It’s no accident that two of Canada’s most highly recommended biotechnology investments have relatively long track records.

Cardiome Pharma Corp. of Vancouver and Æterna Zentaris Inc. of Quebec City were founded in 1992 and 1991, respectively, and each company has undergone dramatic changes to arrive at its current area of focus. More to the point, both firms have been in the business long enough to have developed some promising drugs and therapeutics now in the late stages of clinical testing.

Cardiome, a specialist in drugs aimed at restoring the heart’s normal rhythms, is recommended by all 15 of the analysts that track it, according to Bloomberg LP. Similarly, 11 of 11 analysts have a “buy” recommendation on Æterna, which is creating products aimed at treating cancer, hormone deficiencies and diseases of the lining of the uterus (endometriosis).

Of the two, Cardi-ome has the most solid financial base, thanks to a US$96.6-million secondary offering of 9.2 million shares completed Jan. 23. The timing was deliberate. In December, Cardiome’s U.S. partner, Astellas Pharma U.S. Inc., filed for approval to sell Cardiome’s lead drug — an intravenous version of Vernakalant, which treats atrial arrhythmia.

If the application succeeds, Cardiome could generate royalties from its products this year for the first time. The company has been recording revenue from various licensing and research and development partnerships. But royalties are key to the company’s future growth and potential.

Neil Maruoka, an analyst with Canaccord Adams Inc. in Toronto, estimated in his Feb. 6 research report that Cardiome’s royalty payments this year will be $6.1 million, which will help to push the firm’s total revenue to $28.8 million — up 28% from his estimate of $22.5 million in sales for 2006. Over the same period, Cardiome’s net loss will drop to $27.8 million in 2007 from $33.9 million last year, Maruoka predicted.

Maruoka believes Cardiome will start to generate significant profits in 2010 — $41.5 million in net earnings on sales of $127 million (all but $16 million in the form of royalties).

His estimates for 2010 incorporate two key assumptions: that Cardiome will successfully license the intravenous version of Vernakalant to a global partner, which, in turn, will market the drug to countries outside the U.S. (Astellas has the licence for the U.S.); and that Cardiome will also be cleared to sell an oral variant of Vernakalant. The oral version, now in Phase II studies, is designed to maintain normal heart rhythm after acute conditions have been dealt with.

With an estimated $140 million in cash, Cardiome has the option of seeing the V-oral clinical trials through to completion without any help from partners if necessary. The company also has a number of other drugs aimed at treating cardiovascular disease in the pipeline.

Æterna also has generous amounts of cash on hand — an estimated US$60 million as of Dec. 31, or enough to last slightly less than three years at current rates of spending. But before picking up shares in this cancer and endocrine therapy specialist, investors need to get their head around the company’s recent and dramatic restructuring. This past autumn, Æterna sold one-quarter of its stake in its Atrium unit, which sells products to the cosmetics, chemical and nutritional industries.

The move has allowed Æterna to raise about US$50 million. After distributing its remaining Atrium stake to shareholders, Æterna has become a pure biotech company. Although the move clarifies what Æterna does, it also has eliminated most of the company’s revenue, which would have topped US$250 million last year without the Atrium spinoff.

The result is that, on the surface, Æterna looks much weaker. Mark Knapp, a Toronto-based analyst with Clarus Securities Inc., estimates Æterna will lose US36¢ per share this year on revenue of just US$38.5 million.

In fact, Knapp doesn’t foresee a break-even result until 2011. Yet, he rates the stock a “buy” with a 12-month target price of C$9.75 per share — more than double the price on Feb. 1, when Knapp published his report.

However, what Knapp and other analysts like about Æterna is that the company has an unusually diverse pipeline of drug candidates in various stages of clinical testing. Not only that, but the firm has two products generating sales: Cetrotide, which is aimed at the in vitro fertilization market, is being marketed in more than 80 countries; and Impavido, which attacks black fever, is sold in Latin America, South Asia and elsewhere.

