3 Takeaways From The Elizabeth Holmes Trial For The Diagnostics & Medtech Industry
By Randy Prebula, Hogan Lovells LLP
Early in January 2022, Elizabeth Holmes, the former CEO and founder of Theranos, was found guilty on four charges of defrauding investors regarding the company’s development and use of in vitro diagnostic testing for multiple diseases using very small samples of fingerstick blood. The jury found her not guilty on three charges of defrauding patients and one charge of conspiring to defraud patients and deadlocked on three additional investor-focused charges. Much of the coverage concerning this case has focused on the breadth of her misstatements about the Theranos technology, a “fake it ‘til you make it” mentality in high tech product development, and the brashness of founders, like Holmes, in touting the potential benefits of products still in development.
An equally important corollary to consider, however, is how this case highlights the widespread misunderstanding by developers, investors, patients, regulators, and the public generally about how medical advances of all kinds, but especially diagnostic testing, must be viewed in the context of both patient and population risks and benefits. This case, and the prior settlements with investors and civil settlement with the SEC, reminds companies of the importance of crafting risk factors and descriptions of business models in a prospectus or disclosure statement carefully to ensure that material facts and risks are appropriately disclosed, and it highlights that investors, especially, must be attuned to differences between what company officials say privately and those formal disclosures.
1. Minimizing The Risk Inherent In Drug & Device Development Is A Mistake
Medical products, including drugs and diagnostics, are by their nature intended to do something to help patients with their health. Drugs can lower blood pressure, reduce the debilitating effects of degenerative diseases, and treat pain, for example. Diagnostic tests can detect the presence of harmful pathogens, help identify natural imbalances in the body, or detect signs of cancer and even confirm the presence of genetic mutations that might be passed on to future children. But drugs don’t always work for everyone, they don't always work as effectively, and they always carry some level of risk of unintended effects on patients. As we have seen during the COVID pandemic, diagnostic tests are not 100% capable of detecting what they are designed to measure, 100% specific to just the disease of interest, or intended to produce a single result that overrules other evidence of disease, such as symptoms. These kinds of risks are carefully disclosed in warnings, precautions, and contraindications in product labeling (as required by extensive regulation of drugs and in vitro diagnostic medical devices).
Yet, despite extensive oversight and labeling, the broad tendency of the public, including both patients seeking help and investors evaluating companies, is to overestimate the benefit and minimize the risks. In the Holmes/Theranos case, the lure of detecting hundreds of diseases in a small sample of blood may have clouded the ability to recognize the technological difficulties in simultaneously detecting so many possible disease markers. Many also appear to have overlooked the fact that these disease markers might be present at very low levels in the blood (or possibly present at detectable levels only in other body fluids) or even the possibility of needing larger samples to conduct repeat testing to investigate discrepancies or lab errors.
2. Diagnostic Testing Must Be Sensitive & Specific
Even if the technological and sampling risks had been understood and addressed, understanding diagnostic testing also requires that we take into account both the ability of the test to detect each marker, which is measured as each test’s sensitivity to detecting the marker of interest, and the specificity of that marker to a specific disease. Companies and investors also need to understand that the value of diagnostic testing lies in their predictive value, or the ability of each test to produce meaningful results for its intended patient population. This often is calculated as the likelihood that a person with the marker actually has the disease, called “positive predictive value,” and the likelihood that a person whose test result was negative truly does not have the disease, called “negative predictive value.” Detecting a fever, for example, is a very sensitive marker of an infection, but it is not specific to just one disease. As such, for example, it is not very useful in differentiating COVID-19 from the common flu. On the other extreme, detecting SARS-CoV-2 antigens and/or its RNA is specific to COVID-19, but detecting these markers depends on when someone was infected, when and how the test is performed, and how the test measures the presence of these markers, meaning that such tests may not be as sensitive as people might think they should be. These risks complicate both how tests are developed and how they are evaluated to show how well they work.
3. Show Your Evidence
All the tests Theranos hoped to develop faced these same performance challenges on top of the mechanical challenges of building a simple analyzer/test system that could detect hundreds of markers, while also hoping that they would be present at measurable quantities in very small samples. Investors and patients alike apparently trusted that these issues had all been worked out without ever asking for evidence. In brief, the Holmes case highlights the need for both greater skepticism and a more eyes wide open approach on the part of investors when evaluating new medical products, and the need for greater clarity in communicating what is known and what is still being discovered about technologies and their potential medical benefits on the part of the developers.
Lastly, this case should remind investors of their need to remain focused on the risk disclosures and descriptions of business models and to view skeptically perceived discrepancies in what they hear. It also reminds all of us that intentional misstatements and fabrication of the facts can occur. Founders should take careful heed of the guilty verdicts in this case when discussing their technologies. Disclosures certainly need to be truthful and statements founders and company officials make should be vetted carefully to avoid being misleading. Investors need to be cautious when written disclosures and founder statements are clearly not aligned; they should also consider seeking documentation supporting material oral statements and obtaining independent verification of the most material facts. This case and these verdicts have again put technology company founders on notice that what they say will be rightly scrutinized, and when such statements are knowingly false and used to induce investments, they can be criminally liable.
About The Author:
Randy Prebula is a partner based in the Washington, D.C., office of Hogan Lovells LLP. A member of the Global Regulatory Practice Group and director of the firm’s FDA Medical Devices and Technology practice area, Prebula helps his clients navigate intersections of science, policy, and law. He serves as a resource for medical device, drug, human tissue, and combination product manufacturers, helping to bring innovative medical products to market and meet patient needs throughout each product's unique life cycle.