Why Zafgen Inc. Shares Roared Higher

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Zafgen , a clinical-stage biopharmaceutical company developing therapies to treat obesity, surged as much as 31% in its initial debut as investors clamored to get their hands on this fresh biotech IPO.

So what: Yesterday, after the market had closed, Zafgen increased its share offering from 5 million to 6 million and priced at the upper end of its previous $14-$16 share range. Gross proceeds from today's IPO, therefore, were $96 million for Zafgen. The buzz surrounding today's IPO likely has to do with investigational weight-loss drug beloranib, a blocker of MetAP2 enzymes which helps regulate the production of fatty acids in the body rather than attempting to effect weight-loss via appetite reduction. Last year, Zafgen released encouraging results from a 12-week study which showed that one of its trial study groups lost an average of 22 pounds. As FierceBiotech pointed out in April after scouring Zafgen's prospectus filing, the company plans to target "subpopulations of patients with rare conditions for its first approvals," but will likely move to larger target audiences following initial regulatory approvals.


Now what: Today's move to the upside demonstrates that the market demand for effective weight control management drugs is still incredibly high. Unfortunately, FDA approved therapies already on the market, which are targeted at appetite suppression and not fat production, haven't sold well.

VIVUS' Qsymia has struggled to get insurers on board and the weight control drug even showed a disappointing sequential quarterly decline in prescriptions in the first-quarter.

Arena Pharmaceuticals' Belviq has performed a bit better since it has an established marketing partner, though relative to the number sales staff promoting the drug it's been unimpressive as well.

Of course, we also have Orexigen Therapeutics which released encouraging interim data from its Light Study, a long-term large cardiovascular outcomes study which showed that its investigational weight-loss therapy Contrave didn't increase the potential for cardiovascular-related adverse events. However, Orexigen's PDUFA date was also pushed back three months with the FDA requesting additional data from the Light Study.

In other words, Zafgen could slide right into success in the weight control management arena if beloranib proves effective. However prospective investors should consider that its pipeline is almost entirely reliant on this one drug, that weight control drugs have historically performed poorly, and that much of today's pop could be driven by emotional trading, and chasing a stock higher on the basis of emotion is rarely, if ever, a smart move. I'd suggest getting Zafgen on your watchlist, but I'd hold back from throwing your investing money at it just yet.

The best biotech investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not how we treat a common chronic illness, but potentially the entire health industry. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns you will need The Motley Fool's new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.

The article Why Zafgen Inc. Shares Roared Higher originally appeared on Fool.com.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. 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 don't 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.

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