Theranos Scandal Can Shake The Private Equity Market

  • Theranos was accused of misleading investors and customers.
  • The company declined claims but refused to reveal more information.
  • This scandal can impact investment funds, other private firms, and future IPOs.

A few months ago, I published an article here on Amigobulls, presenting Theranos and its amazing new technology that can analyze few blood drops to produce hundreds of blood tests. Investors were very impressed by the company’s technology, which is based on a proprietary special blood test diagnostic machine, and poured more than $400M into the company, evaluating it at $9B. Theranos kept its entire business confidential, and very few people knew about its technology and business model.

Theranos Scandal

Two weeks ago, the Wall Street Journal published a report unveiling that Theranos uses its proprietary ‘Edison’ machines for only 15 blood tests while the other tests are analyzed using traditional Siemens machines. This shocking fact pulls the rug out from beneath CEO Elizabeth Holmes’ ambitions to disrupt the $75B industry of private blood testing services in the U.S. According to the WSJ report, in 2014, Theranos did less than 10% of its tests on Edison machines, and in order to analyze blood samples using traditional machines, Theranos had to use larger amounts of blood in its samples. However, as Theranos entire business model relies on the fact that it can do 240 blood tests from just a few blood drops, the company could not request large amounts of blood samples from customers and had to dilute the samples. This dilution caused several errors in the results of blood tests of Theranos vs. hospitals.

Immediately after the WSJ report was published, Ms. Holmes declined the accusations in an extensive interview with CNBC and at The Wall Street Journal tech conference in Laguna Beach, California. Ms. Holmes repeated over and over again that the article was false and declined each of the accusations raised there. However, the company refused to reveal more information about its technology and diagnostic process.

Not going into the entire discussion of whether Theranos has misled investors and customers, but looking at the entire private placing market – I believe that this is a red flag.

Impact of Theranos Scandal

When a respectable newspaper publishes such thorough and comprehensive research about a private company, including a number of follow-up articles and a slot in its tech conference, it shows that it stands behind its research. Whether or not its research is accurate, this research follows a sentiment that the private market valuations are too steep, and investors might pour money into businesses that are worth much less. In the worst case scenario, Theranos has indeed misled investors and customers, and its tests are unreliable. If this is true, investors will not be able to get rid of their shares, which will obviously lose their value. This will impact the funds that were invested in the company, which may need to repair its reputation. Moreover, this puts at risk other investments made with these funds and questions many other companies in the unicorns club.

Conclusion

The Theranos scandal might seem to be a small event involving one or two companies. However, it can undermine a long list of investments recently made by leading investment firms and challenge the delicate balance between the private and public equity markets. This rolling event can have an impact on the stocks currently traded and on potential IPOs that benefitted from the recent rise in valuations. We already saw some disappointing IPOs lately from unicorn tech companies, like PURE STORAGE (NYSE:PSTG) and Box (NYSE:BOX), and very disappointing performance by other unicorns, like Twitter (NYSE:TWTR) and Etsy (NASDAQ:ETSY). I believe that, in the short term, investors will become extremely cautious about unicorns and their valuations, and this could impact future IPOs. In the long term, this scandal may reduce the soaring valuation trend in the private equity market.

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  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
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Comments on this article and PSTG stock

DougS
neutral
The Stanford flunk out is nothing less than a scam artist. She has a magic box that does nothing, except give out ridiculously inaccurate results with considerable regularity. She should be run out of polite society.
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