Is this the investment trend of the decade?

Set your sights on medical diagnostics as the next big thing. The bloated $3-$4 trillion global healthcare industry shows itself overripe for radical disruption and the alchemists of Silicon Valley have set their sights firmly on it.

When they home in on an industry, the game changes and wealth creation amounting to hundreds of billions or even trillions of dollar can result. And sometimes be destroyed, it should be added, when a bubble bursts, like the Internet 1.0 bubble in 2000, only to bubble up again as Web 2.0.

Medical diagnostics: follow the silicon

Here, though, we're in at the creation. So let me give you a sense of what's being spawned. Today, doctors are overwhelmed by administration and forceably moved far beyond their main function of old of the laying on of hands and offering a comforting bedside manner. In prospect, is a medical world where they will be superseded by medical knowledge and expertise captured in silicon, software and algorithms and delivered cheaper every year.

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It's been called rebooting your doctor.'

In prospect are diagnostic tools that will detect early signs of plaque in arteries or tiny clusters of cancer cells to enable preventive therapiesall without the need for hospitals, prima donna specialists or blockbuster drug treatments. We don't have to speculate about weird nanobots cruising through our gizzards and blitzing incipient cancer cells en route to get the picture and see that radical change is afoot.

If you want to glimpse where medicine's going, best to talk to those silicon alchemists rather than medicos, biotech scientists or government policy makers. Better still, perhaps, to a truly switched on venture capitalist with a technology background. I sat next to Don Valentine, the doyen of Silicon Valley venture capitalists a few years ago at a dinner in Menlo Park, California.

Formerly, a top executive at National Semiconductor, he is worth over a billion dollars and put seed corn into CISCO and Google when each was little more than a couple of bright sparks from Stanford with a business plan. I asked Valentine his secret. "Follow the silicon'' was his brusque reply as he turned to his other neighbour.

The one thing I learned in 20 years tracking the technology business, first as a journalist and then as a consultant, is that once silicon focuses on something you only have to wait for the big markets to be created from almost nothing - witness PCs, mobile phones, digital cameras and iPODs.

The master mantra is better, faster, cheaper, smaller.' Silicon gets cheaper by 30% every two years and halves in price roughly every two years. If you find something that works today, more or less, but is too expensive, then wait a bit and the fireworks start. Look at PCs, routers, mobile phones, iPODs, search engines, GPS systems for cars, digital cameras. Under the lash of this relentless mantra, silicon integrated circuits get better, faster, cheaper, and smaller with every shortening product cycle.

Why medicine is ripe for innovation

The same cycle of innovation is about to hit medicine, which contrary to everything in information technology, gets more expensive, more muscle bound and less satisfying to its customers every year. This is why medicine meets the criteria laid out by Professor Clay Christensen of the Harvard Business School, author of best seller, The Innovator's Dilemma, and the chief theorist of disruptive forces in business, for being ripe for disruption' from the bottom-up.

This is why Andy Grove, the legendary ex-chief honcho at microprocessor giant Intel, talks of the need for medicine to move "from the mainframe to the PC era''. He is talking metaphorically. He means that technology must now be deployed to undermine the current medical establishments and their ways of doing things, not least to evaporate the crippling fiscal burden of healthcare on governments across the world.

In his recent book, End of Medicine, a sprightly but profound study of the scene, Wall Street veteran and ex-hedge fund manager Andy Kessler points to what he calls "the cholesterol cancer conspiracy'' as the main culprit. He argues that hospitals, specialists, and insurance and drug companies have combined to put the medical focus on costly cut and drug' treatments for chronic conditions, mostly around the Big Three', heart disease, stroke and cancer. But this conspiracy' and this focus on costly late stage treatments is on the point of being subverted by new breeds of diagnostic tools - real time 3D scanners, biomarker chips to scan for cancer cells, neural networks to read mammograms, portable ultrasound kits and expert system GPs etc - all built around silicon.

Rather as the mainframe and minicomputer cultures were subverted by silicon dominated and defined PCs, and by employees smuggling them into their places of work twenty years ago, so these diagnostic tools will surround, squeeze and suffocate medicine's old ways of operating. And they will keep on improving in lockstep, just like mobile phones or digital cameras do now, with the remorseless power of siliconomics. Let's quickly look at what's happening with CT Scanners (Computerised tomography scanners: a diagnostic medical imaging technology) to round all this out and make it tangible.

Medical diagnostics: how medicine could change

You're a baby boomer and you may have a heart attack, but then again you may not.How about having a look in your arteries to see if there's a blockage? The test is doable with the current generation of 64 slice CT scanners but is still too expensive and perhaps still not a good enough test.

Coming next is the new generation of 256 slice scanner making its way to market. They can scan your heart in 4/10ths of a second or less and create a colour 3D image of it of sufficient quality that you and a medical professional, not necessarily a heart specialist, can look at to identify any clogged arteries. Following that, in two to three years time, will come new and improved volume produced scanners costing less than $200. They will become a mainstream product and heart attacks will be a lot less common.

Same for strokes.

With cancer, the development of molecular imaging' will be able to detect tumours 3-5 years earlier when they are easier to treat. Antibody chips costing 10 cents or less will scan your blood or urine for unique proteins of circulating cancer cells. The current medical establishments hold on late stage treatment will be increasingly undermined by technology driving medical practice to the front end, to early detection and preventive therapy.

As Grove, looking back on over 40 years in the tech business, remarks:

"technology always wins''. Nobody is forecasting root and branch change overnight in medicine. But as Kessler puts it: "even if the things budge slightly from chronic to early detection, waves of change like a Cat 5 hurricane will rip through medicine.'' And they will.

By Michael Orme for The Daily Reckoning. You can read more from Michael and many others at www.dailyreckoning.co.uk

Michael Orme is a financial journalist and former stockbroker.

Editor's Note: A Cambridge philosophy graduate, Michael Orme has worked in the UK Treasury and in stockbroking, the latter under the legendary fund manager Nils Taube. He was Mr Bearbull on the Investors Chronicle in the 1970s, then a tech journalist covering Silicon Valley for various journals in the 1980s, including Management Today, Computing and the Mail on Sunday. He is currently an Associate at Westhall Capital, a investment house specialising in Asia.