E XECUTIVE I NS I GHTS

Diagnostics and Research Tools: Outlook

and Industry Trends in 2023
For the diagnostics and research tools industry, 2022 was a year of peaks and valleys. We
witnessed a marketwide retreat from the all-time-high valuations seen in 2021, and a general
resetting of expectations for the industry, as the wave of activity fueled by the COVID-19
pandemic subsided.

At the same time, fundamental megatrends and market drivers remained as strong as ever,
with impressive clinical data reenforcing the promise of personalized medicines and advanced
therapies. In this Executive Insights, L.E.K. Consulting reflects on key evolving trends that are
likely to continue having significant impact throughout the industry this year:

• A challenging financial backdrop driving renewed focus on profitability

• Accelerating demand driven by continued growth in precision medicine and biotherapeutics
• The ongoing evolution of applications that leverage high-resolution advanced tools
• Intensifying competition in the battle for $100 whole genome sequencing

A challenging financial backdrop is driving renewed focus on profitability

Driven by the challenging macroeconomic environment, companies are focusing on controlling

cash burn and driving toward profitability.

Financial markets are creating near-term headwinds for the sector. Public market sentiment
toward the sector has shifted as companies largely failed to meet the unrealistic expectations
set by outsized performance during the COVID-19 pandemic.

1
E XECUTIVE I NS I GHTS Diagnostics and Research Tools: Outlook and Industry Trends in 2023

The all-time-high valuations seen in 2021 continued to correct significantly throughout 2022;
for example, GenomeWeb’s index measurement of the top 40 tools and diagnostics companies
declined by an average of roughly 35% in 2022 (compared with an approximately 18% loss
for the S&P 500 and a roughly 9% decline in the Dow Jones Industrial Average), with half of
tracked companies losing more than 50% of their market value (see Figure 1).1

Private financing also saw a significant decrease in 2022, with total dollars invested in research
tools and diagnostics down from $14.7 billion in 2021 to $9.9 billion in 2022 (an approximately
35% year-over-year decrease).2 However, seed/series A total investment dollars increased
about 35% year over year, reaching $1.6 billion, indicating that investors may be focusing on
early-stage opportunities while they wait for macro conditions to improve.
Figure 1
GenomeWeb Top 40 index versus diagnostics and research tools investment trend
GenomeWeb index value

As a result of these trends, companies have shifted from a growth-at-all-costs approach

toward controlling opex and are striving for profitability. In recent years, when profitability
was not a major focus, emerging companies focused on scaling topline revenues and could
preserve their cash runway — with ample access to fundraising on the promise of disruptive
technologies.

Now, financing is more challenging and expensive, market sentiment has shifted, and investors
want proof that a business can scale toward sustainable operations. As a result, leading

2 L.E.K. Consulting
E XECUTIVE I NS I GHTS Diagnostics and Research Tools: Outlook and Industry Trends in 2023

players are touting significant strides toward profitability and have repeatedly touted
profitability and expected timing as key goals to investors in quarterly earnings calls.

One example is Exact Sciences, which has advanced its timeline to profitability and
now expects to reach this milestone by the end of 2023. 3 For players further away from
profitability, however, restructuring and layoffs have increasingly been used as tools to trim
opex and maximize their cash runway, given reduced access to financing. This shift has resulted
in a broad set of companies across the diagnostics and research tools space (e.g., Adaptive
Biotech, Personalis, Sema4, NanoString, TwinStrand, Illumina, Invitae, 10X Genomics and many
others) reducing their workforce.

While the development of disruptive research tools and diagnostic technologies will continue,
the financing trajectory and growth rate of small, early-stage private companies may
differ significantly compared with the past five years because of these near-term economic
headwinds.

Accelerating demand driven by continued growth in precision medicine and

biotherapeutics

The success of molecular testing and corresponding maturation of precision oncology is

beginning to drive precision medicine into new therapeutic areas. Molecular diagnostics
(e.g., clinical next-generation sequencing (NGS)) have dramatically changed how oncology
patients are managed. Molecular testing itself has also evolved from single tests looking at
small panels of mutations to inform therapy selection for late-stage patients to a series of
longitudinal diagnostics that inform management from presymptomatic (screening) through
to initial diagnosis (prognosis and risk assessment), the adjuvant setting (testing for minimal
residual disease), and monitoring for recurrence.

