It was just a matter of time: shortly after none other than “youngest ever billionaire” Elizabeth Holmes herself admitted that the technology of her “innovative” company Theranos had been effectively a fraud, when several weeks ago the company voided and restated years of test results, the valuation of the company has finally been adjusted to reflect the underlying value of the company. And Holmes’ own net worth. As Forbes reports today, after Elizabeth Holmes topped the Forbes list of America’s Richest Self-Made Women with a net worth of $4.5 billion, today, the magazine lowered its estimate of her net worth to nothing.
Theranos, Forbes notes, had no comment.
This is what Forbes said:
Our estimate of Holmes’ wealth is based entirely on her 50% stake in Theranos, the blood-testing company she founded in 2003 with plans of revolutionizing the diagnostic test market. Theranos shares are not traded on any stock market; private investors purchased stakes in 2014 at a price that implied a $9 billion valuation for the company.
Since then, Theranos has been hit with allegations that its tests are inaccurate and is being investigated by an alphabet soup of federal agencies. That, plus new information indicating Theranos’ annual revenues are less than $100 million, has led FORBES to come up with a new, lower estimate of Theranos’ value.
Forbes added that it had spoken to a dozen venture capitalists, analysts and industry experts and concluded that a more realistic value for Theranos is $800 million, rather than $9 billion. That gives the company credit for its intellectual property and the $724 million that it has raised.
In other words, net of cash, the actual company is virtually worthless.
Forbes adds that the revision “represents a generous multiple of the company’s sales, which FORBES learned about from a person familiar with Theranos’ finances.”
Forbes’ conclusion: “At such a low valuation, Holmes’ stake is essentially worth nothing. Theranos investors own preferred shares, which means they get paid back before Holmes, who owns common stock. According to VC Experts, investors in Theranos own a particular kind of preferred equity, called participating preferred shares, which take precedence to common stock in the event of a liquidation. FORBES is not aware of any plans to liquidate. If that were to happen, participating preferred investors would get their money back and more before Holmes gets a cent.”
Just in case Theranos’ army of fawning fans is disturbed by this dramatic fall from grace, Forbes gave the following three reasons why it its estimated value of the blood testing company:
- Too much is unknown. Everything but the $9 billion valuation is secret. Theranos said it would replace traditional blood tests, in which a needle is used to extract blood into a vial, with machines that could do dozens of tests on a drop of blood taken from a finger. But it has presented no data proving its systems work.
- Theranos has not delivered. Holmes has been promising to publish data for six months, but hadn’t submitted a single paper as of April. She initially presented the Food and Drug Administration’s approval of a single test for herpes virus as proof that her technology worked, and that a startling 120 more approvals would follow. Instead, the FDA introduced restrictions that led Theranos to stop using its finger-stick tests, and no approvals have followed. Theranos has voided thousands of the finger stick tests, according to a May report from The Wall Street Journal.
- Theranos’ target market may not exist. Outside experts are skeptical of the idea that Theranos could be worth nearly as much as incumbents like Laboratory Corp. of America (market capitalization: $13 billion) and Quest Diagnostics DGX -0.05% (market capitalization: $15 billion). Theranos, which charges less per test, would need to dramatically improve margins on its tests (which it has said it can do), as well as get many more people to take its blood tests.
“Trying to displace low-cost lab tests is just such a tough area,” says Robert Nelsen of ARCH Ventures, the top-ranked healthcare venture capitalist on the Forbes Midas List. Margins are low, and it is difficult for new technologies to become established. Robert Kocher, a healthcare-focused partner at venture capital firm Venrock, says if Theranos’ technology works, it will find more value selling its machines than trying to recreate LabCorp LH -0.05% and Quest’s infrastructure from scratch.
Forbes concludes by nothing that Holmes will be making a presentation on Theranos’ data at the annual meeting of the AACC, formerly the American Association for Clinical Chemistry, in August. Perhaps that will shed some light on what data Theranos has to support the use of its technology. In the meantime, given the difficulties at Theranos, Holmes falls off the list of America’s Richest Self-Made Women and off all of FORBES’ other wealth lists.
Surprisingly, a zero net worth for Holmes may end up being generous: in light of the coming legal lawsuits by former users of the company’s products whose use the company has admitted may have implicitly put people’s lives in danger, Holmes will likely end up spending millions to defend herself, money she most likely does not have, unless somehow Theranos’ own funds end up being commingled with her own…
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