The healthcare industry can be precarious for stocks of large companies, much less penny stocks. Nevertheless, smaller companies that capture a niche can grow much faster than large caps. That higher reward potential comes with higher risk. Of course, small-cap healthcare companies can be nudged out of the market by big competitors, and they can simply become unable to service debt when products and services don't sell quickly enough. All of this makes the small-cap healthcare stalwarts on this list more attractive.

None of these are new companies — they have made progress in developing products and finding the marketing outlets that are needed to sustain them. Because of the higher risk, investors should continuously perform due diligence. It is important to watch for product failures, closing markets or excessive competition moving in.

Let's look at how our three picks as of Jan. 30, 2019 break down.

Considerations When Choosing a Healthcare Biotech

Before we look at the top three stocks, it's important for investors to know exactly what makes these — and a stock of your own choosing — a good option. When you're looking at investing in this sector, consider the following:

What's in the pipeline? This is the meat and potatoes for any company. You should really be looking at what's in a company's Phase II programs. If there are multiple items in the pipeline at various stages, even better, because there's a good chance one of them may make it to market.

Partnerships: Are there any big names that your company is partnering up with to help bring its drug(s) to market? Big corporations can help bring value to smaller companies, especially when it's time for production and distribution.

Financials: Remember to take a look at how the company is performing. Does the company have enough cash on hand to meet its obligations?

What they promise to treat: While viable cancer treatment can be very good for a company, make sure the company you're invested in has a novel, unique drug or treatment. After all, there are a lot of companies looking to market the newest cancer treatment.

Curis

Curis is engaged in biotechnology with a focus on developing drugs that treat cancers. It does significant amounts of research and collaborates with other drug makers in testing and developing drugs. Therefore, it must put drugs through trials and obtain approvals, which means that the stock can fluctuate depending on the outcome for any given drug. Profits have been less than robust while the company focuses on research. However, management says it is now ready to bring many drugs to market that will produce profits going forward.

The company already has one drug with FDA approval and was commercialized by Genentech and Roche. Erivedge is used in the treatment of basal cell carcinoma and is available to patients in the U.S., the European Union, and several other countries. Its Fimepinostat drug has also been fast-tracked by the FDA and is currently in the clinical trial stage. The company has four other drugs, two of which are in the clinical stage, while the others are in the pre-clinical phase.

Volatility for this stock is high, but that can be a good thing for investors who want to build a position by buying at support levels. The 50-day moving average is currently below the 200-day moving average, so cautious investors may want to wait until the 50-day line is back on top before buying into this stock. The company has negative operating income, as increasing research and development expenditures have negatively affected the bottom line. Investing in this stock must be based on whether investors see promise in the company's drug pipeline, so it is important for potential investors to track the progress of various treatments developed by the company through pre-clinical and clinical trial stages. 

Curis announced plans to restructure after the third quarter of 2018, saying it would lay off staff in order to concentrate on cutting its costs and pipeline. Revenue increased in the quarter, while it reported a smaller loss, compared to the same quarter of 2017. Management said it also planned to focus on three of its drugs going into 2019 which are expected to have efficacy data from their clinical development.

  • Average Volume: 743,550
  • Market Cap: $38.16 million
  • P/E Ratio (TTM): N/A
  • EPS (TTM) -$1.08

China Pharma Holdings

China Pharma Holdings develops and markets a broad range of products in China, targeting hospitals and retailers. The drugs are focused on cardiovascular applications, brain diseases, and infectious diseases. When the Chinese company reports results, it tends to have the majority of its assets as receivables, so potential investors should keep in mind that many companies do not collect all of their receivables.

The stock dropped dramatically in May 2017, rebounded, then pulled back again. It spent the remainder of 2017 in a sideways pattern, forming a new base. In the first trading days of 2018, China Pharma shares broke out sharply, skyrocketing from under 20 cents per share to nearly 80 cents before declining throughout the year to current prices of around 27 cents.

Investors who buy this stock are hoping that share price momentum will pick up again with the release of effective and popular drugs. As with all penny drug stocks, buyers of China Pharma Holdings shares must be willing to wait out long periods of volatility while hoping for profitability to return. It is also important to remember that China monitors and controls companies closely, so any investor in this stock is obtaining exposure to the geopolitical influences that could affect its price. 

One of the most important things investors need to consider is whether the company can meet its operating expenses, funding and financial obligations within a (short) period of time with whatever cash it has in its reserves. The company's cash and cash equivalents dropped to $0.7 million for the nine months ending Sept. 30, 2018, compared to $1.12 million for the same period in the previous year.

The company also moved into the health product market in November 2018. It launched its Noni Enzyme product (a small fruit used in traditional medicine) called Ararato. The product is targeted at the aging Chinese population and the country's growing middle class who are looking for alternative treatments.

  • Average Volume: 686,441
  • Market Cap: $12.64 million
  • P/E Ratio (TTM): N/A
  • EPS (TTM): -$0.38

Novavax

Shares of this vaccine developer could give your portfolio a shot in the arm over the final months of this year. Novavax develops vaccines for administration across life stages — from infants to older adults — focusing on the prevention of diseases ranging from the seasonal flu to the Ebola and Zika viruses. This company also brings some longevity to the table, having been founded in 1987.

Novavax stock plunged in December 2017 when the markets reacted poorly to an update on one of the company's influenza vaccines. The stock price suffered additional setbacks in February 2018 along with the broader markets and again in June in response to concerns over the effects of the trade conflict with China. However, Novavax still has promising products in the pipeline, including a vaccine for the respiratory syncytial virus which causes significant hospitalizations and deaths among children around the world. The hurdles that remain for the clinical approval of its products make Novavax a risky stock, but bringing a successful vaccine to market could imply significant profits.

The company came one step closer to bringing its NanoFlu vaccine to market when it announced positive results for Phase II of its clinical trials in older adults in January 2019. Results showed the vaccine was well tolerated and 50% more effective than the current market leader vaccine. The company said it planned to meet with FDA officials to discuss its Phase III design.

  • Average Volume: 27,646,275
  • Market Cap: $782.31 million
  • P/E Ratio (TTM): N/A
  • EPS (TTM): -$0.54

The Bottom Line

Penny healthcare stocks are high risk. Trials of drugs can produce negative results, and the market may not readily accept a new drug. On the other hand, a successful drug can cause a penny stock to soar and give investors profits they would not expect from more expensive stocks. It is wise to limit the percentage of your portfolio that you keep in penny healthcare stocks – these are speculative plays.

If you're the type of investor who is looking to take on the inherent risk involved with penny stock investments, look at some of the best brokers for penny stocks so you can get started and ensure that you're using one of the top brokers in the industry for your investment style.