What happened

Shares of Zafgen (NASDAQ:ZFGN) rose more than 16% today after the company announced the pricing of a public offering. The clinical-stage biopharma will offer up to 9.2 million shares at $7.50 apiece, which would provide gross proceeds of up to $69 million. But why would shares rise on news of dilution at a lower price point?

Management is wisely taking advantage of a recent surge in the stock price to raise capital for advancing its three drug candidates. It'll be sorely needed, too, considering Zafgen ended the first quarter of 2018 with $89.1 million in cash, cash equivalents, and marketable securities on its balance sheet. The business is burning about $15 million per quarter, so it now has enough cash to fund over one year of operations, and to push its second-most advanced drug candidate deeper into development.

As of 3:24 p.m. EDT, the stock had settled to a 15.8% gain.

A column chart showing growth with the last column represented by a red arrow on a spring board.

Image source: Getty Images.

So what

Zafgen stock has gained nearly 50% in the last five trading days following the release of positive results in a phase 2 proof of concept trial of its lead drug candidate, ZGN-1061, as a potential therapy for difficult-to-treat Type 2 diabetes. The drug candidate met all primary objectives for efficacy and safety and established a minimally effective dose.

The company is now proceeding to collect more data while doubling the dose, which will provide more information on how to proceed to a potential phase 3 trial. Zafgen told investors to expect final results for the phase 2 trial in early 2019.

Now what

Investors are hoping ZGN-1061 turns the business' long-term prospects around following a collapse of the previous pipeline focus in late 2015. The company sported a market cap of over $1 billion at that time, compared to less than $300 million as of this writing. With promising new (albeit early) results in hand, and enough cash to complete the phase 2 study in Type 2 diabetes and advance the next drug candidate, investors are dreaming of Zafgen's market cap returning closer to its former glory.

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.