What: Shares of Zafgen (NASDAQ:ZFGN), a clinical-stage biopharmaceutical company developing therapies to treat obesity, dropped more than 10% in early morning trading on Monday after the investment research firm Kerrisdale Capital published a less than flattering report about the company's future prospects.
So what: Kerrisdale Capital released a detailed report on why it believes that Zafgen's lead compound -- beloranib -- will fail to receive FDA approval. The firms argument centers around the drugs less than perfect safety data, which Kerrisdale believes will cause the FDA to keep the drug from finding its way to market. The firm believes that Zafgen's shares are worth a little over $3 today, which implies that Zafgen's stock has considerable downside.
Traders reacted harshly to the report and sent shares of Zafgen lower in early trading, though shares have since recovered from their morning lows.
Now what: Kerrisdale Capital was short Zafgen's stock prior to the publication of this report, so the firm does have a vested interest in seeing shares of Zafgen fall. That doesn't mean that its analyst of Zafgen's shares is wrong, but investors need to be aware of that fact.
Making money off of publicly traded companies that are trying to treat obesity has proven to be a tough way to make a buck. Just ask shareholders of Orexigen (NASDAQ:OREX), with obesity drug Contrave that managed to make it to market but has struggled to gain traction. Of course, Orexigen did shoot itself in the foot when it released data from an ongoing clinical trail involving Contrave early, which had the dual effect of upsetting both regulators and its marketing partner. The mishap forced Orexigen to start another cardiovascular outcomes trial from scratch, a move that will cost the company money and time to complete.
The future of Zafgen is currently up in the air as it is still working with the FDA to determine the best path to potential bring beloranib to market. With so much uncertainty in the air surrounding Zafgen's shares, investor who are bullish on the company's prospects should be bracing themselves for a bumpy ride.
Brian Feroldi has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.