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A group member told me a patient-led class action lawsuit against Theranos is making an already skittish medtech investment community even less likely to fund medtech innovation.

“I’ve never heard of an investor getting sued for a portfolio company’s alleged misdeeds,” said John Viguerie, founder of diabetes start-up Glucorecs. “The premise we’re accustomed to limits an investor’s liability to loss of capital.”

He continued, “If a class action by patients or business partners is heard against Theranos, that also names investors, it could drop the temperature on an already tepid MedTech venture finance market which is already suffering a protracted IPO drought – there have been only 3 IPO’s in 2016 so far.”

From https://hbsslaw.com/cases/theranos:
“We’re probing Theranos’s relationships with investors, the representations made to them, and this apparently self-interested shift in business strategy,” said Hagens Berman partner Reed Kathrein. “Sources indicate that Theranos sold stock in a Series C round to investor in 2014 and 2015. Normally, by the time of a Series C round, the technology or product is proven and the funds are used to expand the products’ presence in the market.”

Do you think the case will be heard?

If so, do you think John’s assertion, that medtech funds will become even scarcer, would materialize? Or do you believe even the threat of action against investors has already done the damage?

Related: The 10x talk on the Theranos 483 Warning Letters at

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See http://medgroup.biz/translations to register for the Nov 2 event (Noon, New York time).

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I hope you’ll join us at http://medgroup.biz/translations on Wednesday, November 2.

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DISCUSSIONS

Qualified Person (QP) in the field of medical devices

Co-pay determination

Withdrawal of TGA submissions

MDR Procedure for Contract Manufacturers?

Acceptance Sampling for Medical Devices

Experience working with CROs?
http://bit.ly/To-CRO-or-not-to-CRO

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Make it a great week.

Joe Hage
Medical Devices Group Leader

P.S. Take advantage of the free medical device translation content at http://medgroup.biz/translations

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Robert Cogan
Principal Attorney at Continuum Law
Based on the content of the HBSSLaw website, Investor Fraud seems to mean fraud ON investors, NOT fraud BY investors. There are specific state and federal laws against misrepresentation. The web entry does not seem to be asserting any new or far-out theories and does not seem to be going after investors.
In some cases, outrageous theories pushed by one side do not go anywhere. Just because somebody gets sued, it does not mean that a new area of liability will be created.
When a client asks me if he/she/entity can be sued, my answer is, “Hey, this is
America.”

Paul Teitelbaum
Experienced Strategic Advisor in Medical Technology
I don’t think so. If you look at the daily news, there’s a continuously growing stream of early stage device companies getting funded and going public. I think people see Theranos CEO and/or her CTO as one bad egg. Besides, most VCs and other investors have not liked diagnostics for a very long time and many still don’t. It’s a tough niche but easier than 5-10 years ago when it was completely dead. Transaction activity has been increasing for devices that are therapeutic or connected/mobile/continuous patient monitoring.

Robert N. Blair
Linqto, Sapien Ventures, S-LSI
As someone already said – ‘ lack of quality due diligence by the real science folks’. When these kind of too good to be true med stories come along – they usually are – especially when pitched by an unqualified / inexperienced person in the space. It really should impact the casual less technically qualified med investors by putting them on notice of buyer beware, as these investors were taken for an expensive joy ride by either very bad ethics or a lack of understanding of the technology, or maybe both. The amazing thing to me from the WSJ articles is the fact that industry off the shelf equipment was being used for customer testing – that alone told me that the in house technology was not as advertised – an $9B advertisement as I remember – wow. This one should be an eye opener.

In Sickness and Wealth
Insights on Investing in Healthcare Stocks
Medical lab scientists were skeptical from the start and understood the regulatory landscape Theranos would face. Holmes did a grand job of convincing investors, media, and herself that Theranos’ revolutionary technology (and political BOD) were exempt (and could shelter it) from scrutiny that should have signaled concern for those performing due diligence – something all investors, in any sector, should adhere to.

Peter Rule
Founder, Consultant
I don’t think Theranos will affect mainstream medical device investors. They did not and would not have invested. I have talked to several who saw it for what it was early on.

I do think it impacts those investors who occasionally would invest in our sector. However, assuming one has proper value and a good syndicate, I don’t see much of an impact there either.

I just raised $45M and did not hear word one about it.

Maren Nelson
Medical Device Development, Quality System, and Regulatory Specialist
If you’re doing due diligence, anything that increases the potential risk to investors will make any deal less attractive. While some investors may be looking for “quick money”, most of the people I know that invest early in medical device companies are looking for a better solution for patients and a good financial investment.
Unfortunately, the time and money it takes to sort out these issues in the courts removes that potential money from other uses.
I appreciate that many of these investors back companies with great ideas before the ideas are proven, so they fill a valuable niche. The reality is that fully understanding and auditing a company to ensure their data is accurate is beyond the time available for “due diligence”, and investors are looking for a company management team they can trust.
I think the potential damage to trust done by Theranos will also have a long term impact.

Gregory Dennis
Journalist & Consultant
Theranos is a mess and will certainly make investors even more wary.

