Biomarker diagnostics are the linchpin of personalized medicine. But building a successful business around such tests is anything but straightforward, given the complexities associated with both their development and commercialization. Today's molecular diagnostic companies need to think carefully before they choose a "go it alone" strategy when developing a particular test. It may make more sense to forge a partnership with another diagnostic company or a drug developer with the goal of sharing costs and relative risks.

J&J isn't the ground-shaker in molecular testing that Roche Diagnostics is--so it is forging a different path to becoming a leader in emerging high-potential sectors of the in vitro diagnostics industry. It formed a subsidiary Veridex, dedicated to cancer diagnostics. That subsidiary is assembling a platform of core technologies and recently completed several deals, including in-licensing prostate cancer markers based on methylation, a hot area of research, from start-up Oncomethylome Sciences.

Encouraged by successes in the biotech space, public market investors' interest in the device arena has returned in 2004 to support 10 companies' IPOs so far. Windhover's analysis of the valuations achieved indicate that private investors in these companies have, on average, enjoyed larger returns than their biotech counterparts.

After years of confusion and stagnation, the field of cancer biomarker diagnostics seems to be progressing, even as huge challenges remain. Investors are alert but cautious. The sheer volume of funding and attention devoted to proteomics and genomics, along with advances in research tools, have led to new approaches to looking for and developing assays. But with exception of Cytyc Corp., not a lot of successful cancer-oriented diagnostic role models exist for start-ups.