In parallel, molecularly defined patient subgroups have unlocked pan-cancer approvals (e.g.,
Viktravi for patients with NTRK mutations, regardless of tissue of origin) and challenged
tumor site-specific treatment paradigms. With the growing evidence of the value of precision
medicine in terms of total cost of care and patient outcomes, precision medicine principles are
being applied in disease areas beyond oncology, including epilepsy, rheumatoid arthritis and
depression, and will require entirely new molecular tests and predictive signatures to inform
optimal patient management in these large, chronic indications.

Approvals of novel, disease-modifying therapies underscore the need for advanced

diagnostics to effectively manage chronic diseases of large populations

The recent approvals of Biogen’s Aduhelm4 (aducanumab) and Eisai/Biogen’s Leqembi5

(lecanemab-irmb) gave patients the first potential therapies that may treat the root cause of

3 L.E.K. Consulting
E XECUTIVE I NS I GHTS Diagnostics and Research Tools: Outlook and Industry Trends in 2023

neurodegeneration observed in Alzheimer’s patients. However, these approvals also

underscored the significant need for better tools to identify patients early and stratify
subpopulations,6 both to identify patients most likely to respond to therapy and to identify
those who may be at elevated risk of severe adverse events (e.g., amyloid-related imaging
abnormalities.7

Continued acceleration of advanced modalities (cell, gene and nucleic acid therapies)
will require novel bioproduction equipment and analytical tools

Advanced biologic therapies reached several milestones in 2022, with the first wave of CAR-T
cell therapies gaining approval for second-line use in hematologic indications, approval of
two new gene-modified cell therapies from bluebird bio, the approval of a new viral vector
gene therapy (Hemgenix for hemophilia B) from uniQure, and compelling data from the RNA
therapeutics pipeline (e.g., Moderna and Merck personalized cancer vaccine met the primary
phase 2b efficacy endpoint).8,9

Advanced therapies are beginning to expand beyond the orphan and oncology indications
(e.g., near-curative effect of autologous cell therapies in lupus),10 and 2023 could see around 15
additional advanced therapeutic Food and Drug Administration (FDA) approvals (see Figure
2). To support development and commercialization of advanced therapies in larger patient
populations, advances in tools and bioprocessing will need to significantly bend the cost curve
of these complex and expensive-to-manufacture drugs.
Figure 2
Figure 2
Timeline of advanced therapy medicine launches in the US
Timeline of advanced therapy medicine launches in the US
2016-17 2018-19 2020-21 2022 2023E

• Afami-cel (afamitresgene autoleucel),

Adaptimmune
Cell • Zevor-cel (zevorcabtagene autoleucel),CARsgen

therapy • Exa-cel (exagamglogene autotemcel), Vertex

• Lifileucel, Iovance Bio
• NiCord (omidubicel), Gamida Cell
• Tab-cel (tabelecleucel), Atara Bio

Gene • Fidanacogene elaparvovec, Pfizer

therapy • Adstiladrin (nadofaragene • LentiGlobin (lovotibeglogene autotemcel),
firadenovec-vncg), Ferring bluebird bio
• SRP-9001 (delandistrogene moxeparvovec),
Sarepta

• Cemdisiran, Regeneron/Alnylam

Nucleic • Eplontersen, Ionis/AstraZeneca

acid • Zimura (avacincaptad pegol), Iveric

therapy*

*mRNA vaccines are excluded; launch dates are based on Food and Drug Administration (FDA) approval dates or expected FDA approval dates
Source: FDA; Evaluate Pharma; ARM State of the Industry Briefing 2023

4 L.E.K. Consulting
E XECUTIVE I NS I GHTS Diagnostics and Research Tools: Outlook and Industry Trends in 2023

Similarly, novel tools will be required to define and measure critical quality attributes of
advanced biotherapeutics for quality control and release testing. Looking ahead, industry
fundamentals are likely to continue to be as strong as ever, with accelerating demand driven
by key megatrends in healthcare.

