Zafgen, Inc. announced that it has decided to suspend the development of its lead pipeline candidate, beloranib (a MetAP2 inhibitor). We expect investors to react negatively to this disappointing news.

Zafgen was developing beloranib for the treatment of multiple indications, including severe obesity in two rare diseases, Prader-Willi syndrome (PWS) and obesity caused by hypothalamic injury, including craniopharyngioma-associated obesity and severe obesity in the general population.

The company ran into trouble with beloranib when the FDA had placed the candidate’s investigational new drug application on complete clinical hold (Dec 2015) due to an imbalance in severe venous thromboembolic events, including two patient deaths reported in a phase III study (bestPWS ZAF-311). The study evaluated beloranib in patients with PWS. Though the company reported positive efficacy results from the study earlier this year, the path forward for the candidate was uncertain.

Lately, Zafgen held a type A meeting with the FDA to discuss clinical and pre-clinical data on beloranib as well as a proposed risk mitigation strategy for beloranib in PWS. Based on discussions with the regulatory authority and review of other considerations, Zafgen realized that the obstacles, costs and development timelines to gain marketing approval for beloranib are way too much to explain additional investment in the program.

Instead, the company intends to focus its resources on the development of a differentiated second-generation MetAP2 inhibitor, ZGN-1061, as a potential new treatment for prevalent obesity-related indications. The company noted that the candidate possesses a promising safety profile with reduced potential to impact thrombosis, unlike beloranib.

Currently, Zafgen is screening patients to initiate a phase I study for the evaluation of safety, tolerability, and weight loss efficacy of ZGN-1061 over a treatment period of four weeks. Data from the study is anticipated by the end of the first quarter of 2017. The company plans to move ZGN-1061 into a late-stage development for the treatment of severe and complicated obesity, if things go well.

Zafgen announced a strategic restructuring to align its operations with its new clinical development priorities, which are now focused on the development of ZGN-1061. Zafgen plans to eliminate 31 positions, representing approximately 34% of the company's workforce by the end of this year. The company expects this restructuring to result in approximately $4.8 million in reduced annualized workforce expenses once the plan is fully implemented. The company also expects to incur a non-recurring charge of approximately $2.4 million in the third quarter of 2016 related to the restructuring.

Additionally, both President, Patrick Loustau and Chief Commercial Officer, Alicia Secor will be leaving the company to pursue other opportunities.

Zafgen ended Jun 30, 2016, with approximately $150.5 million in cash and cash equivalents and now expects to end 2016 with greater than $125 million. The company believes that its current cash balance is sufficient to fund operations through the end of 2018, at which time it expects to complete a phase IIa study on ZGN-1061.

Zafgen is currently a Zacks Rank #3 (Hold) stock. Some better-ranked stocks in the health care sector include Innoviva, Inc. (INVA Quick QuoteINVA - Free Report) , Fibrocell Science, Inc. and Nektar Therapeutics (NKTR Quick QuoteNKTR - Free Report) . All three sport a Zacks Rank #1 (Strong Buy).

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