Biotech stocks have been in free-fall mode this holiday season. For instance, the closely watched iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) lost a staggering 16.7% of its value at its low point this month. The IBB's December swoon had even outpaced the sharp drop across the broader markets -- that is, prior to yesterday's historic rally. And not surprisingly, this turbulent environment has been particularly treacherous for small-cap biotechs, especially those with limited revenue and sub $5 share prices (i.e., penny stocks). 

AcelRx Pharmaceuticals (NASDAQ:ACRX) and Novavax (NASDAQ:NVAX) are prime examples. Both of these companies have seen their shares struggle mightily this month in the wake of this marketwide downturn. While neither of these beaten-down biotechs is a sure-fire winner, this latest pullback has arguably skewed their respective risk-to-reward ratios for the better -- perhaps making them attractive buys for risk-tolerant investors. Read on to find out more. 

A plant growing out of a cup full of change.

Image source: Getty Images.

A victim of bad press

Normally, the Food and Drug Administration green-lighting your top drug candidate results in a nice uptick in your share price and market capitalization. AcelRx Pharmaceuticals, however, has seen its shares drop by an astonishing 54% since the FDA approved its sublingual opioid, Dsuvia, on Nov. 2. 

The problem? Investors are apparently concerned about Dsuvia's tsunami of bad press since its approval. The big knock against the drug is basically the timing of its approval. Right now, the raging opioid crisis is reportedly claiming 115 American lives every single day. Critics have thus argued that approving yet another powerful opioid in the midst of this crisis is an absolutely terrible move by the FDA. 

To counter this sea of negativity, AcelRx has noted in its various investor presentations that Dsuvia both fills an unmet medical need (patients who are not amenable to injected opioids) and it can only be administered in medically supervised settings, whereby minimizing the potential for diversion and abuse. The drug also stands to fill a clear need in battlefield situations where wounded soldiers need rapid pain relief but are unable to receive an IV-administered pain reliever. 

What's the upside? Despite the stock's painful drop over the last two months, AcelRx should turn out to be a stellar long-term play for patient investors. After all, Wall Street and the company both have Dsuvia generating close to $500 million in annual sales within the next few years. That projected sales estimate is considerably larger than AcelRx's current market capitalization, suggesting that this stock is ridiculously undervalued right now. 

Two reasons to be optimistic

Novavax, a developmental-stage vaccine company, is close to rolling out two major trial readouts. First up, the biotech is slated to release top-line results for its pivotal respiratory syncytial virus (RSV) vaccination study sometime in the first quarter of 2019.

At present, there are no vaccines on the market indicated to prevent this ultracommon disease in infants and young children. So, if successful, Novavax's RSV vaccine known a ResVax should easily go to generate several hundred million in annual sales in short order. Longer term, this vaccine is expected to eventually achieve blockbuster status (over $1 billion in annual sales), especially if it can be successfully combined with the company's experimental flu vaccine, NanoFlu.

Speaking of which, Novavax is expected to follow-up this ResVax release with an update on its mid-stage NanoFlu program. If these flu vaccine data are positive, the company plans on advancing NanoFlu into a pivotal-stage study before the end of next year. Novavax could thus have two high-value vaccines on the market within the next two to three years. 

What does this all mean for Novavax's near-term outlook? The big picture issue is that the company's share price should shoot higher if at least one of these clinical readouts turns out positively. Wall Street, after all, has this stock's 12-month consensus price target pegged at $4.33 -- implying that Novavax's shares could more than double from current levels. 

All that being said, this is a company with a lengthy history of clinical setbacks, so you definitely shouldn't buy more than you can afford to lose.