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3 Penny Stocks That Could Make You Rich -- or Regretful

George Budwell, The Motley Fool

Penny stocks -- or stocks with sub-$5 share prices -- can be tremendous growth vehicles for risk-tolerant investors. By the same token, stocks that trade at these bargain-basement levels often do so for a very good reason, such as large outstanding share counts, poor underlying fundamentals, or recent strategic setbacks.

The penny biotech stocks Inovio (NASDAQ: INO), Geron (NASDAQ: GERN), and Verastem (NASDAQ: VSTM) each suffer from one or more of these core problems. Nevertheless, these three companies also sport eye-popping upside potentials that could result in life-changing returns on capital for early-bird investors.

Pennies laid out across a form that reads "penny stocks."

Image Source: Getty Images.

Should aggressive investors take a flier on these high-risk, high-reward biotech stocks? Lets dig in to find out.

Taking the slow boat

Over the past five years, Inovio's share price and its average number of outstanding shares have headed in opposite directions:

INO Chart

INO data by YCharts.

The core problem is the company's extremely slow pace of development. Inovio's promising HPV-related cervical precancer drug, VGX-3100, after all, took an exceedingly long time to enter late-stage development following its successful mid-stage trial. And the direct consequence of this slow-boat approach to product development is that the vaccine specialist has had to repeatedly dilute shareholders to fund its operations.

Are brighter days ahead? If VGX-3100 can meet its primary endpoint in the current pivotal trial, industry insiders expect the vaccine to achieve sales of more than $600 million by 2024, according to a report by EvaluatePharma. Even so, this experimental vaccine won't be ready for a regulatory filing until 2021 at the earliest.

Bottom line: Inovio's probably going to keep diluting shareholders over the next two years. So even though VGX-3100 could drive a significant surge in the company's share price at some point, investors may want to wait until this vaccine is closer to a top-line readout before buying shares.

A lost opportunity

Biotech investors aren't a patient bunch. So when Geron lost the blessing of its partner Johnson & Johnson (NYSE: JNJ) last year, investors hit the exits without much forethought. J&J's departure, after all, signaled that Geron's blood cancer drug imetelstat wasn't poised to gain an accelerated approval and that more clinical work was needed before the drug would transform into a commercial-stage product.

Geron, for its part, still believes in the drug. As a result, the biotech is gearing up to launch imetelstat into a pivotal-stage trial for a rare blood disorder known as lower-risk myelodysplastic syndromes. This late-stage trial could unlock hundreds in millions in future sales for the company, and possibly billions. So, not surprisingly, Geron has captured the imaginations of a considerable number of investors hoping to catch lightning in a bottle.

Geron's stock sports a painfully high level of risk, however. If imetelstat flops in this upcoming trial, this biotech is probably toast. So while this speculative stock has the potential to double or triple your money, it could also go belly-up, costing investors most -- if not all -- of their hard-earned capital.

Waiting for growth

Like Inovio's, Verastem's share price and average share count have gone in polar opposite directions over the last five years:

VSTM Chart

VSTM data by YCharts.

However, Verastem did score a big win late last year when the U.S. Food and Drug Administration green-lit its lymphoma and leukemia medicine, Copiktra, as a later-line treatment for these indications. Wall Street has the drug's peak sales ranging from $500 million to $800 million.

If Copiktra can achieve anywhere near these figures, Verastem's shares should turn out to be a steal at current levels. The company's present market cap, after all, is a mere $238 million at the time of writing.

Why is Verastem's stock trading at such a steep discount relative to Copiktra's commercial opportunity? In short, investors, by and large, aren't buying these lofty sales estimates. Copiktra's commercial launch has already gotten off to a poor start, and similar drugs on the market haven't performed well, either.

While Verastem is a tantalizing watch-list candidate in light of Copiktra's commercial opportunity, there's no compelling reason to pull the trigger on this risky stock right now. The drug's commercial launch needs to gain momentum in a big way; otherwise Verastem will continue to burn through its cash reserves, eventually triggering even more dilution.

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George Budwell owns shares of Geron and Johnson & Johnson. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.