The State of Medical Diagnostics, Venture Capital, and Beyond

Written By: Benjamin Pipicelli

The patient suffers from abdominal pain, along with symptoms in atypical locations, making diagnosis tricky. An astute examination reveals the cause: an unusual form of appendicitis. However, credit doesn’t go to the radiologist. Instead, an imagery machine built with artificial intelligence technology, which can draw on knowledge of tens of millions of similar scans, recognizes the anomaly and makes the diagnosis.

This scenario, once considered science fiction, is now a reality. To reduce costs and increase productivity, both medical equipment manufacturers and technology companies are investing significantly in AI. Several systems already exist, and the growth in this field, particularly in diagnostic imaging, is expected to accelerate in the coming years.

In a recent report, Deloitte discovered that although there are obstacles to overcome in the development and deployment of AI in medical technology (MedTech), such as regulatory and patient data privacy concerns, successful implementation of AI could enhance productivity, reduce treatment costs, and drive growth throughout the healthcare value chain1.

The biotech startup sector is projected to continue expanding and evolving in the forthcoming years. Key trends that will shape the industry include personalized medicine, bioprinting and tissue engineering, orphan drugs, drug discovery, and gene editing along with CRISPR diagnostics. Moreover, the combination of Generative AI with biotech offers additional opportunities for groundbreaking advancements in medicine. Generative AI is now utilized to create novel drugs and treatments that were previously unattainable.

All amounts are in $US unless otherwise stated.

Timeline & Methodology of MedTech Startups

When it comes to building a biotech startup, the company lifecycle rarely follows the typical framework that tech companies follow. While parallels may exist between tech and biotech companies, there are several key differences. First, biotech startups typically produce a drug (if not multiple drugs), which makes them subject to stringent testing conditions before the drug can be approved and marketed. This requires significant academic and scientific labor to identify drug compounds or platform technologies, and many more years to determine the drug’s safety and efficacy profiles.

Second, the capital required to develop a startup’s drug pipeline is magnitudes greater than what most tech startups spend. The marginal costs associated with developing new software and adding new lines of code pales in comparison to the incremental costs of lab equipment, staffing, and consumables. Third, without feedback from beta testers and initial customers, biotech companies struggle to quickly iterate on a drug product and pivoting a drug compound into a new trial is arduous due to the level of pre-clinical data required by regulators.

Fourth, the go-to-market strategy for biotech companies is bound by the US Food & Drug Administration (FDA) as companies require regulatory approval for their drug products. Fifth, revenue streams are dependent on reimbursement policies from private health insurance providers and government-based programs such as Medicare and Medicaid.

Lastly, first-mover advantage plays an outsized role for a drug’s TAM due to protection from patents and exclusivity periods and slow competition from copycats. Econometric analysis has shown that first-to-market drugs almost never lose their market dominance to minimally differentiated competitors during the patent timeline, and that subsequent drugs show a significant dependence on order of entry, promotional spending, and time delay from launch of the previous entrant when attempting to capture market share.

Regulatory bodies’ checkpoints, especially the FDA, serve as major binary events for biotech startups. Typically, once a drug compound has been identified and pre-clinical/ animal testing has shown early signs of efficacy, companies will file an Investigational New Drug (IND) application with the FDA. This application contains clinical trial protocols and, upon approval, allows the company to progress into human clinical trials and begin patient recruitment. As we detailed in a previous analyst note, average clinical trial costs can range from $4 million for a Phase 1 trial to $20 million for a Phase 3 trial.

If a drug meets its primary endpoints as it progresses through trials, companies will eventually submit a New Drug Application (NDA) or Biologics License Application (BLA) to the FDA. At this stage, the drug sponsor formally proposes that the FDA approve the drug for sale and marketing based on the clinical trial data.

Diagnostics Trends

Focus on Convenience, Adoption, and Access: The growing availability of virtual health services and connected devices is empowering a larger number of individuals to conveniently access health information, receive diagnoses, and seek care beyond the confines of traditional clinical settings. Retail clinics, pharmacies, and community-based sites are now providing diagnostic tests directly to consumers, while an increasing number of employers are offering on-site diagnostic testing options. To enhance convenience for patients, specific companies in the field of MedTech are introducing innovative diagnostic tests. An exemplar of this is Roche, which recently unveiled a self-sampling device for HPV screening, enabling patients to privately collect their own samples2. Furthermore, certain blood tests can now be performed outside of clinical facilities or even in the comfort of one’s own home. For instance, the utilization of Dried Blood Spot cards allows patients to collect small blood samples and send them for testing2.

