Business

Zafgen shares drop as hedge fund discloses short position

Zafgen CEO Thomas Hughes in his office.
Lane Turner/Globe Staff/File 2015
Zafgen chief executive Thomas Hughes in his office.

Shares of Zafgen Inc. dropped 10.6 percent Monday after Kerrisdale Capital, a hedge fund, disclosed it had taken a short position in the Boston biotech company.

Kerrisdale contended in a research report that Zafgen is overvalued and that its experimental obesity-fighting drug stands little chance of winning US market approval.

Despite a rise in Zafgen’s share price last week, after it reported data showing patients taking its drug in a clinical trial lost weight and engaged in less binge eating, Kerrisdale said it believes the shares are worth only $3, or about 65 percent less than their $8.84 opening price Monday.

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Zafgen shares closed at $7.90 on Monday, losing 94 cents.

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Sahm Adrangi, founder and chief investment officer of New York-based Kerrisdale, said his firm released its critical report to “trigger a debate” because Zafgen’s management is “overhyping” the clinical findings. Adrangi said the deaths of two patients who took the drug candidate, called Beloranib, in a clinical trial last year will weigh too heavily on Zafgen’s chances for Food and Drug Administration approval.

“Based on the deaths that occurred, we think it’s very unlikely that the [FDA] would even consider approving Beloranib,” Adrangi said.

The two patients died from pulmonary embolism, blood clotting in the lungs. Zafgen’s chief executive, Thomas Hughes, last week said that there is no evidence Beloranib caused the clotting. Patients with the condition Beloranib treats, Prader-Willi syndrome, are prone to thrombotic events such as pulmonary embolism, he said.

Adrangi, however, said two deaths out of 73 patients who took the drug is a much higher rate than would be normally seen in such patients.

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Susan Francis, a spokeswoman for Zafgen, declined to respond to Kerrisdale’s assessment of Beloranib’s prospects or the reaction of investors. “The company does not comment on individual trades or movement in stock or speculate what FDA will do or not do,” she said.

Adrangi described his firm as part of a small group of “short activists” that publish research to support their positions against stocks when they believe company management or outside analysts have been overly promotional. Seven-year-old Kerrisdale has about $400 million in assets under management, but did not did not disclose the size of its short position in Zafgen.

The firm is known in investment circles for a high-profile bet in 2014 against GlobalStar, a satellite communications company whose stock subsequently declined significantly.

He said Kerrisdale has not attempted to engage Zafgen executives in a dialogue.

“In the case of Zafgen, we just believe the situation is cut-and-dried, given the mortality risk,” Adrangi said. “The management view is already out there. We didn’t think we needed any additional insight from them.”

Robert Weisman can be reached at robert.weisman@globe.com. Follow him on Twitter @GlobeRobW.