Opinion
A rendering of red blood cells

Three Questions: Dr. Greg Licholai on Biotech After Theranos

On June 15, Elizabeth Holmes, founder of the blood-testing startup Theranos, and her former chief operating officer, Ramesh “Sunny” Balwani, were indicted by a federal grand jury on charges of misleading and defrauding investors, patients, and doctors. We asked Dr. Greg Licholai, a lecturer at Yale SOM and co-director of the Yale Center for Digital Health as well as chief medical information officer at PRA Health Sciences, what other healthcare startups can learn from the Theranos debacle.


Many biotech companies have to maintain a level of secrecy to stay ahead of the competition. How can companies whose mechanics will directly affect human health balance disclosure of necessary information and competitive advantage?

Researchers who work in industry actually consider themselves part of the same community as scientists in medicine and academia. Ultimately, medical and scientific experts are public stakeholders who help judge if new biomedical technologies are effective, safe, and worthy of use. 

Almost every biotech company leader will strategically use publications in scientific journals and presentations at research conferences to gain traction for their work. Frequently, investors will reach out to independent experts to check the validity of company claims based on public disclosures. There are well-established publication standards that allow research to be presented without needing to disclose intellectual property or trade secrets.

The fact that Theranos was so secretive should have raised red flags early to its investors, who should have become suspicious enough to perform their own detailed, confidential diligence.

One of the charges in the indictment is that Holmes and Balwani performed too few tests before launching. Is there a gold standard in testing for biotech companies—and if not, how can startups avoid launching too soon?

This field is regulated to ensure consumer safety and patient protection. The Centers for Disease Control established a set of rules called Clinical Laboratory Improvement Amendments, and companies are subject to inspection by the Centers for Medicare & Medicaid Services, who issue certifications. 

The fraud committed by Theranos was so broad that it extended to regulatory inspections. For example, the company purchased standard blood-testing equipment and hacked into commercial machines. Investors or inspectors would be toured through laboratories where their own blood samples might be taken. Then the samples were rushed to secret rooms accessible only by fingerprint scanners, where tests were performed on the hacked commercial machines.

According to the indictment, Holmes and Balwani used their appearances in the press and the company’s own marketing, as well as financial statements, to mislead investors. What steps can investors take to ensure that management doesn’t overhype their product while still getting consumers, business partners, and media excited about it? 

The Theranos fraud was so extensive and systemic that it managed to fool those who should have been looking closer. In this case, Elizabeth Holmes used personal relationships and family connections with powerful men—there were no women on Theranos’s board—who had good reputations in Silicon Valley and government to convince them that she was a wunderkind who created breakthrough technology where others had failed. She styled herself as a tech prodigy and famously took on the appearance and persona of the second coming of Steve Jobs. 

Back in 2002, Rakesh Khurana wrote about the curse of the superstar CEO. Since then, many more articles have been written about the dangers of overdependence on charismatic leaders who may seem attractive, but who can drive companies into ruin while amassing personal fame and fortune. 

So what can we do? First, investors should maintain a “trust but verify” attitude toward companies. We want to enable innovation by providing appropriate resources to creative people—but simultaneously scrutinize their claims, especially when it comes to technology that affects patient safety. Second, companies should foster open cultures and allow for feedback and safe environments for whistleblowers when necessary. Third, industry must continue to embrace transparency and recognize that in the long run, those companies that listen to their constituents achieve sustainable success. 

Lecturer, Yale School of Management; Co-director, Yale Center for Digital Health; Chief Medical Information Officer, PRA Health Sciences