XOMA Chart

What: Shares of XOMA (NASDAQ:XOMA), a clinical-stage biopharmaceutical company focused on developing therapies to primarily treat metabolic, inflammatory, and infectious diseases, were absolutely decimated in December, losing 37% of their value, according to data by S&P Capital IQ. Two culprits were to blame.

So what: The first reason XOMA shares came under heavy selling pressure in December relates to its Dec. 9 pricing of nearly 8.1 million shares of common stock and warrants, netting the company $37.7 million in proceeds after fees. Clinical-stage biotech companies need cash in order to run their studies, and it's not uncommon for them to turn to the open market to seek that capital.

The upside of its warrant deal is that these shares won't become exercisable until $7.90, so there's no immediate share dilution on the horizon. The downside is that $7.90 could become a troublesome ceiling as warrant holders begin cashing in their shares and diluting existing shareholders.

The second brick wall that XOMA ran into was one of emotion. XOMA shares exploded higher at the end of November, which I can only guess was in anticipation of a presentation at the Piper Jaffray Healthcare Conference in early December. Following XOMA's presentation, momentum for its monstrous rally simply fizzled and its shares went in reverse.

Source: Flickr user Sergei Golyshev. 

Now what: If there's one prevailing trend with most clinical-stage biotech stocks, it's that they tend to be very volatile -- and XOMA is no exception.

The primary catalyst that investors should concern themselves with is gevokizumab, an experimental drug being targeted at a number of eye diseases, as well as moderate-to-severe acne and autoimmune inner ear disease. Because of gevokizumab's wide span of label indications, it would just take a few successes to send XOMA significantly higher.

However, expenses for XOMA are rising (partially because partner Servier has met its end of the bargain in study expenses), and last March it discontinued its midstage study involving gevokizumab as a treatment for erosive osteoarthritis. In short, there's plenty of risk baked into XOMA shares, even after its swoon in December.

Following its latest round of financing, XOMA should be sporting close to $97 million in cash. The problem is that its expenses are rising and it'll probably burn through $50 million to $60 million in fiscal 2015. I would expect XOMA to be on the hunt for financing again within 12 to 18 months if gevokizumab fails to pan out. Even if it does succeed, it'll likely need a cash infusion to prepare for a product launch.

The potential is there for XOMA to succeed, but I also see ample amounts of risk. With that being said, I'm perfectly happy sticking to the sidelines.