Penny stocks can be a risky bet. But with that risk comes the potential for high reward. And biotech penny stocks have been some of the most rewarding in 2020.

The hunt for a coronavirus vaccine has propelled former penny stocks into the big time. For instance, Novavax (Nasdaq: NVAX) was trading for less than $5 at the beginning of 2020. Then came the news that it was rolling out clinical trials for a COVID-19 vaccination.

The news propelled the stock price upward. And the good news continued for those who had already invested in the company. It got a $1.6 billion injection of government funds through Operation Warp Speed. Despite its midcap status, Novavax’s share price is on pace with much larger companies like AbbVie (NYSE: ABBV) and Novartis (NYSE: NVS).

Meanwhile, lots of other biotech penny stocks have also had a breakout year.

Shares of Opka Health (Nasdaq: OPK) have more than doubled on news of the development of its antibody testing. Co-Diagnostics‘ (Nasdaq: COSDX) COVID-19 testing kits propelled the company’s shares up more than 1,850%. And when iBio’s (NYSE: IBIO) vaccine got fast-tracked, it sent the company’s shares up more than 633%.

All of these gains have investors scrambling to find the next great coronavirus stock. But the simple truth is trying to pinpoint the next biotech penny stock to break out with a COVID-19 treatment is a fool’s gambit.

There are much more telling and reliable metrics. Potential investors should be looking at more than a firm’s press release touting a novel coronavirus therapy.

And with that, here are three more valuable characteristics that biotech penny stock investors should be looking for. Keeping an eye on these can mean the difference between a four-bagger and watching your investment go up in flames.

Biotech Penny Stocks: Look for Cold Hard Cash

When a small biotech firm doesn’t have a lot of cash on hand, it’s common for the company to sell more shares. This helps it fund future clinical trials of its therapies. And when a glut of shares suddenly enters the market, share price usually falls.

That’s why one of the safest metrics to look for in a biotech penny stock is cash. Make sure the company has plenty of cash on hand. Because when a company has hundreds of millions of dollars to cover operating costs and future trials, it’s unlikely it will resort to watering down its share price by offering additional ones.

The Significance of Biotech Diversity

Just like a well-managed investment portfolio, diversification for a biotech company is key. A firm with only one or two treatments in the pipeline can be an extremely risky venture. Because if they fail, so can that investment.

On the other hand, a company with a lot of irons in the fire can be a better investment. If one drug fails, there are still plenty of other treatments on the horizon. Any of them can act as a catalyst to send share prices skyward.

Speaking of Diversity…

This might seem obvious, but never put all of your nest eggs in one basket. Because if you drop that basket, well, you know the story…

When investing in biotech penny stocks, do your homework and spread the money around. In the same way it’s important for a company to have many treatments that it’s hoping to bring to market. Investors should diversify their portfolios or accept the higher risk.

Holding 500 shares of a single biotech penny stock could mean a stagnant portfolio until a breakthrough therapy comes onto the market… which can take years in some cases. But Holding 100 shares of five companies increases the odds that one of your holdings can go gangbusters and make up for the stagnation of the others.

For even more diversification benefit, it’d be good to consider other stocks as well. Here are some of the top biotech IPOs. Also, here’s a list of the top penny stocks in 2020 from all sectors.

Top Biotech Penny Stocks for 2020

Based on the criteria above, we’ve put together a list of five biotech penny stocks that could be poised to have a breakout year.

1. CymaBay Therapeutics (Nasdaq: CBAY)
2. InflaRx (Nasdaq: IFRX)
3. Five Prime Therapeutics (Nasdaq: FPRX)
4. Tonix Pharmaceuticals Holding Corp. (Nasdaq: TNXP)
5. Cleveland BioLabs (Nasdaq: CBLI)

CymaBay Therapeutics

The first biotech penny stock to keep an eye on is CymaBay Therapeutics. This California-based small cap outfit focuses on therapies to help those with liver and other chronic diseases. And it’s got millions of dollars in cash on hand. This will help it see therapies in its pipeline through the clinical trial stage.

The company’s working on a treatment for primary biliary cholangitis (a destructive autoimmune disease). And an expert independent panel has just unanimously found it to have caused no liver injury in a phase 2b NASH study. And the company plans on moving forward per approval from the FDA as soon as possible.

Also, clinical studies for MBX-2982 as a potential treatment for diabetes are moving forward. As are studies of its CB-001 treatment for fatty liver disease. And even though these two therapies are in the early stages, if either gets fast-tracked for these common conditions, it could do wonders for the company’s stock price.

InflaRx

The next company to keep an eye on is InflaRx. This company is also flush with cash.

InflaRx currently has several treatments in the works. But its leading candidate for market is IFX-1, which is entering Phase 3 trials to verify its treatment of hidradenitis suppurativa. It’s a debilitating chronic skin disease that results in painful inflammation of hair follicles. This can lead to inflammatory nodules, abscesses and scarring.

That same treatment is being tested to treat COVID-19 pneumonia and the inflammation of blood vessels. By testing a single drug’s ability to fend off several conditions, InflaRx might be setting itself up for several successes at once. All of which means this might not be a biotech penny stock for long.

Five Prime Therapeutics

Another small cap company with plenty of cash on hand, Five Prime has several cancer therapies in the works. This San Francisco-based company has also partnered with Bristol-Myers Squibb on two promising programs to decrease tumor growth.

The company is also working toward developing treatments for gastric, breast, ovarian and endometrial cancers. And while there is a lot of promise here, all of Five Prime’s treatments are multiple phases away from coming onto the market. So this one isn’t likely to shoot up as quickly. But thanks to the partnership with Bristol-Myers, the company should have plenty of money to continue to move the needle forward on its trials.

Tonix Pharmaceuticals

Tonix Pharmaceuticals’ pipeline of products is the very picture of diversity. Its stable of potential therapies are being developed to treat PTSD, autoimmune conditions, cancers, radiation injury, fibromyalgia, depression, smallpox and monkeypox.

Tonix’s broad spectrum of applicable biological options are sound enough in their own right. And the company has also recently partnered with Southern Research on a COVID-19 vaccine. This shotgun approach puts Tonix in a good position for rapid growth in the not too distant future… which could lead to big rewards for those who invest in this biotech penny stock.

Cleveland BioLabs

This New York-based biotech firm’s stock price has seen a fair amount of peaks and valleys. And while a lot of the price spikes this year have been head-scratchers (nothing has moved beyond Phase 1 trials quite yet), there is a lot to like about the company’s pipeline of therapies.

The company is developing novel approaches to activate the immune system. It also addresses several serious medical conditions with unmet needs. The product candidate that has moved the most is entolimod, which the company is developing as a countermeasure to radiation exposure and as an immunotherapy for oncology. This treatment is currently in the second Phase 1 study in patients with advanced-stage cancer. If things go according to plan, this biotech penny stock won’t be this cheap for too much longer.

The Bottom Line

Anyone interested in investing in biotech penny stocks is going to need a decent level of risk tolerance. Small cap and midcap stocks can ebb and flow with the tide of the greater market – regardless of therapy pipeline.

But for investors who have the stomach for it, biotech penny stocks have the potential to outpace the market. Any investment comes with some form of risk. But few come with this type of potential payoff.

Investors looking for an 8% rate of return would just put their money into an S&P 500 index fund and call it a day. But if you’re looking for the latest trends in the biotech space with plenty of analysis and additional investment opportunities, be sure to sign up for our Wealthy Retirement e-letter below.