Biotech stocks trading under $5 a share may seem like more trouble than they're worth. Low-priced biotechs, after all, are often victims of serious clinical or regulatory setbacks that cast doubt on their long-term viability. 

Over the past few years, however, several beaten-down biotech stocks have ended up producing enormous gains for risk-tolerant investors. For example, Acadia Pharmaceuticals (ACAD 2.10%), Exelixis (EXEL 0.72%), and Dynavax Technologies Corporation (DVAX 2.52%) were all once so-called "penny stocks" that went on to rebound nicely once their lead clinical candidates made it successfully onto the market.

Man standing in front of a concrete wall littered with drawings of money bags and question marks.

Image Source: Getty Images.

The unifying theme here is that Acadia, Exelixis, and Dynavax each had their fair share of skeptics that caused their share prices to trade at bargain-basement levels once upon a time. When the worm turned, however, all three of these biotechs rose sharply in the blink of an eye.  

That brings us to the focus of this article. Shares of Amarin Corporation (AMRN 1.14%) and Geron Corporation (GERN -2.10%) are both trading well under $5 at the moment, and both of these small-cap biotech companies are nearing pivotal catalysts that will undoubtedly have a major impact on their valuations for a long time to come. With this background in mind, let's consider which of these two speculative biotech stocks has the better shot at following in the footsteps of Acadia, Exelixis, and Dynavax moving forward.

The case for Amarin

Amarin is set to reveal the long-awaited cardiovascular outcome data for its prescription fish oil pill Vascepa before the end of next month. If this trial hits the mark, Vascepa's sales are projected to eventually reach upwards of $2 billion per year at peak. The drug is currently only approved for patients with severely high triglycerides, which is a market that can arguably only support a couple hundred million in annual sales. So, this upcoming data readout is certainly a big deal for Amarin and its shareholders.

The biotech's main risk factor centers around the fact that no previous trials have ever assessed the cardioprotective benefit of a pure form of eicosapentaenoic acid as an add-on to statin-therapy in a double-blinded fashion. In short, Vascepa's ongoing cardiovascular outcomes trial known as "Reduce-It" will break new ground regardless of its outcome. 

The good news is that Amarin's shares are unlikely to roll into a death spiral if Reduce-It is a failure. Vascepa has proven to be a powerful tool in the battle against high triglyceride levels in its first approved indication and that situation shouldn't be dramatically impacted by Reduce-It's results. The downside is that the market will probably overreact in a big way if Vascepa fails to hit on its primary endpoint in Reduce-It. 

Wall Street thus seems to think that Amarin's stock will be trading somewhere between $2 to $5.50 once these results are announced -- at least based on the volume and open interest in the options market for this stock. This projected share-price range translates into a potential 45% downside risk, compared to an 89% upside potential within the next six weeks of trading. 

The case for Geron

Geron is expected to announce Johnson & Johnson's (JNJ -1.39%) decision regarding the pair's blood cancer collaboration for the experimental drug imetelstat before the end of the third quarter. Since 2014, J&J has been evaluating imetelstat in patients with two forms of blood cancer known as myelofibrosis and myelodysplastic syndromes.

Taken together, these first two indications could push the drug's peak sales into the range of $2 billion to $3 billion within a decade. However, there's a good chance that J&J would also pursue several additional indications like acute myeloid leukemia if it retains the drug's rights moving forward. 

Geron's core risk factor is that it has no other clinical assets outside of imetelstat, and it essentially downshifted into a holding company following the initiation of this licensing deal roughly four years ago. Stated simply, Geron doesn't have the capability to easily transition back into a true research and development operation if this collaboration doesn't work out.

The biotech has been raising cash to buffer itself from total collapse in the event imetelstat fails to convince J&J's decision makers to sally forth. But the impact on Geron's share price will undoubtedly be dramatic if the company is forced to advance imetelstat's clinical program alone. 

Using the options market as a guide once again, Wall Street seems to be forecasting that Geron's share price will range from a low $0.50 to a possible high of $12 by the third week of September. Geron's maximum downside risk therefore appears to be about 87% from current levels, whereas its peak upside potential right after this binary event looks to be about 200% from here.     

Which stock is the better buy?

In this head-to-head matchup, Amarin arguably comes off as the more compelling speculative buy because its shares aren't expected to utterly collapse if Vascepa's cardiovascular outcomes trial fails to live up to expectations. Geron, on the other hand, has some serious skeptics out there that seem to think the company may struggle to recover if J&J walks.

That's not a totally unfair assessment, given that Geron is basically a science experiment -- and not a traditional business -- at this juncture. The company also lacks the resources to rapidly reconstitute its clinical capabilities if J&J hands back imetelstat's rights next month. 

All that being said, investors should bear in mind that both stocks are firmly in penny stock territory for a good reason: Their risk profiles are sky-high at this point. That's why you definitely shouldn't buy more than you can afford to lose in either case, and you may even want to hedge your position ahead of these binary events by buying some put options.