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The Wellness Play

Safeway’s business was doing poorly. The supermarket chain had just announced a 6 percent drop in its profits for the last three months of 2011, a disappointing performance its longtime CEO Steve Burd was struggling to explain to the dozen analysts who had dialed in to the company’s quarterly earnings call.

One of them, Ed Kelly from the Swiss bank Credit Suisse, was gently needling Burd for using stock buybacks to mask the bad results. By reducing the number of shares it had outstanding, buybacks could artificially raise a company’s earnings per share—the headline number investors focused on—even if its actual earnings fell. It was an old trick that astute Wall Street analysts versed in corporate sleights of hand saw right through.

Piqued, Burd said he disagreed. He was confident that Safeway’s fortunes were about to improve, which would make purchasing its own shares a smart investment. To justify his optimism, he cited three initiatives the company was pursuing. The first two were shrugged off as old news by his hard-to-please audience, but the analysts’ ears pricked up when he got to the third.

“We’re contemplating a significant…huh—I’m just going to call it a wellness play,” he said cryptically.

It was the first time Burd had made any public mention of this. He didn’t elaborate, but the message the analysts took away was that the stodgy, ninety-seven-year-old grocery chain had a secret plan to jump-start its stagnating business. Inside Safeway, this secret plan was code-named “Project T-Rex.” It referred to none other than the company’s partnership with Theranos, which by now—February 2012—was two years in the making.

Burd had high hopes for the venture. He’d ordered the remodeling of more than half of Safeway’s seventeen hundred stores to make room for upscale clinics with deluxe carpeting, custom wood cabinetry, granite countertops, and flat-screen TVs. Per Theranos’s instructions, they were to be called wellness centers and had to look “better than a spa.” Although Safeway was shouldering the entire cost of the $350 million renovation on its own, Burd expected it to more than pay for itself once the new clinics started offering the startup’s novel blood tests.

A few weeks after the earnings call, Burd and his executive team took a group of analysts on a tour of a Safeway store a few miles from his home in the scenic San Ramon Valley east of Oakland. The analysts were shown the store’s new wellness center, but Burd remained evasive about what sort of service it was going to offer. Even the store’s manager was in the dark. Theranos had insisted on absolute secrecy until the launch.

There had been quite a few delays since the companies had first agreed to do business together. At one point, Elizabeth told Burd that the earthquake that struck eastern Japan in March 2011 was interfering with Theranos’s ability to produce the cartridges for its devices. Some Safeway executives found the excuse far-fetched, but Burd accepted it at face value. He was starry-eyed about the young Stanford dropout and her revolutionary technology, which fit so perfectly with his passion for preventive health care.

Elizabeth had a direct line to Burd and answered only to him. A war room had been set up in the Pleasanton headquarters where a small group of Safeway executives privy to Project T-Rex met once a week to discuss its progress. Burd attended all the meetings, either in person or via conference call if he was traveling. When questions or issues came up that had to be taken back to Theranos, he would pipe up with what became a refrain: “I’ll talk to Elizabeth about it.” Larree Renda, the executive who had started out at Safeway as a teenage bagger in 1974 and climbed the corporate ranks to become one of Burd’s top deputies, and other executives involved in the project were surprised by how much latitude he gave the young woman. He usually held his deputies and the company’s business partners to firm deadlines, but he allowed Elizabeth to miss one after the other. Some of Burd’s colleagues knew he had two sons. They began to wonder if he saw in Elizabeth the daughter he’d never had. Whatever it was, he was in her thrall.

AFTER ALL THE DELAYS, the partnership seemed to finally be getting off the ground in the early months of 2012: as a beta run before a full launch, the companies had agreed that Theranos would take over the blood testing at an employee health clinic Safeway had opened on its corporate campus in Pleasanton. The clinic was part of Burd’s strategy to curb the supermarket operator’s health-care costs by encouraging its workers to take better care of themselves. It offered free checkups. Employees who scored well on them were entitled to discounts on their health plan premiums. Conveniently located next to the gym on the Safeway campus, it was staffed with a doctor and three nurse practitioners and featured five exam rooms. It also had a little lab. A new sign in the reception area read, “Testing done by Theranos.”

