Earlier today, shares of Zafgen Inc. (ZFGN, Financial) plunged 41% on news that the Food and Drug Administration placed a clinical hold on the company’s Investigative New Drug Application (IND) for ZGN-1061, an early-stage candidate drug for the treatment of type 2 diabetes.
Zafgen is a clinical-stage biopharmaceutical company specializing in the study of MetAP2 inhibitors in common and rare metabolic disorders. It is currently pursuing research into type 2 diabetes, Prader-Willi syndrome and hepatic diseases. The company has a market capitalization of $200 million and its stock is currently trading at $5.40 per share.
Let's take a look at the recent setback, and whether it has created an opportunity to buy this beaten-down name on the cheap.
What is the problem?
A clinical hold stops patient enrollment in ZGN-1061 studies, and prevents already enrolled patients from receiving further doses of the drug. The FDA cited concerns over possible cardiovascular risks.
However, no cardiovascular red flags have been raised in any ZGN-1061 studies conducted by Zafgen to date, a point raised by management in today’s investor update:
"Zafgen continues to advance its ongoing ex-U.S. Phase 2 clinical trial of ZGN-1061, which includes a 1.8 mg dose cohort. Dosing in this clinical trial was recently completed and, while still blinded, no CV safety signals have been observed to date. The Company remains on track to report topline data from this cohort in early 2019. Zafgen previously reported positive full 12-week results for its initial cohort of this Phase 2 proof-of-concept clinical trial, which included a range of doses up to 0.9 mg. In that initial cohort, ZGN-1061 met all primary endpoints, demonstrating proof-of-concept efficacy with robust A1C lowering effects, and a favorable safety and tolerability profile generally comparable to placebo, with no treatment-related serious adverse events and no CV safety signals observed."
So why the concern? Although ZGN-1061 has not demonstrated any adverse cardiovascular effects, the FDA has decided the compound has the potential to lead to blood clots if it is not cleared from the body within a certain time period. The agency was additionally motivated by the company’s history: in late 2015, Zafgen halted a Phase 3 clinical trial for beloranib, the predecessor to ZGN-1061, after two patients died from pulmonary embolisms - blood clots that block blood flow to the lungs.
Buy the dip?
The news that the FDA has found sufficient similarities between the two drugs must be chilling to investors. Beloranib was discontinued in 2016, when it become clear the obstacles to getting approval for the drug in the U.S. would be too great to recoup with projected revenue from sales. Many people are surely worried that ZGN-1061 may face similar problems. Before today’s announcement, Zafgen’s valuation was based on the assumption that the drug would be marketable in the United States, so the selloff is at least partially justified.
That said, it is important to remember that ZGN-1061 itself has not been found to cause cardiovascular issues. Bullish analysts from JMP Securities are reportedly advising clients to buy the dip on the logic that this is simply a precaution that the FDA has no choice but to take, given the legacy of beloranib. If this is so, then the stock is currently priced at a bargain discount relative to future earnings.
Verdict
This story illustrates the dangers of investing in small-cap biotech companies with narrow drug pipelines. Even though it may well turn out that this is simply an instance of a regulatory agency being overly heavy-handed, the delays caused by today’s news are likely to significantly delay Zafgen’s timeline.
Results from the Phase 2 trial currently being conducted outside of the U.S. are expected in early 2019, and management said the company has enough cash to keep the lights on through 2020. All eyes will be on the safety data from that trial. If Zafgen can produce findings that allay the FDA’s concerns, expect the share price to rally significantly.
(This article was co-authored by Stepan Lavrouk, director of research at Atreides Capital LLC and a former research analyst for Almington Capital Merchant Bankers.)
Disclosure: No positions.
Read more here:
