PFM Health Sciences partner Brian Grossman had a laundry list of due-diligence questions for the latest investment he was considering.
"How does your accuracy and speed stack up against your traditional tests?"
"What are the limitations of the technology? What tests are not feasible?"
The answers he got back from the company — Theranos — obfuscated the truth, he testified on Tuesday in the ongoing criminal fraud trial of Elizabeth Holmes, the blood-testing startup's co-founder and former CEO.
As he faced repeated questioning by Assistant U.S. Attorney Robert Leach, Grossman said he was never told that Theranos' own analyzers were only being used for a handful of tests. He did not know that modified commercial machines were being used, he said, and he "absolutely" did not know that Theranos' expenses included the cost of the Siemens machines it was using to test patient samples.
Instead, he said he was pitched on a 10-year-old company whose technology had been vetted, validated and used on the battlefield and medevac helicopters "in matters of life and death." In his first meeting with company executives in December 2013, he was told by Holmes and Sunny Balwani, Theranos' then-president who is also facing fraud charges, that it had taken Theranos a decade to get to the point where it could run every test on the menu of its largest competitors. They emphasized that their technology was "better than conventional lab equipment" with lower variability.
Grossman was particularly enamored with the potential Theranos had for replacing an entire laboratory in a box — a move that would have had major implications to the cost structure of health care if you could scale down the square footage and people needed to operate testing. And, importantly to Grossman, it was a technology that had made it beyond the lab and into Walgreens stores, being run on human samples.
"Was that impressive?" Leach asked. "Very," Grossman replied.
So far, much of the testimony from Theranos investors in the drawn-out trial has exposed gaps in due diligence and how FOMO overruled formal process. But Grossman's testimony has been notable for just how much due diligence his firm did and the pushback he had received from Theranos along the way.
"From a bigger-picture perspective, we wanted to understand if there was development technological risk, or if we were investing in a company that was past that proof of concept and the risks were commercial roll-out and business strategy," Grossman said.
When he tried to reach out to companies like Walgreens and United Healthcare, Balwani wouldn't allow him to talk to the companies, Grossman said.
"He said 'No, we are not comfortable with that. It would look badly if investors are asking to speak with the company,'" Grossman said. The PFM investor ended up talking to Channing Robertson, a Stanford professor and former board member, who signed off on the technology as not having serious risks.
Grossman then worked with Balwani to arrange a tour of the manufacturing facility and the lab at Theranos, but faced resistance because the company was concerned he would see unpatented work and it would "compromise their intellectual property." Balwani acquiesced and allowed him to visit after saying he'd move some machines, and when Grossman toured the manufacturing facility and the CLIA lab, he said he only saw miniLabs and not the third-party devices that often ran the tests.
Grossman also tried the Theranos miniLab himself, or at least attempted to.
He went to a Walgreens to have his own blood drawn, only to end up with a venous draw instead of a fingerstick prick. After the results came back past the promised four-hour window, Grossman raised concerns with Balwani, who assured him it was just a problem with a specific test.
An email shown in court revealed that Grossman's test had actually been run on a Siemens Immulite machine and not one of Theranos' proprietary devices, something he didn't know at the time. (A different analyst at PFM did successfully get a fingerprick test, the defense showed in their cross-examination.)
Defense attorney Lance Wade pressed Grossman on the idea that he should have known if his blood was being collected by a venous draw that the lab would've been using a third-party device, but Grossman said he believed the microsample, taken with a venous draw, meant it would still be used on the Theranos proprietary device designed for smaller samples.
"I would be concerned if someone was using a microsample from traditional methods and using that on traditional lab equipment," Grossman replied. "That would be concerning for me."
Wade noted that despite PFM's long list of diligence questions, it never explicitly asked if Theranos did use third-party devices. Grossman conceded his firm didn't pose that question.
Even with the hiccups in the diligence process, Grossman's fund went ahead and invested roughly $96 million because it believed the representations Holmes had made about Theranos' capabilities — without revealing what was really going on in the labs.
Grossman's testimony is expected to continue Wednesday.