The ongoing evolution of novel applications leveraging high-resolution advanced tools

Rapid development and innovation in tools capabilities will continue to drive novel application
development in the R&D, bioprocess testing and clinical diagnostic lab settings.

Tools innovators will continue to move beyond singleomic technologies toward

multiomic approaches to better understand complex biology

This trend manifests in both the platform tools and the applications development side of
the market. Research tools companies will continue to build flexibility and capabilities for
multiomic integration on existing platforms. For example, 10X Genomics’ Chromium platform
was first adopted as a differentiated cell partitioning solution for single-cell RNA-seq analysis.
Now, 10X Genomics has expanded the platform’s capabilities to include adjacent workflow
steps (e.g., library construction) as well as other “-omics analyses” (immune profiling, ATAC-
seq, etc.).11

Similarly, diagnostics players are increasingly exploring multiomic approaches for developing
more sensitive/specific tests. This is especially true in the multicancer early detection space,
where players like Thrive (now part of Exact Sciences) and Freenome are pioneering tests
that combine genomics, transcriptomics, proteomics and other biomarkers (e.g., methylation,
fragmentomics) in conjunction with machine learning platforms to detect novel cancer
signatures in blood.

Spatial biology continues to bridge the gap between biomarkers and biological context
and is beginning to demonstrate its potential in clinical applications

Historically, the spatial biology space has been segmented by transcriptomics-focused players
(e.g., 10X Genomics and NanoString) and proteomics-focused players (e.g., Akoya, Standard
BioTools). Now, both 10X Genomics and NanoString are launching “in situ” spatial imaging
platforms (Xenium and CosMx SMI, respectively), with plans to combine both transcriptomics

5 L.E.K. Consulting
E XECUTIVE I NS I GHTS Diagnostics and Research Tools: Outlook and Industry Trends in 2023

and proteomics capabilities while promising improved resolution, higher throughput and
greater plex for proteomics.

These platforms are being used to compare gene and protein expression with the added
dimension of spatial resolution throughout a tissue sample, an approach with potential for
generating actionable clinical signatures and representative of the broader trend toward
higher-resolution outputs for analytical tools (see Figure 3). The leaders in spatial biology are
actively pursuing development of clinical applications, with NanoString included in more than
100 sessions and presentations at the American Association for Cancer Research annual
meeting in 2022, and Akoya announcing a partnership for developing a companion diagnostic
(CDx) for Acrivon Therapeutics’ candidate ACR-368.12

Figure 3
Figure 3
Map
Map ofof advanced
advanced tools tools landscape
landscape

Molecular assays Cellular assays

Higher Spatial profiling

Increasing focus for advanced tools

resolution
Light microscopy
with tissue
High-content imaging
context

Higher Single-cell sequencing CyTOF

resolution Single-cell metabolomics Flow cytometry
without tissue
Single-cell proteomics
context

Bulk NGS Whole-tissue western blot

Lower Microarray ELISA
resolution PCR IHC
Mass spectrometry

Note: ELISA=enzyme-linked immunoassay; IHC=immunohistochemistry; PCR=polymerase chain reaction; NGS=next generation-sequencing;

CyTOF=cytometry by time of flight
Source: L.E.K. research and analysis

Going forward, multiomics technologies will increasingly seek to tie analytical findings
to in vivo phenotype and, ultimately, biological function

The underlying need driving development of the -omics and spatial biology fields is a better
understanding of biologic function, with the -omics analyses serving as surrogates for direct
measurement of function/phenotype. Toward that end, analysis of live biological systems
will become increasingly important, particularly as the FDA and other regulators begin to
emphasize moving away from animal models for preclinical development.13 As such, it’s likely
that custom cell-based disease models and 3D organoid model systems will be increasingly

6 L.E.K. Consulting
E XECUTIVE I NS I GHTS Diagnostics and Research Tools: Outlook and Industry Trends in 2023

important for biopharma R&D, with the market requiring better tools to create, monitor
and analyze live biological systems. Further evidence for this trend can be seen in the recent
combination of two players with significant capabilities in live cell -omics and functional cell
characterization, with Berkeley Light’s acquisition of IsoPlexis to form PhenomeX.

