By John Carreyrou 

A top executive who helped build Theranos Inc. into a major blood-testing laboratory is leaving the company amid regulatory probes of the embattled Silicon Valley firm.

The departure of Sunny Balwani as Theranos president and chief operating officer comes amid a broader board reorganization announced by the Palo Alto, Calif., firm. In a release late Wednesday, Theranos said it is expanding its board, adding three members to beef up its scientific and medical expertise.

The 50-year-old Mr. Balwani, a top associate of Theranos founder Elizabeth Holmes, leaves in the wake of last month's news that the Securities and Exchange Commission and the U.S. attorney in San Francisco are investigating whether the company misled investors and regulators about the state of its technology and operations. Theranos said it is cooperating with the investigations.

Theranos also is attempting to persuade the Centers for Medicare and Medicaid Services, the federal agency that oversees clinical labs, not to shut down its northern California laboratory. Closure of the lab would result in Ms. Holmes and Mr. Balwani being barred from the blood-testing business for at least two years, under federal regulations.

Mr. Balwani joined Theranos as its No. 2 executive in 2009, five years after Ms. Holmes founded the company upon dropping out of Stanford University as a 19-year-old sophomore.

"I am deeply grateful for the opportunity to contribute to Theranos' mission to make healthcare accessible through its technology and products," Mr. Balwani said in a statement. "I will continue to be the company's biggest advocate and look forward to seeing Theranos' innovations reach the world."

Theranos spokeswoman Brooke Buchanan said Mr. Balwani isn't being blamed for the company's regulatory problems. Rather, she said, his departure is merely part of a broader reorganization that will see the company appoint a new chief medical officer, to whom its labs will report, a new head of research and a new operating chief. The company is actively recruiting for those positions. Depending on the new COO's profile and qualifications, he or she could take on both the operating chief and head of research roles, she added.

Theranos declined to make Mr. Balwani available for comment.

Since launching Theranos in 2003, Ms. Holmes has set out to revolutionize the blood-testing industry. Before the company made changes to its website earlier this year, the website cited "breakthrough advancements" that made it possible to run "the full range" of lab tests on a few drops of blood pricked from a finger.

In October, The Wall Street Journal reported that Theranos did the vast majority of more than 200 tests it offered to consumers on traditional lab machines purchased from other companies. The Journal also reported that some former employees doubted the accuracy of a small number of tests run on the devices Theranos invented, code-named Edison.

Theranos has declined to say how many tests or which ones it runs on commercial machines. The company has said its technology has the capability to handle a broad range of tests.

Along with the announcement of what Theranos described as Mr. Balwani's retirement, the company also said it had made three new additions to its board that it said would bring "a wealth of scientific, medical and executive leadership to the company."

The three new directors are Fabrizio Bonanni, a 14-year veteran of Amgen Inc., former Wells Fargo & Co. Chief Executive Richard M. Kovacevich, and William Foege, a former director of the Centers for Disease Control and Prevention.

Mr. Kovacevich and Dr. Foege used to be on Theranos's board until a previous board reshuffle last October, following The Wall Street Journal's front-page articles raising questions about Theranos's technology and operations. They spent the past six months on a board of counselors along with former Theranos board members George Shultz and Henry Kissinger.

During his tenure at Amgen, Dr. Bonanni served as senior vice president of quality and compliance and corporate compliance officer, Theranos said.

"Dr. Bonanni's leadership and guidance in operations, quality and compliance is exceptional, and we are fortunate to add his experience to our team both on the board and to work with us internally," Ms. Holmes said in a news release about the new appointments.

Mr. Balwani, Theranos's departing president, worked in the software industry before joining Theranos, holding jobs at Lotus and Microsoft. He also founded an e-commerce company that he sold at the height of the dotcom boom in the late 1990s.

Despite not having any medical or science background when he joined Theranos in 2009, he took charge of much of its research, according to former employees.

Some former Theranos employees said they questioned his hiring at the time because of his software background.

Ms. Buchanan told the Journal in December that Mr. Balwani had an "extensive and successful background in technology."

Mr. Balwani's duties at Theranos included overseeing the laboratory in Newark, Calif., where federal health inspectors found major deficiencies last fall. Some of those deficiencies were so serious that they posed "immediate jeopardy" to patient health and safety, CMS said.

The Journal reported in October that internal emails showed Theranos employees questioned the company's proficiency-testing practices. Proficiency tests are submitted to organizations that accredit labs to help ensure labs' accuracy. The employees questioned whether Theranos's protocols complied with federal regulations.

Mr. Balwani, the Journal reported, told them in an email, "I am extremely irritated and frustrated by folks with no legal background taking legal positions and interpretations on these matters." He wrote, "This must stop."

He then ordered the employees to only report to the accrediting organizations results from proficiency tests performed on conventional devices, and not the results of those tests obtained from the company's proprietary Edison machines, according to former employees.

Theranos general counsel Heather King told the Journal last year that Mr. Balwani's instructions were consistent with the company's "alternative assessment procedures," which it said it adopted because it believes its unique technology has no peer group and could be thrown off by the preservatives used in proficiency-testing samples.

When one employee separately brought to Ms. Holmes's attention frequent quality-control failures involving the Edison devices, Mr. Balwani responded in an email that the failures were due to the "newness of some of our processes, which we are improving every day," the Journal reported in December. "This is product development, this is how startups are built," he wrote.

Ms. Buchanan said in December that the employee was too inexperienced to "make these types of comments" and "struggled" to grasp Theranos's scientific processes.

CMS noted in an extensive inspection report made public last month that Edison devices often failed quality-control checks. For instance, the report showed that 29% of quality-control checks for tests run on Edison devices failed in October 2014.

Ms. Buchanan said last month the problems related to how Theranos used various testing machines, including its Edison devices, not "the fundamental integrity of the technologies themselves."

--Christopher Weaver contributed to this article.

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

 

(END) Dow Jones Newswires

May 12, 2016 02:48 ET (06:48 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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