The Diagnostics Year in Review
Volume 11, Issue 17 | April 24, 2025
ALSO IN THIS ISSUE
Measles and Bird Flu Updates
2024 and early 2025 has been a time of transition for the diagnostics industry, marked by regulatory shifts, technological advances, and select investment rebounds. The near future promises an unusual number of hurdles and great uncertainties, particularly when it comes to reimbursement, the clinical utility and adoption of AI (or lack thereof), and regulation. However, we believe that the sector’s growth opportunities are promising: Diagnostics are playing an increasingly central role in clinical genomic medicine, healthcare at home, and AI-driven clinical decision-making.
Technology: We believe that sequencing will still play an outsized role moving forward, especially single-cell genomics, proteomics and spatialomics - and soon, immunomics. We remain cautious about multi-cancer early detection mortality benefits, but we expect to see many clinical single-cancer early detection tests, initially targeting high-risk individuals. Liquid biopsy adoption continues to grow quickly in oncology and is beginning to expand in neurology and autoimmune disease.
Therapeutic Areas: While oncology still dominates clinical and research complex testing, we expect that clinic-based diagnostics for neurodegenerative diseases and home-based diagnostics for sexually transmitted infections (STIs) to be growth segments.
Financial and Investment Landscape
Pricing and demand were resilient amidst challenges and uncertainty.
Variable performance in public markets: The MegaDx Index for 2024 showed aggregate stability for the diagnostics sector this year: Large-cap companies maintained value while mid-to-small caps were volatile. Like most sectors not in the “magnificent seven” tech stocks, it significantly lagged the S&P 500.
Investment climate: The value of venture capital (VC) and private equity (PE) investments in diagnostics surpassed pre-COVID levels but deal volume was still lower than it was during the pre-COVID era. VC and PE dollars are selectively flowing back into diagnostic companies in focused ways. The “best” companies are being funded, but many others are struggling to get financing. For most investors, the elimination of the FDA’s final rule on LDTs is good news, but the current uncertainty around federal grants is bad news. Most importantly, investors need to see exits - and right now, the IPO market is closed and acquisitions are few and far between. The industry is currently fueling innovation with more accurate and impactful tests and we hope will set the stage for a potential resurgence in M&A in 2026.
M&A shift: While mega-mergers (> $1B) were absent in 2023 and 2024, smaller acquisitions (< $1B) were solid, particularly in genomics, AI-driven diagnostics, and at-home testing.
Notable IPO drought: The virtual disappearance of IPOs reflects a history of IPO overvaluation and sector-wide market caution.
Regulatory & Reimbursement Developments
A glimpse of clarity has been replaced by increasing uncertainty.
FDA's Final Rule on Laboratory-Developed Tests (LDTs): The LDT rule was struck down in court, so none of the FDA’s new guidelines will go into effect. (We believe the decision is unlikely to be appealed.) LDTs will continue to go through the CLIA process for the foreseeable future.
European IVD transition postponed: The EU extended transition periods for legacy in vitro diagnostic (IVD) devices into 2027 - 2029, alleviating short-term compliance burdens.
Reimbursement complexity increases: Medicare and private payers continue downward pressure on per-test reimbursement, while proprietary laboratory analysis codes for genomic and specialty tests expand reimbursement rates.
"AI inside": Machine-learning and embedded AI systems now broadly used to improve diagnostic development and lab efficiency, but it is stretching the capabilities of traditional regulatory processes.
Technology and Dx Clinical Utility
Revolutionary new techniques, but traditionally slow adoption
Companion diagnostics (CDx) remain bedrock of precision-medicine growth: The more we learn, the more therapeutically diverse diseases become. That knowledge is driving further CDx approvals within oncology as well as in neurology, metabolic disorders, and autoimmune diseases. For the seventh time in eight years, more than one third of new drug approvals included biomarkers to guide drug usage in their label.
AI integration: AI has moved beyond radiology and electro-cardiology and is becoming embedded across the industry. It is now increasingly common in multimodal diagnostics and digital pathology as well as in lab operations. While it is improving efficiency, it is also facing challenges when it comes to broad physician adoption.
Liquid biopsy gains clinical utility: Liquid biopsy’s success in oncology has led to its use in more and more diseases, as its enormous capability comes to be recognized. The ability to find ever rarer pathogenic DNA, RNA, and proteins in a less-invasive blood sample is enabling simpler, cheaper, and broader uptake of diagnostics across the board. Minimal residual disease monitoring is now a validated surrogate endpoint for multiple myeloma trials, reinforcing liquid biopsy as a critical tool in oncology treatment.