Going forward, we anticipate continued development of -omic technologies and acceleration

of their uptake in biopharma R&D and clinical testing applications. However, these
technologies generate large, complex, high-dimensional data sets, so the future winning
players are likely to be those that can successfully reduce friction for data management
and bioinformatics analysis and generate near “push button” solutions for higher-volume
applications.

Intensifying competition in the battle for $100 whole genome sequencing

A new wave of competitors will attempt to erode Illumina’s market-leading position in the core
NGS workflow and further democratize NGS with lower-cost sequencing.

An emerging set of in-class (short-read sequencing) competition will attempt to push the
boundaries of low-cost sequencing, as market leader Illumina faces potential patent cliffs for
its core short-read sequencing by synthesis technology, whereby the genome is sectioned into
small (50-300 base) fragments before massively multiplexed parallel sequencing is conducted
by detection of light emitted from incorporation of a labeled base into a growing DNA
strand.14 Ultima Genomics launched from stealth in May 2022 with a flurry of headlines, on
the strength of $600 million in funding and a widely touted claim to be “on the way to a $100
whole genome sequence.”

Another potential competitor, Element Biosciences, launched its AVITI system in 2022 and
emphasized its potential to democratize access to genomics with a low-cost, easy-to-use
sequencing platform.15 Most recently, Complete Genomics (a subsidiary of Chinese NGS player
MGI Tech) announced DNBSeq-T20x2, an ultra-high throughput platform promising <$100
human genomes.16 Illumina has not remained stagnant, however, and in 2022 unveiled its new
sequencing chemistry while highlighting its near-term goal of achieving a $200 whole genome
sequence.

7 L.E.K. Consulting
E XECUTIVE I NS I GHTS Diagnostics and Research Tools: Outlook and Industry Trends in 2023

A key question remains: “What novel applications will lower-cost sequencing unlock?”
Historically, the cost of sequencing has been inversely proportional to the level of application
development and valuation of genomics players (see Figure 4).

Figure 4
Figure 4
DNA sequencing cost per gigabase
DNA sequencing cost per gigabase (Gb)
(Gb) over over time
time

Cost of DNA sequencing (2001-2023E) Illumina market cap (2001-2020)

10,000,000 60
Cost/Gb 54.0
1,000,000 Illumina market cap 50
USD per Gb DNA

1,00,000
40

Billions of USD
10,000

1,000 28.1 30

100
20
10
7.9 10 $100 whole
1 genome
0.4 0.6 sequencing costs
0.1 0 ~$1 per Gb
2001 2005 2010 2015 2020 2023E

Note: Market capitalization value shown for last date of respective year
Source: National Institutes of Health (NIH) National Human Genome Research Institute (Wetterstrand KA. “DNA Sequencing Costs:
Data from the NHGRI Genome Sequencing Program (GSP)”); S&P Capital IQ

Alternative approaches (e.g., long-read sequencing) may be starting to catch up on

cost and accuracy

Long-read sequencing uses larger fragments of DNA to map genomes and benefits from
fewer gaps in genome assemblies. Historically, long-read competitors have thrived in the area
of de novo sequencing of complex genomes but have struggled to match short-read methods’
costs and accuracy, which has tended to limit development of applied use cases for long-read
technology (e.g., clinical diagnostics). However, PacBio recently unveiled its new Revio long-
read sequencer, which utilizes “HiFi reads” capable of matching the accuracy of short-read
methods.17 PacBio anticipates a whole genome sequence could be generated at 30X coverage
for approximately $1,000. Oxford Nanopore, leveraging nanopore sequencing technology, has
experienced strong growth (approximately 50% year-over-year revenue increase during 2022),
and researchers indicate that their direct measurement of nucleic acids may improve the
fidelity of RNA sequencing (i.e., the method obviates the RNA synthesis workflow step) and
may enable measurement of epigenic changes beyond today’s commonly assessed cytosine
methylation.18

8 L.E.K. Consulting
E XECUTIVE I NS I GHTS Diagnostics and Research Tools: Outlook and Industry Trends in 2023

In the future, the increase in competition may directly impact the economics of sequencing
and potentially further democratize access to NGS technology — as well as drive more
extensive use in clinical (e.g., genomics for universal newborn screening) and other applied
markets (e.g., agricultural biotechnology).

