BERKELEY, Calif. ( TheStreet) -- Most of the market took a breather the Christmas holidays but not Xoma ( XOMA - Get Report), which saw the value of its shares more than double on extraordinary volume despite the lack of any real news from the company (Unless you count disclosure of another dilutive financing right before the end of the year.)

Investors are looking ahead to when Xoma is expected to release interim results from a small, mid-stage study of an experimental diabetes drug, XOMA 052. The company announced late Monday that it will hold a conference call Tuesday morning to provide a business update. Whether or not that includes XOMA 052 data was not disclosed.

Clearly, investors who've been buying the stock in the past week or so believe strongly that the XOMA 052 data will be positive. What's just as clear is that Xoma's entire future rests on the development of XOMA 052, so the bet investors are making is big -- and risky.

XOMA 052 has the potential to be a blockbuster drug because it aims to attack the root cause of diabetes -- the inability of damaged islet cells in the pancreas to produce insulin. All other diabetes drugs either boost insulin production or help the body to be more sensitive to insulin produced naturally. XOMA 052 could also play a meaningful role in other diseases where inflammation is the culprit -- including cardiovascular disease and rheumatoid arthritis.

The scary, glaring danger is that XOMA 052 is owned by Xoma -- a company with an ignominious reputation in the biotech sector for drug development futility (and a chief executive who was almost named TheStreet's Worst Biotech CEO of 2010.) Over the course of two decades, Xoma has accomplished very little but rack up a mountain of losses amidst a plummeting stock price. Developing XOMA 052 successfully on its own is a feat that Xoma's management team may be incapable of achieving, even if the drug works.

At Monday's close of $5.30, Xoma shares are up 122% since Dec. 21. The stock actually closed above $7 on Dec. 23 before selling off a bit. Mind you, remember that Xoma instituted a 1-for-15 reverse stock split last August in a last-ditch effort to remain Nasdaq listed.

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With that background, here's a quick FAQ on XOMA 052 and the upcoming phase II study results:

What should investors be looking for in this phase II study of XOMA 052?

The key data point (and the primary endpoint of the study) will be to determine the ability of XOMA 052 to reduce blood glucose (as measured by reductions in HbA1c levels) in patients with Type 2 diabetes.

This phase IIa study enrolled about 70 patients with Type 2 diabetes and randomized them to one of three dose levels of XOMA 052 and a placebo. All patients were also treated with a background regimen of the diabetes medicine metformin.

Xoma will be releasing interim results from the study based on three months of treatment. The study will continue, with patients randomized to XOMA 052 remain under treatment for another three months.

How will we know if the XOMA 052 data are positive or not?

The most immediate thing to look for is a greater reduction in HbA1c levels for XOMA 052-treated patients compared to patients treated with a placebo. It's not unusual in diabetes trials to see placebo patients demonstrate small reductions in blood glucose levels, but of course, the improvement (reduction) in XOMA 052 patients needs to be larger.

What's the magic blood glucose-lowering number that XOMA 052 needs to beat in order for investors to judge the phase II study a success?

That's a tough question to answer. Interim, three-month data from a relatively small study will only provide a snapshot of the drug's potential. With that said, David Kliff of the Diabetic Investor newsletter tells me that a .75% reduction in HbA1c would be a meaningful result worthy of some optimism (assuming the side effect profile is relatively benign.)

RBC Capital Markets analyst Jason Kantor is willing to be a bit more accommodating. In a recent note, he told clients that an HbA1c reduction of around 0.6% after three months should be viewed favorably. That would match results from an earlier, phase I study of XOMA 052.

Previous data on XOMA 052 in diabetes exists? Tell me more.

Xoma conducted a series of small, phase I diabetes studies of XOMA 052 in 2008 and 2009. These studies provided a hint of XOMA 052's efficacy but also raised some questions that cast a shadow over the drug. (These questions are also the reason for why investors and potential Xoma partners have wanted to see more data before getting comfortable with XOMA 052's diabetes potential.)

I won't go through all the previous data, but in a multi-dose study of just five Type 2 diabetes patients, treatment with a 0.03 mg/kg dose of XOMA 052 resulted in a 0.6% reduction in HbA1c and a fasting blood glucose reduction of 27 mg/dl after 56 days. By comparison, the placebo patients reported a 0.1% drop in HbA1c and a 13 mg/dl increase in fasting blood glucose after 56 days.

However, in the same study, another five Type 2 diabetes patients treated with a higher 0.3 mg/kg dose of XOMA 052 reported a 0.2% increase in HbA1c and a 20 mg/dl increase in fasting blood glucose levels. The decidedly worse outcomes for the higher dose of XOMA 052 raised questions about the entire study. Given the small number of patients, the poor high-dose results might just have been a fluke but then again, it also cast some doubt over the more optimistic lower-dose results.

What is XOMA 052 and how does the drug work?

XOMA 052 is an injectable monoclonal antibody that targets interleukin-1 beta, a pro-inflammatory protein that is thought to play a role in diabetes, rheumatoid arthritis and other diseases. XOMA 052 binds to IL-1 beta, thereby preventing inflammation that can damage insulin-producing islet cells in the pancreas.

In a Dec. 21 note that seems to have ignited this most recent wave of Xoma buying, SummerStreet Research Partners noted that while other companies are developing IL-1 beta inhibitors, Xoma's XOMA 052 could be best in class.

"We see an opportunity for significant expansion of the IL-1 class in diabetes. Pending data in diabetes should confirm this thesis during the first half of 2011. We believe anti-IL-1 therapy could play an important role in diabetes due to its impact on islet cell function which could allow glucose control with a reduced risk of hypoglycemia or heart attacks. Xoma, which has a minuscule current valuation and a potentially best-in-class compound, offers the biggest leverage to this opportunity," the SummerStreet report stated.

What else can we expect from Xoma on XOMA 052 after the release of the phase IIa results?

Xoma is also running a larger, phase IIb study of XOMA 052 in Type 2 diabetes patients which is expected to yield data in the latter part of the first quarter. This study, which enrolls 440 patients, is studying the same HbA1C endpoint but with a more clinically relevant six months of treatment. Xoma is also conducting a small phase II study in Type 1 diabetes patients.

Will Xoma find a partner for XOMA 052?

That's the plan. Xoma management has generally botched the XOMA 052 partnership expectation game with investors, meaning the company has so far overpromised and under-delivered. The data from the phase IIb study coming at the end of the first quarter, if positive, should be sufficient to garner interest from a larger drug company. Whether Xoma's management team can get a deal done is not a guarantee. Again, XOMA 052 is a potentially valuable drug in the hands of a Keystone Cops management team. Whether or not they can do something right is still an open question.

Competition? Any other IL-1 beta blockers being tested in diabetes?

Yes, as SummerStreet also points out, helpfully, Eli Lilly ( LLY - Get Report) is conducting an 80-patient phase II study of its anti IL-1 beta antibody Ly2189102 in Type 2 diabetes, with results expected in the first half of the year.

Novartis ( NVS - Get Report) owns an anti IL-1 beta antibody known as Ilaris (canakinumab), approved as a treatment for the orphan disease cryopyrin-associated periodic syndromes (CAPS) in 2009. Sales are minimal. Novartis is conducting phase II studies of Ilaris in Type 2 diabetes, with data from one of these trials expected later this year.

--Written by Adam Feuerstein in Boston.

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Adam Feuerstein writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.