Now Available: Shares in Zafgen, the Best Obesity Drugmaker to Date

Investors looking for a piece of the obesity market, but uninterested in the current offerings -- Arena Pharmaceuticals (ARNA), VIVUS (VVUS), and Orexigen (NASDAQ: OREX) -- have a new opportunity: Zafgen (ZFGN) debuted on the NASDAQ today, having raised $96 million in its initial public offering .

Shares are currently selling more than 20% above the IPO price of $16 per share.

Investors are right to be excited. Zafgen's beloranib looks much better than Arena Pharmaceuticals' Qsymia, VIVUS' Belviq, and Orexigen's Contrave.

Source: Company press releases and FDA labels.

We have to be a little careful declaring a winner here as none of the drugs were compares head to head, but Zafgen might actually be better than it appears in the chart. The weight loss is from a phase 2 trial that lasted just 12 weeks; the data for the others are after patients have been on the drugs for about a year. In a longer trial, beloranib might induce even more weight loss.

Working against beloranib, the drug has to be injected while the rest of the drugs are taken orally. To be competitive, beloranib has to produce substantially better weight loss after a year.

Different mechanism
Qsymia, Belviq, and Contrave mostly work by stimulating patients' brains to make them feel content and/or by decreasing the pleasure that comes from eating. Contrave, for instance, contains an antidepressant that is also used to help people stop smoking and a drug that blocks opioid receptors that are believed to be responsible for the pleasure associated with addition .

Beloranib works on the fat itself . The drug inhibits methionine aminopeptidase 2, or MetAP2, a gate keeper that appears to make obese patients produce more fat and reduces the use of the fat that is stored. By inhibiting MetAP2, beloranib restores the balance between production and utilization of fat, which can also have positive effects on LDL-cholesterol, HDL-cholesterol, triglycerides, and blood pressure. 

Source: Zafgen

Years away
Arena Pharmaceuticals' Qsymia and VIVUS' Belviq are already on the market. Orexigen's Contrave should be approved by the FDA in September if not sooner. Zafgen's beloranib is still a few years away from joining them.

To get to market quicker, and perhaps carve out a more realistic market, Zafgen is testing beloranib in patients with Prader-Willi Syndrome, or PWS, a rare genetic disease that causes patients to have uncontrollable desire to eat. In PWS patients, beloranib reduced body fat content by 8.1% compared to placebo after just four weeks of treatment at the highest dose. There was a trend toward weigh loss improvement as well, although it didn't reach statistical significance, which isn't all that surprising given that there were only 17 patients in the trial .

Zafgen is still working out details with the Food and Drug Administration for the pathway for approval of beloranib in PWS, but the current plan is to run two phase 3 clinical trials in PWS patients with the first scheduled to begin before the end of the year .

The biotech is also running a phase 2a trial testing beloranib in patients with craniopharyngioma. The benign brain tumor usually requires surgery that can result in the damage or removal of the hypothalamus, resulting in obesity in about half of the patients due to deregulation of hormones.

By going after these orphan indications, Zafgen can get onto the market quicker and cheaper than if it went straight for the larger obesity market, which requires phase 3 trials of 4,500 patients on drug or placebo for a year. Given that there are only 5,000 to 7,000 PWS patients needing treatment in the U.S., the FDA is likely to allow much smaller trials.

And without any other treatment, the agency will be more tolerant of side effects than it will in the larger population where diet and exercise can theoretically help most people.

It should also be easier to sell the drug into the orphan indication. Arena Pharmaceuticals' marketing partner, Eisai, and VIVUS have had a hard time convincing doctors to prescribe their drugs and insurers to cover them. Given the underlying genetic condition, doctors and insurers are more likely to be open to prescribing beloranib for PWS even if Zafgen demands orphan-drug pricing potentially north of $100,000 per year.

Zafgen plans to run a phase 2b clinical trial in obese patients, and based on the efficacy and safety data from that trial and the phase 3 trials in PWS, it'll make a decision about whether to proceed with development of beloranib in the larger population.

Zafgen is also developing oral MetAP2 inhibitors, which would have an easier time competing with Arena's, VIVUS', and Orexigen's drugs than injected beloranib. Depending on how quickly it can get them through pre-clinical development, Zafgen might be best off just waiting for the oral version, especially since the pricing would have to be different.

Investors have to wait a few years for Zafgen to be profitable, but could see decent returns from the current market cap around $425 million. If Zafgen can hits sales for PWS around $500 million annually, it could be worth $2.5 billion, using a price-to-sales ratio of 5.