Conclusion

Despite the near-term economic challenges, the core investment thesis for diagnostics and
research tools remains as strong as ever. Development of advanced tools will continue, driven
by needs underpinning megatrends in healthcare, such as precision medicine and advanced
therapeutic modalities. Moving forward, we may see continued consolidation as many players
still have significant cash reserves on the balance sheet to effect strategic M&A.

For more information, contact healthcare@lekinsights.com.

Endnotes
GenomeWeb.com, “Losses Deep and Widespread as GenomeWeb Top 40 Drops 34 Percent in 2022.” https://www.genomeweb.com/molecular-
1

diagnostics/losses-deep-and-widespread-genomeweb-top-40-drops-34-percent-2022#.ZGUlh3bMKUl

2
Ibid.

3
Exact Sciences, “Making earlier cancer detection a routine part of medical care.” https://s22.q4cdn.com/877809405/files/doc_
downloads/2023/01/JPM-2023-website-version.pdf#page=23

4
FDA.gov, “FDA Grants Accelerated Approval for Alzheimer’s Drug.” https://www.fda.gov/news-events/press-announcements/fda-grants-
accelerated-approval-alzheimers-drug

5
Ibid.

Nature.com, “Designing the next-generation clinical care pathway for Alzheimer’s disease.” https://www.nature.com/articles/s43587-022-
6

00269-x

7
Evaluate.com, “A new market beckons for Alzheimer’s blood tests.” https://www.evaluate.com/vantage/articles/analysis/spotlight/new-
market-beckons-alzheimers-blood-tests

8
Alliancerm.com, “Cell & Gene State of the Industry Briefing.” https://alliancerm.org/arm-event/sotibriefing/

9
Merck.com, “Moderna and Merck Announce mRNA-4157/V940, an Investigational Personalized mRNA Cancer Vaccine, in Combination With
KEYTRUDA® (pembrolizumab), Met Primary Efficacy Endpoint in Phase 2b KEYNOTE-942 Trial.” https://www.merck.com/news/moderna-and-
merck-announce-mrna-4157-v940-an-investigational-personalized-mrna-cancer-vaccine-in-combination-with-keytruda-pembrolizumab-met-
primary-efficacy-endpoint-in-phase-2b-keynote-94/

10
Nature.com, “Anti-CD19 CAR T cell therapy for refractory systemic lupus erythematosus.” https://www.nature.com/articles/s41591-022-02017-5

0xgenomics.com, “Increasing the power of single cell resolution with expanded flexibility and scale: Introducing Chromium X.” https://
11

www.10xgenomics.com/blog/increasing-the-power-of-single-cell-resolution-with-expanded-flexibility-and-scale-introducing-chromium-x

GenomeWeb.com, “Akoya Biosciences, Acrivon Therapeutics Partner to Develop CDx.” https://www.genomeweb.com/molecular-diagnostics/

12

akoya-biosciences-acrivon-therapeutics-partner-develop-cdx#.ZGUnbXbMKUk

13
Science.org, “FDA no longer needs to require animal tests before human drug trials.” https://www.science.org/content/article/fda-no-longer-
needs-require-animal-tests-human-drug-trials

Several key Illumina patents tied to its nucleotide chemistry are anticipated to expire in 2024 (U.S. patent numbers: US7771973B2,
14

US7541444B2), with another patent expiring in August 2022 (U.S. patent number: US10480025B2)

