Investing in small-cap biotech stocks can be scary and exciting at the same time. A pipeline failure can devastate the stock, while great clinical results can cause share prices to skyrocket.

There are more small-cap biotech stocks than any investor can realistically keep up with. But three stocks I think you'll want to keep on your radar are Abeona Therapeutics (NASDAQ:ABEO), Atara Biotherapeutics (NASDAQ:ATRA), and Viking Therapeutics (NASDAQ:VKTX). Here's why these small-cap biotech stocks are worth monitoring closely. 

Hand holding flask with laboratory equipment in background

Image source: Getty Images.

1. Abeona Therapeutics

Abeona's candidate that's furthest along in development is EB-101. The biotech plans to begin a pivotal phase 3 study later this year evaluating the gene therapy in treating recessive dystrophic epidermolysis bullosa (RDEB), a rare genetic disease that causes the skin to blister easily. EB-101 showed considerable promise in earlier clinical studies. If it ultimately wins approval, the therapy could achieve peak annual sales of more than $100 million.

The crown jewel for Abeona, though, is another gene therapy: ABO-102. This gene therapy targets treatment of Sanfilippo syndrome type A, which is also known as mucopolysaccharidosis (MPS) IIIA. The rare genetic disease affects the brain and spinal cord, with symptoms typically appearing during early childhood.

Abeona presented data from a phase 1/2 clinical study for ABO-102 in May at the annual meeting of the American Society for Gene and Cell Therapy (ASGCT). Investors were somewhat disappointed by the data despite encouraging efficacy and safety results. However, this disappointment likely stemmed more from what Abeona didn't report -- demonstrable improvement in patients' cognitive scores -- than concerns about the positive results measured by key biomarkers. 

ABO-102 could generate peak annual sales in the ballpark of $200 million if approved. Abeona's market cap is currently around $760 million. Success for the two lead products could make this biotech stock much more valuable in the next few years.

2. Atara Biotherapeutics 

Atara Biotherapeutics' share price has soared close to 150% so far in 2018, nearly making Atara's market cap too large to allow it in the small-cap category. The big catalyst for the biotech is heightened anticipation for Atara's lead candidate, tab-cel, which is being evaluated in two phase 3 clinical studies.

Tab-cel is an off-the-shelf immunotherapy where T cells (white blood cells that are key to the body's immune system) from a healthy donor are engineered to treat specific conditions, including cancer and viral infections, and are then delivered to a patient. In the ongoing phase 3 studies, the therapy is targeting a type of lymphoma (lymph node cancer) that develops following stem cell transplants or solid organ transplants.

The key thing to really know about tab-cel is that phrase "off the shelf." Currently approved T cell therapies require complex off-site manufacturing that drives up costs and increases the amount of time required for treatment. If Atara is successful, treatment will be able to be delivered quickly to patients at a lower cost.

My colleague George Budwell views Atara as one of the top growth stocks to buy right now. His enthusiasm stems from Atara's timeline of potentially being able to file for European approval for tab-cel next year and the prospects that the biotech could be acquired in the not-too-distant future. I suspect that George could be right.

3. Viking Therapeutics

Viking Therapeutics is the biggest year-to-date winner of these three small-cap biotechs, with its stock price tripling so far this year. While Viking has several pipeline candidates, the one attracting the most attention is thyroid hormone receptor beta-selective agonist VK2809.

The biotech expects to report results later in 2018 from a phase 2 study of VK2809 targeting high cholesterol and non-alcoholic fatty liver disease (NAFLD). It's the latter target indication that has investors especially eager, because NAFLD includes non-alcoholic steatohepatitis (NASH) -- a disease some predict could become "the next hepatitis C."

Viking stock received a huge boost recently thanks to great results reported by Madrigal Pharmaceuticals (NASDAQ:MDGL) from its phase 2 study of NASH candidate MGL-3196. Because Madrigal's drug uses the same mechanism of action as VK2809, expectations are high for similar success for Viking's phase 2 study. 

Madrigal has reportedly begun looking seriously at selling to a larger drugmaker. With quite a few big pharma companies wanting to score in the potentially lucrative NASH market, I think Viking could also find itself an acquisition target

High risk, high reward

Small clinical-stage biotech stocks like Abeona, Atara, and Viking aren't great picks for many investors. The risks are very high. On the other hand, the potential rewards from these stocks are also great.  

More cautious investors might prefer to closely watch these biotechs and wait for more clinical results for their lead products. That approach would decrease the risk somewhat, although it also means the potential profits would be lower as well. 

Like I said earlier, these kinds of stocks can be both scary and exciting and investors will have to take into account their appetite for volatility when deciding whether to buy.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.