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Table of Contents

As filed with the Securities and Exchange Commission on January 16, 2015

Registration No. 333-201439

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

ZAFGEN, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   2834   20-3857670

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

175 Portland Street, 4th Floor

Boston, Massachusetts 02114

(617) 622-4003

(Address, including zip code and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Thomas E. Hughes, Ph.D.

Chief Executive Officer

Zafgen, Inc.

175 Portland Street, 4th Floor

Boston, Massachusetts 02114

(617) 622-4003

(Name, address, including zip code and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Mitchell S. Bloom, Esq.

Michael J. Minahan, Esq.

Laurie A. Burlingame, Esq.

Goodwin Procter LLP

Exchange Place

Boston, Massachusetts 02109

(617) 570-1000

 

Thomas E. Hughes, Ph.D.

Chief Executive Officer

Zafgen, Inc.

175 Portland Street, 4th Floor

Boston, Massachusetts 02114

(617) 622-4003

 

Patrick O’Brien, Esq.

Ropes & Gray LLP

Prudential Tower

Boston, Massachusetts 02199

(617) 951-7000

 

 

Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer   ¨    Accelerated Filer   ¨
Non-Accelerated Filer   x  (Do not check if a smaller reporting company)    Smaller Reporting Company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Class of

Securities to be Registered

 

Number of

Shares to be
Registered(1)

 

Proposed

Maximum

Offering Price

Per Share(2)

 

Proposed

Maximum

Aggregate

Offering Price

 

Amount of

Registration Fee(3)

Common Stock, par value $0.001 per share

  3,267,045   $36.45   $119,083,790   $13,838

 

 

(1) Includes shares that the underwriters have the option to purchase.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended and based on the average of the high and low sale price of the registrant’s common stock as reported on The NASDAQ Global Market on January 15, 2015.
(3) $12,751 previously paid.

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

 

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JANUARY 16, 2015.

PRELIMINARY PROSPECTUS

 

LOGO

Common Stock

 

 

We are selling 2,840,909 shares of common stock.

Our common stock is listed on The NASDAQ Global Market under the symbol “ZFGN.” The closing price of our common stock on The NASDAQ Global Market on January 15, 2015 was $35.20 per share.

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012, and, as such, we have elected to take advantage of certain reduced reporting requirements for this prospectus and may elect to comply with certain reduced public company reporting requirements for future filings.

 

     Per
Share
     Total  

Public offering price

   $                $                

Underwriting discounts and commissions(1)

   $         $     

Proceeds to Zafgen, Inc. before expenses

   $         $     

 

(1) See “Underwriting” beginning on page 147 for additional information regarding underwriting compensation.

We have granted the underwriters an option to purchase up to 426,136 additional shares of common stock.

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 13.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to purchasers on or about                 , 2015.

 

 

 

Leerink Partners   Cowen and Company
Canaccord Genuity   JMP Securities

Prospectus dated                 , 2015


Table of Contents

TABLE OF CONTENTS

Prospectus

 

     Page  

Prospectus Summary

     1   

Risk Factors

     13   

Cautionary Note Regarding Forward-Looking Statements

     45   

Use of Proceeds

     46   

Dividend Policy

     47   

Capitalization

     48   

Dilution

     49   

Selected Consolidated Financial Data

     50   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     52   

Business

     72   

Management

     112   

Executive and Director Compensation

     120   

Certain Relationships and Related Party Transactions

     128   

Principal Stockholders

     131   

Description of Capital Stock

     134   

Shares Eligible for Future Sale

     139   

Material U.S. Federal Income and Estate Tax Considerations to Non-U.S. Holders

     142   

Underwriting

     147   

Legal Matters

     152   

Experts

     152   

Where You Can Find More Information

     152   

Index to Consolidated Financial Statements

     F-1   

We and the underwriters have not authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the underwriters are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

Until              2015, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside of the United States: We have not, and the underwriters have not, done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.


Table of Contents

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes included elsewhere in this prospectus. You should also consider, among other things, the matters described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case appearing elsewhere in this prospectus. Unless otherwise stated, all references to “us,” “our,” “ZFGN,” “we,” the “Company” and similar designations refer to Zafgen, Inc. and its subsidiaries.

Overview

We are a biopharmaceutical company dedicated to significantly improving the health and well-being of patients affected by obesity and complex metabolic disorders. Beloranib, our lead product candidate, is a novel, first-in-class, twice-weekly subcutaneous injection being developed for the treatment of multiple indications, including severe obesity in two rare diseases, Prader-Willi syndrome, or PWS, and hypothalamic injury-associated obesity, or HIAO, including craniopharyngioma-associated obesity; and severe obesity in the general population.

Obesity is a complex medical disorder involving appetite dysregulation and altered lipid and energy metabolism that results in excessive accumulation of fat tissue. Weight loss and hunger control are urgently needed for certain subpopulations of obese patients, in which obesity is life-threatening and a co-morbidity of an underlying condition such as PWS and HIAO that, while rare, occurs most commonly as a consequence of treatment for craniopharyngioma and other mid-brain tumors. PWS and HIAO are characterized by uncontrollable hunger resulting from damage to or impaired functioning of the hypothalamus, an area of the brain responsible for many functions including the neurophysiological drive to eat.

Beloranib for the Treatment of Obesity and Hyperphagia in PWS

PWS is a rare and complex genetic disorder characterized by physiologic, cognitive and behavioral symptoms, including hyperphagia, uncontrollable hunger and its related behaviors, and obesity. In January 2014, we completed a Phase 2a clinical trial evaluating beloranib’s ability to reduce body weight and to improve hyperphagia in patients with PWS. In this trial, we observed reductions in body weight, body mass and body fat content and reductions in hyperphagia-related behaviors in patients with PWS. Based on the results of this Phase 2a trial, we initiated our Phase 3 clinical program, which is planned to consist of two Phase 3 clinical trials of beloranib in patients with PWS, with the first Phase 3 trial in the United States having started in September 2014. We expect to report six month data from this U.S. clinical trial in late 2015. We plan to initiate our second Phase 3 clinical trial of beloranib in patients with PWS in the European Union in the middle of 2015, with 12-month data anticipated in late 2016. Beloranib received orphan designation for the treatment of PWS by both the U.S. Food and Drug Administration, or FDA, and the European Commission in January 2013 and July 2014, respectively. We believe that rare conditions such as PWS afford us an opportunity to rapidly develop and commercialize beloranib using smaller, more focused and less costly clinical trials, relative to those required to develop beloranib for the broader severe obesity population.

PWS is characterized by hyperphagia resulting at least in part from impaired functioning of the hypothalamus. Hyperphagia impairs a PWS patient’s ability to live independently, requiring costly and constant supervision to prevent overeating. Without supervision, patients with PWS are likely to die prematurely as a result of choking, stomach rupture or tissue necrosis, or from complications caused by morbid obesity, such as right heart failure and respiratory failure. Based on our evaluation of published survival data, the average life expectancy of patients with PWS is approximately 32 years of age. While a small number of patients with PWS are cared for in costly group homes, the majority of patients with PWS are cared for in their homes, and their families undertake substantial

 

 

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effort to create physical barriers to eating. These efforts result in extremely stressful environments, as caregivers often place locks and alarms on cabinets and refrigerators that contain food to impede a patient with PWS’s efforts to obtain food at all times. We estimate the typical annual cost of treating a patient with PWS is $100,000 to $200,000, excluding the often significant costs of drug therapies related to other medical and psychological conditions and the costs of any lost time from work experienced by their families due to responsibilities related to the care of a patient with PWS.

Published population studies estimate that the prevalence of PWS in the United States and in the European Union ranges from 1 in 8,000 to 1 in 50,000. PWS is diagnosed at an early age, typically in the first year of life, and we believe that, due to the severity of the condition and its unique attributes, the vast majority of patients affected by PWS are diagnosed. We believe approximately 40-50% of patients with PWS are 12 years of age or older. We believe that further information regarding the prevalence of PWS will become available through a patient registry that is currently being developed by the Foundation for Prader-Willi Research.

