Published on LinkedIn on Nov 17th
The diagnostics sector faces a paradox: we’re living through a precision medicine revolution, yet the tools that make precision medicine possible remain chronically underfunded.
In 2023-2024, diagnostics captured just $2.2 billion in global venture funding, while AI companies raised over $100 billion globally in 2024. Even within healthcare, nearly 30% of the $23 billion in US healthcare VC funding went to AI-focused startups, leaving diagnostics fighting for scraps.
Why does the market avoid a sector that underpins every major advance in modern medicine?
The Perfect Storm of Disincentives
For someone who works in diagnostics it is always a bit puzzling why capital avoids diagnostics. But superficially it makes sense. Development cycles stretch 7-10 years from concept to market, longer than most VC fund lifecycles. Drug development takes an average of 9.1 years through clinical phases, but pharma can command premium pricing. Unlike software that can pivot weekly or drugs that command blockbuster revenues, diagnostics occupy an uncomfortable middle ground: complex biology requiring extensive validation, but reimbursement models that treat them as commodities. So diagnostics end up looking as the ugly duckling in the health technologies investment scene.
Merck’s Keytruda generated $29.5 billion in 2024, Novo Nordisk’s Ozempic hit $17.5 billion, and J&J’s Darzalex reached $11.7 billion. A breakthrough AI model can scale to billions of users overnight. A transformative diagnostic test? Exact Sciences, one of the most successful diagnostic companies, generated $2.76 billion in 2024, impressive, but a fraction of a single blockbuster drug. Guardant Health, despite pioneering liquid biopsy, reached just $737 million in revenue.
The M&A story is equally disappointing. While Pfizer acquired Seagen for $43 billion and Bristol Myers Squibb bought Karuna Therapeutics for $14 billion, Roche’s acquisition of LumiraDx’s point-of-care diagnostics business fetched just $295 million(and this was one of the larger ones!). Total diagnostics M&A deal value plummeted 65% in 2023, from $53 billion to $18.5 billion.
Add regulatory complexity, the reference ones being CE marking under the stricter IVDR regulations, FDA clearance that can cost up to $440,000 per device submission, CLIA certification, combine that with reimbursement battles that can take years to resolve, and you have an innovation landscape where even successful diagnostic companies struggle to reach $3 billion in annual revenue, while single blockbuster drugs routinely exceed $10 billion.
Is the Market Missing Anything?
I believe it is.
The conventional wisdom on diagnostics economics is, in my opinion, outdated. The global IVD market, valued at $74 billion in 2024 and projected to reach $117.6 billion by 2032, masks a fundamental shift happening beneath the surface. Four fundamental shifts are creating the basis for a new investment thesis:
1. Precision Medicine Creates Captive Markets
Every targeted therapy approved creates demand for a companion diagnostic. As pharma shifts from blockbusters to precision treatments, they don’t just need diagnostics, they depend on them. We’re moving from diagnostics as optional add-ons to diagnostics as essential infrastructure. The companies that own this infrastructure will extract value from every precision drug that flows through the system.
2. Data Moats Are Real and Defensible
Unlike drugs that face biosimilar competition or AI models vulnerable to replication, validated clinical databases represent genuine competitive moats. A diagnostic company with 10,000 clinically validated samples in a specific disease isn’t just selling a test, they own the reference standard. These datasets become increasingly valuable as healthcare systems adopt AI and machine learning.
3. Regulatory Barriers Are Assets
Yes, regulatory pathways are complex. But in an era where anyone can train an AI model or launch a genetic test, regulatory approval is one of the few remaining barriers to competition, perhaps more so than IP protection. CE marking under IVDR, FDA breakthrough device designation, CLIA certification represent defensive moats that took years and millions to construct.
4. The Margins Are Misunderstood
The “low margin” narrative assumes diagnostics compete on price. The reality is that properly positioned precision diagnostics command premium reimbursement because they drive treatment decisions worth tens or hundreds of thousands in downstream therapy costs. A diagnostic that prevents unnecessary treatment or identifies patients who will respond to expensive immunotherapy isn’t a commodity, it’s essential clinical intelligence.
Do Diagnostics Make Bad Investments?
Not if you’re comparing them to the right benchmarks.
The problem isn’t that diagnostics generate poor returns. From my experience and from what I read, I believe the problem is that investors evaluate them using the wrong reference points. Diagnostics will never be consumer software unicorns. They’re unlikely to ever deliver the 100x multiples of a viral app or the overnight scale of an AI model. But they shouldn’t be judged by those standards.
