Happy Fourth of July

Happy Fourth of July!

How to Found a Republic Right


Auxilium Pharmaceuticals (AUXL) is a skyrocket

The United States has two days every year whose dates say it all. The Fourth of July (technically Independence Day) and 9/11 are familiar to everyone just from their calendar dates.

Some other holidays float around the calendar without a fixed date (New Year’s Day, Thanksgiving, Memorial Day) and others are named for the person or group being memorialized (Birthday of Martin Luther King, Jr., Washington’s Birthday, Labor Day, Columbus Day, Veteran’s Day and Christmas Day).

The Federal government, the official keeper of the list of days when everyone gets to sleep in, has chosen to ignore the international festivals of chocolate and alcohol (Valentine’s Day and Saint Patrick’s Day) and two major religious holidays (Easter and The SuperBowl), because they don’t involve paid time off work.

It’s customary to use these holidays to take a moment to contemplate the meaning of the lives and contributions of the events and people that they commemorate. This is a good thing, because we certainly manage to ignore what the others try to tell us for the rest of the year.

I’d like to take a couple of paragraphs to make two observations about what July 4th means to me.

First, I’d say that the United States is extremely fortunate to have been founded by (and represent the philosophies and intellects of) a group of Eighteenth Century rationalists. The Founding Fathers had read widely about the nature of man, and they were a skeptical and judicious lot. The central tendency that they manifested in the founding documents of our country was a reasoned mistrust of human nature.

Their understanding that people will tend to act in their own interests made them leery of allowing anyone to get their hands on too much power. It wasn’t just George III and the Parliament that they disliked, it was what happens any time coercive power goes unchecked. And that’s why we have a system that frustrates anyone with big ambitions and a big agenda. The frustrations were baked into our political structure almost 240 years ago by those clear-eyed gents in the Age of Reason. The system leads to constant fuming, feuding and perpetual warfare among our leaders, and I thank our founders for it.

Second, I have twice sung with the Boston Pops Orchestra in the Hatch Shell in Boston on the Fourth of July. That means I got to stand about 15 feet away from the 155mm howitzers that punctuate the finale of the 1812 Overture. Fabulous. I could feel my chest compress with each blast. It also meant having a great seat right on the river for the huge fireworks show, with both direct and reflected views of the festivities.

But my personal relationship with fireworks, which used to include sparklers, huge strings of Black Cat firecrackers, roman candles, skyrockets, fountains, bottle rockets and plenty of heavy artillery, including M-80s and cherry bombs, has long been robbed of real joy.

I deeply regret the almost universal ban on fireworks–at least on any fireworks that are any fun at all–in my corner of the country. (I haven’t done a systematic study of U.S. fireworks laws, so I’m too ignorant to generalize.)

Yes, I know that fireworks are dangerous and that people get hurt playing with them. People in general, and young people in particular, do get hurt when explosives are involved. Part of that is general ignorance of what it means to be around things that go “boom,” part is youthful (and not-so-youthful) malevolence, and part is bad luck.

I didn’t get hurt because my father, who had grown up with even more powerful fireworks at his disposal, taught my brother and me how to create the maximum of noisy chaos without losing any of our fingers, toes, eyes, eardrums, etc. That’s one benefit of having a fireman for a father.

But while something has been gained in terms of safety, something has also been lost. It’s pretty much the same thing that has happened with Halloween, the celebration of which has been robbed of its real danger and scariness.

The lessons that fireworks used to teach were expensive, but the rewards were substantial.

So, this year, as I do every year, I will seek out the biggest fireworks displays north of Boston that I can find. Because communities try to avoid scheduling their celebrations at the same time, I can usually take in two or three shows.

But I swear, I used to get as much pleasure from sending a coffee can 20 feet in the air with my own very personal cherry bomb as I do from an entire professional fireworks show.

So, with a slight bit of wistfulness for the dangers of the past, I wish you all a happy (and safe) Fourth of July celebration. We have much to celebrate.

Speaking of safety, one of my favorite cartoons of all time showed a little old lady in a supermarket produce aisle. She was looking at two displays, one of which was labeled MUSHROOMS–$6 PER POUND. The other had a sign that said MUSHROOMS?–$1 PER POUND.

It’s the same with stocks, of course. A certified blue chip stock, one with a long earnings history and an attractive product and a host of institutional sponsors will sell at a premium and will have a chart that shows slow, steady growth.

But if you’re in the mood for fireworks in your portfolio, you have to look for companies with a mixed bag of qualities. In the case of Auxilium Pharmaceuticals (AUXL), you will be looking at a company that hasn’t booked a profitable quarter in its entire life. And the stock’s chart will look like a roman candle, with a whole lot of hissing punctuated by occasional moments of brilliance.

Auxilium has two FDA-approved products that have produced seven years of revenue growth; during that time, revenue increased from $8.8 million in 2003 to $264 million in 2011.

The first product, Testim, is a gel that replaces replaces testosterone for guys who aren’t producing enough. There are about 13 million men out there with this condition, but there are lots more who just appreciate the muscle-building, fat-burning, sex-drive stimulating effects, which creates opportunities for off-label uses. The second product is Xiaflex, a drug that treats potentially crippling contractions of hand tendons.

So why has AUXL, which spent three years dropping from 42 in August 2008 to 14 in August 2011, been soaring like a skyrocket since June 4? This rally has kicked the stock from 19 when June began to 27 in recent trading.

The answer is that Xiaflex has had great results in late-stage clinical trials for treatment of another condition (Peyronie’s Disease), and investors always like it when existing drugs find new uses. Without increasing costs, such a move can have a big impact on the bottom line. (I won’t describe Peyronie’s Disease here, but any men who want to do the research will quickly see why a treatment has high potential.)

Auxilium is, like fireworks, both high potential and high risk. Investors are buying AUXL now, but pharmaceutical companies can occasionally hit potholes when it looks like clear sailing.   

All the best,

Paul Goodwin  
Editor, Cabot China & Emerging Markets Report

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