Vanda Pharmaceuticals' (NASDAQ:VNDA) IPO has been one of the more intriguing ones this year. The small-cap stock had traded at $8 to $10 from the public offering in April until October. Over the past seven weeks, there's been a great deal of volatility. Now shareholders are riding high.

Vanda develops and commercializes clinical-stage drugs. Its portfolio includes drugs intended to treat various conditions, including schizophrenia, bipolar disorder, depression, and insomnia.

Shareholders received splendid news Wednesday when the company announced positive results for the phase 3 clinical trial of its VEC-162 drug, which treats transient insomnia. In a double-blind, placebo-controlled study including 412 patients, the results showed that patients taking VEC-162 fell asleep faster and remained asleep longer than those taking the placebo.

Vanda also reported that the drug appears to lack the side effects associated with hypnotics and sedatives and should not be considered a controlled substance. If it hits the market, VEC-162 would be up against Sepracor's (NASDAQ:SEPR) Lunesta, Sanofi-Aventis' (NYSE:SNY) Ambien, and a host of other generic sleep drugs.

The test results sent Vanda's stock price to $14.90 when the market closed on Wednesday, up 53% over Tuesday's close of $9.76. Trading volume increased nearly 30-fold on a day-over-day basis. The spike has been part of a roller-coaster ride this month for Vanda. The stock had gradually declined since the company reported its Q3 results at the beginning of the month.

For the third quarter, Vanda reported a net loss of $12.1 million, compared with a net loss of $21.4 million in the preceding quarter. The company also reported a significant reduction in both research and development expenses and total expenses from the second quarter. R&D expenses declined to $9.5 million from $19 million, while total expenses dropped to $12.8 million from $22.1 million. The decreases are attributed to the company reducing the combined costs of running its two phase 3 trials.

So is this stock a buy or a sell? While I certainly wouldn't take a short position in Vanda, given its recent volatility and the potential for VEC-162 in a U.S. market of about 70 million adults suffering from insomnia, I do have concerns about the company's cash position.

The company expects its total cash position to be $25 million to $30 million on Dec. 31, excluding any financial relationships started before the year ends. Vanda also says its current funding is enough for its ongoing phase 3 clinical trials that are expected to finish in 2006, and to continue additional development and clinical activities for possible products through mid-2007. Beyond that, there is little guidance about the company's burn rate in the Q3 earnings release.

Vanda is burning cash rapidly and expects to run through $55 million o $60 million this year. While the potential upside for shareholders is great, I feel inclined to wait to buy in until the company either begins to generate operating income or presents a more concrete long-range funding plan to investors.

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Fool contributor Billy Fisher does not own shares of any of the companies mentioned. The Fool has a disclosure policy.