The biotech sector has struggled for many months, undermined by a series of high-profile pricing scandals that have dropped sector funds well off bull market highs. However, the low end of the capitalization spectrum still generates new winners at a steady pace, with start-up companies testing unique compounds that may have the power to cure cancer, relieve pain or treat a broad variety for formerly untreatable illnesses.

Of course, these junior biotech plays carry high speculative risk because their efforts are likely to fail, either through weak research trial results or due to competitors producing more potent compounds at lower prices. Admittedly that’s part of the attraction in buying these speculative issues, with hopes that one or two winning lottery tickets will pay for the bigger basket of losers.

CNAT

San Diego-based Conatus Pharmaceuticals, Inc. (CNAT) focuses on new approaches in the treatment of hepatitis and other liver diseases. It opened for business at $11 in July 2013 and settled into a sideways pattern that topped out at $15.67 in early 2014. The subsequent decline posted two lower highs in 2015, bottoming out in January 2016 at an all-time low, ahead of a bounce that reached $3.45 in April 2016. The stock traded at that level until December 20 when it gapped up on heavy volume, following a licensing agreement with Novartis AG (NYSE: NVS ).

It spent the first quarter of 2017 testing boundaries from the big breakout, finally lifting above the December peak on April 10. It’s gained additional ground since that time in a healthy uptick that may target double digits and critical testing at the 2015 high near $12. A timely pullback to the $6.00 to $6.50 price zone looks like a good spot for most traders to get on board while more aggressive trend followers should place trailing stops to protect against a reversal. The company currently holds a $202-million market cap.

ZYNE

Based in the Philadelphia suburbs, Zynerba Pharmaceuticals, Inc (ZYNE) creates synthetic cannabinoid compounds for the treatment of epilepsy, fibromyalgia, and osteoarthritis. The stock came public at $18 in August 2015 and topped out at $43 just three days later. That marked the all-time high, ahead of a steep downtrend that dumped price to an all-time low at $4.64 in the first quarter of 2016.

A March 2016 buying spurt got faded, generating a rally peak at 21.56, ahead of a reversal that required more than ten months for a return trip. The stock broke out above that level last week, opening the door to additional upside that could reach the .786 Fibonacci selloff retracement level in the mid-30s. The On Balance Volume (OBV) indicator jumped to an all-time high in February supporting the upside. The company currently holds a $320-million market cap

PRTK

Boston’s Paratek Pharmaceuticals, Inc. (PRTK) currently holds a $527-million cap. This is a clinical stage company seeking new antibiotic treatments for pneumonia and infectious diseases. It came public at $54 in February 2009, at the height of the economic collapse, and took off in a strong uptrend that reached an all-time high at $185 in October. An equally vigorous decline followed, dumping the stock into the 30s in 2011, ahead of even lower lows into November 2016’s all-time low at $9.80.

It turned higher into 2017, rallying above the 200-day EMA in January and testing new support into a late March breakout, driven by positive research results. It’s currently trading near the highest high since September 2015 after gapping into the 50% retracement of the 2015 into 2016 selling wave. A downturn at this barrier could offer a buying opportunity in the upper teens.

The Bottom Line

Committed sellers are controlling broad biotech action, but a basket of junior biotech stocks continue to attract buying interest, with bullish stories and positive research results underpinning speculative interest that could yield even higher prices.

<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>

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