The employee clinic was part of Renda’s portfolio. Among other responsibilities, she oversaw Safeway Health, the subsidiary Burd had created to sell the retailer’s health benefits expertise to other companies. Renda’s husband had lost his battle with lung cancer since Elizabeth had first showed up in Pleasanton two years before, but she hoped Theranos’s painless finger-stick tests would spare others the torment he’d endured getting repeatedly stuck with needles in the last months of his life.

Renda had just hired Safeway’s first chief medical officer. His name was Kent Bradley and he came from the U.S. Army, where he had served for more than seventeen years after attending West Point and the armed forces’ medical school in Bethesda, Maryland. Bradley’s last military assignment had been to run the European wing of Tricare, the health insurance program for active and retired servicemen. Among other responsibilities, Renda gave the soft-spoken former army doctor oversight of the campus clinic.

Bradley had worked with a lot of sophisticated medical technologies in the army, so he was curious to see the Theranos system in action. However, he was surprised to learn that Theranos wasn’t planning on putting any of its devices in the Pleasanton clinic. Instead, it had stationed two phlebotomists there to draw blood, and the samples they collected were couriered across San Francisco Bay to Palo Alto for testing. He also noticed that the phlebotomists were drawing blood from every employee twice, once with a lancet applied to the index finger and a second time the old-fashioned way with a hypodermic needle inserted in the arm. Why the need for venipunctures—the medical term for needle draws—if the Theranos finger-stick technology was fully developed and ready to be rolled out to consumers, he wondered.

Bradley’s suspicions were further aroused by the amount of time it took to get results back. His understanding had been that the tests were supposed to be quasi-instantaneous, but some Safeway employees were having to wait as long as two weeks to receive their results. And not every test was performed by Theranos itself. Even though the startup had never said anything about outsourcing some of the testing, Bradley discovered that it was farming out some tests to a big reference laboratory in Salt Lake City called ARUP.

What really set off Bradley’s alarm bells, though, was when some otherwise healthy employees started coming to him with concerns about abnormal test results. As a precaution, he sent them to get retested at a Quest or LabCorp location. Each time, the new set of tests came back normal, suggesting the Theranos results were off. Then one day, a senior Safeway executive got his PSA result back. The acronym stands for “prostate-specific antigen,” which is a protein produced by cells in the prostate gland. The higher the protein’s concentration in a man’s blood, the likelier he is to have prostate cancer. The senior Safeway executive’s result was very elevated, indicating he almost certainly had prostate cancer. But Bradley was skeptical. As he had done with the other employees, he sent his worried colleague to get retested at another lab and, lo and behold, that result came back normal too.

Bradley put together a detailed analysis of the discrepancies. Some of the differences between the Theranos values and the values from the other labs were disturbingly large. When the Theranos values did match those of the other labs, they tended to be for tests performed by ARUP.

Bradley shared his concerns with Renda and with Brad Wolfsen, the president of Safeway Health. Her faith already shaken by the delays of the past two years, Renda encouraged him to talk to Burd about them, which Bradley did. But Burd politely brushed him off, assuring the ex–army doctor that the Theranos technology had been vetted and was sound.

THE BLOOD SAMPLES DRAWN from Safeway employees in Pleasanton were being couriered to a one-story building with a stone façade on East Meadow Circle in Palo Alto. Theranos had temporarily set up its fledgling lab there in the spring of 2012 while it moved the rest of its growing operations from Hillview Avenue to a larger building nearby formerly occupied by Facebook.

A few months earlier, the lab had obtained a certificate attesting that it was in compliance with CLIA, the federal law that governed clinical laboratories, but such certificates weren’t difficult to obtain. Although the ultimate enforcer of CLIA was the Centers for Medicare and Medicaid Services, the federal agency delegated most routine lab inspections to states. In California, they were handled by the state department of health’s Laboratory Field Services division, which an audit had shown to be badly underfunded and struggling to fulfill its oversight responsibilities.

Had Steve Burd been allowed inside the East Meadow Circle lab, a network of rooms located in the center of the low-slung building, he would have noticed that it didn’t contain a single Theranos proprietary device. That’s because the miniLab was still under development and nowhere near ready for patient testing. What the lab did contain was more than a dozen commercial blood and body-fluid analyzers made by companies such as Chicago-based Abbott Laboratories, Germany’s Siemens, and Italy’s DiaSorin. The lab was run by an awkward pathologist named Arnold Gelb, who went by Arne (pronounced “Arnie”), and staffed with a handful of clinical laboratory scientists, or CLSs—lab technicians who are certified by the state to handle human samples. Although it made use of only commercial instruments at this juncture, there were still plenty of things that could and did go wrong.