There are currently no effective pharmacological treatments for obesity and hyperphagia in PWS. Furthermore, bariatric surgery is contraindicated in patients with PWS due to poor outcomes related to an increased risk of rupture of the reduced stomach in the setting of sleeve gastrectomy or gastric bypass procedures, or rupture of the restricted esophagus in the setting of gastric banding procedures with the consequence of life-threatening gastric perforation.

Beloranib for the Treatment of HIAO

HIAO is most commonly caused by damage incurred during removal of a central nervous system tumor called craniopharyngioma, but it can also result from less common types of hypothalamic injury such as strokes, brain trauma, or radiation therapy to the brain. We recently completed a Phase 2 clinical trial of beloranib administered twice weekly in 14 patients with HIAO caused by the treatment of craniopharyngioma or pituitary macroadenoma. We observed mean weight loss of 3.4 kg and 6.2 kg in patients with HIAO after four and eight weeks of treatment with beloranib, respectively, in contrast to 0.3 kg mean weight loss in patients treated with placebo for four weeks. Improvements in cardiovascular disease risk factors of lipids and inflammation (measured by C-reactive protein) were also observed. The biomarker and other secondary endpoint results of the trial are expected to become available in the first half of 2015. In 2015, we plan to establish the regulatory path for a registration program with U.S. and European Union regulatory authorities for our HIAO program, and will decide whether to pursue additional clinical trials of beloranib in patients with HIAO following completion of our Phase 3 clinical program of beloranib in patients with PWS. We plan to seek orphan drug designation for the treatment of craniopharyngioma-associated obesity in the United States and European Union.

Craniopharyngioma is a rare form of benign brain tumor that occurs most commonly during childhood and infiltrates near the optic nerve, pituitary gland and the hypothalamus. Approximately 30% to 50% of cases of craniopharyngioma are diagnosed in childhood and adolescence. Manifestations of craniopharyngioma include visual disturbances, headaches and impairment to the hypothalamus-pituitary axis affecting hormone secretion. Treatment of these tumors commonly involves radical surgical removal of the tumor mass by endoscopy or craniotomy, followed by radiation treatment, which results in disruption or removal of neighboring structures including the hypothalamus. Depending on the degree of damage to the hypothalamus caused by tumor removal and subsequent radiation, there may be greater variation in hyperphagia and obesity prevalence in craniopharyngioma patients than patients with PWS. Post-treatment hypothalamic dysfunction results in hyperphagia in approximately 50% of these patients, resulting in obesity and a worsened quality of life.

Published population studies estimate that the incidence of craniopharyngioma is 0.13 to 0.17 per 100,000 per year, or approximately 400 to 500 cases per year in the United States and 650 to 850 cases per year in the

 

 

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European Union. We believe patients with craniopharyngioma-associated obesity have a longer life expectancy than patients with PWS, which contributes to an increased risk of developing obesity-related co-morbid conditions such as type 2 diabetes in such patients.

Currently available therapeutic agents fail to provide satisfactory management of weight or hyperphagia in patients with HIAO, and bariatric surgery is not frequently employed in this patient population. We believe this is related to perceived risks of surgical interventions in this population including increased risk of post-surgical complications and minimal impact on the underlying problems of low metabolic rate and hyperphagia.

Treatment of Severe Obesity in the General Population

In 2013, we completed a 12-week Phase 2a clinical trial of beloranib administered twice weekly in obese patients. We observed placebo-adjusted weight loss of up to 10.3% after 12 weeks of treatment with beloranib. In addition, we observed reductions in levels of low density lipoprotein cholesterol, C-reactive protein and systolic blood pressure. Patients treated with beloranib also reported reduced hunger, as assessed using a visual analog scale, a widely used self-reported measure of hunger and related endpoints.

Our long-term intention is to pursue clinical development of beloranib or another methionine aminopeptidase 2, or MetAP2, inhibitor as a treatment for severely obese patients in the general population. We believe this patient population would benefit from MetAP2 inhibitor treatment through the reduction of body weight and through improvement of severity or symptoms of other co-morbid conditions. We believe that MetAP2 inhibitors have the potential to offer this patient population, most of which is not adequately responsive to available therapies, substantial health and quality of life benefits. We initiated a Phase 2b clinical trial of beloranib as a treatment for severe obesity in the general population in patients who also have type 2 diabetes in December 2014. We expect to report interim six month data from this clinical trial in late 2015 or early 2016. We are also evaluating additional proprietary MetAP2 inhibitors beyond beloranib as potential development candidates that would provide increased patient convenience in the form of oral dosing, or an otherwise improved clinical profile. A decision on whether to subsequently advance beloranib into pivotal trials for severe obesity or to leverage the opportunity to advance another MetAP2 inhibitor into early development for severe obesity is anticipated to be made on the basis of results obtained from our Phase 3 clinical program of beloranib in patients with PWS and discussions with regulatory authorities.

The most effective current treatment for severe obesity is bariatric surgery, including procedures such as the Roux-en-Y gastric bypass, adjustable gastric banding, sleeve gastrectomy and biliopancreatic diversion. Bariatric surgery produces dramatic and sustained weight loss, ranging on average from 20% to 35% one year post-procedure, and reduces overall mortality, but it can result in numerous complications and adverse events including thrombotic events, such as pulmonary embolism, infection, internal bleeding, pulmonary disease and gastrointestinal obstruction, which sometimes require reoperation during the post-operative period. Longer-term side effects of bariatric surgery, such as poor nutrient absorption, strictures and hernias, have also been observed.

Bariatric surgery eligibility criteria generally identify surgical candidates as those patients with body mass indices, or BMIs, greater than 40 kg/m2, or those with BMIs over 35 kg/m2 who also have a significant and uncontrolled co-morbid condition. Based on these criteria, it is estimated conservatively that there will be at least 16 million adults in the United States eligible for bariatric surgery by the time beloranib or another MetAP2 inhibitor could become available commercially. In addition to the BMI and co-morbidity eligibility criteria, patients need to satisfy a number of other criteria in order to have bariatric surgery: a severely obese patient must not have any known endocrine causes of obesity, a drug or alcohol problem, or an uncontrolled psychological condition, and must understand and appreciate the risks of the surgical intervention. According to the American Society for Metabolic & Bariatric Surgery and to HealthGrades, the average cost of bariatric surgery in the

 

 

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United States is approximately $22,000-$38,000. As a result of these limiting criteria and the financial commitments required, only a few hundred thousand patients undergo bariatric surgery each year even though over 16 million patients in the United States are eligible for the surgery based on BMI alone.

The pharmaceutical industry has undertaken several waves of activity to discover and develop new drugs for the treatment of obesity. Relative to bariatric surgery, pharmaceutical treatments have produced modest efficacy. In addition, existing pharmacotherapeutics for obesity often have undesirable adverse event profiles.

Our Product Pipeline

The following table summarizes our product pipeline and development status of our product candidates for the treatment of indications we are currently pursuing:

 

Indication

   Product Candidate      Stage of
Development
  

Development Status

Obesity and hyperphagia in patients with PWS

     Beloranib       Phase 3   

•  Phase 2a clinical trial completed

 

•  Phase 3 clinical trial of beloranib in patients with PWS began in the United States in September 2014, with six month data anticipated in late 2015

 

•  Phase 3 clinical trial of beloranib in patients with PWS in the European Union expected to begin in the middle of 2015, with 12-month data anticipated in late 2016

HIAO

     Beloranib       Phase 2   

•  Phase 2 clinical trial recently completed

Severe obesity in the

general population

     Beloranib       Phase 2b   

•  Phase 2a clinical trial completed

 

•  Phase 2b clinical trial began in December 2014 with interim six month data anticipated in late 2015 or early 2016

 

•  Advancement into pivotal trials under consideration

      
 
Second-generation
MetAP2 inhibitors
  
  
   Pre-clinical   

•  Development candidates under consideration

Nonalcoholic steatohepatitis, or NASH, nonalcoholic fatty liver disease and abdominal obesity      ZGN-839        Pre-clinical   

•  Pre-clinical studies ongoing

 

•  Investigational New Drug Application, or IND, filing anticipated by the middle of 2015

Company History

Zafgen was founded in 2005 to explore novel approaches to obesity therapeutics, including agents known to inhibit MetAP2 that had been found to drive unprecedented weight loss and metabolic improvements in mice. After performing a wide range of experiments to validate the effects of MetAP2 inhibitors in validated animal models, we committed the full resources of the company to testing the efficacy and safety of MetAP2 inhibition in obese patients and to establishing the feasibility of MetAP2 inhibitors for eventual commercialization. We identified beloranib as a suitable in-licensing candidate, and, in parallel with preparing beloranib for use in otherwise healthy but obese patients, we conducted our own chemistry program to identify compounds with complementary characteristics. After completing studies to establish preliminary safety, mechanism of action, manufacturing feasibility and clinical proof of concept, we advanced beloranib as a clinical development candidate and explored its application in severely obese patient populations. Our early clinical experience

 

 

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highlighted several key aspects of beloranib’s actions, including rapid and robust weight loss, changes in circulating hormones known to impact fat metabolism, clinically significant reductions in cardiovascular disease risk markers and a particularly striking impact on hunger.

