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. 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 March 11, 2018. (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 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. (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 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 returning to current prices of around 35 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. (For more, see: China on a Record High International Healthcare Acquisition Spree.)

  • Average Volume: 1,542,196
  • Market Cap: $15.34 million
  • P/E Ratio (TTM): N/A
  • EPS (TTM): -$0.20

Novavax, Inc. (NVAX)

Shares of this vaccine developer could give your portfolio a shot in the arm 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. However, there are other promising products in the pipeline, including a vaccine for 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 a bringing a successful vaccine to market could imply significant profits. (See also: How to Pick Winning Penny Stocks.)

  • Average Volume: 11,972,380
  • Market Cap: $665.852 million
  • P/E Ratio (TTM): N/A
  • EPS (TTM): -$0.68

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.)

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