Zafgen Stock Moves Up Sharply On Clinical Trial Data- What Investors Need To Consider

| About: Zafgen, Inc. (ZFGN)


Company's clinical trial meets endpoint goals.

Drug candidate shows promise for Prader-Willi Syndrome.

Investors need to bear in mind a narrow label if approved.

Wednesday was a day that many Zafgen (NASDAQ:ZFGN) longs have been waiting for. After the stock was slammed on two patient deaths in clinical trials, the prospects for the company seemed to hinge on whether the phase 3 trial results were good enough to give the drug a chance at approval.

Zafgen released the trial data before the market opened, and as of this writing the stock was up an impressive 75% to just under $10 per share. This is far from a full recovery to the $30 per share level that the equity enjoyed several months ago, but it is a positive move. The results of the trial met both endpoints and demonstrated statistically significant weight reduction.

"Treatment with the 2.4 mg and the 1.8 mg doses of beloranib resulted in 9.45 percent (p<0.0001) and 8.20 percent (p<0.0001) reductions in body weight relative to placebo, respectively. Treatment with the 2.4 mg and the 1.8 mg doses of beloranib also resulted in reductions of hyperphagia-related behaviors of 7.0 units (p=0.0001) and 6.3 units (p=0.0003) relative to placebo, respectively, as measured by the Hyperphagia Questionnaire for Clinical Trials (HQ-CT)."

One thing we should all know and understand about the markets is that there is often an over-reaction to any news. This over-reaction can be to the upside or downside. The news today was very good for Zafgen investors, as it allows the drug candidate to take the next steps in the approval process.

Let's be very realistic here. Prader-Willi syndrome is a very serious condition. The life expectancy of a Prader-Willi patient is not very long. There were two patient deaths in clinical trials and there were serious recommendations made by the FDA. The second death resulted in a full closure of the clinical trial.

Investors need to understand that the FDA process is now just beginning in terms of approval. Zafgen needs to meet with the FDA, allow the FDA to assess the data, determine if an approval application will be submitted, and agree to the label.

There are probably investors out there that had hoped to see the Zafgen drug carry applications beyond Prader-Willi Sydrome. In my opinion, such a thought process should reconsidered. It is still early, but I believe that if Zafgen gets approval on this drug, it will carry a restrictive label that is specific to Prader-Willi and also requires testing to identify high risk patients with thrombotic events. A stringent label could narrow the field of potential patients such that getting the company on the path to profits will have higher hurdles.

When the clinical trials had two deaths, this equity went from optimistic speculation on positive events to cautious speculation on a much harder path to approval. The risk vs. reward dynamic shifted greatly and the number of investors under water increased. Thus, Zafgen has market forces to fight, a tougher approval process, as well as the reality that any approval might be stringent. These forces are difficult to overcome.

Investors that played the bottom on this stock are doing well. Investors that speculated last summer are not. We will now have people that bought at the bottom trying to lock in profits, and people that are under water seeing an opportunity to trim losses to lower levels. This will create selling pressure as soon as this news begins to wear off. The next news from this company on its drug is likely weeks, if not months away. Pay attention to the news flow and dynamics of the market. Stay Tuned!

Disclosure: I am/we are long ZFGN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.