Beloranib Mechanism of Action

Beloranib is a novel, first-in-class injectable small molecule therapy with a unique mechanism of action that reduces hunger while stimulating the use of stored fat as an energy source. Beloranib is the first anti-obesity agent with the potential to address two important abnormalities that are present in the obese patient—hunger that is inappropriate relative to the amount of energy stored as fat and dysregulation of fat metabolism, which causes more fat to be made and stored in an obese patient than in a lean person. Beloranib acts through potent inhibition of MetAP2, an enzyme that modulates the activity of key cellular processes that control metabolism. MetAP2 inhibitors work, at least in part, by directing MetAP2 binding to cellular stress mediators, thereby reducing the tone of signals that drive lipid synthesis by the liver and fat storage throughout the body. In this manner, MetAP2 inhibition serves the purpose of re-establishing balance to the ways the body packages and metabolizes fat and glucose. MetAP2 inhibitors reduce the production of new fatty acid molecules by the liver and help convert stored fats into useful energy while reducing hunger.

We have completed six clinical trials, including three Phase 2 clinical trials, evaluating beloranib in over 200 patients. Although these clinical trials were of short duration and designed to demonstrate safety and tolerability, significant decreases in both body weight and sense of hunger were observed in patients treated with beloranib when compared to the placebo group. Additional clinical trials of longer-term treatment with beloranib designed to demonstrate efficacy are required before we can submit a New Drug Application for beloranib as a treatment for any indication that we are pursuing. In our ongoing Phase 2b clinical trial of beloranib as a treatment for severe obesity in the general population and our ongoing Phase 3 clinical program of beloranib as a treatment for obesity and hyperphagia in patients with PWS, patients are being treated with beloranib for a substantially longer period of time than as treated in our earlier clinical trials. In addition, we observed improvements in cardiovascular disease risk factors such as plasma total cholesterol, low density lipoprotein cholesterol and C-reactive protein. Across our completed clinical trials, beloranib has been well-tolerated at doses in the range of 1.0 mg to 2.0 mg administered twice weekly, and has not been associated with serious side effects. Laboratory safety measures, vital signs and electrocardiograms have been unremarkable in all completed clinical trials for all doses of beloranib tested.

Our Strategy

Our objective is to be a leader in the discovery, development and commercialization of novel therapies to significantly improve the health and well-being of patients affected by obesity and complex metabolic disorders. Key elements of our strategy include:

 

    Advance the clinical development of beloranib in subpopulations of obese patients, including those with rare conditions, where obesity is a co-morbidity of an underlying condition. Diseases in this category include PWS, HIAO and monogenic loss of function mutations, including leptin deficiency and melanocortin receptor subclass 4 mutations. We believe that rare conditions such as PWS and HIAO afford us an opportunity to rapidly develop and commercialize beloranib using smaller, more focused and less costly clinical trials, relative to those required to develop beloranib for the broader severe obesity population. Beloranib exerts its weight loss effects using a novel mechanism that does not appear to require fully functioning hypothalamic control pathways. We believe this mechanism is well-suited for patients with obesity that is caused by the failure of hypothalamic food intake control mechanisms, in particular the control of insatiable life-threatening hunger and hunger-related behavior, or hyperphagia.

 

 

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    Advance the clinical development of MetAP2 inhibitors for the treatment of severely obese patients in the general population, including those who are candidates for bariatric surgery. We believe the severely obese patient population would benefit from MetAP2 inhibitor treatment through the reduction of body weight and through improvement of other co-morbid conditions. Bariatric surgery results in significant weight loss, but the financial expense and the potential for complications, adverse events and longer-term side effects limit its overall adoption, with only a few hundred thousand patients in the United States undergoing bariatric surgery each year. Existing pharmacotherapies result in less weight loss than surgical options, and these therapies not only have undesirable side effects, but also have risk of abuse.

 

    Leverage the knowledge of our experienced team of drug developers that have deep expertise in the field of obesity, the function of MetAP2 inhibitors and metabolic diseases. Our management team has deep expertise in obesity and related metabolic diseases, the function of MetAP2 inhibitors, the strengths and weaknesses of current treatments for obesity and the ability to recognize the potential of novel therapies for the treatment of obesity. Our team is complemented by highly experienced external consultants and collaborators in the areas of drug discovery, development and regulatory approval.

 

    Maintain flexibility in commercializing and maximizing the value of our development programs. While we intend to develop and commercialize beloranib for indications such as PWS and HIAO, we may enter into strategic relationships with biotechnology or pharmaceutical companies to realize the full value of beloranib or our other earlier-stage development programs. For beloranib, we may enter into one or more strategic relationships to access broader geographic markets or additional indications. These relationships could focus on specific patient populations and their caregivers, on regional development or on distribution and sales of beloranib.

 

    Development of other potential product candidates. We have a second program focused on the delivery of MetAP2 inhibitors with targeted tissue distribution that shows early promise in animal models of NASH, nonalcoholic fatty liver disease and abdominal obesity. Our lead MetAP2 inhibitor in this class of molecules is called ZGN-839. We plan to advance multiple candidate drugs into early development to establish clinical proof of concept, safety and tolerability of these molecules as a way to leverage our internal know-how in metabolic diseases and the effects of MetAP2 inhibitors. These compounds, typified by ZGN-839, could provide additional short-term value to our company through focused development partnerships and collaborations.

Risks Associated With Our Business

Our business is subject to many risks and uncertainties of which you should be aware before you decide to invest in our common stock. These risks are discussed more fully under “Risk Factors” in this prospectus. Some of these risks include:

 

    We depend almost entirely on the success of one product candidate, beloranib, which is in Phase 3 clinical development for our lead indication of the treatment of obesity and hyperphagia in patients with PWS and Phase 2 clinical development for HIAO and severe obesity in the general population
. We cannot be certain that we will be able to obtain regulatory approval for, or successfully commercialize, beloranib.

 

    Positive results from early clinical trials of beloranib are not necessarily predictive of the results of later clinical trials of beloranib. If we cannot replicate the positive results from our earlier clinical trials of beloranib in our later clinical trials, we may be unable to successfully develop, obtain regulatory approval for and commercialize beloranib. It may further be necessary to validate different or additional instruments for measuring subjective endpoints, and to show that beloranib has clinically meaningful impact on those endpoints in order to obtain regulatory approval.

 

 

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    Failures or delays in the commencement or completion of our planned clinical trials of beloranib could result in increased costs to us and could delay, prevent or limit our ability to generate revenue and continue our business.

 

    We rely, and expect that we will continue to rely, on third parties to conduct any future clinical trials for beloranib. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize beloranib and our business could be substantially harmed.

 

    The number of patients suffering from PWS and HIAO is small and has not been established with precision. If the actual number of patients with either of these conditions is smaller than we estimate or if any approval that we obtain is based on a narrower definition of these patient populations, our revenue and ability to achieve profitability will be adversely affected, possibly materially.

 

    If we are unable to adequately protect our proprietary technology or maintain issued patents which are sufficient to protect beloranib, others could compete against us more directly, which would have a material adverse impact on our business, results of operations, financial condition and prospects.

