Theranos, the $9 billion biotechnology startup that officially dissolved last year after allegations of fraud, is a warning for investors in life sciences. Namely, a lack of transparency within portfolio companies creates the possibility of another multibillion dollar implosion, according to researchers from the Meta-Research Innovation Center at Stanford.
In the startup space, many emerging companies enter a stealth mode when it comes to their research. In the case of Theranos, a medical diagnosis company founded by Stanford dropout Elizabeth Holmes, no peer-reviewed papers were ever published, though the company made claims its technology would change and disrupt medicine. The company raised more than $700 million based on those claims.
However, unlike the technology sector, peer-reviewed publications are essential to the healthcare space, according to study author Ioana A. Cristea, PhD, et al. The researchers’ study was published in the European Journal of Clinical Investigation.
While Theranos has been accused of fraud, and its founder Holmes is facing potential jail time, a lack of transparency is a bigger problem, the authors argued. As of December 2017, there were 222 unicorns––or startup companies with valuations above $1 billion––with an aggregate value of $775 billion, according to researchers.
“Healthcare startups are a major force in biomedical innovation, positioned to make revolutionary discoveries,” Cristea et al. wrote. “They are considered a more adaptable and dynamic alternative to the conservative, risk-averse business model of incumbent pharmaceutical and other health-related companies. … We worry that stealth research may reflect a more systemic state of affairs among unicorns.”
Researchers examined 18 current and 29 exited unicorns, focused in digital health, AI, personal genomics or messenger RNA therapeutics, and other areas, to review how many published papers were highly-cited. They found that more than half of the current unicorns and almost 40 percent of the exited unicorns had highly-cited papers.
Three current unicorns––Outcome Health, GuaHao and Oscar Health––had no published papers. Two––Clover Health and Zocdoc––had published just one.
Overall, researchers found no association between company valuation and the number of published or highly-cited papers. In some cases, those with the highest valuations and few or no highly-cited papers faced challenges, including FDA denial or delay for their products, fabricated preclinical trial data and accusations of misleading investors. Further darkening the waters, rejection letters from the FDA are confidential.
The lack of papers also extended to companies with less funding. In other words, a company’s valuation was unrelated to its publication record, according to the study.
“Most startups apparently do not publish much,” Cristea et al. wrote.
Another challenge to investors is the presence of influential scientists who may be founders or leaders at startups. Their involvement could offer “indirect reassurance” of the company’s valuation, despite a lack of transparency and peer-reviewed publications.
Some of the issues related to Theranos––specifically, that its proprietary blood-sampling technology did not work––could have been uncovered if its technology was used in studies with other researchers.
With healthcare startups being heralded as the “key purveyors” of innovation and disruption in the medical world, it is essential to uphold them to a minimal standard of evaluation from the scientific community, the study concluded.