Continuous Information and Monitoring: Continuous monitoring of an individual’s health status and the collection of real-world data in real-time have become achievable through technological advancements, such as wearables. The miniaturization of wearable devices has facilitated their widespread adoption. Notably, Philips has developed a wearable patch capable of detecting irregular heart rhythms, which can be instrumental in stroke prevention. These patches, in conjunction with cloud-based artificial intelligence, can compare a patient’s heart rhythms with a vast database of 20 million ECG recordings3. Enabling individuals to monitor their health conditions and conduct tests at home or outside traditional clinical settings has the potential to motivate consumers to take a proactive role in managing their well-being. However, concerns regarding the reliability of at-home tests and wearables have emerged, as these devices provide results without the supervision of a trained specialist. As the volume of patient data generated by medical devices increases, the healthcare industry will face the task of defining which information is clinically relevant.

Artificial Intelligence: AI-based approaches using models are playing a critical role in enhancing workflows, providing more accurate analyses and images, and offering valuable support to clinicians in their decision-making processes. Software solutions aimed at improving workflow efficiency and productivity are now categorized as AI solutions. Furthermore, AI is being harnessed to identify diagnostic errors and streamline data processing, ultimately leading to improved outcomes. The ongoing discourse surrounding the accuracy of human expertise versus AI will significantly shape the future of medical diagnoses and treatment decisions. This discussion will determine how AI is adopted and integrated into healthcare, as stakeholders carefully consider the strengths and limitations of human professionals and AI technologies. The objective is to leverage the benefits of AI while striking a balance that optimizes the quality and reliability of medical outcomes.

Investor and Industry Interest: In recent years, there has been a notable rise in the involvement of private equity firms and venture capitalists in the MedTech sector. This surge in interest stands in stark contrast to the relatively limited investments in digital health witnessed a decade ago. However, MedTech companies currently encounter challenges related to supply chain disruptions and a labor market that is experiencing a shortage of skilled workers. When it comes to venture capital funding, investments in in-vitro diagnostics have attracted the most substantial funding over the past decade. Furthermore, non-healthcare companies, such as those in the retail, consumer products, and high-tech manufacturing sectors, are disrupting the traditional MedTech landscape through significant investments and innovation.

Public/Private Collaborations and Solutions: The pandemic showed that the public and private sectors can move rapidly when the need arises. For example, the National Institutes of Health, the Centers for Disease Control & Prevention, the Food and Drug Administration, and other agencies were deeply involved in facilitating and accelerating research2. They helped to ensure funding, and regulatory flexibility as well as overseeing testing, vaccination, treatment, and recovery. While the response was not perfect, the speed with which issues were addressed is a strong example of public-private partnerships.

Industry Drivers

Technology Driving Diagnosis Innovation: Diagnostics are undergoing a transformation, with increasing portability and adaptability. New technologies, such as rapid chip-based testing, are emerging as replacements or supplements to reference lab testing, positioning themselves at the forefront of innovation. In addition to physical technologies, algorithms and AI are assuming greater roles in diagnostics, enabling algorithm-based innovations that aid in the diagnosis of a wide range of conditions. While some startups focused on lab-on-a-chip technologies are developing their own tests, the adoption of this technology has the potential to drive the overall diagnostic market by facilitating the introduction of new tests5. There is also a noticeable trend toward faster diagnostics with minimal compromises on accuracy, ultimately bringing the diagnostic process closer to the patient. However, traditional labs are expected to continue playing a role in the foreseeable future, given the early stage of development of many point-of-care technologies. Notably, lab companies themselves are expanding into the diagnostics space, as demonstrated by Quest’s recent acquisition of liquid biopsy manufacturer Haystack Oncology.

Increasing Demand for Sequencing and Genomic Health Solutions: The emergence of new sequencing technology, offering higher throughput, integrated analytics, and reduced costs, enables startups to rapidly expand their genomic research and diagnostic services. The combination of these advancements, including lower sequencing expenses and improved capabilities, yields substantial advantages for startups involved in genome-based testing downstream5. As the demand for genomic sequencing rises in tandem with precision medicine testing approaches, there will be an increasing requirement for sequencing equipment. Additionally, the growing genomic health market will encompass associated diagnostic services like genetic health counseling and software designed to optimize treatment selection. These factors contribute to the expansion of the genomic health sector.