 

    We are dependent on licensed intellectual property. If we were to lose our rights to licensed intellectual property, we may not be able to continue developing or commercializing beloranib or our other product candidates, if approved.

 

    Our future success depends on our ability to retain our Chief Executive Officer, and to attract, retain and motivate qualified personnel.

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:

 

    two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;

 

    reduced disclosure about our executive compensation arrangements;

 

    no non-binding advisory votes on executive compensation or golden parachute arrangements; and

 

    exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting.

We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company on the date that is the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of our initial public offering completed in June 2014; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the last day of the fiscal year in which we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission, or SEC, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th. We may choose to take advantage of some but not all of these exemptions. We have taken advantage of reduced reporting requirements in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock. Also, we have irrevocably elected to “opt out” of the exemption for the delayed adoption of certain accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

 

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Corporate History and Information

We were incorporated under the laws of the State of Delaware in November 2005. Our principal executive office is located at 175 Portland Street, 4th Floor, Boston, Massachusetts, 02114 and our telephone number is (617) 622-4003. Our website address is www.zafgen.com. We do not incorporate the information on or accessible through our website into this prospectus, and you should not consider any information on, or that can be accessed through, our website as part of this prospectus.

We own various U.S. federal trademark registrations and applications and unregistered trademarks, including the following trademarks referred to in this prospectus: ZAFGEN® and our corporate logo. All other trademarks or trade names referred to in this prospectus are the property of their respective owners. Solely for convenience, the trademarks and trade names in this prospectus may be referred to without the ® and symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.

 

 

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THE OFFERING

 

Common stock offered by us

2,840,909 shares

 

Common stock to be outstanding after this offering

25,547,921 shares

 

Option to purchase additional shares

We have granted the underwriters an option to purchase a maximum of 426,136 additional shares of common stock from us. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

 

Use of Proceeds

We estimate that we will receive net proceeds from the sale of shares of our common stock in this offering of approximately $93.5 million, or $107.6 million if the underwriters fully exercise their option to purchase additional shares, based on an assumed public offering price of $35.20 per share, which was the last reported sale price of our common stock on The NASDAQ Global Market on January 15, 2015, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds from this offering to advance the clinical development of beloranib as a treatment for obesity and hyperphagia in patients with PWS and HIAO, including pediatric patients with PWS, to develop multiple back-up or follow-on molecules of beloranib as a treatment for severe obesity in the general population, to continue the development and initiate clinical development of ZGN-839, to develop a pen-injector system for eventual commercial use in PWS, HIAO and severe obesity in the general population and to fund new and ongoing research and development activities, working capital, early commercialization activities and other general corporate purposes. See “Use of Proceeds” for additional information.

 

Risk Factors

You should read carefully “Risk Factors” beginning on page 13 and other information included in this prospectus for a discussion of factors that you should consider before deciding to invest in shares of our common stock.

 

NASDAQ Global Market symbol

ZFGN

The number of shares of common stock to be outstanding after this offering is based on 22,707,012 shares of common stock outstanding as of September 30, 2014 and excludes:

 

    1,839,895 shares of common stock issuable upon exercise of outstanding options as of September 30, 2014 at a weighted average exercise price of $5.26 per share;

 

    1,841,679 shares of our common stock reserved for future issuance under our 2014 Stock Option and Incentive Plan, or 2014 Stock Option Plan, as of September 30, 2014;

 

    265,000 shares of our common stock reserved for future issuance under our 2014 Employee Stock Purchase Plan, as of September 30, 2014; and

 

    171,750 shares of our common stock issued to Chong Kun Dang Pharmaceutical Corp. of South Korea to cover milestone payments.

 

 

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Except as otherwise indicated, all information in this prospectus assumes or gives effect to:

 

    no exercise of the outstanding options described above; and

 

    no exercise by the underwriters of their option to purchase up to an additional 426,136 shares of our common stock in this offering.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

You should read the following summary consolidated financial data together with our consolidated financial statements and the related notes appearing at the end of this prospectus and the “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this prospectus. We have derived the consolidated statement of operations data for the years ended December 31, 2011, 2012 and 2013 from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of operations data for the nine months ended September 30, 2013 and 2014 and the consolidated balance sheet data as of September 30, 2014 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus and have been prepared on the same basis as the audited consolidated financial statements. In the opinion of management, the unaudited data reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information in those statements. Our historical results are not necessarily indicative of results that should be expected in the future, and results for the nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year ending December 31, 2014.

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2011     2012     2013     2013     2014  
     (in thousands, except per share data)  

Statement of Operations Data:

          

Revenue

   $ —        $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development

     11,403        11,544        9,561        7,038        20,046   

General and administrative

     1,751        2,247        4,219        2,981        4,822   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     13,154        13,791        13,780        10,019        24,868   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (13,154     (13,791     (13,780     (10,019     (24,868
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

          

Interest income

     —          —          —          —          2   

Interest expense

     —          (97     —          —          (658

Foreign currency transaction gains (losses), net

     (3     8        (247     (162     (23
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (3     (89     (247     (162     (679
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (13,157     (13,880     (14,027     (10,181     (25,547

Accretion of redeemable convertible preferred stock to redemption value

     (53     (67     (213     (160     (92
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (13,210   $ (13,947   $ (14,240   $ (10,341   $ (25,639
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(1)

   $ (19.17   $ (19.65   $ (19.53   $ (14.19   $ (2.97
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding, basic and diluted(1)

     689        710        729        729        8,619   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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     As of September 30, 2014  
     Actual      As Adjusted(2)  
     (in thousands)  

Balance Sheet Data:

     

Cash and cash equivalents

   $ 127,030       $ 220,530   

Working capital(3)

     117,848         211,348   

Total assets

     129,636         223,136   

Long-term debt, net of discount, including current portion

     7,503         7,503   

Total stockholders’ equity

     111,196         204,696   

 

(1) See Note 9 to our audited consolidated financial statements for further details on the calculation of basic and diluted net loss per share attributable to common stockholders.
(2) As adjusted balance sheet data give effect to the sale by us of 2,840,909 shares of our common stock in this offering at an assumed public offering price of $35.20 per share, which was the last reported sale price of our common stock on The NASDAQ Global Market on January 15, 2015, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
(3) We define working capital as current assets less current liabilities.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and uncertainties, together with all other information contained in this prospectus, including our consolidated financial statements and related notes, before investing in our common stock. Any of the risk factors we describe below could adversely affect our business, financial condition or results of operations. The market price of our common stock could decline if one or more of these risks or uncertainties actually occur, causing you to lose all or part of the money you paid to buy our common stock. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business. Certain statements below are forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements” in this prospectus.

Risks Related to Product Development, Regulatory Approval and Commercialization

We depend almost entirely on the success of one product candidate, beloranib, which is in Phase 3 clinical development for our lead indication of the treatment of obesity and hyperphagia in patients with PWS and Phase 2 clinical development for HIAO and severe obesity in the general population. We cannot be certain that we will be able to obtain regulatory approval for, or successfully commercialize, beloranib.

We currently have only one product candidate, beloranib, in clinical development, and our business depends almost entirely on its successful clinical development, regulatory approval and commercialization. We currently have no drug products for sale and may never be able to develop marketable drug products. Beloranib, which is currently in Phase 3 clinical development as a treatment for obesity and hyperphagia in Prader-Willi syndrome, or PWS, Phase 2 clinical development for hypothalamic injury-associated obesity, or HIAO, and Phase 2b clinical development for severe obesity in the general population, will require substantial additional clinical development, testing and regulatory approval before we are permitted to commence its commercialization. Our other product candidates, including ZGN-839, are still in pre-clinical development stages. The clinical trials of our product candidates are, and the manufacturing and marketing of our product candidates will be, subject to extensive and rigorous review and regulation by numerous government authorities in the United States and in other countries where we intend to test and, if approved, market any product candidate. Before obtaining regulatory approvals for the commercial sale of any product candidate, we must demonstrate through pre-clinical testing and clinical trials that the product candidate is safe and effective for use in each target indication. This process can take many years and may include post-marketing studies and surveillance, which will require the expenditure of substantial resources beyond the proceeds we currently have on hand plus those raised in this offering. Of the large number of drugs in development in the United States, only a small percentage will successfully complete the U.S. Food and Drug Administration, or FDA, regulatory approval process and is commercialized. Accordingly, even if we are able to obtain the requisite financing to continue to fund our development and clinical trials, we cannot assure you that beloranib or any other of our product candidates will be successfully developed or commercialized.

