Busted Billion-Dollar-Baby Fraud Finds Another Greater Fool - Softbank Lends Theranos $100 Million!

Japan’s Softbank Group is coming to the rescue of yet another embattled Silicon Valley “unicorn”. The Wall Street Journal reported Saturday that Fortress Capital, the publicly traded private-equity firm that agreed to sell itself to the Japanese conglomerate earlier this year, has extended a $100 million loan to Theranos, which is still facing multiple lawsuits and investigations for misleading investors, business partners and clients about the efficacy of its core technology.

The loan, which will avert a bankruptcy filing for the former poster-child of tech-centric "disruption", which was once one of Silicon Valley’s most valuable private companies with a valuation of $10 billion. Theranos famously marketed itself to investors by playing up its core innovation: A diagnostic machine that could supposedly run tests for hundreds of medical conditions with only a single drop of blood.

The company’s founder, Elizabeth Holmes, honed the perfect marketing pitch: A Stanford dropout, she claimed she was inspired to create the “nanotainer” fingerstick that would become Theranos’s signature product by her irrational fear of needles.

Elizabeth Holmes

There was only one problem: The product didn’t work. And instead of disclosing this to investors, Theranos was using standard lab testing similar to that used by competitors like Quest Diagnostics. When this was revealed by the WSJ in a wide-ranging investigation, the backlash was intense. Walgreens Boots Alliance abruptly canceled a partnership that offered Theranos testing in certain Walgreens locations. Other corporate partners also backed away. Some, including Walgreens, sued Theranos.

Though Theranos has settled its regulatory disputes with the Centers of Medicare and Medicaid Services – and Holmes is nearly finished serving a two-year ban from operating a laboratory – several customer lawsuits are pending and are seeking class-action status. The company is also facing lawsuits from investors and partner’s like Walgreens, and probes by the DOJ and SEC are ongoing. The fallout from the scandal led many of the company’s investors, which included mutual funds run by Fidelity and other asset-management behemoths, to write off the value of their investments in the company. Forbes revised Holmes’s net worth to zero after previously including her on its billionaire’s list.

In a macabre twist, Theranos’s former top scientist committed suicide after leaving the company after having a crisis of conscience.

Two years later, Theranos has somehow managed to survive (the $400 million in venture capital it raised) and Holmes has remained at the helm (despite being called out for lying to the world about a business she founded at the age of 19). Since the scandal, the company has pivoted away from the nanotainer and is instead focusing on building a device called the mini-lab.

The Fortress loan is collateralized by the company’s portfolio of patents (for useless equipment) and grants Fortress warrants for 4% of the company – a not-insubstantial sum if the company were to reclaim its former valuation, a possibility that looks increasingly remote.

Here's WSJ:

The loan from Fortress is collateralized by Theranos’s patent portfolio and the deal grants Fortress warrants for 4% of the company’s equity, Ms. Holmes told investors in her email. She said she anticipated the loan would provide Theranos “sufficient liquidity through 2018."

 

One of Fortress’s specialties is to invest in distressed assets. Earlier this year, the publicly traded private-equity firm agreed to be acquired by Japan’s SoftBank Group for $3.3 billion.

 

After closing its laboratories in California and Arizona, Theranos has refocused its strategy on commercializing a device called the miniLab that miniaturizes various lab instruments and packs them into one box. However, this strategy requires getting the box approved by the Food and Drug Administration. For now, the only application Theranos is working on submitting to the agency is for a test to detect Zika, the mosquito-borne virus that causes severe brain malformations in infants, with the device.

 

Theranos recently got a paper about the miniLab accepted for publication by the scientific journal Bioengineering & Translational Medicine, but it doesn’t include any data from small fingerstick samples—the technological advance Ms. Holmes had once touted as revolutionary. Instead, the data is based on blood samples obtained the traditional way, with a needle in the arm, according to a person familiar with the paper.

 

In May, Theranos announced in a press release that it had hired Cass Grandone, a former Abbott Diagnostics executive, to head its product development. Ms. Holmes was quoted in the press release as saying that Mr. Grandone’s leadership would be critical to the company. However, Mr. Grandone resigned last month after just six months on the job, according to a person familiar with his departure.

Extrapolating from the WSJ report, it seems Theranos has given up on its core testing technology, and has decided that lab tests conducted the traditional way will be sufficient to build its new suite of products.

Of course, being a veritable cash-burning machine has historically not been a deterrent from Softbank, which recently agreed to invest $10 billion in Uber (though it’s worth noting that some of that investment will go to early investors looking to cash out their stakes). To be sure, Softbank secured its shares at a discount to Uber’s impossibly lofty “official” valuation of $70 billion.

For her part, Holmes said the cash infusion will help Theranos finance its operations through the end of next year. To save money, Theranos recently moved all its employees and operations from its pricey headquarters on Page Mill Road in Palo Alto to a manufacturing facility across San Francisco Bay in Newark, Calif.

But once the money runs out, we imagine Softbank-owned Fortress will be waiting and ready with another infusion as they hold out hope that Theranos will some day launch a public offering of its own – or at least become enough of a threat to the health-care establishment that one of its much-larger rivals is forced to acquire it.

If all else fails, there are other options...