The main problem was the lab’s dearth of experienced personnel. One of the CLSs, a fellow by the name of Kosal Lim, was so sloppy and poorly trained that one of his counterparts, Diana Dupuy, was convinced he was jeopardizing the accuracy of test results. Dupuy was from Houston and had trained at MD Anderson, the city’s world-renowned cancer center. She’d spent most of her seven years since becoming a CLS as a blood-transfusion specialist, which had given her extensive exposure to CLIA regulations. She operated strictly by the book and didn’t hesitate to report violations when she saw them.

To Dupuy, Lim’s blunders were inexcusable. They included ignoring manufacturers’ instructions for how to handle reagents; putting expired reagents in the same refrigerator as current ones; running patient tests on lab equipment that hadn’t been calibrated; improperly performing quality-control runs on an analyzer; doing tasks he hadn’t been trained to do; and contaminating a bottle of Wright’s stain, a mixture of dyes used to differentiate blood cell types. Dupuy, who had a fiery streak, confronted Lim on several occasions, telling him at one point that she was going to become a laboratory inspector to root out bad lab technicians like him. When he proved unable to meet her standards, she began documenting his poor practices in regular emails she sent to Gelb and to Sunny, often attaching photos to prove her point.

Dupuy also had concerns about the competence of the two phlebotomists Theranos had stationed in Pleasanton. Blood is typically spun down in a centrifuge before it’s tested to separate its plasma from the patient’s blood cells. The phlebotomists hadn’t been trained to use the centrifuge they’d been given and didn’t know how long or at what speed to spin down patients’ blood. When they arrived in Palo Alto, the plasma samples were often polluted with particulate matter. She also discovered that many of the blood-drawing tubes Theranos was using were expired, making the anticoagulant in them ineffective and compromising the integrity of the specimens.

Shortly after making one of her complaints, Dupuy was sent to Delaware to train on a new Siemens analyzer Theranos had purchased. When she returned from her trip a week later, she noticed that the lab was spotless. Sunny, who appeared to have been waiting for her, summoned her into a meeting room. In an intimidating tone, he informed her that he had taken a tour of the lab in her absence and found not a single one of her complaints to be justified. He then brought up the fact that she had allowed her boyfriend into the building to help her carry out her luggage on the day she’d flown to Delaware. It was a serious breach of the company’s security policy and he had decided to fire her for it, he said. After letting that sink in for a moment, he called Gelb in and asked him whether he valued Dupuy as a member of the lab and wanted to keep her on. Gelb said he did, at which point Sunny grudgingly reversed himself. Dupuy was still employed after all.

Shaken, she went back to her desk in a daze. The next thing she knew, an employee from the IT department tapped her on the shoulder and asked her to step out into the hallway with him. He was trying to reestablish her company cell-phone connection and needed some information from her. Before changing his mind, Sunny had ordered it disconnected along with her company email and her access to the corporate network.

Someone as outspoken as Dupuy was bound not to last long at Theranos. Three weeks later, on a Friday morning, Sunny returned to the East Meadow Circle building and fired her again, this time for good. She was immediately escorted out of the building without being given the chance to gather her personal belongings. The reason for her dismissal was that she had called attention to the fact that one of the lab’s main vendors had put its purchase orders on hold because of unpaid bills.

Upset about the way she was treated, Dupuy fired off an email to Sunny that weekend insisting that she be allowed to retrieve her belongings, which in addition to lab books included a makeup bag containing her eyeglasses and her California CLS license. The email, on which she copied Elizabeth, provided a searing indictment of Sunny’s management style and of the state of the lab:

I was warned by more than 5 people that you are a loose cannon and it all depends on your mood as to how [sic] what will trigger you to explode. I was also told that anytime someone deals with you it’s never a good outcome for that person.

The CLIA lab is in trouble with Kosal running the show and no one watching him or Arne. You have a mediocre Lab Director taking up for a sub-par CLS for whatever reasons. I fully guarantee that Kosal will certainly make a huge mistake one day in the lab that will adversely affect patient results. I actually think he has already done this on several accounts but has put the blame on the reagents. Just as you stated everything he touches is a disaster!

