Eavesdropping on the Huddle at Zafgen

By DrKSSMDPhD, April 16, 2016

[Ed. Note: Dr. KSS writes about medicine and biotech stocks for the Irregulars. He has agreed to our trading restrictions, choses his own topics, and his words and opinions are his own. You can see his latest comments and all of his past articles on his Gumshoe page, here.]

Investor ardor has cooled considerably for Zafgen ($ZFGN), a stock we first presented to readers as a long idea in February 2015 (“The Zed Files”). ┬áBut in October 2015, a tornado hit the sheepdip (“Is Zafgen Kaput?”), with disquieting insider sales surrounding early reports of death in beloranib-treated patients resulting from unanticipated thrombotic events (pulmonary embolism, for example). The saying of sooth led to further revelations of such episodes occurring outside the Prader-Willi syndrome (PWS) patient population. The unavoidable outcome of this was that the Food and Drug Administration placed the drug on clinical hold. Such action by the FDA is by no means universally fatal to a drug’s development, but places considerable onus on a drug company to revisit its data with extreme thoroughness, explain it, derive conclusions about whether future therapy with the agent is safely feasible, and devise a so-called risk evaluation and mitigation strategy to safeguard patients, the company and the FDA. Executed deftly and with discretion, timely and insightful action by the company leads to the FDA placing a quitclaim on its concerns.

Zafgen shares now trade at around one seventh of their 21 September 2015 high ($47.98), roughly on the eve of the bad news, when rumors of death in a trial began swirling. However, as we write, the worst of short sentiment has been flushed out of the stock. Present short interest is about 13.8 percent. 98 percent of the outstanding shares remain spoken for by institutions. Between institutional and insider owners, large block ownership now exceeds 100 percent of the float, probably via overlapping in counting. Atlas Venture, Deerfield Management and Fidelity Management each own at least 10 percent of the outstanding shares (27.3M). In addition to the Deerfield stake, James E. Flynn, lead portfolio manager at Deerfield, directly holds 3.06M shares, a position he amped up considerably in March 2016. As favorable as this barcode snapshot of the situation is, however, Zafgen is hardly here a springloaded stock ready to pop.

Readers have justifiably grown agitated at the situation because nothing has advanced since our last coverage installment in October. The bad ...

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