The Coming Boom in Australian Life Sciences

By Stuart Roberts, Senior Analyst, stuart@ndfresearch.com, +61 447 247 909 (July 2016)

Australia is a lucky country... - Donald Horne

Yeah, I know. The full quote from Donald Horne (1921-2005), which comes from the opening words of his 1964 book, The Lucky Country: Australia in the 1960s, runs as follows: 'Australia is a lucky country run mainly by second-rate people who share its luck. It lives on other people's ideas, and, although its ordinary people are adaptable, most of its leaders (in all fields) so lack curiosity about the events that surround them that they are often taken by surprise'. As you can see, Horne called our country 'The Lucky Country' as a criticism. And the criticism at that time was spot on. When I read the book, in 2011 (alas, most Australians haven't), I was surprised at how right Horne had been, predicting that we would struggle once the global competition got a bit harder, which it did in the 1970s. But guess what? Sometime in the 1980s we became the Lucky Country again, this time in a good way, and we stayed Lucky. The second-rate leaders made way for first-rate ones. We started living off our own ideas rather than other people's. And I think we moved away from Horne's portrait of us as 'a nation more concerned with styles of life than with achievement' and away from 'a social climate largely inimical to originality and the desire for excellence (except in sport) and in which there is less and less acclamation of hard work'. That evolution into what we are today is one reason why, if you ask most contemporary Australians, they will agree with me that The Lucky Country remains an appropriate nickname.

Being The Lucky Country sets Australia up for a Boom. The reason I started this essay by discoursing on Australia's nickname is because I believe the relevant mindset - that we Australians are Lucky - gets us ready for a future boom in the Australian Life Sciences sector. And by 'boom', I don't just mean a few years of stocks going up 10% or 20% p.a. I mean a Boom, where serious 'easy' money gets made, and gets made fast. Where stocks that were going for pennies per share six months ago are suddenly quoted in the dollars per share. And where, when you go to dinner parties, the only thing people want to talk about is the next hot biotech. The kind of speculative enthusiasm that the historians will call a 'Boom' or a 'Bubble' with a capital B, depending on how kind they want to be to the participants. The first thing you need for that kind of Boom to happen is a population that is reasonably optimistic. I believe that we've had that here in The Lucky Country since the mid-1990s.

The next Boom that Australia enjoys will be a Life Sciences Boom. I have been arguing for some years now that Australia is probably about due for a really big Boom. These come around fairly rarely, maybe only two or three in one's working life. The last one was dot.com. The reason I think the next one will be a Life Sciences Boom is that all the elements are gradually coming into place, to wit:

An established group of stocks to invest in - I can point to in excess of 90 Life Sciences companies currently listed on the Australian Securities Exchange that are working on pretty original drugs and medical devices, most of which originated right here;
Investors who have made money in the past trading Life Sciences stocks - this sector has been around in a serious way in Australia since the late 1990s;
An awareness by Australians that innovation-based ventures are a plausible way to make serious money. You can tell that Aussies now get 'innovation' by the fact that the Government campaigned during the the 2016 Federal election on a promise to boost support for the 'New Economy';
An increasing interest by investors in health, due to the fact that our population is ageing - the median age of the Australian population in mid-2015 was 37 years, as against 34 years in mid-1995 (click here);
The realisation that decent investment opportunities in the mining and energy sector have become few and far between, the resources boom having more or less ended in 2011.

Boom Times - We've been here before. I have often suggested that the Life Sciences sector in Australia is today roughly where the Australian resources sector was just prior to Kambalda. What do I mean by that? Kambalda is a small mining town in the Western Australian desert around seven hours' drive east of Perth and 60 km from the more famous mining city of Kalgoorlie where Herbert Hoover once worked in the 1890s. It was at Kambalda, in 1966, that an Australian resources company called Western Mining discovered a large deposit of nickel. The discovery led to a new nickel mine for Western Mining, but for Australia it did something much more significant. It helped change the country's mindset. Within four years of Kambalda, and off the back of other discoveries of large mineral deposits elsewhere in the country, Australia experienced probably the greatest speculative boom in its history, the so-called Posideon Boom. Let me sketch the background to that Boom before I draw parallels with the Life Sciences sector today:

Before Kambalda people thought Australia was more or less an agricultural nation. Wool was our main export commodity from the 1870s to the 1960s, and that led to the commonplace that Australia had to ride to prosperity 'on the sheep’s back'. We were so reliant on our farms that in 1963/64 close to half our exports were wool and wheat. After Kambalda, however, we started once again thinking of ourselves as a country that was blessed with great mineral wealth that was ours for the taking.
The timing of Kambalda was exquisite. Nickel as a commodity had been more or less stable until the Vietnam War raised the demand for the metal, and therefore its price. By the late 1960s it wasn't just nickel that was rising but just about every other metal. Never mind that this boom was really just the fruits of African independence in the early 1960s, when the Belgians had scrambled out of the Congo in a hurry. All we knew was that we were a particularly Lucky people.
Kambalda was concurrent with what seemed like significant generational change in Australia. Our long-time conservative Prime Minister, Sir Robert Menzies, had retired from office in January 1966 at the grand old age of 71, while the first of the Baby Boomers were just getting the vote. The Kambalda discovery, announced in April 1966, could in that sense be said to have heralded a 'rejuvenation' of Australian society, which had everyone excited for the future.
Finally, Kambalda happened while the whole Australian economy was booming. Real GDP was expanding 5% p.a., inflation was negligible, and unemployment was less than 2%, largely because our economic base had been untouched by the Second World War. The prosperity couldn't last because of the things Donald Horne pointed out at the time, but it meant that people were feeling 'rich' for a while.

