The Importance of Transparency in Scientific Innovation

The health technology company Theranos once received enthusiastic media coverage for its promises of radical innovation in clinical laboratory testing and its eye-catching valuation of $9 billion. Now the company can’t seem to stop the unending stream of bad news. In addition to Theranos’ previous troubles (discussed here and here), the company is now under investigation by both the U.S. Securities and Exchange Commission and the U.S. Attorney’s Office for the Northern District of California. Recently, Sunny Balwani, the company’s president and chief operating officer, departed Theranos.

Many of Theranos’ problems ultimately reflect systemic issues within medical technology innovation. Multiple articles have begun to discuss Theranos as a cautionary tale for innovators and investors. With the advantages of hindsight, a clear theme emerges from the morass Theranos finds itself in: the company’s lack of transparency about its science is at the root of many of its problems. Theranos’ refusal to allow scrutiny about its science and claims prevented effective oversight and earlier checks on the company’s grandiose claims. This negatively impacted the company’s relationships with regulators, its own board, and its business partners, and has dramatically undermined the company’s claims.

Theranos has long been criticized for failing to publish data associated with its tests, including accusations that the company actively concealed unfavorable data and sought to intimidate critics into silence. Some have argued that the company’s intense secrecy is in direct conflict with the type of scientific advancement Theranos claims to promote. The company has still not revealed its data, although it says it will do so in August – nearly 10 months after it promised to do so.

Theranos has defended its secretive actions and general unwillingness to provide data as necessary to protect its trade secrets and prevent competitors from undermining its goal of disrupting the medical laboratory tests market. But a number of commentators have highlighted the role Theranos’ secrecy played in its rapid fall from grace, arguing that the company’s insular culture significantly contributed to its problems and prevented earlier course corrections that might have saved Theranos from reaching such a grim point.

There are a number of clear connections that can be drawn between the lack of transparency and Theranos’ problems. The SEC investigation specifically relates to whether Theranos made accurate disclosures to its investors. The criminal investigation Theranos is facing is examining whether the company misled partners or government officials with its statements. Similarly, the harsh sanctions Theranos faces from CMS are directly linked to the company’s failure to provide regulators with sufficient information to support Theranos’ claims that its processes are now in compliance with scientific and regulatory standards.

The levels of secrecy and opacity seem to have impacted even the company’s own board and leadership. Theranos has responded to previous criticisms of its board’s lack of health-care expertise by creating a medical advisory board. With Sunny Balwani’s departure, the company is reorganizing again, adding three new members of the board to bolster its scientific and medical expertise, appointing a new chief medical officer, a new head of research, and a new COO. The company is also creating separate divisions within the company, with one stated goal being to allow greater oversight within the company. But questions remain about whether the board has the requisite knowledge or power to provide effective oversight.

There are also questions about whether Theranos’ investors knew enough information to adequately assess the claims the company made. The investigation of Theranos for fraud is notably unusual – one commentator said it was “the first time [he] could think of it ever happening” to a venture capital-backed company, because such companies typically provide sufficient information to their investors to allow due diligence. One of Theranos’ investors is Walgreens, also Theranos’ first retail partner. Reports suggest that Walgreens may not have completed thorough due diligence when evaluating Theranos as a potential partner and investment opportunity, allowing Theranos to remain secretive about many of the details of its technology. Walgreens has taken steps to try to extract itself from its contract with Theranos since regulators began to flag problems – and some commentators have suggested Walgreens may be able to allege Theranos materially misrepresented information about its technology when signing the contract.

Even after a lack of transparency has clearly harmed the company, Theranos continues to try to control information and simply deny the many accusations made against the company. This isn’t working – it’s losing the company money, ruining its business relationships, and undermining confidence in the company and its technology. Although secrecy may work for some industries, for a business built on innovative science, transparency is crucial.

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