 19 years old when she founded Theranos in 2003 as a sophomore, dropping out of Stanford a year later to focus on the company in 2004. The proposed technology would have revolutionized the global medical industry and eventually changed how every medical practitioner handled their diagnostic operations.

Ms. Holmes was described as the potential next Steve Jobs and a self-made billionaire. Theranos had a market capitalization value of over $9 billion. Celebrity moguls and billionaires worldwide were donating hundreds of millions of dollars to Holmes at a time.

The problem? Theranos' breakthrough instant blood diagnosis device was severely flawed and never worked outside of proprietary theory. Claims of the company's fraud started in 2015 were suspected as the Wall Street Journal began writing articles claiming that Theranos could not scientifically prove the viability of its device.

How could this happen? While Ms. Holmes is the face of the fraud perpetrated by Theranos, she certainly was not the only one who knew the blood diagnosis device didn't work. Employees knew. Leaders in the field knew. It appears that leaders within Theranos knew, too. From some of the news articles, apparently, several employees voiced concerns about assumptions being made.

How did Elizabeth Holmes and Theranos convince multiple millionaires and billionaires to donate to her company without any certifiable proof of concept? Some in the media asked, “Was Theranos always a massive Ponzi scheme with Holmes paying off tiers of previous investors with new investors while buying time in the hopes of perfecting her blood diagnosis device in the meanwhile?”

Theranos, a company valued at $9 billion at the time, had collapsed by 2018. Elizabeth Holmes was criminally convicted on four counts of fraud in January 2022 and could spend decades behind bars after being sentenced.

And while the fraudulent, criminal activities of Elizabeth Holmes will become salacious fodder for news and entertainment, every medical device company should study the downfall of Theranos as a cautionary tale.

How could the operational practices of a hyped medical company break down to the point that its non-functioning proprietary technology was being anticipated by the world? The F.D.A. cleared (lay language “approved”) a Theranos quick test for herpes diagnosis in 2015. Theranos never filed paperwork showing the test worked, so how did it happen?

An obvious and troubling question that hasn't been answered is how much the Theranos fraud case has compromised the trust of patients, regulators, the medical industry, and investors. Silicon Valley will be affected, but the ripple effect will be worldwide. This might negatively affect medical device companies promising a breakthrough invention or technique that could otherwise change the world. Steve Jobs had mockingly referred to those as, the crazy ones. Apple's 1997 Think Different campaign was launched not long after he returned to the company he founded. It began with these words:

"Here's to the crazy ones, the misfits, the rebels, the troublemakers, the round pegs in the square holes ... the ones who see things differently -- they're not fond of rules, and they have no respect for the status quo. ... You can quote them, disagree with them, glorify or vilify them, but the only thing you can't do is ignore them because they change things. ... They push the human race forward, and while some may see them as the crazy ones, we see genius, because the people who are crazy enough to think that they can change the world, are the ones who do."

If you desire to be one of the crazy ones, we still need you!

On January 3, 2022, a federal court in San Jose, California, found Holmes guilty on 4 of the 11 charges brought against her by prosecutors. She was found guilty of three charges for wire fraud — a scheme intended to obtain money under false pretenses using a method of remote communication such as e-mail — against investors. She was also found guilty on one charge for conspiracy to commit wire fraud against investors. The jury acquitted her on four charges related to defrauding patients. They could not reach a decision on three further charges related to defrauding investors. Sentencing will begin later in the fall.

I’m in the final stages of publishing a fun, captivating book looking at a medical device company, Mythical Medical?, ?that takes steps to represent the good in our medical device sector. Mythical Medical? Coming Soon. Follow this story of intrigue and redemption within an up-and-coming fictional manufacturer. There are growth and leadership moments that we can all relate to and be proud of!

Fortunately, there are several Quality Management standards and leadership principles for medical device companies to follow. Implementing these processes can help you to build something special.

What are Quality Management Principles??

Improve Your Process: Five Quality Management Leadership Principles

If there was ever any time that a medical device company needs to reevaluate or implement its quality management principles, it's now. Here are five quality management and leadership principles that your medical device company should always follow.

Contact Global Strategic Solutions today to receive expert consultation, advice, and help to get your medical device approved and ready for market.

Related: How Medical Device Companies Raise Money – Build something people want

Quality management principles are a group affirmed set of fundamental rules, norms, beliefs, goals, and values that become the basis for quality management in services or operations.

A company's quality management principles are a set of operational commandments that can always be referred to as affirming and reaffirming standard best practices when conducting business, achieving a goal, and improving its performance and quality guidelines.

The basis for the concept of quality management principles was created by an international team of experts in 1947. They were looking to develop an operational and business philosophical guideline for companies to identify, detect, and rectify fatal errors before reaching the marketplace.

It was called the International Standard for Operations and they have published several standards including those that address Quality Management System Standards. There can be anywhere between seven and eight quality management principles depending on the region.

Here are the basic five that your medical device company should follow.

1. Customer Focus

Always remember that a business needs customers like a beating heart needs oxygen-rich blood. Always strive to appreciate, understand, and meet the needs of your customer base.

Strive to reach and design your product to suit customer demand. Understand the requirements and needs of your consumer base.

Related: USA FDA Medical Device Safety – The good and the better

A medical device company must create a product that serves the public good. If your product is designed to meet a demand or service and works from design to final product, you will never lose your consumer base. In other words, build products that people want now and will also want in the future.

2. Leadership

A company leader must be honest and extol a unifying purpose and vision that employees can follow by example. The leader must create a progressive, productive, and safe working environment that attracts qualified workers.

It is the leader who is responsible for the hiring practices of a company. Make sure you develop hiring guidelines that enhance your quality management principles and don’t take away from them.

3. People Involvement

Your business could not exist long without a consumer base to buy your products or a qualified workforce behind the scenes to realize goals.

Your workers need to understand and appreciate their job descriptions, goals, and how their actions affect the company as a whole. Every worker at each level of the company has a role in its failure or success, so always motivate them to succeed.

4. Process-Driven Approach

There should be a customized and proprietary process approach to determine how your business is run from the formula, design, and conceptualization stage to prototype, testing, final design, and introduction to the market. The standards also address post-production or surveillance expectations.

Having an operational process will also maintain morale if you lose key staff – all you have to do is hire competent replacements who can follow your operational approaches.?

5. Systemic Management Approach

As the leader, you have enough responsibilities. Defer responsibilities as appropriate while maintaining an oversight role. Trust your workers to work in a management style to streamline processes and keep work efficient.

Final Thoughts

Proof of Concept is performed, in part, to demonstrate that critical design features of one or more of the selected design concepts perform as intended. Prototypes of critical design features can be developed to discover and address design challenges. Additionally, where a design concept relies on one or more critical manufacturing processes, these too should be proven.?

We can help you with strategies around Proof of Concept. Do you need either assistance to develop your concept or a different set of eyes to evaluate your strategy? Let’s talk. What’s in your strategy??

Contact Global Strategic Solutions today to get your medical device approved and ready for market.

David R Rutledge, Pharm.D., FCCP, FAHA

[email protected]

https://globalstrategicsolutions.com/

+1 (630) 846-0350 cell