Throw in the above factors with a climate of rising share prices globally in the mid and late 1960s, and Australia was ripe for a speculative resources boom.

When the Boom happened, it was breathtaking. The Boom unfolded not long after Man Landed on the Moon for the first time. Workers at the Canadian nickel miner Inco went on strike and suddenly, with global shortages of nickel, the price of the metal skyrocketed. Right about that time an Australian mineral explorer called Poseidon NL discovered nickel at a place called Windarra, around 350 km north of Kalgoorlie. Suddenly the Boom was on. In September 1969 you could have bought Poseidon shares for 80 Australian cents per share. By the first day of October the stock had made it to $12.30. But it wasn't just Poseidon, it was every other mineral explorer traded on the stock exchanges around Australia (we didn't finish merging all the exchanges together until the 1980s) that suddenly shot up. The country went mad for resources stocks, and the mania went on for months until Poseidon had made it to A$280 per share in February 1970. Alas, the bubble was burst shortly thereafter by some disappointing initial resource estimates.

The best Booms are a long time coming. The part of this story that appeals to me is the fact that the Boom, which seemed to many to have come out of nowhere, actually took many years to work up a head of steam. In effect, it was more than a decade in the making. The Kambalda area had a rich history of mining going back to the 19th Century, and a couple of local prospectors named John Morgan and George Cowcill had found nickel gossans in the neighbourhood in 1954. Ten years later Morgan and Cowcill showed their gossans to a Western Mining geologist named Roy Woodall, and the rest, as they say, is history.

Is Australian Life Sciences reaching its 'Kambalda Moment'? The thing about Kambalda is that it reminded Australians that they were actually 'good' at mining, with a long history of successful prospecting and resource development in every corner of the country that had begun with the Victorian Gold Rush of 1851. Once a country is confident that it is 'good' at something, the investment dollars tend to follow, particularly if the economics are favourable, which in 1966 for mining they most definitely were. Now fast forward fifty years to 2016. I argue that we are nearing a 'Kambalda Moment' for the Life Sciences in Australia:

At the moment Australians don't think they are good at innovation of any kind and reckon the only thing we're really good at is mining. The typical Aussie needs to be reminded that it was Australia that gave the world Wi-Fi (invented at the CSIRO, in the early 1990s - click here), as well as the 'black box' flight recorder (click here) and polymer bank notes (click here).
There is, however, an easy-to-tell story of long-standing success in Life Sciences going back decades. The Nobel Prizes our people have earned, and the success of companies like Cochlear and ResMed, can, I believe, convince Australians that we are 'good' at Life Sciences;
The economics of the Life Sciences are more favourable than ever, given how much the world spends on healthcare, the prices at which successful products are reimbursed, and the valuations with which successful companies are being acquired or are partnering their products;
The mood of the country is one that pays more attention to the Life Sciences, as I have shown above;
Now all it takes is one more small ASX-listed Life Sciences company to be successful in the clinic with its new drug or device, and I say that we have had our 'Kambalda Moment' where people wake up and say 'We're good at this stuff!'. And start buying the stocks of Life Science companies.

So when do we get our Kambalda Moment? I think it's sometime before the current decade is out. There are enough ASX-listed Life Science companies that will be in pivotal studies, or through them, by 2020 to suggest that this kind of timeframe is not unrealistic. The good news that the Kambalda Moment and the speculative mania will probably be separated by a few years, so there's time to get ready when it happens.

So how do I get ready for the Boom? Well, you've come to the right place. Reading the content on this web site will help you get started in terms of building your knowledge, and there's some good books I would highly recommend taking a look at (click here). But remember, this is a game where you have to do your homework. And then do some more.

And how do I know when the Boom is about to end? That's relatively easy. You may recall the old story about the American speculator and statesman Bernard Baruch (1870-1965), who knew to sell his stocks just before the Crash of '29. That was because a beggar to whom he used to give an occasional coin offered him a stock tip. Baruch later wrote “When beggars and shoeshine boys, barbers and beauticians can tell you how to get rich, it is time to remind yourself that there is no more dangerous illusion than the belief that one can get something for nothing." My technique, for what it's worth, is to listen to what the folks at Church are talking about after the service. When the Faithful start telling me what biotech stocks they are buying, I'll be selling, particularly if the Text that day came from 1 Timothy 6:10. When the pastor gets into the game, I'm going short.

Further reading