The day the swine flu story broke in the global press I wrote up for the blog a possible influenza hedge.  It was a stock I thought would make money – but I did not really want to win big on.  It would be nice to profit – but not because of mass influenza deaths.

Biota Holdings is an Australian small-molecule drug development company whose core asset is that they own a 7 percent royalty on all sales of Relenza.  Relenza is a distant number two influenza antiviral drug.  As explained in the original post the drug is taken through a “turbo-inhaler” which is less marketable than a tablet – but more marketable than an injection.  The difficulties taking Relenza meant that Tamiflu dominated the market. 

The story I posted was nuanced and accurate.  It was only possible to write that story because I had followed Biota before the Swine Flu outbreak and had been considering purchasing the stock anyway.  Swine Flu forced the decision.

In our quarterly client letter I wrote a follow up story which I think deserves a wider circulation. 

Firstly our clients were really lucky.  Whereas personally I purchased the stock the day the swine flu outbreak happened our clients purchased a few weeks later.  Why?  Because we could not purchase the stock for them until we received our Australian Financial Services License.  The following graph shows the advantage that they received:

The lower purchase price (dumb luck) meant the clients purchased more.  The very strong Australian dollar has meant that our US based clients have well over doubled their money. 

The luck continues

Tamiflu drug resistance (something alluded to in the original post) turned out to be the critical ingredient in the story.  It has both policy and investing implications.

In Japan, where Tamiflu is widely prescribed, the active compound (oseltamivir carboxylate) is excreted by the body (in urine) or is activated by the biological processes at the sewerage treatment works itself.  Water at and downstream from the sewerage treatment works is high in oseltamivir carboxylate.  That is really bad news because birds (especially ducks) like to bathe in the nutrient rich waters.  Those ducks are the hosts in which new influenza viruses breed – and because the water is rich in antivirals the Japanese are breeding new strains of Tamiflu resistant influenza.  This is not good news because the US government and other drug stockpiles are heavily weighted to Tamiflu – and there is a reasonable chance that the next global flu epidemic will be Tamiflu resistant.

Whilst that is not good news for the world – it is wonderful news for Relenza sales and hence our clients’ position in Biota.  And it is nothing that we anticipated.  If you told me my blog would wind up being about ducks in Japanese sewerage works I would have laughed.  From the perspective of our clients it is plain luck – but that will not stop us profiting from it.

Luck is pervasive in the investing game.  We did not figure on Tamiflu being a serious environmental pollutant.  It was just as likely that Relenza would be a pollutant.  Then, rather than showing profits we would be explaining losses to our clients.  A story about ducks in sewerage treatment works causing us losses would not sound plausible (even if true). 

Anyone with good investing results who does not admit to a dose of luck is lying.  The world is a complex place – and I would never have guessed that ducks in Japanese sewers had anything to do with our portfolio. 

Read more at John Hempton's Weblog