In the wild, wild Silicon Valley west, startups have been tiptoeing around government regulation agencies for the last decade, often inciting scrutiny and fines for ignoring state laws. However, government agencies have taken the Theranos case to another new level, and with the founder, Elizabeth Holmes, being indicted on criminal fraud charges with possible jail time, could actually make a case for a regulatory sandbox for healthcare.
Elizabeth Holmes, founder of Theranos, is being indicted on fraud charges which she has pleaded not guilty.
A regulatory sandbox framework enables startups to manage regulatory risks during the testing stage, even though more solutions may be trialled later and potentially introduced to the market. This allows startups to test their technology and methods onto the public during a trial period in which they are shielded from regulatory agencies. The Ministry of Health (MOH) in Singapore recently launched a regulatory sandbox for healthcare beginning with telemedicine:
“The healthcare landscape is changing rapidly. New and innovative models and services have the potential to bring significant benefits to patients and support healthcare transformation. First announced by Senior Minister of State for Health, Dr Lam Pin Min, at the 2018 Committee of Supply debate, LEAP will provide regulatory sandboxes that enable new and innovative models and services to be developed and refined in a safe and controlled environment. Participating providers and MOH will achieve this through clear boundary conditions, data governance measures and risk mitigation strategies.” -Singapore Ministry of Health
A Short History of Silicon Valley Rulebreakers
When 23andMe started selling their genetic tests in 2007 for $99, it advertised on its site and in the media that it could diagnose 254 health conditions and traits as well as offering to help people trace their genealogy. However, in 2013, the FDA banned the tests, and 23andMe had to take their tests off the US and European markets and apply for FDA approval. The CEO of 23andMe, Anne Wojcicki made a public statement of apology in which she said her startup would be working closely with the FDA to receive approvals on all of 254 tests, and an ancestry only version was repackaged for the US market. It was only recently in which 23andMe started receiving FDA approval, one test at a time.
In 2007, 23andMe launched their genetic kits for the US market in which they said they would diagnose 254 different diseases through a saliva sample. By 2013, they had to pull their kits off the market due to FDA banning their kits for genetic testing. It was only recently in 2018 that they started to receive approval for one test.
Airbnb, a platform where people can put up their residences for short-term rent has been fined by cities around the world for breaching tourism laws and was banned in New York in 2016, making it illegal to list short-term rentals under 30 days. They have been in a protracted legal battle with the New York State Attorney General in which Airbnb has been disrupting the hotel and hospitality industries.
Zenefits, a startup that simplified the insurance paperwork for companies with online software, was under fire for its violation of insurance brokerage laws in 7 states, and its founder and CEO, Parker Conrad, was forced to resign from the company.
Uber, the ride hailing company has pulled out of multiple markets around the world due to regulatory issues. From Austin, Texas; to Bulgaria, to Canada to Italy, Hungary and France, Uber has been not been net positive since its inception in 2009.
Napster was founded in 1999. They revolutionalised digital music distribution by allowing peer-to-peer network sharing of music; however, was brought down by lawsuits from record labels and recording artists for copyright infringement and had to cease operations 3 years later.
Being The First-To-Market And Its Disadvantages
As one can see, being first to market to disrupt a sector and distribute new technology can often have negative consequences, usually in the form of regulatory trouble and multiple lawsuits that can shut down an innovative company. Although 23andMe and YouTube had the financial and political backing of Google (now Alphabet) to allow it to survive through the initial phases, other startups may not be so lucky.
We have all read the hyped up, sensationalistic stories in the media about the founder of Theranos, Elizabeth Holmes. She has even been characterised by John Carreyrou, as having “sociopathic tendencies”. His book on Theranos, called “Bad Blood: Secrets and Lies in a Silicon Valley Startup”, which reads like a psychological thriller, is also now being glamourised into a Hollywood movie starring Jennifer Lawrence.
What could be more gripping and exciting than a beautiful female sociopath, set in Silicon Valley surrounded by lots and lots of money? It certainly would be a best-selling page turner.
However, let’s examine some facts. The fact of the matter is that John Carreyrou’s initial coverage of Theranos in his article for the Wall Street Journal was entirely speculative in nature. He made some inferences without relating it to factual data, and the majority of his article was based on heresay, whom it was later discovered that the source of the article was Tyler Shultz, a man who had a “personal relationship” with Elizabeth Holmes, and who, in an interesting coincidence, had launched his own one-drop blood testing company, using very similar technology to Theranos, right after he left the company.
Capillary Blood Samples More Accurate in Detecting Disease Than Venous Samples
John Carreyrou’s main argument in his much quoted Wall Street Journal article was that because Theranos blood test results were different from the blood tests taken at John Hopkins Hospital’s traditional laboratory that it must be because Theranos' results were inaccurate.
