Troubled microbiome startup uBiome to lay off some employees, refund payments from federal insurers

SAN FRANCISCO — Layoffs are coming at uBiome, a microbiome-testing startup under widespread scrutiny for allegedly engaging in improper billing practices, according to an internal email sent Thursday by the company’s interim CEO. The email did not specify how many employees would be laid off, nor when the cuts would happen.

The company is also refunding payments for its tests that it received from federal insurers, according to the email, which was obtained by STAT.

The email from interim CEO John Rakow, who had been uBiome’s general counsel before taking over a month ago, did not specify which federal insurers the company is refunding payments to. (uBiome did not immediately return emailed questions from STAT sent late Thursday night.) In his email to employees, Rakow pointed to those refunds as “one of our most immediate priorities in connection with our cooperation with the federal government investigations.”

Rakow’s email also suggested the company was scrambling to bring order to a startup riddled with dysfunction. He pointed to “many unknown expenses and liabilities that we’ve only recently discovered.” He also wrote that he and his team have “learned of many expenses that would not have been approved at a company with stronger core values, such as unnecessary travel and entertainment expenses.”

Rakow detailed “real financial challenges” facing the company, as it spends big on crisis management with “very limited revenue.” In connection with the government probes, the company has hired “a number of outside lawyers,” Rakow wrote. The company has also hired the New York financial advisory firm Goldin Associates to help with financial planning and analysis, Rakow wrote.

In spite of the challenges, Rakow tried to assure employees in his email, saying “at the moment we are okay. We have available funding. We are making payroll and working on paying our vendors and consultants.”

When Rakow took over the company at the beginning of May, he replaced co-founders Jessica Richman and Zac Apte, who had been serving as co-CEOs. Richman and Apte were placed on administrative leave, while the company’s board started its own investigation.

UBiome had been a leader in a burgeoning testing industry building off the emerging science of the microbiome. It sells an $89 consumer test as well as — until a few weeks ago — several tests that had to be ordered by a physician, including SmartGut and SmartJane. Customers swabbed their own poop or vagina and mailed in the sample, so that uBiome could sequence the different types of microbes in the sample to try to offer insights about their health.

The first signs that all was not well at the company emerged this past January, when CNBC reported that the company had recently laid off more than 50 of its 300 employees.

Then more of the company’s troubles burst into public view in late April, when special agents from the FBI searched uBiome’s San Francisco offices as part of an investigation into the company’s billing practices. The Wall Street Journal reported that the California Department of Insurance was also looking into uBiome’s billing practices, as were several private insurers that had covered uBiome’s physician-ordered tests.

A few days later came the leadership shakeup. Rakow wrote to investors that beyond the FBI, the U.S. Attorney’s Office for the Northern District of California and several other governmental agencies at the federal level and in California were involved in the office raid, Business Insider reported.

The startup also notified customers that it would be temporarily suspending clinical operations for its physician-ordered tests; that included canceling pending orders and refunding customers’ out-of-pocket costs for those canceled orders.

Meanwhile, several board members left the company, Business Insider reported.  

To add to the messiness, Business Insider reported that Richman had lied to journalists about her age in an apparent effort to get on several 30-under-30-style lists of up-and-coming founders. Business Insider also reported that Richman and Apte had been in a romantic relationship while running the company. Several people familiar with the matter also confirmed the relationship to STAT.