Kerrisdale Short Zafgen, Says Beloranib Has 'No Reasonable Chance' Of FDA Approval And Recent Bullishness Is 'Misplaced'

Zafgen Inc ZFGN shares are up 41 percent in the last five trading days amid positive data for beloranib's ability to treat weight loss in patients with Prader-Willi syndrome. In a new report Monday morning, hedge fund Kerrisdale Capital said it is short the stock with a $3 price target. Shares closed last week at $8.30.

According to Kerrisdale, the market's positive reaction to beloranib efficacy is "misplaced," as it leads to weight loss of 4 to 5 percent but increases the risk of death four-fold. Zafgen’s experimental drug is "highly dangerous," it added. "With patients’ lives at stake, Kerrisdale believes the FDA will reject Zafgen’s pleas for another chance," the fund added. The FDA put Phase 3 trials of beloranib on partial hold in October after two patient deaths.

"While no one knows why Zafgen’s drug is harming patients, similar drugs (called angiogenesis inhibitors) cause similar side effects, suggesting that there is no easy fix." With other "safer" competitors already on the market, Kerrisdale said Zafgen is "worth no more than the present value of the cash it will hold" with its only clinical candidate "gone and little else in its pipeline."

'No Good Way To Mitigate Beloranib's Risks'

Kerrisdale also took aim at sell-side analysts who believe Zafgen has a "risk mitigation plan." The fact that the second patient death occured as Zafgen was screening for risk factors shows -- in the fund's opinion -- that "it is now glaringly obvious that Zafgen doesn't know what to look for...the countermeasures it came up with after one patient died didn't stop a second patient from dying of the same cause."

Kerrisdale added that further human experiments are "unethical," providing a hypothetical idea of how a patient would be pitched to participate in a trial:

"Would you like to enroll in a trial of a deadly drug with modest benefits? It kills people at an alarming rate, and no one knows exactly why, but maybe if we give you a lower dose or some anticoagulants, you won’t die. Or maybe you will. Science is a messy business. Interested?"

Zafgen shares were down 13 percent off Kerrisdale's short thesis in the first few minutes of trading. The company has not yet provided a comment in response to the report.

The full report can be accessed here.