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Theranos accused of setting up secret company

Theranos, the embattled blood-testing start-up, set up a secret company to buy off-the-shelf machines, allowing it to hide the fact that it was generating patient results using commercial equipment rather than its own flawed devices, according to an investor lawsuit.

Partner Fund Management, which invested $96.1m in Theranos in 2014, alleges the company created a wholly owned subsidiary, Protegic Procurement, to “secretly” buy the commercially available analysers, which it then used to run the majority of tests, according to a court filing that has been unsealed.

The lawsuit is another blow for Theranos, once seen as a Silicon Valley darling for its pledge to replace needles and venous draws with its own proprietary blood-testing system.

In a statement, Theranos dismissed the court filing as “one-sided” and said it would respond “at the appropriate time in the appropriate forum”.

Its founder, Elizabeth Holmes, had claimed the system could generate accurate results from a few drops of blood deposited in a tiny glass vial or “nanotainer”. Her pledges attracted hundreds of millions of dollars from financial backers, including PFM, giving Theranos a valuation of $9bn.

But for the past 18 months Theranos has been battling allegations that it knew its proprietary system was technically flawed, and that its staff were poorly qualified, resulting in dangerously erroneous results being sent to patients.

In October, PFM sued Theranos for “fraudulently inducing” its investment by misleading it over the capabilities of its technology.

Now it is trying to block a deal that Theranos is trying to agree with other investors, whereby they would accept additional shares in the group in exchange for legal releases that would shield Ms Holmes and the company’s directors from future lawsuits.

PFM said the exchange offer would “benefit a select group of investors at the expense of minority stockholders, obscure the company’s precarious strategic, financial, and legal position, and immunise” Ms Holmes and others.

In addition to alleging that Theranos created a secret shell company to buy the commercial devices, the PFM filing alleges that the company used “fake ‘demonstration tests’ for prospective investors and business partners” such as Walgreens.

Investors were told the results had been generated using the nanotainer and Theranos system, whereas in fact they were produced from commercial machines found throughout the blood-testing industry, according to the PFM filing.

Theranos has shut down its blood-testing operations, sacked large numbers of staff, and agreed to a two-year regulatory ban that prevents it from operating a laboratory. Last year it said it would focus its efforts on a new portable blood-testing machine.

Theranos said: “The items on which PFM focuses have nothing to do with why PFM invested, and they amount to a repackaging of allegations the media have already reported for nearly two years.”

Theranos said more than 99 per cent of its most significant shareholders had agreed to the exchange offer, which involved Ms Holmes using her own stock to recapitalise them.

The move was “consistent with [Ms Holmes’] longstanding personal commitment to doing the right thing for the Theranos shareholder base,” the statement said.

Via FT