The health-care debate is drawing lots of attention to problems: rising medical costs, the Medicare budget, need for better clinical outcomes, and the push for biogenerics. This has caused a lot of concern among investors and limited returns in the healthcare sector. But biotechnology is evolving particularly in genomics, robotics and cell biology, and opportunities still abound where there is true innovation. M&A activity has picked up, even though funding for venture start-ups, equity for public companies, and IPOs have slowed to a trickle. This means that companies in the diagnostic sector that already have the cash flow or a strong balance sheet, product sales,  and platform technologies  can take advantage of this environment because diagnostic tests have become faster, better and cheaper with the added blockbuster of molecular medicine that can ultimately deliver lower costs of treatment and better clinical outcomes. Below are some thoughts on specific stocks to watch in this space. The Raygent Associates Life Science Portfolio had several diagnostic picks that had huge gains over a one year period: Abaxis (ABAX) up  56% , Inverness (IMA) up 71%, and Hologic (HOLX) up 36%. We still like these stocks on weakeness as they are leaders among the small caps in their markets. Other diagnostic companies  in the 2009 Portfolio are still at good values: GenProbe (GPRO) $43.7 and tools Company Illumina (ILMN) $37. With a view to the emerging long-term technology trends in genomics and personalized medicine, we see a greater need for diagnostics that can show clinical utility and cost effectiveness of treatment. This trend is already happening with Cancer (Her-2 test) and various infectious diseases such as HIV, HCV and HPV. Some of the diagnostic stocks to watch with strong molecular capability are : Genomic Health (GHDX), $17.30: Genomic based testing. Genoptix (GXDX), $31.90: Personalized testing Qiagen (QGEN), $21.40:  Molecular tools and Diagnostics Sequenom (SQNM), $5.20: Genetic Analysis and SNP analysis More on these companies later, in Part II -- Rod Raynovich, Raygent Associates (www.raygent.com) Disclosure: The author of this post trades actively in biotech and is currently long SQNM