Chuck M Calvert, MBA
Execution is the competitive Advantage.
Due diligence, investors, consultants engaged my company for “Data Analytics.”
Gathering CI | Competitive Intelligence, Tableau visual trends, strategic planning
(specificity of providers by market, by zip code, by decile – influencers), # of prescribed, where to place human capital. In addition, validating business models; BI | Business Intelligence, ANSI X12 N codes, CMS approves?, a range for commercial payers? IPOs (4), consultant to start ups, Big 4 and fortune…
My team trains project managers.
• IoT, CPT codes, yes back in ’96 a revenue stream to providers, IDN, interfacing with LIMS, moderately complex to simple A1C’s, glucose, now used in EHR for
disease analytics, Population Health…
• Pfizer and Novartis use the same data and contribute to updating the data
• Pall now Danaher, OEM New Med Device dev., each project managed by CEO’s, mktg, sales, buyers engaged in Go-to-Market…so why the surprises or excuses?
* Invest in American Companies and human capital…

Julie Omohundro
Principal Consultant at Class Three, LLC
Joe Atkins, RN,MBA,CNN,CHT, how did FDA help provide an air of plausibility and efficacy of the technology?

Bill Waller
Part-time US General Counsel and Managing Partner at Waller Professional Consulting; Start up executive at Monitor Mask
Theranos was odd. No need tech people on BOD. Secretive when science needs peer review. Both were red flags. The ranks should not be an example.

Todd Davis
Founder, RoyaltyRx Capital, LLC
If investors are exposed to liabilities beyond their capital loss, less investment will occur. There is already a dearth of interest in med devices for good reason, reimbursement risk in particular. I am not sure what precedent would justify suing passive investors, who have already paid dearly.

Charles Thornton
Vice President, Regulatory Affairs and Quality Assurance at Meridian Bioscience Inc.
Martin B. … Nicely stated. Two words for the investors of Theranos: “due diligence.”

Ken Powell
President
To put this into perspective, let’s not forget Bernie Madoff. Almost every week there are stories in the NY metro newspapers regarding exactly the same type of criminal scams. quest paid Medi-Cal $241 million for fraudulent billing. LabCorp also paid a fine over $40 million. I could provide endless examples of fraudulent behavior in the healthcare space. Suffice it to be said again, Theranos was not the first alleged suspect company nor will it be the last. Caveat emptor.

Joe A.
CEO Medical Concepts & Innovations, LLC
Absolutely. Whenever anything like Theranos happens, people are going to become more weary of investing in new medical technology. The trick is for people not to become enthralled with the personality, or good looks, of the face person selling the new technology. People are lazy, and greedy, and this is what con-men and women count on. Investors are going to have to be smarter, more circumspect, and, dare I say, more suspicious, and be willing to do their due diligence, before sinking their hard earned money into a project. In this case, it was a little more difficult for investors to not be taken in, as the FDA didn’t do the company any favors. In fact, it was the FDA that helped provide an air of plausibility and efficacy of the technology. Investors were tempted to rush to judgment out of greed. The excitement was the potential windfall and it was their undoing.

Julie Omohundro
Principal Consultant at Class Three, LLC
I was always taught that the philosophy in such actions is “Sue everybody, and let the courts sort it out.” It’s a reasonably legitimate strategy, because you can’t really know who is liable for what until you get into discovery, and you can’t get into discovery until you sue.

With these investors, it will probably come down to the age-old, “What did they know and when did they know it?” Investors are the owners of the company; they share responsibility, and it remains to be seen whether they were victims, perpetrators, or something in-between. Then I think it will be a question of whether circumstances support piercing the corporate veil.

Would love to have a lawyer chime in on this one.

Julie Omohundro
Principal Consultant at Class Three, LLC
We can only hope that it will hurt the investment that hurts medtech.

Julie Omohundro
Principal Consultant at Class Three, LLC
Mark, I just have to go on the record and say that there is no amount of “smoke and mirrors” that I don’t think is possible. I do wonder sometimes about how much there actually is of the other.

Ken Powell
President
Marc C – You’re absolutely correct. In the WSJ, Walgreen’s openly admitted to skipping their normal due diligence processes to “get the deal done” with Theranos. After so many decades of doing business development deals, I learned long ago that if you are in such a hurry to do a deal you can’t wait to do it, you’re going to wind up making a bad deal – and regret it.

Ken Powell
President
Mark P – You should have seen those rapid HIV OTC companies of the early 90s. No internet in those days and not so high profile, but they sold themselves to willing investors with little or no experience in clinical diagnostics, just like Holes and her board of notables to raise those funds. As many of you already know, Holmes was just 17 when Quest Diagnostics and LabCorp launched their OTC diagnostic initiatives in 2001, only to abandon them in 2006. Since over 30 companies are now in the OTC genetic testing space Quest is taking another look at the OTC segment and just re-launched their OTC diagnostic offering through Safeway (same original partner – Theranos wanted them badly).

Regarding the potential for future lawsuits, you haven’t seen anything yet. PFM and others are teeing up to sue Theranos and I would logically suspect another obvious target with much deeper pockets.

Mark Proulx
Quality and Remediation Rock Star
Ken Powell As much as I respect your opinion on this, Theranos broke new ground in just how badly a company can sell the adoring public on a technology, rise up to the unicorn level company that it did, and come crashing to the ground in spectacular fashion. Holmes has obfuscated, denied and taken the blame, all the while the hint that there were a lot more “smoke and mirrors” going on than was once thought possible. The CMS, FDA, CBER et al don’t take kindly to wholesale falsification of data and lack of proof, but it is a whole new level of taking money by selling investors on the idea that this was “proven technology” when it clearly was not. I imagine Theranos’ troubles have only begun and we will hear a lot more about what Ms. Holmes said and promised investors through legal channels. Theranos is so completely wrong on so many levels, it doesn’t surprise me that lawyers are inventing new ways to sue companies…and may very well succeed. Gonna be interesting to watch and see…