Navigating the new biotech and medtech cycle

Post-COVID valuations normalise

Biotech and medtech valuations have steadily recalibrated from their pandemic-era highs, returning to a market environment where fundamentals again dominate. The excesses of COVID-driven exuberance have largely subsided, creating a more disciplined landscape in which scientific quality, capital efficiency, and genuine clinical differentiation increasingly determine value.

In medtech, forward P/E multiples are now at their lowest levels in a decade, signalling a compelling entry window for long-term investors. 

The public biotech market tells a similar story. The XBI, after experiencing a sharp correction in 2022, has broadly stabilised and reverted to more sustainable levels, with modest signs of recovery emerging in late 2025. 

This valuation reset is not a sign of weakness but rather a normalisation phase that rewards rigorous diligence and favours companies with clear pathways to clinical and regulatory milestones. 

For investors, the current backdrop offers an opportunity to back high-quality assets at more reasonable prices, positioning portfolios for future upside as sentiment improves.

Chart 1: Medtech vs Biotech vs Pharma vs S&P500 Forward PE (2002-2025)

Chart 2: Annual performance periods for XBI (2006 – 2025)

Capital scarcity creates Venture Capital openings

Tighter financing conditions and a pronounced flight to quality have left many strong early-stage biotech and medtech companies undercapitalised. 

For venture funds with dry powder, this imbalance is creating unusually attractive entry points, offering more favourable terms, stronger governance rights, and a greater ability to help shape company strategy. 

Australia now hosts close to 1,600 biotech and medtech companies, according to AusBiotech – roughly double the number eight years ago. This expanding innovation base gives investors a broader opportunity set and enables far greater selectivity. VCs can run deeper diligence, concentrate capital in the highest-conviction teams, and take a more hands-on role in building each portfolio company. 

The long-term performance backdrop reinforces the sector's attractiveness: over the ten years to 31 March 2024, private equity and venture capital delivered a net annual return of around 17%, significantly outperforming the ASX 300 and Small Ords at 8% and 7%, respectively, according to the Australian Investment Council.

IPO window stays narrow, but M&A is still active

While public markets remain highly selective and the IPO window is slow to fully reopen, strategic acquirers and private equity funds have become increasingly active buyers of innovative assets. 

As a result, the exit landscape is tilting toward private transactions, where differentiated science and clear clinical positioning command competitive valuations. The biotech sector has experienced a pronounced surge in M&A through 2023 and 2024, as pharma companies seek to replenish pipelines and secure next-generation technologies. 

This momentum has continued into the first half of 2025, reinforcing the view that private-market exits will remain a central value-creation pathway even as public markets lag in reopening.

Chart 3: IPO size by quarter (2020-1Q25)

Chart 4: Count of Biotech M&A deals (2008-July 2025)

Regulation evolves to accelerate innovation

Recent regulatory shifts – including broader acceptance of adaptive clinical designs, accelerated approval pathways, and greater alignment of international standards – are reducing development friction and supporting faster translation of breakthrough technologies into the clinic. 

The global movement toward non-animal testing is also gathering momentum, opening doors for novel platforms in toxicology and preclinical validation. At the same time, policy uncertainty has been a persistent overhang, with FDA leadership changes, tariff discussions, and heightened scrutiny on drug pricing.

While the environment remains fluid, these dynamics ultimately favour companies with the strongest scientific foundations and clearest value propositions, reinforcing the premium placed on high-quality, innovation-led assets.

Summary

Biotech and medtech investing are entering a more rational cycle as valuations normalise from pandemic-era highs, creating attractive entry points for high-quality assets. Capital remains selective, leaving many strong early-stage companies underfunded and opening opportunities for VCs to invest on better terms and play a more active role. 

With IPO markets slow to reopen, private exits – especially strategic M&A – continue to accelerate. At the same time, evolving regulatory frameworks, from adaptive trial designs to non-animal testing and harmonised standards, are reducing development friction and reinforcing the premium on genuinely innovative science.