Did You Interpret Zafgen Inc. (NASDAQ: ZFGN)’s Announcement Correctly?

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Zafgen Inc. (NASDAQ: ZFGN) announced something this week and its shares moved on adverse market reaction. But sometimes it is easy to see things clearly once the dust has settled, which is why it is important to revisit Zafgen’s announcement to see if the market reacted correctly and the hidden opportunity that might be lying there.

The announcement was clear: Zafgen Inc. (NASDAQ: ZFGN) will not continue with the development of its previously lead candidate for obesity called Beloranib. The clinical trial of Beloranib was just progressing well until patient deaths were reported. The deaths prompted the FDA to put further clinical testing of the candidate on hold.

But opportunity still existed for Zafgen to resume development of Beloranib, but only after satisfying certain conditions set by the FDA. After thoroughly assessing what it would take to bring Beloranib to market, Zafgen determined that the costs were too great to justify additional investment in the compound. With that, the company announced that it has suspended work on Beloranib.

Zafgen Inc. (NASDAQ: ZFGN) and a new obesity candidate

Instead, Zafgen Inc. (NASDAQ: ZFGN) has got another candidate for obesity that it believes stands a better such of success in clinical trials. The new candidate is called ZGN-1061 and it is set to begin early-stage clinical study with results from the study expected by the end of 1Q2017.

According to Zafgen, it has decided to focus its resources on the development of ZGN-1061. CEO Thomas Hughes hinted that Zafgen has enough cash to undertake the development of ZGN-1061. The company is hoping to close 2016 with cash balance of $125 million, which should be adequate to fund operations through at least the end of 2018.

What’s the takeaway?

In addition to halting Beloranib program, Zafgen Inc. (NASDAQ: ZFGN) said it will lay off 34% of its workers. The layoff together with the suspension of Beloranib study will save the company millions of money and the savings can be channeled to the work on the more viable candidate ZGN-1061.

It seems to be in the best interest of shareholders that Zafgen has decided to abandon what looked like a riskier path struggling to bring Beloranib back to clinical study.

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