Instead, compare diagnostics to what they actually are: infrastructure plays in a massive, stable, essential market. The right comp isn’t the latest SaaS darling. It’s the rails that essential transactions run on. Think Visa/Mastercard in payments, or Quest/LabCorp in broader clinical testing: regulated infrastructure with defensive moats that captures value from every transaction that flows through.
My Case for Risk-Adjusted Returns
Diagnostics don’t offer lower returns: they offer better risk-adjusted returns. Consider a simplified portfolio math. Drug development costs roughly 10x more than diagnostics (around $2.6 billion vs. $20-100 million from concept to market), with only 7.9% of drugs entering Phase 1 reaching approval. Deploy $100 million in pharma and you’re buying minority stakes in 5-10 candidates, betting that, at best, one 50-100x winner will compensate for nine failures. Deploy that same $100 million in diagnostics and you can build controlling positions in 3-5 companies or meaningful stakes in 10-15, with 60-70% reaching sustainable revenue because pivots, indication adjustments, and platform redeployment are possible. You don’t need one miracle: you need three solid performers to get the same return. So investment in diagnostics is not about accepting lower returns; it’s recognizing that the same capital deployed more efficiently with better hit rates produces superior portfolio outcomes (but that’s an argument for my next article on what investors can do differently). The advantages compound from there:”
Real exit multiples: When strategic acquirers buy diagnostics companies, they’re paying for future positioning in precision medicine, not current revenue. The multiples reflect the value of being essential to the therapeutic value chain.
Recession-resistant: People still get sick in downturns. Cancer doesn’t pause during recessions. Diagnostic testing volumes may shift, but they don’t collapse like discretionary consumer spending or advertising budgets.
Better than most medtech: Diagnostics span a spectrum from manufactured reagent kits to pure information USPs, but even manufactured IVDs have better unit economics than most medtech. The capital intensity of producing test kits is orders of magnitude lower than manufacturing implantable devices or equipments, and many successful diagnostic companies operate as lab-developed tests with no manufacturing footprint at all. The value is in the validated clinical algorithm and dataset, not the physical product.
The Arbitrage Is Real
I believe there’s a real opportunity in diagnostics: while everyone chases AI and therapeutics, a systematic funding gap has opened. This isn’t a problem: it’s a market inefficiency creating upside for those willing to look past the hype cycles. As precision medicine becomes standard of care, I’m convinced that the “picks and shovels” that enable it will command appropriate valuations. Smart capital is already moving, but the window won’t stay open forever.
What Can Entrepreneurs Do To Seize This Opportunity?
So how do entrepreneurs make diagnostics investable enough to capture that arbitrage? This is something that keeps me awake at night thinking about my own company, but also because I hear the same concern from Technology Transfer Offices in academia and early founders. I don’t pretend to have definitive answers; I’m simply another founder in the trenches, trying to work this out. But over the years I’ve come to believe that entrepreneurs need to rethink at least five things in how they build their companies:
1. Build for the Pharma Ecosystem, Not Against It
We need to stop positioning diagnostics as standalone products. The winning move is to design companion diagnostics from day one, embedded in therapeutic development programs. When a pharma company invests $2.6 billion developing a targeted therapy, they must have a diagnostic to identify responders. That’s not a nice-to-have, it’s a regulatory demand.
Smart diagnostic entrepreneurs are co-developing with pharma from Phase 1, not waiting to retrofit a test after drug approval. This flips the business model: instead of fighting for reimbursement as a standalone test, you become essential infrastructure that pharma needs to monetize its blockbuster. Your validation happens in their pivotal trials. Your regulatory pathway runs parallel to theirs. Your market access rides on their commercial launch.
A critical caveat: In theory, this same logic should apply to co-development with any intervention: surgical, radiotherapeutic, or otherwise. In practice, it doesn’t. We pursued exactly this strategy with HepatoPredict, positioning it as a decision-support tool for surgical interventions in liver disease. What I learned is that surgery is driven by individual surgeon interests and clinical judgment rather than the concerted company-driven development efforts you see with drugs. There’s no “Big Surgery” equivalent to Big Pharma with billions invested in specific procedural innovations that require companion diagnostics for market access. Surgeons adopt tools that make their individual practice better, but there’s no systematic pressure or regulatory requirement that creates the same captive market dynamic.
