It takes a certain kind of investor to invest in small specialty drug developers. Share prices of these baby pharma and biotech stocks swing wildly based on even small developments with their lead drugs.

The large price swings in these small-cap drugmakers can provide a good opportunity for investors who keep some of the more promising ones on their watch lists. Here are four small specialty pharmas trading at under a $1 billion market cap that all investors should have on their watch list for their potential to produce huge multibagger returns.

Array BioPharma (NASDAQ:ARRY)
If Rule Breakers pick Exelixis (NASDAQ:EXEL) can be described as a baby Genentech thanks to its strong drug pipeline and pharmaceutical partners, then Array deserves to be called a baby Exelixis.

Array has five cancer compounds in phase 1 testing, as well as two about to begin human clinical trial work. Much like how Exelixis is connected to many of the best oncology-focused pharmas, Array also has development partnerships or receives research funding from many of these same top drugmakers like Amgen, Genentech, Takeda, Eli Lilly (NYSE:LLY), and AstraZeneca.

Array's cancer compounds, like its MEK inhibitor currently in phase 2 testing, will even compete directly with some of Exelixis' drug candidates if Array's partner AstraZeneca can bring them through the development process.

Array is also the company that InterMune licenses its exciting hepatitis C protease inhibitor compound from, and stands to gain royalties and milestone payments from any success with the drug.

Even though it is burning cash and has no compounds on the market, Array clearly has the potential to become a biotech-research powerhouse with so many novel drugs in development.

ViroPharma (NASDAQ:VPHM)
While much of the recent focus in the hepatitis C development space has been on Vertex Pharmaceuticals (NASDAQ:VRTX) and its hepatitis C compound, telaprevir, ViroPharma and partner Wyeth have quietly been working on bringing their hepatitis C non-nucleoside polymerase inhibitor through the clinical trial process.

If the drug candidate, dubbed HCV-796, successfully makes it through the regulatory process, it would represent a much-needed new class of hepatitis C treatments.

The companies reported positive phase 1 results in December of last year for HCV-796. Currently the drug is in phase 2 testing, with four- and 12-week efficacy results from the study expected later this year.

There's not enough room to get into the rest of ViroPharma's pipeline or business, but the drugmaker is highly profitable as a result of sales from the antibiotic drug Vancocin. Its other pipeline product, Maribavir, an antiviral drug to help transplant patients, produced robust phase 2 study results last year and also has a good chance of gaining FDA regulatory approval if its earlier trial results hold up in phase 3 testing.

Alexza Pharmaceuticals (NASDAQ:ALXA)
I've mentioned Alexza before in an article on successful health-care entrepreneurs. Perhaps the most speculative of the four picks thanks to the commercialization risk of its drugs, Alexza is developing inhaled versions of genericized drugs like the anxiety treatment Xanax and pain drug fentanyl.

What makes Alexza exciting is the scope for it to use its technology across a broad range of drugs. Taking already-approved compounds and changing their method of delivery reduces some of the development risk with its pipeline and means Alexza's pipeline is only constrained by its budget.

The current market cap of less than $300 million for such a platform technology with minimized drug development risk doesn't seem an unreasonable price to pay. The main questions are whether there will be a market for Alexza's compounds if they gain approval, and how well the company handles its finances until it can start marketing its drugs. For more on Alexza, see our CEO interview from last month.

Progenics Pharmaceuticals (NASDAQ:PGNX)
Progenics and partner Wyeth stand to be the first companies to gain regulatory approval in the U.S. and European Union early next year to treat opioid-induced constipation with a subcutaneous version of their methylnaltrexone compound.

The companies are developing several versions of their methylnaltrexone drug candidate but have stumbled somewhat with the sure-thing, billion-dollar oral version of the drug after having to send it back into phase 1 testing earlier in the year.

Just two weeks ago, Progenics announced that the oral version was back on track following a positive phase 1 study and could be on the market in late 2009 or early 2010 if further testing goes smoothly.

The reduced $580 million market cap at which Progenics now trades, thanks to the stumble with the oral version, presents an opportunity for investors to buy into shares of a drugmaker whose lead drug has a strong chance of being on the market in less than six months.

Progenics has a fairly deep drug pipeline besides methylnaltrexone. I'm not keen on some of its drug candidates, but another pipeline product worth watching is its HIV treatment PRO 140, which belongs to the same novel class of HIV drug candidates as Pfizer's almost-approved Maraviroc (although PRO 140 is a less convenient monoclonal antibody).

I'll continue to follow these four drugmakers to see what happens to them in the future. Investors looking for the least speculative of the bunch should stick with ViroPharma and Progenics. All four deserve following, though, because of their potential to provide market-stomping share price returns even if investors wait for these company's drug candidates to ripen in development.

Vertex, Exelixis, and InterMune are Rule Breakers selections. You can check out all of our recommendations, as well as get access to our message boards and exclusive content, with a 30-day free trial.

Eli Lilly is an Income Investor recommendation. Pfizer is an Inside Value pick.

Fool contributor Brian Lawler owns shares of InterMune, but no other company mentioned in this article. The Fool has a disclosure policy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.