I am [sic] only hope that somehow I bring awareness to you that you have created a work environment where people hide things from you out of fear. You cannot run a company through fear and intimidation…it will only work for a period of time before it collapses.

Sunny agreed to have someone meet her in front of the East Meadow Circle building to return her belongings but warned her that she would be hearing from the company’s lawyers. Over the next several days, Dupuy received a series of sternly worded emails from David Doyle, the Theranos senior counsel, demanding that she sign a declaration pledging to return to Theranos or “permanently destroy” any materials from her employment at the company and abide by her confidentiality obligations.

Dupuy initially refused and hired an Oakland attorney to threaten the company with a wrongful termination lawsuit, but her lawyer advised her to back down and to sign the document once Theranos brought in a high-powered attorney from Wilson Sonsini. Going up against Silicon Valley’s premier law firm was a losing battle, he told her. She reluctantly followed his advice.

SAFEWAY OF COURSE had no knowledge of any of this. It continued to let Theranos handle the blood testing at its Pleasanton clinic throughout 2012 and into 2013. It also began hiring phlebotomists to staff the wellness centers it had built in dozens of its stores in Northern California. But as the months went by, Theranos continued to push back the date for a launch.

Burd was asked about the status of Safeway’s mysterious “wellness play” on its first-quarter earnings call in late April 2012. He replied that it wasn’t yet “ready for prime time” but that when the company did unveil it, it would “have a material impact” on its financial results. In the next earnings call in July, he volunteered that it would play “out in all likelihood in the fourth quarter.” However, the fourth quarter came and went without a launch.

By this point, some Safeway executives were getting angry. They were being denied their bonuses because the company was missing its financial targets, which had factored in the anticipated extra revenues and profits from the Theranos partnership. Matt O’Rell, an executive in Safeway’s finance department, had been tasked with coming up with revenue projections for the wellness centers. Working from the aggressive assumption that each of them would attract an average of fifty patients per day, he had forecast $250 million in extra revenue per year. Not only had that revenue failed to materialize, Safeway had spent $100 million more than that just to build the centers.

While they sat idle, the wellness centers occupied valuable real estate inside the stores that could have been put to other, profitable uses. Fed up with waiting, Renda and Bradley put together various ideas for how the space could be utilized. One of them was to staff the centers with nutritionists who would offer dietary advice. Another was to turn them into full-fledged medical clinics run by nurse practitioners. Yet another was to offer telemedicine services. They lobbied Burd to let them implement these plans but, after discussing the matter with Elizabeth, he turned them down. She didn’t want to surrender the space, he said.

Behind the scenes, Safeway’s board of directors was losing patience. After twenty years in the job, it was clear that Burd had lost the confidence of Wall Street. His first decade as CEO had been a big success and featured a sharp rise in Safeway’s stock price. But in recent years, his passion for health and wellness had made him lose sight of what remained at the heart of the company: the unglamorous business of selling groceries. The large investment made in the wellness centers and the endless delays in bringing it to fruition were the last straw.

Shortly after the stock market closed on January 2, 2013, Safeway put out a press release announcing that Burd would retire the following May after the company’s annual shareholder meeting. The news was presented as a voluntary decision, but Renda and other executives suspected that the board had asked him to step down. Even on his way out, Burd remained upbeat about the prospects for the still-secret Theranos partnership. Among a list of his achievements as CEO, the press release quoted him as saying that Safeway would soon “be rolling out a wellness initiative that has the potential to transform the Company.”

After Burd’s departure, the communication channel to Elizabeth was lost. Anyone from Safeway who wanted to talk to Theranos had to go through Sunny or the Frat Pack. Sunny acted put-off whenever Safeway executives asked for status updates, as if his time was too precious to waste and they had no idea what it took to produce an innovation of this magnitude. His arrogance was infuriating. And yet Safeway was still hesitant to walk away from the partnership. What if the Theranos technology did turn out to be game-changing? It might spend the next decade regretting passing up on it. The fear of missing out was a powerful deterrent.

As for Burd, it was clear he hadn’t been ready to retire. Just three months after leaving the supermarket chain, he founded a consulting firm to advise companies on how to reduce their health-care costs. He called it Burd Health. In his new role as a fellow health-startup founder, he tried to get back in touch with Elizabeth. But she no longer returned his calls.

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