Risks and Considerations

Drawbacks of More Early Cancer Screening: In liquid biopsy, while many analysts highlight the potential for early testing to catch cancers sooner and save lives, there has also been some discussion around the cost-benefit of a significant increase in early testing. Additionally, by the time liquid biopsies are ready for “prime time,” meaning with widespread payer coverage and as part of the standard of care, there could be new technologies that reduce the need for widespread early-stage cancer testing. As an example, Moderna is currently developing cancer vaccines that it hopes will be ready for market by the end of the decade.

Incumbent Competition: Diagnostics & life sciences markets face incumbent companies and established processes that can make it challenging for new entries to find a stable positioning. In genomic sequencing, Illumina is estimated to have an approximate 80% market share and is simultaneously developing new technologies meant to fend off competition5. Considering Illumina’s established installed base and long lead times for sequencing equipment turnover, startups in this space need strong financial backing support and investor patience to take meaningful share. Despite this, these markets are large and growing, and even a small single digit share in sequencing can lead to a large sales opportunity. Other processes in life sciences, such as blood collection and drug delivery, do not necessarily have dominant incumbents, but they have procedures that benefit from familiarity of providers and patients.

Accelerating Growth in MedTech

MedTech offers a compelling value proposition for investors. With high barriers to entry, sophisticated technology innovations, and substantial clinical and nonclinical unmet needs to address, the industry looks set for a future of profitable growth. Over the past 30 years, the industry has outpaced the S&P 500 index by almost 15 points, with stellar periods in the early 1990s, mid-2000s, and late 2010s7. Yet creating value has become more difficult in the past five years, especially for large, diversified companies. In fact, the top 30 cross-category companies have underperformed the S&P over one-, three-, and five-year periods.


This stalled value creation largely stems from investors’ apprehensions about the growth prospects of large companies. In MedTech, growth can create a valuation “flywheel”: a fast-growing top line compels investors to prioritize revenue over profit and cash flow, and that in turn allows companies to invest more in R&D, M&A, and market creation, fueling yet more growth in sales. As of January 1, 2022, companies projected to grow by more than 10% CAGR traded at a multiple of almost 11x revenue7. By contrast, those with projected growth rates below 10% traded at less than 4x revenue. Growth and growth expectations are driving MedTech valuations.

What’s Next?

The near term could represent a pivot point for the MedTech industry’s portfolio moves. Cash flows are returning to normal, and the top 30 large diversified MedTech’s now hold more than $300 billion in cash or cash equivalents7. If an interest-rate hike comes to pass, it could make borrowing more expensive, but in any event the median leverage ratio across the top 30 has fallen by more than 40% since 20196.

Notably, high-growth small and midcap stocks have become more affordable over the past 12 months7, following years of swelling valuation multiples. Most of these companies have maintained the attributes that make them attractive targets for larger acquirers: healthy growth prospects, well-stocked innovation pipelines, and portfolios ripe for acceleration through larger commercial engines. Their valuations, for the most part, have been compressed not as a result of poor performance but of macro forces, including speculation that rising interest rates will increase risk levels for unprofitable smaller companies.

Author’s Notes

I believe that the diagnostics segment, or MedTech at large, is a very exciting space. From a venture capital investor’s perspective, it can be hard to understand the nuances that each early-stage venture has without a strong background in medicine, biology, etc. However, anyone can acknowledge the shear potential and trajectory that the industry is heading towards. With VC investing creeping back to pre-COVID levels, it will be important to keep up in the space to stay updated on future investment pipelines. Competition will rise as the cost of acquiring venture debt gets lower, which I believe will happen in the next year or two, which will only increase the quality of each up-and-coming venture. Nonetheless, in my opinion, MedTech remains one of the top industries primed for disruption in the short-mid term which will be very exciting to see unfold before us.


Works Cited

  1. (2023, March). Europe Diagnostic Imaging Market Worth USD 13.5 bn by 2028. Market Data Forecast.
  2. Roche Diagnostics USA.
  3. Shudes, C., Shukla, M., Chang, C., Appleby, C., Hendricks, J., & Wurz, J. (2023, June 6). Digital Transformation. Deloitte Insights.
  4. Shaping the future of European Healthcare. Deloitte United Kingdom. (2020, September).
  5. Whole-genome sequencing (WGS). Illumina.
  6. Q1 2023 emerging tech indicator. (2023, April).
  7. Q1 2023 emerging tech indicator | Pitchbook. (2023, April).

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