@page_break@Knapp points out that Æterna’s main upcoming drug candidates “target large markets with unmet medical needs.” One drug, called Cetrorelix, is aimed at slowing growth in benign tumours or enlarged prostates. The company started a Phase III trial with 600 patients early in January.

Æterna is also developing several anti-cancer remedies. One, called Perifosine, is being developed jointly with New York-based Keryx Biopharmaceuticals Inc., which holds the North American rights to the drug. Keryx is running a number of Phase II studies.

A second anti-cancer platform, ZEN-012, works to destabilize blood vessels inside solid tumours. Æterna is conducting Phase I tests.

A third oncology candidate, dubbed AN-152, is aimed at breast, ovarian and endometrial tumours.

In all, the company has more than 20 drugs and therapies under development. Æterna has said it intends to put at least one new drug into clinical testing each year.

Although Æterna has a relatively large number of advanced drug candidates by the standards of Canadian biotech, it remains a high-risk investment. A failure or disappointing result in one set of clinical trials could have a huge impact on the company’s share price.

Investors with a limited tolerance for this kind of volatility would probably do better to consider the larger U.S.-based biotechs. Among the most favoured by independent analysts are Gilead Sciences Inc. of Foster City, Calif. (23 of 28 analysts rate it a “buy,” according to Bloomberg) and Genentech Inc. of San Francisco (25 of 34 favour it).

Gilead has impressed analysts with the strength of its franchise in HIV drugs. On Jan. 31, the company reported better than expected results for 2006. Product sales jumped 43% to US$2.59 billion last year compared with US$1.81 billion in 2005, paced by a 52.5% increase in HIV drug revenue that, in turn, accounted for 82% of all product revenue.

Counting royalty, contract and other sales — mostly royalties derived from licensing the technology behind Tamiflu (which is marketed by F. Hoffmann-La Roche Ltd.) — Gilead’s total sales last year jumped 49% to US$3.03 billion from US$2.03 billion.

Michael King Jr., an analyst with Rodman & Renshaw LLC in New York, predicted in his Jan. 31 report that Gilead’s performance this year will be boosted further by the recent, very successful launch of Atripla, a next-generation HIV medicine. Government stocking of Tamiflu over the next four years to prevent a pandemic is also expected to be a catalyst.

King projected Gilead’s earnings will jump to US$2.75 per share this year, in contrast with a net loss (the result of several acquisitions) of US$2.59 per share in 2006. Sales will jump 29% to US$3.89 billion from US$3.03 billion, he estimated.

The momentum at Genentech isn’t nearly as strong, but the company operates from a much larger base. A biotech pioneer, Genentech has the leading portfolio of anti-cancer agents, including three well-known drugs that each generate more than US$1 billion in sales: Avastin (used to combat colorectal cancer); Herceptin (breast cancer); and Rituxan (recently approved to fight rheumatoid arthritis, but also used on patients with non-Hodgkin’s lymphoma and leukemia).

Genentech also recently received approval to market Lucentis, which is aimed at wet-form age-related macular degeneration, a common cause of blindness.

While all these drug franchises appear strong and have the potential to be tweaked to fight new ailments, Genentech faces a lot of competition in each of its niches. Albert Rauch, an analyst with A.G. Edwards & Sons Inc. in St. Louis, pointed out in his Feb. 7 research report that almost two-thirds of the company’s sales last year depended on “only a handful of drugs.”

Rauch estimates Genentech’s earnings should rise by 28% this year to US$2.86 per share from US$2.23 per share in 2006. Over the same period, company sales will increase 25.8% to US$11.67 billion in 2007 from US$9.28 billion last year, he predicted.

Although Rauch’s estimates are roughly in line with the consensus for the company, he has a “hold” recommendation while most of his colleagues rate it a “buy.”

Rauch’s report was his initial, detailed look at Genentech. His fresh perspective, perhaps, is another useful reminder of the risks inherent in biotech. IE