We are not permitted to market beloranib in the United States until we receive approval of a New Drug Application, or an NDA, from the FDA, or in any foreign countries until we receive the requisite approval from such countries. We recently completed three Phase 2 clinical trials evaluating beloranib’s ability to reduce body weight and to improve hyperphagia, one in patients with PWS, one in patients with HIAO and one in severely obese patients. We expect that the FDA will require us to conduct at least one pivotal trial in order to submit an NDA for beloranib as a treatment for patients with PWS. However, meeting requirements of the FDA or certain European regulatory authorities may require that we conduct additional pivotal trials. We expect that the FDA will also require us to complete our ongoing Phase 2b clinical trial and at least two Phase 3 clinical trials to submit an NDA for beloranib as a treatment for severe obesity in the general population, and may require that we conduct a cardiovascular outcomes trial. Pursuant to the FDA’s February 2007 draft guidance to industry on the development of weight management drugs, in order to reasonably estimate the safety of a weight-management drug, Phase 3 clinical trials must randomize approximately 3,000 subjects to active doses of the product and 1,500 subjects to placebo in clinical trials for a one-year duration.

 

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We initiated our Phase 3 clinical program, which is planned to consist of two Phase 3 clinical trials, of beloranib in patients with PWS, with the first Phase 3 trial in the United States having started in September 2014. We plan to initiate our second Phase 3 clinical trial of beloranib in patients with PWS in the European Union in the middle of 2015. We continue to engage in discussions with applicable regulatory authorities to determine if our proposed Phase 3 clinical trial protocols would be sufficient to support an NDA submission to the FDA and a marketing authorization application, or MAA, to the European Medicines Agency, or EMA, and other regulatory agencies seeking approval of beloranib for the treatment of obesity and hyperphagia in patients with PWS. Prior to initiation of our Phase 3 clinical program for beloranib in patients with PWS, we submitted pre-clinical animal studies and clinical trial results for the FDA’s review, and have several additional studies to complete, including a human factors study to demonstrate patients’ ability to correctly use the device for dispensing beloranib, an abuse potential study and rat and mouse carcinogenicity studies. However, the FDA may require additional pre-clinical animal studies or clinical studies. We also initiated a Phase 2b clinical trial of beloranib as a treatment for severe obesity in the general population in patients who also have type 2 diabetes.

We are also evaluating additional proprietary methionine aminopeptidase 2, or MetAP2, inhibitors beyond beloranib as potential development candidates that would provide increased patient convenience in the form of oral dosing, or an otherwise improved clinical profile. A decision on whether to subsequently advance beloranib into pivotal trials for severe obesity or to leverage the opportunity to advance another MetAP2 inhibitor into early development for severe obesity is anticipated to be made on the basis of results obtained from our Phase 3 clinical program of beloranib in patients with PWS and discussions with regulatory authorities.

Accordingly, obtaining approval of an NDA is a complex, lengthy, expensive and uncertain process, and the FDA and certain European regulatory authorities may delay, limit or deny approval of beloranib for many reasons, including, among others:

 

    we may not be able to demonstrate that beloranib is safe and effective in treating obesity and hyperphagia in patients with PWS, HIAO or severe obesity in the general population, to the satisfaction of the FDA and certain European regulatory authorities;

 

    the results of our clinical trials may not meet the level of statistical or clinical significance required by the FDA and certain European regulatory authorities for marketing approval;

 

    the FDA and certain European regulatory authorities may disagree with the number, design, size, duration, conduct or implementation of our clinical trials;

 

    the FDA and certain European regulatory authorities may require that we conduct additional clinical trials or pre-clinical studies;

 

    the FDA and certain European regulatory authorities may not approve the formulation, labeling or specifications of beloranib;

 

    the contract research organizations, or CROs, that we retain to conduct our clinical trials may take actions outside of our control that materially adversely impact our clinical trials;

 

    the FDA and certain European regulatory authorities may find the data from pre-clinical studies and clinical trials insufficient to demonstrate that beloranib’s clinical and other benefits outweigh its safety risks;

 

    the FDA and certain European regulatory authorities may disagree with our interpretation of data from our pre-clinical studies and clinical trials;

 

    the FDA and certain European regulatory authorities may not accept data generated at our clinical trial sites;

 

    if our NDA, if and when submitted, is reviewed by an advisory committee, the FDA may have difficulties scheduling an advisory committee meeting in a timely manner or the advisory committee may recommend against approval of our application or may recommend that the FDA require, as a condition of approval, additional pre-clinical studies or clinical trials, limitations on approved labeling or distribution and use restrictions;

 

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    the FDA may require development of a Risk Evaluation and Mitigation Strategy, or REMS, as a condition of approval or post-approval;

 

    the FDA and certain European regulatory authorities may not approve the manufacturing processes or facilities of third-party manufacturers with which we contract; or

 

    the FDA and certain European regulatory authorities may change their approval policies or adopt new regulations.

Any of these factors, many of which are beyond our control, could jeopardize our ability to obtain regulatory approval for and successfully market beloranib. Moreover, because our business is almost entirely dependent upon this one product candidate, any such setback in our pursuit of regulatory approval would have a material adverse effect on our business and prospects.

Positive results from early clinical trials of beloranib are not necessarily predictive of the results of later clinical trials of beloranib. If we cannot replicate the positive results from our earlier clinical trials of beloranib in our later-stage clinical trials, we may be unable to successfully develop, obtain regulatory approval for and commercialize beloranib. It may further be necessary to validate different or additional instruments for measuring subjective endpoints, and to show that beloranib has clinically meaningful impact on those endpoints in order to obtain regulatory approval.

Positive results from our Phase 1 and Phase 2a clinical trials of beloranib may not necessarily be predictive of the results from required later-stage clinical trials. Similarly, even if we are able to complete our Phase 2b or Phase 3 clinical trials of beloranib according to our current development timeline, the positive results from our Phase 1 and Phase 2a clinical trials of beloranib may not be replicated in our Phase 2b or Phase 3 clinical trial results. The design of our Phase 3 clinical program of beloranib as a treatment for obesity and hyperphagia in patients with PWS differs in several aspects from our recently completed Phase 2a clinical trial for PWS. For example, patients with PWS will not be limited to living in closely-controlled PWS-specific group homes like they were in our Phase 2a clinical trial but will be predominantly living in family homes. In addition, patients with PWS will be treated with beloranib for substantially longer than four weeks and our U.S. Phase 3 extension trial, European Phase 3 trial for PWS and all subsequent Phase 2 and 3 studies will test a pre-filled diluent syringe instead of single use glass vials, which were used in our Phase 2a and U.S. Phase 3 clinical trials. One of the Phase 3 clinical trials will be conducted in Europe, where we have not previously conducted clinical trials. Based on discussions with regulatory authorities, the dual primary efficacy endpoints for our Phase 3 clinical trials have changed from improvement in hyperphagia-related behaviors or body fat mass to improvements in hyperphagia-related behaviors or body weight. In our Phase 2a clinical trial for PWS we saw statistically significant improvements in body mass and fat mass; body weight was also reduced, but not to a statistically significant level. In each Phase 3 trial, the trial will be considered successful based on a statistically significant result for either dual primary efficacy endpoint at a p-value of less than 0.025. Later-stage clinical trials will utilize highly rigorous statistical analyses. For example, the results of our Phase 2a clinical trial for severe obesity were based on a per protocol analysis of patients who completed the 12-week dosing in the clinical trial. Later-stage clinical trials will be evaluated based on an intent-to-treat analysis that includes all patients randomized in the clinical trial, regardless of whether they complete treatment, which may lead to different results. The draft statistical analysis plan for our U.S. Phase 3 trial is still under review by the FDA. Moreover, if we fail to validate a caregiver-administered PWS-specific hyperphagia-related behaviors questionnaire, or PWS-HQ, in time for it to be an effective tool to support the data from our Phase 3 clinical trials, our Phase 3 clinical program and, in turn, our regulatory filing may be delayed until we validate the tool or develop and test a new one. This can be a lengthy process.

Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in later-stage clinical trials after achieving positive results in early-stage development, and we cannot be certain that we will not face similar setbacks. These setbacks have been caused by, among other things, pre-clinical findings made while clinical trials were underway or safety or efficacy observations made in clinical trials, including previously unreported adverse events. Moreover, pre-clinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that believed their product candidates performed satisfactorily in pre-clinical studies and clinical trials nonetheless failed to obtain FDA approval. If we fail to produce positive

 

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results in our Phase 2b or Phase 3 clinical trials of beloranib, the development timeline and regulatory approval and commercialization prospects for our leading product candidate, and, correspondingly, our business and financial prospects, would be materially adversely affected.

Failures or delays in the commencement or completion of our planned clinical trials of beloranib could result in increased costs to us and could delay, prevent or limit our ability to generate revenue and continue our business.

We initiated our Phase 3 clinical trial of beloranib as a treatment for obesity and hyperphagia in patients with PWS in the United States in September 2014. We plan to initiate our second Phase 3 trial in the European Union in patients with PWS in the middle of 2015. We also initiated a Phase 2b clinical trial of beloranib as a treatment for severe obesity in the general population in patients who also have type 2 diabetes in December 2014. Despite the guidance received from, and to be received from, these regulatory authorities, both the FDA and the European regulatory authorities can change their positions on the acceptability of our trial designs or the clinical endpoints selected, which may require us to complete additional clinical trials or impose stricter approval conditions than we currently expect. Successful completion of such clinical trials is a prerequisite to submitting an NDA to the FDA and, consequently, the ultimate approval and commercial marketing of beloranib. We do not know whether any of these Phase 2b or Phase 3 clinical trials will begin or be completed on schedule, if at all, as the commencement and completion of clinical trials can be delayed or prevented for a number of reasons, including, among others:

 

    the FDA or European regulatory authorities may place an ongoing clinical trial on hold or may deny permission to pursue other clinical trials we want to initiate;

 

    delays in regulatory filing or receiving regulatory approvals or additional investigational new drug applications, or INDs, that may be required;

 

    negative results from our ongoing pre-clinical studies or the FDA or European regulatory authorities may require additional pre-clinical studies;

 

    delays in reaching or failing to reach agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

    inadequate quantity or quality of a product candidate or other materials necessary to conduct clinical trials, for example delays in the manufacturing of sufficient supply of finished drug product;

 

    difficulties obtaining Institutional Review Board, or IRB, approval to conduct a clinical trial at a prospective site or sites;

 

    challenges in recruiting and enrolling patients to participate in clinical trials, including the size and nature of the patient population, the proximity of patients to trial sites, eligibility criteria for the clinical trial, the nature of the clinical trial protocol, the availability of approved effective treatments for the relevant disease and competition from other clinical trial programs for similar indications;

 

    severe or unexpected drug-related side effects experienced by patients in a clinical trial, including side effects previously identified in our completed clinical trials;

 

    delays in validating the PWS-HQ or any other self-reported measures of hunger and related endpoints utilized in a clinical trial, including delays caused as a result of the need to translate the PWS-HQ or other self-reported measures of hunger into European languages other than English;

 

    the FDA or European regulatory authorities may disagree with our clinical trial design and our interpretation of data from clinical trials, or may change the requirements for approval even after it has reviewed and commented on the design for our clinical trials;

 

    reports from pre-clinical or clinical testing of other weight loss therapies that raise safety or efficacy concerns; and

 

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    difficulties retaining patients who have enrolled in a clinical trial but may be prone to withdraw due to rigors of the clinical trials, lack of efficacy, side effects, personal issues or loss of interest.

Clinical trials may also be delayed or terminated as a result of ambiguous or negative interim results. In addition, a clinical trial may be suspended or terminated by us, the FDA, other regulatory authorities, the IRBs, at the sites where the IRBs are overseeing a clinical trial, a data and safety monitoring board, or DSMB, overseeing the clinical trial at issue or other regulatory authorities due to a number of factors, including, among others:

 

    failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;

 

    inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities that reveals deficiencies or violations that require us to undertake corrective action, including the imposition of a clinical hold;

 

    unforeseen safety issues, including any that could be identified in our ongoing pre-clinical studies, adverse side effects or lack of effectiveness;

 

    changes in government regulations or administrative actions;

 

    problems with clinical supply materials; and

 

    lack of adequate funding to continue the clinical trial.

Changes in regulatory requirements, FDA guidance or guidance from certain European regulatory authorities or unanticipated events during our clinical trials of beloranib may occur, which may result in changes to clinical trial protocols or additional clinical trial requirements, which could result in increased costs to us and could delay our development timeline.

Changes in regulatory requirements, FDA guidance or guidance from certain European regulatory authorities or unanticipated events during our clinical trials may force us to adjust our clinical program or the FDA or certain European regulatory authorities may impose additional clinical trial requirements. For instance, the FDA issued draft guidance on developing products for weight management in February 2007, but this guidance may be revised in the near future. In March 2012, the FDA’s Endrocrinologic and Metabolic Drugs Advisory Committee met to discuss possible changes to how the FDA evaluates the cardiovascular safety of weight-management drugs. Amendments to our clinical trial protocols would require resubmission to the FDA or certain European regulatory authorities and IRBs for review and approval, which may adversely impact the cost, timing or successful completion of a clinical trial. If we experience delays completing, or if we terminate, any of our clinical trials, or if we are required to conduct additional clinical trials, the commercial prospects for beloranib may be harmed and our ability to generate product revenue will be delayed.

We rely, and expect that we will continue to rely, on third parties to conduct any future clinical trials for beloranib. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize beloranib and our business could be substantially harmed.

We enter into agreements with third-party CROs to provide monitors for and to manage data for our ongoing clinical trials. We rely heavily on these parties for execution of clinical trials for beloranib and control only certain aspects of their activities. As a result, we have less direct control over the conduct, timing and completion of these clinical trials and the management of data developed through the clinical trials than would be the case if we were relying entirely upon our own staff. Communicating with outside parties can also be challenging, potentially leading to mistakes as well as difficulties in coordinating activities. Outside parties may:

 

    have staffing difficulties;

 

    fail to comply with contractual obligations;

 

    experience regulatory compliance issues;

 

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    undergo changes in priorities or become financially distressed; or

 

    form relationships with other entities, some of which may be our competitors.

These factors may materially adversely affect the willingness or ability of third parties to conduct our clinical trials and may subject us to unexpected cost increases that are beyond our control. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on CROs does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with current Good Clinical Practices, or cGCPs, which are regulations and guidelines enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area and comparable foreign regulatory authorities for any products in clinical development. The FDA enforces these cGCP regulations through periodic inspections of clinical trial sponsors, principal investigators and trial sites. If we or our CROs fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply with cGCPs. In addition, our clinical trials must be conducted with product produced under current Good Manufacturing Practices, or cGMPs, regulations and will require a large number of test subjects. Our failure or the failure of our CROs to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process and could also subject us to enforcement action up to and including civil and criminal penalties.

Although we do design our clinical trials for beloranib, CROs conduct all of the clinical trials. As a result, many important aspects of our drug development programs are outside of our direct control. In addition, the CROs may not perform all of their obligations under arrangements with us or in compliance with regulatory requirements, but we remain responsible and are subject to enforcement action that may include civil penalties up to and including criminal prosecution for any violations of FDA laws and regulations during the conduct of our clinical trials. If the CROs do not perform clinical trials in a satisfactory manner, breach their obligations to us or fail to comply with regulatory requirements, the development and commercialization of beloranib may be delayed or our development program materially and irreversibly harmed. We cannot control the amount and timing of resources these CROs devote to our program or beloranib. If we are unable to rely on clinical data collected by our CROs, we could be required to repeat, extend the duration of, or increase the size of our clinical trials and this could significantly delay commercialization and require significantly greater expenditures.

