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Blood-Testing Firm Theranos Gets $100 Million Lifeline From Fortress

John Carreyrou
Elizabeth Holmes

The embattled Silicon Valley blood-testing company Theranos Inc. told its investors this week that it has secured a $100 million loan from Fortress Investment Group LLC, averting for now a possible bankruptcy filing as its remaining cash dwindled.

The loan is “subject to achieving certain product and operational milestones,” Theranos’s founder and chief executive officer, Elizabeth Holmes, told the company’s shareholders in an email Friday evening that was reviewed by The Wall Street Journal. A spokeswoman for the company didn’t respond to requests for comment.

Theranos was once one of Silicon Valley’s best-funded startups, having raised a total of $900 million at a peak valuation of $10 billion, but an investigation by the Journal that raised questions about its technology and practices sent it into a downward spiral.

The Centers for Medicare and Medicaid Services banned Ms. Holmes from owning or operating clinical laboratories for two years. In addition, investors and former partners sued Theranos, alleging fraud, and the U.S. attorney’s office in San Francisco and the Securities and Exchange Commission both launched investigations into the company.

ZUMAPRESS.com To save money, Theranos recently moved all its employees and operations from its Palo Alto headquarters, shown here, to a manufacturing facility across San Francisco Bay in Newark, Calif.

Theranos has since settled lawsuits brought by a San Francisco hedge fund and by its former retail partner, Walgreens Boots Alliance Inc., and it has refunded all its customers in Arizona under a deal with the state’s attorney general after it voided nearly a million blood-test results.

But the Justice Department and SEC probes are ongoing. Theranos also still faces a lawsuit from two investors in California that seeks class-action status, as well as a separate suit brought by consumers in Arizona also seeking class-action status.

In her email to investors Friday, Ms. Holmes said Theranos was continuing to cooperate with the federal investigations but would defend itself “vigorously” against the investor and consumer class actions.

The loan from Fortress is collateralized by Theranos’s patent portfolio and the deal grants Fortress warrants for 4% of the company’s equity, Ms. Holmes told investors in her email. She said she anticipated the loan would provide Theranos “sufficient liquidity through 2018.”

One of Fortress’s specialties is to invest in distressed assets. Earlier this year, the publicly traded private-equity firm agreed to be acquired by Japan’s SoftBank Group for $3.3 billion.

After closing its laboratories in California and Arizona, Theranos has refocused its strategy on commercializing a device called the miniLab that miniaturizes various lab instruments and packs them into one box. However, this strategy requires getting the box approved by the Food and Drug Administration. For now, the only application Theranos is working on submitting to the agency is for a test to detect Zika, the mosquito-borne virus that causes severe brain malformations in infants, with the device.

Theranos recently got a paper about the miniLab accepted for publication by the scientific journal Bioengineering & Translational Medicine, but it doesn’t include any data from small fingerstick samples—the technological advance Ms. Holmes had once touted as revolutionary. Instead, the data is based on blood samples obtained the traditional way, with a needle in the arm, according to a person familiar with the paper.

In May, Theranos announced in a press release that it had hired Cass Grandone, a former Abbott Diagnostics executive, to head its product development. Ms. Holmes was quoted in the press release as saying that Mr. Grandone’s leadership would be critical to the company. However, Mr. Grandone resigned last month after just six months on the job, according to a person familiar with his departure.

Mr. Grandone declined to comment.

To save money, Theranos recently moved all its employees and operations from its pricey headquarters on Page Mill Road in Palo Alto to a manufacturing facility across San Francisco Bay in Newark, Calif.

Write to John Carreyrou at john.carreyrou@wsj.com

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