Disease heterogeneity fuels AI multi-omics: For 20 years, molecular diagnostics focused on DNA variants. We now know that newer therapies require more than information about genomics and its methylation, because disease progression is also driven by RNA expression (transcriptomics), proteins (proteomics), and the structure and behavior of single cells within their tissue microenvironment (tumor spatialomics). Pathologists understand this, but have historically been slow to adopt the use of digital pathology for analysis. (We believe adoption will accelerate going forward.) Tailored multi-omics across all these technologies will fuel the future, beginning with oncology.
Home-testing breakthroughs: FDA approvals of the first over-the-counter flu tests (multiplexed with COVID) and home STI tests mark a major milestone in health-care-at-home expansion. 2024 saw the early signs of increased test adoption.
Expansion beyond traditional samples: New categories of less-invasive sample types (saliva, hair, breath, and sweat) are gaining traction, reducing patient burden and enabling decentralized testing models.
The Hurdles
Ongoing challenges get in the way of growth
AI clinical utility: Almost every new test now claims "AI inside,” but there is still considerable disagreement about exactly how clinical utility will be improved and be reflected in revenue outcomes.
AI governance dilemma: While AI-driven diagnostics promise to improve accuracy and efficiency, physician adoption remains slow beyond administrative tasks, and regulatory pathways for AI-generated clinical decisions remain undefined.
Reimbursement pressures: Payers are increasingly scrutinizing “high”-priced tests, turning AI-driven pre-authorization systems to reduce AI-inside reimbursement approvals.
Perception (and reality) challenges: Diagnostics are still misunderstood, underappreciated, and undervalued, impacting pricing, adoption, and M&A attractiveness.
Reasons for Optimism
The path forward
AI-driven diagnostics revolution: AI is essential to enable multimodal diagnostics, and clinical decision support, while AI workflow automation is reshaping how diagnostics deliver value.
Home and decentralized testing accelerates: Consumer demand and payer cost-containment efforts drive growth in OTC and point-of-care diagnostics.
Precision medicine expands beyond cancer: New CDx biomarkers and genomic tests for metabolic, neurological, and autoimmune diseases represent a significant market expansion.
Growth Areas: The only area of standard lab-based testing that has grown in the last five years is molecular and genetic testing (50% above 2019) and we expect that to continue. In addition, we expect to see digital pathology finally move to broad adoption (although full adoption will take another decade).
The future: A complex mix of forces will define whether and how the industry is able to grow in the next phase. The future will depend on how quickly stakeholders can capitalize on new testing technologies, fund operations pre-revenue, integrate into therapeutic development, and leverage AI’s growing clinical effectiveness. We hope that current testing companies (large and small) fuel innovation and set the stage for a resurgence in M&A and public market interest in the industry in 2026.
The ILV Diagnostics Year in Review for 2024 is available here.
Bird Flu Update: What Americans do and don’t know about H5N1
New infections slowing
In an American Journal of Public Health study published last week, about 64% of survey respondents were aware of H5N1, but only about 26% knew that humans could get the virus, and only 18% knew that it had been found in cattle. In addition, the authors reported, more than half of respondents didn’t know that pasteurized milk is safer than raw milk, and nearly a third “would be unwilling to modify their diet” to reduce the risk of getting exposed. About 28% would be reluctant to get vaccinated against the virus - even if the CDC recommended doing so. The survey was conducted last August and included 10K US residents, half of whom live in rural areas.
That said, as Your Local Epidemiologist (YLE) reported, new infections in both cattle and poultry have “slowed considerably.” Animals are still getting infected - most notably dairy cows in Idaho, which now has the second-largest number of affected herds in the country, after California - but not at the rate we were seeing this winter.
Measles Outbreaks: Americans falling for vaccine misinformation
Texas outbreak continues to grow
A KFF News poll published this week showed “at least half of the public are uncertain when it comes to false claims about measles.” In addition, “a quarter of adults (25%) and a third of parents (33%) say that it is ‘definitely’ or ‘probably’ true that there’s a proven link between the MMR vaccine and autism.” (Spoiler alert: Not true. Vaccines do not cause autism. Full stop.) On the bright side, 83% of adults and 78% of parents “say they are very or somewhat confident that the vaccines for measles, mumps, and rubella are safe.”
The current larger outbreaks are shown below. The cases in Texas, New Mexico, Kansas, and Oklahoma all came from the same source; the outbreaks in Indiana, Michigan, and Ohio are unrelated.