If any of our relationships with these third-party CROs terminate, we may not be able to enter into arrangements with alternative CROs. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, any such clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize beloranib. As a result, our financial results and the commercial prospects for beloranib in the subject indication would be harmed, our costs could increase and our ability to generate revenue could be delayed.

The number of patients suffering from PWS and HIAO is small and has not been established with precision. If the actual number of patients with either of these conditions is smaller than we estimate or if any approval that we obtain is based on a narrower definition of these patient populations, our revenue and ability to achieve profitability will be adversely affected, possibly materially.

There is no current comprehensive patient registry or other method of establishing with precision the actual number of patients with PWS or HIAO in any geography. Published population studies estimate that the prevalence of PWS in the United States and in the European Union ranges from 1 in 8,000 to 1 in 50,000. Published population studies estimate that the incidence of craniopharyngioma, the leading cause of HIAO, is 0.13 to 0.17 per 100,000 per year, or approximately 400 to 500 cases per year in the United States and 650 to

 

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850 cases per year in the European Union. The total addressable market opportunity for beloranib for the treatment of patients with PWS or HIAO will ultimately depend upon, among other things, the diagnosis criteria included in the final label for beloranib, if approved for sale for these indications, acceptance by the medical community and patient access, product pricing and reimbursement. If the actual number of patients with PWS or HIAO is lower than we believe or if any approval that we obtain is based on a narrower definition of these patient populations, then the potential markets for beloranib for these indications will be smaller than we anticipate.

In addition, we plan to seek approval of beloranib initially for the treatment of adolescent (12 years of age and older) and adult patients with PWS and adolescent and adult patients with HIAO. We believe that approximately 40-50% of patients with PWS are 12 years of age or older. We are currently engaged in discussions with the FDA regarding plans for development of beloranib for the treatment of pediatric patients under the age of 12. To support approval for pediatric patients (younger than 12 years of age) we will need to conduct pediatric clinical trials of beloranib for the treatment of these patients with PWS, but we do not yet have plans regarding when these trials will commence. As a result, any FDA approval would likely, at least initially, be limited to use for treating adolescent and adult patients with PWS or adolescent and adult patients with HIAO. This would limit our initial product revenue and may make it more difficult for us to achieve or maintain profitability.

We rely completely on third-party suppliers to manufacture our clinical drug supplies for beloranib, and we intend to rely on third parties to produce commercial supplies of beloranib and pre-clinical, clinical and commercial supplies of any future product candidate.

We do not currently have, nor do we currently plan to acquire, the infrastructure or capability to internally manufacture our clinical drug supply of beloranib, or any future product candidates, for use in the conduct of our pre-clinical studies and clinical trials, and we lack the internal resources and the capability to manufacture any product candidates on a clinical or commercial scale. The facilities used by our contract manufacturers, or CMOs, to manufacture the active drug substance, sterile drug substance and final drug product must be approved by the FDA and other comparable foreign regulatory agencies pursuant to inspections that would be conducted after we submit our NDA or relevant foreign regulatory submission to the applicable regulatory agency.

We do not control the manufacturing process of, and are completely dependent on, our CMOs to comply with cGMPs for manufacture of active drug substance, sterile drug substance and finished drug products. If our CMOs cannot successfully manufacture material that conforms to our specifications and the regulatory requirements of the FDA or applicable foreign regulatory agencies, the CMOs will not be able to secure and/or maintain regulatory approval for their manufacturing facilities. While we manage our quality expectations through a regular audit program for our vendors and suppliers, we have no direct control over our CMOs’ ability to maintain adequate quality control, quality assurance and qualified personnel. Furthermore, our CMOs are engaged with third party vendors to supply and/or manufacture starting materials or components for them, which exposes our CMOs to regulatory risks for the production of such materials and components. As a result, failure to satisfy the regulatory requirements for the production of those materials and components may affect the regulatory clearance of our CMOs’ facilities generally. If the FDA or an applicable foreign regulatory agency does not approve these facilities for the manufacture of our product candidates or if it withdraws its approval in the future, we may need to find alternative manufacturing facilities, which would adversely impact our ability to develop, obtain regulatory approval for or market our product candidates.

We control our clinical trial supply chain by periodically meeting to assess clinical trial material needs and status of supply. Clinical trial materials are forecasted on a six month rolling basis taking into account enrollment rates, number of sites, component inventory and clinical kit shelf-life. The clinical supply forecast is maintained internally and used to aid in decision making for cGMP manufacturing as well as clinical kit packaging and labeling. In addition, the CRO we employ maintains an inventory of all clinical kits that are allocated for a clinical trial as well as all components needed for the clinical kits. Our cross-functional internal working group discusses inventory on a regular basis. Distribution of kits to clinical sites is controlled via a validated system

 

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thus helping to manage inventory at the CRO. Resupply of finished drug product is in progress at our drug product CMO. The manufacturing process is under active development and is not yet validated. Any delays encountered with manufacturing activities, CMO scheduling or raw material supply could delay the manufacturing of finished drug product.

We do not have long-term supply agreements in place with our CMOs, and each batch of beloranib is individually contracted under a quality and supply agreement. CMOs are currently supporting clinical activities, however CMOs that will manufacture commercial cGMP batches for beloranib will need to be approved by the FDA and other applicable foreign regulatory agencies, prior to commercialization. We plan to continue to rely upon CMOs and, potentially, collaboration partners to manufacture commercial quantities of beloranib, if approved. Our current scale of manufacturing is adequate to support all of our needs for clinical trial supplies and launch for orphan markets. For peak usage in orphan markets and for indications with larger populations of affected patients, we will need to identify CMOs or partners to produce beloranib on a larger scale.

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell beloranib, we may not be able to generate any revenue.

We do not currently have an infrastructure for the sales, marketing and distribution of pharmaceutical products. In order to market beloranib, if approved by the FDA or any other regulatory body, we must build our sales, marketing, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, or if we are unable to do so on commercially reasonable terms, our business, results of operations, financial condition and prospects will be materially adversely affected.

Even if we receive marketing approval for beloranib in the United States, we may never receive regulatory approval to market beloranib outside of the United States.

We intend to pursue marketing approval of beloranib in the European Union and in other countries worldwide. In order to market any product outside of the United States, we must establish and comply with the numerous and varying safety, efficacy and other regulatory requirements of other countries, including potential additional clinical trials or pre-clinical studies. Approval procedures vary among countries and can involve additional product candidate testing and additional administrative review periods. The time required to obtain approvals in other countries might differ from that required to obtain FDA approval. The marketing approval processes in other countries may implicate all of the risks detailed above regarding FDA approval in the United States as well as other risks. In particular, in many countries outside of the United States, products must receive pricing and reimbursement approval before the product can be commercialized. Obtaining this approval can result in substantial delays in bringing products to market in such countries. Marketing approval in one country does not ensure marketing approval in another, but a failure or delay in obtaining marketing approval in one country may have a negative effect on the regulatory process in others. Failure to obtain marketing approval in other countries or any delay or other setback in obtaining such approval would impair our ability to market beloranib in such foreign markets. Any such impairment would reduce the size of our potential market, which could have a material adverse impact on our business, results of operations and prospects.

Even if we receive marketing approval for beloranib, it may not achieve broad market acceptance, which would limit the revenue that we generate from its sales.

