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 developed products and found 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. To learn more about trading penny stocks, Investopedia Academy has a day trading course online.

Let's look at how our top three picks break down. All figures are current as of Nov. 8, 2017. (For a quick primer on healthcare stocks, check out: Investing in the Healthcare Sector.)

Curis, Inc. (CRIS)

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.

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 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 been paring its income losses, according to the earnings report for the period ended June 30, 2017. Curis has been increasing its research and development expenditures, which has negatively affected the bottom line. Investing in this stock must be based on whether investors see promise in the company's drug pipeline. (See also: Invest in Cancer Research With These 3 Stocks.) 

China Pharma Holdings, Inc. (CPHI)

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, and 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 is in a sideways pattern now, perhaps forming a new base. Investors should note that the 50-day moving average has crossed below the 200-day moving average, which suggests that the stock could have more downside. However, these moving averages are trailing indicators. (See also: Pharma Majors to Benefit From China Drug Inclusion.)

For the period ended March 31, 2017, the company reported that it had reduced its losses. Operating income was negative but had rebounded dramatically from the previous quarter. Yearly revenues decreased by 23.5%. Revenues and income were also down in the period ended June 30, 2017. Investors who buy this stock are hoping for 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 important to remember that China monitors and controls companies closely, so any investor in this stock is also obtaining exposure to the geopolitical influences that could affect the stock. (For more, see: China on a Record High International Healthcare Acquisition Spree.)

  • Average Volume: 160,820
  • Market Cap: $7.356 million
  • P/E Ratio (TTM): -0.87
  • EPS (TTM): -$0.19

Repligen Corporation (RGEN)

Antibodies dominate the product line for Repligen. The company sells worldwide and has been in business since 1981. Quarterly revenues have been rising, and operating income is slightly up for the past four quarters.

The stock price broke through resistance at around $34 per share in April 2017 and then climbed steadily, but it saw a decline at the end of September, plummeting over 14% in one session on Sept. 26. However, Repligen's revenues have been rising for the past four quarters, and the company's longevity offers stability. It would be very unlikely that this company would disappear given its strong product line and marketing effectiveness. (See also: How to Pick Winning Penny Stocks.)

  • Average Volume: 392,086
  • Market Cap: $1.62 billion
  • P/E Ratio (TTM): 73.44
  • EPS (TTM): $0.51

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. (See also: Understanding Penny Stocks' Risks and Rewards.)

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.