Theranos' nanotainer takes a capillary blood sample and analyses the blood in real time via nanotechnology. Whereas, in a traditional laboratory, venous blood samples are diluted, and heparin and reactants are usually added to prevent the blood from clotting. The results of a blood test taken in real time would most inevitably differ from a test in which blood samples are diluted with added reactants, such as in a laboratory.
What John Carreyrou fails to mention is that in a traditional laboratory setting, blood samples are often diluted, treated with heparin and other reactants before they are tested. So a blood test conducted in real time, as in the case of Theranos’ nanotainer, the blood results would indeed be different. They would actually probably be more accurate.
Another fact that John Carreyrou fails to mention is our blood tests can vary from hour to hour, depending on what we ingest. A venous sample (blood taken from veins) won’t have the same concentrations of a particular substance as in a capillary (finger prick) sample. From the onset, Elizabeth Holmes was well aware of these challenges and her goal was to create a high quality capillary blood sample. However, capillary samples are oftentimes more predictive when toxins are ingested because they will immediately show up in the blood, whereas in the venous sample, it may at first not be apparent. For instance, to test blood sugar for people with diabetes, a capillary sample is preferred over the venous sample because it is more accurate. Also, parasites and viruses are more easily detected with capillary blood samples than venous samples, leading to a faster and safer malaria and dengue virus infection diagnoses. A capillary blood sample would immediately show the concentration of a substance such as paracetamol that has been ingested, whereas a venous sample would not show a higher concentration of the substance.
In effect, because a capillary blood sample comprises of both arterial and venous blood, substances can more easily be detected through a capillary sample as opposed to a venous sample.
FDA Approval Hurdles
What John Carreyrou also failed to mention in his article was that Elizabeth Holmes had begun partnerships to launch her blood diagnostics without first receiving FDA approval (with companies such as Walgreens, Safeway and the Cleveland Clinic etc), which consequently lead to the FDA banning her technology, so that she had to retract all the blood tests that were administered using her unapproved medical devices, and not because as Carreyrou inferred, that her technology didn't work. In addition, Elizabeth Holmes started a campaign to successfully change laws in Arizona, so that patients could bypass a doctor’s prescription in order to receive blood tests in July 2015, which most likely infuriated many institutions, such as HMOs and medical insurance companies, who saw her startup disrupting their sector. A few months later, John Carreyrou would publish his article in the Wall Street Journal using Tyler Shultz as his primary anonymous source, a man who worked at Theranos briefly before he would leave to launch his own clone Theranos company.
Tyler Shultz, who has said he had a "personal relationship" with Elizabeth Holmes, was found to be the primary anonymous source that John Carreyrou used in his Wall Street Journal article. Shultz, who has said Theranos was a fraud, coincidentally has utilised similar technology to launch his own Theranos clone company, Flux Biosciences after working at Theranos for 8 months.
The story of Theranos is indeed a cautionary tale, in that an innovative inventor and scientist cannot bypass FDA regulation, and then attempt to change legislation at the same time. Elizabeth Holmes didn’t play by the rules, but her technology was not based on fraud. She was the first-to-go-to-market, and with this role came legal hurdles and boundaries. However, it is not only the investors who lose out on a pioneering platform that has revolutionalised an industry that has been in long need of disruption; it also prevents the public, the average consumer from access to her medical technology.
In media interviews, Elizabeth Holmes often appears socially awkward, fumbling with words and appears to be an introverted type who doesn't really like talking and media attention; however, it did not stop John Carreyrou from characterising her as a charming "sociopath" in which his book about her is now being made into a Hollywood movie.
It was probably easy for John Carreyrou and Tyler Shultz to team up together to condemn Elizabeth Holmes in the media because she is neither a charismatic nor a great speaker. She fumbles with words, she appears socially awkward in interviews and she has a hard time trying to explain her technology in ways that people can easily understand. Instead, she appears as an introvert who likes being alone in a laboratory and prefers not to talk to people. However, it is way more entertaining to believe that she was indeed some charming sociopath who tried to swindle people out of money, instead of focusing on the facts of her case, in which negative media coverage fueled doubt into investors’ minds who then started to panic and sue the company when they got into regulatory trouble. What is most evident in the federal lawsuit complaint against her is that she did not attain FDA approval before she received investor funds.
I think however, if we can learn from the lessons of our past, beginning with Napster to YouTube to 23andMe, that startup founders must work together with government regulators and create a space where they can launch their products and services without first having to go through years and years of FDA approval processes. This is why I think a regulatory sandbox for healthcare is necessary, so that in the fast changing landscape of healthcare, startups can work together with regulatory agencies and not be pitted against them; this creates a win-win situation for both consumers and healthcare practitioners.
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