9 L.E.K. Consulting
E XECUTIVE I NS I GHTS Diagnostics and Research Tools: Outlook and Industry Trends in 2023

Businesswire.com, “Element Biosciences Launches the AVITI™ System to Democratize Access to Genomics.” https://www.businesswire.com/
15

news/home/20220314005243/en/Element-Biosciences-Launches-the-AVITI%E2%84%A2-System-to-Democratize-Access-to-Genomics

GenomeWeb.com, “Complete Genomics Unveils New Platform for Ultra-High-Throughput Sequencing Market.” https://www.genomeweb.com/
16

sequencing/complete-genomics-unveils-new-platform-ultra-high-throughput-sequencing-market#.ZGUnOHbMKUl

17
Pacb.com, “PacBio Announces Revio, a Revolutionary New Long Read Sequencing System Designed to Provide 15 Times More HiFi Data and
Human Genomes at Scale for Under $1,000.” https://www.pacb.com/press_releases/pacbio-announces-revio-a-revolutionary-new-long-read-
sequencing-system-designed-to-provide-15-times-more-hifi-data-and-human-genomes-at-scale-for-under-1000/

18
Nature.com, “Long-read human genome sequencing and its applications.” https://www.nature.com/articles/s41576-020-0236-x

10 L.E.K. Consulting
E XECUTIVE I NS I GHTS Diagnostics and Research Tools: Outlook and Industry Trends in 2023

About the Authors

Jeff Holder
Jeff Holder, Ph.D., is a Managing Director and Partner in L.E.K. Consulting’s San Francisco office
and a member of the firm’s Life Sciences practice. Jeff has expertise in the life science tools,
bioprocessing, biopharma services and diagnostics space with a particular focus on growth
strategy, portfolio planning, new product opportunities and business development support.

Adam Siebert
Adam Siebert is a Managing Director and Partner in L.E.K. Consulting’s New York office and a
member of the Life Sciences practice. Adam has been with L.E.K. for over eight years, and has
experience across diagnostics and research tools, bioprocessing, and pharma services, as well
as emerging, mid-cap and large pharma. He has helped a number of clients in the life sciences
industry with growth strategy, life cycle management, portfolio optimization and M&A projects.

Tian Han
Tian Han is a Managing Director and Partner in L.E.K. Consulting’s Los Angeles office. Tian
joined L.E.K. in 2008 and is one of the leaders of the firm’s Diagnostics and Research Tools
practice, where he specializes in precision medicine, advanced diagnostics, life sciences research
tools and advanced therapeutic bioprocessing. He advises clients on corporate and business
strategy, product strategy, commercial planning, and transaction support.

Alex Vadas
Alex Vadas, Ph.D., is a Managing Director in L.E.K. Consulting’s Los Angeles office, where he
leads the firm’s Diagnostics and Research Tools practice. Alex joined L.E.K. in 2000 and focuses
on diagnostics, research tools and personalized medicine. Within those areas, he has worked
with a range of established and emerging clients in the areas of corporate strategy, product
strategy, commercial planning and transaction support.

Alex Masset
Alex Masset is a Senior Associate Consultant in L.E.K. Consulting’s Boston office and a member
of the Life Sciences Enablers practice. Alex has helped numerous clients across precision
medicine, diagnostics, life science tools and bioprocessing. He has supported clients on a
range of projects, including growth strategy, M&A, partnership strategy, and organization and
planning.

11 L.E.K. Consulting
E XECUTIVE I NS I GHTS Diagnostics and Research Tools: Outlook and Industry Trends in 2023

About L.E.K. Consulting

We’re L.E.K. Consulting, a global strategy consultancy working with business leaders to seize competitive advantage and
amplify growth. Our insights are catalysts that reshape the trajectory of our clients’ businesses, uncovering opportunities and
empowering them to master their moments of truth. Since 1983, our worldwide practice — spanning the Americas, Asia-Pacific
and Europe — has guided leaders across all industries, from global corporations to emerging entrepreneurial businesses and
private equity investors. Looking for more? Visit lek.com.

L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC. All other products and brands mentioned in this document
are properties of their respective owners. © 2023 L.E.K. Consulting LLC

12 L.E.K. Consulting