Source: Wikimedia

Biotech stocks frequently attract extreme optimists -- and pessimists -- in droves, for good reason: these stocks can rocket higher or drop like a rock on a single material event.

On the lower end of the market cap range, some biotechs are even known for the fiery battles that break out between bears and bulls, creating tremendous levels of stomach-churning volatility in their wake. Arena Pharmaceuticals (NASDAQ:ARNA), Amarin Corp. Plc (NASDAQ:AMRN), and Keryx Biopharmaceuticals (NASDAQ:KERX), for instance, all have their die-hard fans and detractors with diametrically opposing views.

Although these three small-cap biotech stocks offer eye-popping levels of theoretical upside, I personally wouldn't add any of these battleground biotech stocks to my portfolio. Here's why. 

Arena's fat-fighting pill Belviq is falling far short of expectations
Because a little over a third of Americans are already obese and this number is only expected to get worse going forward, Arena's appetite suppressing pill Belviq was once to believe to have blockbuster potential. Despite being on the market for two years, however, the drug generated a mere $10.9 million in revenue for Arena through the first six months of this year. Making matters worse, Orexigen Therapeutics' rival fat-fighting medicine, Contrave, overtook Belviq in the second-quarter as the market leader.

Source: Arena

With Arena on track to lose a whopping $100 million this year and Belviq unable to make much of a dent cash flow-wise, management wisely shifted investors' collective attention toward its clinical pipeline during its second-quarter conference call. Unfortunately, the company is perhaps three years away from bringing a second drug to market, meaning that Arena is most likely going to be forced to resort to a secondary offering in 2016 to meet its long-term financial needs.  

Amarin's refined fish oil pill is lost at sea
A few years back, investors were excited at the prospect of investing in the next generation of fish oil-based products aimed at reducing high triglyceride levels with Amarin's Vascepa. The basic assumption was that Vascepa could follow in GlaxoSmithKline's Lovaza's footsteps toward blockbuster status. Since the FDA shot down Vascepa's so-called ANCHOR indication targeting a much larger population of patients with only moderately high triglycerides, though, the Irish drugmaker has been faced with a daunting task of funding its ongoing cardiovascular outcomes study "REDUCE-IT", while simultaneously carrying out the commercial launch of Vascepa for a limited patient population.

Source: Amarin

The net result can be seen by taking a quick peak at Amarin's second-quarter results. Through the first half of 2015, the company has already generated a net loss of $94.8 million, despite a nice uptick in Vascepa sales in the first six months of the year to $33.3 million. With only $136 million in cash and cash equivalents remaining, there is almost no way for Amarin to avoid a massive secondary offering to fully fund REDUCE-IT to its conclusion, which could crash its stock price. Perhaps the worst part is that a large offering at this stage could put Amarin's stock in danger of being de-listed from the NASDAQ due to the exchange's price requirements, hinting that a reverse split might be in the stock's future. 

Keryx's chronic kidney disease medication Auryxia is turning into a commercial flop
Because of its billion dollar peak sales estimates in the U.S., Keryx's Auryxia, a medicine indicated for the control of serum phosphorous levels in patients with chronic kidney disease on dialysis, garnered boatloads of attention from investors prior to its approval late last year. Since its launch, though, Auryxia has run into serious trouble from both payers and doctors alike, with both showing little interest in the new medicine. 

This problematic combination is part of what led to Auryxia generating a mere $1.8 million in U.S. sales in the second-quarter of 2015, causing Keryx's share price to fall by 57% so far this year. 

Looking ahead, Keryx, like its peers mentioned above, is staring down a major cash crunch. The company is on track to lose around $100 million this year. So, with only $131 million in cash in the bank at the end of the second-quarter, Keryx could be looking toward the market to raise funds within the next six months. 

Tying it all together
These three small-cap biotechs demonstrate why it's generally a bad idea to invest based on peak sales projections for experimental-stage drugs. After all, the real world sales results can, and often do, differ materially from analysts' models, as well as investors' optimistic back of the envelope calculations. Apart from a white knight in the form of a big pharma partner or buyer coming into the picture, there is little to keep these stocks from continuing their downward move going forward. And that's why I'd avoid taking a chance on catching these falling knives for the time being. 

George Budwell has no position in any stocks mentioned. The Motley Fool has no position in any stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.