Buying stocks just because they're going up is a great way to lose a lot of money, but that doesn't mean you should avoid every company that's signaling signs of success.

These three small-cap biotech stocks have been rocketing higher all year and for good reasons. They're all heading toward the exciting transition from a clinical-stage drugmaker to a company with something to sell.

Company (Symbol) Price Change in November 2019 Price Change in 2019 Market Cap
Kodiak Sciences (NASDAQ:KOD) 41% 314% $1.08 billion
Krystal Biotech (NASDAQ:KRYS) 26% 198% $892 million
Axsome Therapeutics (NASDAQ:AXSM) 15% 1,030% $955 million

Data source: Yahoo! Finance.

Here's why the returns they've already provided this year could be the beginning of a much longer run -- that is, unless a deep-pocketed biopharma company delivers a juicy buyout offer.

1. Kodiak Sciences: Pharmacokinetics made easy

It isn't easy getting injectable drugs to do their jobs for the entire time in between visits to the practitioner who does the poking. Efficacy gaps between appointments can be a big problem for patients with progressive diseases, especially those with age-related macular degeneration (AMD) and related causes of blindness.

Along with diabetic macular edema, AMD involves the formation of unnecessary new blood vessels that obstruct the retina. Kodiak's lead candidate, KSI-301, is a vascular endothelial growth factor (VEGF) inhibitor, like Eylea from Regeneron (NASDAQ:REGN) that prevents invading blood vessels from growing larger.

A 12-week dosing regimen is an option for treatment with Regeneron's VEGF inhibitor, but it's not as effective as standard eight-week dosing. That won't be a problem with Kodiak's VEGF inhibitor, because it's attached to long strands of a biopolymer used in drug-eluting stents that help it stick around much longer than Eylea. In fact, the results so far suggest an injection of KSI-301 can keep doing its job for up to six months.

Sales of Eylea are on pace to reach $7.7 billion this year. If KSI-301 can repeat its previous success in an ongoing pivotal study, shares of Kodiak Sciences will soar much higher.

Big rocket waiting for launch.

Image source: Getty Images.

2. Krystal Biotech: Providing closure

Krystal Biotech's developing a topical gene therapy called bercolagene telserpavec (B-Vec), for dystrophic epidermolysis bullosa (DEB) patients. There are different forms of DEB, but they all have trouble producing type 7 collagen on their own. Without enough collagen to keep skin layers from separating, giant blisters form easily and leave open wounds that don't close for months at a time, if they close at all. 

During a mid-stage trial with four severely affected DEB patients, a single treatment with B-Vec closed nine out of 10 open wounds, and the last one closed a week after receiving a second administration. None of the wounds treated with a placebo showed measurable improvement, but the chronic wound that required a second administration to close had been open for more than four years.

In the U.S., less than a million children are born with the most severe form of DEB, and Krystal's B-Vec will probably be their first available treatment option. Different forms of DEB affect a combined 6.5 million newborns in the U.S. each year, which gives this biotech plenty of room to grow.

3. Axsome Therapeutics: Drug development on a shoestring

The brain doesn't give up its secrets easily, which makes developing drugs to treat mental disorders seem like a black hole for research and development dollars. This hasn't been the case for Axsome Therapeutics. This opportunistic biotech saved a bundle by taking advantage of two well-understood drugs known to amplify each other's effects.

Axsome's lead candidate, AXS-05, is the combination of a decades-old antidepressant called bupropion, and dextromethorphan, the active ingredient in most cough suppressants. In a mid-stage clinical trial, 47% of patients with major depressive disorder (MDD) who were treated with AXS-05 achieved clinical remission, compared with just 16% of those treated with bupropion on its own.

In 2020, Axsome Therapeutics could launch the first new oral antidepressant aimed at MDD and treatment-resistant depression in over a decade. Every year, millions of adults experience at least one bout of MDD, many of which resist treatment with today's treatment options. 

With such a large patient population, AXS-05 could generate more than $1 billion in annual sales for Axsome Therapeutics in a few short years. That's a return worth waiting for.

A laboratory worker places fluid from a pipette into a beaker.

Image source: Getty Images.

Be responsible

It might be tempting to try supercharging your portfolio by going overboard with these stocks, but it's not a great idea. There are plenty of factors that can delay the review of new drug applications, and most are beyond the control of the biopharmaceutical companies that submit them.

Getting the thumbs up from the FDA doesn't guarantee a successful launch either. In fact, the trajectory of new drug launches can be harder to predict than clinical trial results. These biotech stocks have what it takes to keep flying higher, but they belong in a diversified portfolio.