Earlier this week, XOMA (Nasdaq: XOMA) presented data at the American Diabetes Association on two new classes of monoclonal antibodies: one that activates the insulin receptor and another that sensitizes it. Both, however, are still in the preclinical stage -- experiments in mouse models -- and won't be on the market for many years.

If you're going to invest in XOMA, you're betting your money squarely on XOMA 052.

The drug is an antibody directed against a protein called interleukin-1, or IL-1. XOMA believes IL-1, a pro-inflammatory protein, is involved in multiple diseases including diabetes, cardiovascular disease, arthritis, and gout.

At this point, it appears diabetes is off the table. XOMA 052 has failed to show an effect on glucose levels in two clinical trials in patients with diabetes. But as far as I can tell, the rest of the potential indications are still on the table.

There are already a couple of IL-1 inhibitors on the market. Regeneron Pharmaceuticals' (Nasdaq: REGN) Arcalyst is approved as a treatment for a rare hereditary condition called cryopyrin-associated periodic syndromes, as is Novartis' Ilaris. Regeneron has also produced positive data for Arcalyst in gout.

Clearly, being third to market isn't ideal for competition. But some of the diseases that IL-1 is involved in are large enough markets that XOMA 052 could potentially still be a blockbuster as a third entrant.

Abbott Labs (NYSE: ABT), for instance, sold $6.5 billion worth of Humira last year despite being approved after Merck and Johnson & Johnson's (NYSE: JNJ) Remicade, and Pfizer (NYSE: PFE) and Amgen's (Nasdaq: AMGN) Enbrel. All three drugs block the same molecule: TNF.

And there's a possibility that XOMA 052 might be dosed as little as once a month, which should be a serious plus for marketing.

How the bet wins, how it loses
XOMA and its partner Laboratoires Servier plan to push XOMA 052 into a phase 3 clinical trial in Behcet's uveitis. The orphan indication probably won't propel XOMA 052 into blockbuster status, but it's a decent strategy for getting the drug on the market, reminiscent of what Regeneron and Novartis did with their anti-IL-1 drugs.

With a market cap of a mere $70 million, pretty much any positive clinical trial should increase the value of the company substantially.

On the losing side, the validity of IL-1 as a target has been established in multiple indications, so the biggest risk is that the drug just doesn't inhibit IL-1 enough to cause an effect. A failure in the phase 3 trial in Behcet's uveitis patients would likely mean XOMA 052 is done. The drugs in XOMA's earlier pipeline are far enough back that investors would likely prescribe little or no value to them.

With $57 million in cash and $26 million in loans at the end of the first quarter, XOMA could fall as low as $30 million in a worst-case scenario.

Fish or cut bait?
XOMA could be worthy of an investment, but I'd like to see a few things happen before hitting the buy button.

The company's press releases say XOMA "plans to enter XOMA 052 into phase 3 clinical development in Behcet's uveitis," but investors need more details. When will the trial start? How long will it last? How much will it cost beyond the $50 million that Servier has agreed to cover entirely? Will the trial look substantially similar to the positive phase 2 trial? Until those details are revealed, the stock is fairly risky even at this microcap level.

I'd also like to see XOMA kill the idea that XOMA 052 might work in diabetes. There doesn't seem to be any evidence that it's controlling glucose levels, and yet the company still mentions the possibility of treating diabetes multiple times on its website. Investors should be convinced that XOMA isn't going to waste additional funds on diabetes before investing.

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Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Abbott Laboratories and Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson, Pfizer, Abbott Laboratories, and Novartis. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.