The pharmaceutical ecosystem works because drug companies have regulatory and commercial imperatives that make companion diagnostics non-negotiable. Until we see similar forces in other intervention modalities, and I’m not holding my breath, pharma co-development remains the clearest path to sustainable diagnostic business models.
2. Treat Data as the Product, Not the Byproduct
Every test generates data. Most diagnostic companies treat this as exhaust. The smart ones recognize it as their most defensible asset.
A validated clinical database with 10,000 samples in a specific disease context isn’t just evidence supporting your current test: it’s a moat that takes competitors years and millions to replicate. Guardant Health runs over 200,000 clinical tests annually, generating a dataset that’s essentially irreproducible at scale.
This data becomes exponentially more valuable as AI and machine learning permeate healthcare. The companies that own ground-truth clinical validation data will train the algorithms that power next-generation diagnostics. Licensing this data to pharma for clinical trial enrichment, to AI companies for model training, to payers for outcomes research. These secondary revenue streams can dwarf the original test revenue. (Europeans reading this are thinking that AI-act and GDPR are insurmountable problems; read point 3. below and use the same logic).
If you visit us at Ophiomics you will read on one of the whiteboards: “Data is the Product”. It’s been there for months as a reminder to all of us. But it is harder to live it than write it on the wall…
3. Turn Regulatory Complexity Into Competitive Advantage
Everyone (me!) complains about CE marking under IVDR, FDA clearance timelines, CLIA certification. We must embrace it.
Yes, navigating these pathways takes time and capital. That’s precisely why they’re valuable. In an era where anyone can train an AI model on public datasets or order oligos to launch a “me-too” genetic test, regulatory approval is one of the few remaining barriers to competition.
The strategy: go for breakthrough designation. Seek FDA expedited pathways or equivalent in other geographies (eg Innovative Medical Device in Saudi Arabia’s SFDA). Build regulatory strategy into product design from day one, not as an afterthought. The companies that crack regulatory science early build moats that capital-rich followers can’t simply buy their way through. They can only buy you!
4. Price for Value, Not Volume
The “low-margin commodity” trap comes from thinking it terms of cost-per-test metrics. The escape route is demonstrating health economic value.
A diagnostic that costs $1,000 but prevents a $150,000 unnecessary treatment course isn’t expensive, it’s a bargain for the payer funding that treatment. A test that identifies the 30% of patients who’ll actually respond to a $200,000 immunotherapy isn’t a barrier to access, it’s essential stewardship for the insurance company paying for the therapy.
So, build the health economics case into your clinical validation. Publish outcomes data. Demonstrate not just analytical validity but clinical utility and economic impact. Payers increasingly understand value-based pricing, but you have to make the case with data, not assertions.
The most successful diagnostic companies will not be fighting for commodity reimbursement. They’ll be documenting how their test changes clinical decisions, improves outcomes, and reduces total cost of care. That documentation on its own becomes an investable asset.
5. Think Platforms, Not Point Solutions
Single-analyte tests have limited defensibility and capped market size. Platforms that can address multiple clinical questions from a single sample type create expanding TAMs and network effects.
Exact Sciences started with colorectal cancer screening (Cologuard) but expanded into precision oncology, liver cancer detection, and now multi-cancer screening. Each new indication leverages the existing commercial infrastructure, clinical relationships, and technical capabilities.
The platform approach also creates strategic optionality. Instead of being a one-product company vulnerable to competitive displacement, you can become essential infrastructure that can pivot to address emerging clinical needs.
A Personal Note
Many of these strategic insights, along with the lessons learned from navigating these exact challenges, are explored in depth in my book, Precision Diagnostics: A Founder’s Journey (https://amzn.to/4iEwUjp). It’s a practitioner’s guide to building diagnostic companies that matter, written from the trenches of actually doing it.
What’s Next
In this article, I’ve focused on what I believe entrepreneurs can do to make diagnostics more investable. But the equation has two sides.
In my next piece, I’ll flip the lens: What should investors do better in the diagnostics space? The funding crisis in diagnostics isn’t just about entrepreneurs failing to build compelling companies. It’s also about investors applying the wrong frameworks, asking the wrong questions, and potentially missing opportunities.
The diagnostics sector doesn’t need more capital chasing the same metrics. It needs smarter capital that understands what actually creates value in precision medicine infrastructure. And there is opportunity there!
Stay tuned.