The commercial success of beloranib, if approved by the FDA or EMA or other applicable regulatory authorities, will depend upon the awareness and acceptance of beloranib among the medical community, including physicians, patients and healthcare payors. Market acceptance of beloranib, if approved, will depend on a number of factors, including, among others:

 

    beloranib’s demonstrated ability to treat obesity and hyperphagia in patients with PWS, HIAO, or severe obesity in the general population and, if required by any applicable regulatory authority in connection with the approval for these indications, to provide patients with incremental health benefits, as compared with other available weight loss therapies, devices or surgeries;

 

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    the relative convenience and ease of subcutaneous injections as the necessary method of administration of beloranib, including as compared with other treatments for severely obese patients;

 

    the prevalence and severity of any adverse side effects associated with beloranib, such as nausea, vomiting, headaches and difficulty sleeping or falling asleep;

 

    limitations or warnings contained in the labeling approved for beloranib by the FDA, EMA, or other regulatory authorities;

 

    availability of alternative treatments, including a number of competitive obesity therapies already approved or expected to be commercially launched in the near future;

 

    the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

 

    the strength of marketing and distribution support and timing of market introduction of competitive products;

 

    publicity concerning our products or competing products and treatments;

 

    pricing and cost effectiveness;

 

    the effectiveness of our sales and marketing strategies;

 

    our ability to increase awareness of beloranib through marketing efforts;

 

    our ability to obtain sufficient third-party coverage or reimbursement; and

 

    the willingness of patients to pay out-of-pocket in the absence of third-party coverage.

If beloranib is approved but does not achieve an adequate level of acceptance by patients, physicians and payors, we may not generate sufficient revenue from beloranib to become or remain profitable. Before granting reimbursement approval, healthcare payors may require us to demonstrate that, in addition to treating hyperphagia and obesity in patients, beloranib also provides incremental health benefits to patients. Our efforts to educate the medical community and third-party payors about the benefits of beloranib may require significant resources and may never be successful.

Our product candidates may cause undesirable side effects that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.

Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other regulatory authorities. In our recently completed Phase 2a clinical trials of beloranib, the main adverse events, or AEs, including those leading to premature treatment discontinuation, in patients dosed with beloranib, have been sleep disturbances, principally manifested as delayed onset of sleep, as well as nausea and vomiting.

The safety data we have disclosed to date represents our interpretation of the data at the time of disclosure and it is subject to our further review and analysis. There have been no serious adverse events, or SAEs, attributed to beloranib in our completed clinical trials. However, SAEs that are not characterized by clinical investigators as possibly related to beloranib or SAEs that occur in small numbers may not be disclosed to the public until such time the various documents submitted to the FDA as part of the approval process are made public. We are unable to determine if the subsequent disclosure of SAEs will have an adverse effect on our stock price. In addition, our interpretation of the safety data from our clinical trials is contingent upon the review and ultimate approval of the FDA or other regulatory authorities. The FDA or other regulatory authorities may not agree with our methods of analysis or our interpretation of the results.

 

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Further, if beloranib receives marketing approval and we or others identify undesirable side effects caused by the product (or any other similar product) after the approval, a number of potentially significant negative consequences could result, including:

 

    regulatory authorities may withdraw or limit their approval of the product;

 

    regulatory authorities may require the addition of labeling statements, such as a “boxed” warning or a contraindication;

 

    we may be required to change the way the product is distributed or administered, conduct additional clinical trials or change the labeling of the product;

 

    we may decide to remove the products from the marketplace;

 

    we could be sued and held liable for injury caused to individuals exposed to or taking our product candidates; and

 

    our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidate and could substantially increase the costs of commercializing our product candidates and significantly impact our ability to successfully commercialize our product candidates and generate revenues.

Even if we receive marketing approval for beloranib, we may still face future development and regulatory difficulties.

Even if we receive marketing approval for beloranib, regulatory authorities may still impose significant restrictions on beloranib’s indicated uses or marketing or impose ongoing requirements for potentially costly post-approval studies. Beloranib will also be subject to ongoing FDA and EMA requirements governing the labeling, packaging, storage and promotion of the product and recordkeeping and submission of safety and other post-market information. The FDA has significant post-market authority, including, for example, the authority to require labeling changes based on new safety information and to require post-market studies or clinical trials to evaluate serious safety risks related to the use of a drug. The FDA also has the authority to require, as part of an NDA or post-approval, the submission of a REMS. Any REMS required by the FDA may lead to increased costs to assure compliance with new post-approval regulatory requirements and potential requirements or restrictions on the sale of approved products, all of which could lead to lower sales volume and revenue.

Manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMPs and other regulations. If we or a regulatory agency discover problems with beloranib, such as adverse events of unanticipated severity or frequency, or problems with the facility where beloranib is manufactured, a regulatory agency may impose restrictions on beloranib, the manufacturer or us, including requiring withdrawal of beloranib from the market or suspension of manufacturing. If we or the manufacturing facilities for beloranib fail to comply with applicable regulatory requirements, a regulatory agency may, among other things:

 

    issue warning letters or untitled letters;

 

    seek an injunction or impose civil or criminal penalties or monetary fines;

 

    suspend or withdraw marketing approval;

 

    suspend any ongoing clinical trials;

 

    refuse to approve pending applications or supplements to applications submitted by us;

 

    suspend or impose restrictions on operations, including costly new manufacturing requirements; or

 

    seize or detain products, refuse to permit the import or export of products, or request that we initiate a product recall.

 

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Competing technologies could emerge, including devices and surgical procedures, adversely affecting our opportunity to generate revenue from the sale of beloranib.

The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. We have competitors in a number of jurisdictions, many of which have substantially greater name recognition, commercial infrastructures and financial, technical and personnel resources than we have. Established competitors may invest heavily to quickly discover and develop novel compounds that could make beloranib obsolete or uneconomical. Any new product that competes with an approved product may need to demonstrate compelling advantages in efficacy, convenience, tolerability and safety to be commercially successful. Other competitive factors, including generic competition, could force us to lower prices or could result in reduced sales. In addition, new products developed by others could emerge as competitors to beloranib. If we are not able to compete effectively against our current and future competitors, our business will not grow and our financial condition and operations will suffer.

There are no current pharmacological treatments for regulating hunger and hyperphagia-related behaviors of patients with PWS or patients with HIAO, and bariatric surgery is contraindicated in patients with PWS and is not frequently employed in patients with HIAO. We are aware of a clinical trial currently recruiting patients by Ferring Pharmaceuticals, Inc. to evaluate the use of carbetocin, an analogue of a brain peptide hormone oxytocin hypothesized to increase trust, reduce anxiety and improve behavior in patients with PWS. We also are aware of a clinical trial being conducted by Essentialis, Inc. to evaluate the safety and tolerability of controlled-release diazoxide in patients with PWS and to explore the effects of diazoxide on hyperphagia-related behaviors and energy expenditure. We are aware of an exploratory trial being planned, or in its early phase of execution, by Rhythm Pharmaceuticals, Inc. to evaluate the effect of treatment with RM-493, a melanocortin receptor agonist, in patients with PWS. In addition, any of our competitors may develop a drug to treat patients with PWS at any time. We are not aware of any clinical trials of drugs specifically targeting patients with HIAO.

Other potential competitors in the severe obesity market include bariatric service providers, and other potential approaches which utilize various implantable devices or surgical tools that have been approved by the FDA, such as EnteroMedics Inc.’s recently FDA-approved (January 2015) VBlock Therapy, or that are in development by companies such as Allergan, Inc., Boston Scientific Corporation, Covidien Ltd., GI Dynamics, Inc., Johnson & Johnson and Medtronic, Inc. In addition, beloranib will compete with orlistat, phentermine/topiramate and lorcaserin, three recently approved and currently marketed pharmaceutical products in the United States for the treatment of obesity, and several older agents, indicated for short-term administration, including phentermine, phendimetrazine, benzphetamine and diethylpropion. Orlistat is marketed in the United States by the Roche Group under the brand name Xenical and over-the-counter in the United States at half the prescribed dose by GlaxoSmithKline under the brand name alli. In June 2013, Arena Pharmaceuticals, Inc. launched its lorcaserin product, which is marketed in the United States under the name Belviq and in September 2012, Vivus, Inc. commercially launched its combination product, phentermine/topiramate, under the trade name Qsymia. In October 2014 Takeda Pharmaceuticals U.S.A., Inc. and Orexigen Therapeutics, Inc. launched Contrave (naltrexone HCI and bupropion HCI) extended-release tablets for chronic weight management in obese adults and in December 2014 the FDA approved Novo Nordisk A/S’s Saxenda for weight management in obese and overweight patients in the presence of at least one related co-morbid condition. Despite the large market opportunity for anti-obesity agents, there are relatively few competitive products in late-stage clinical development. Neurosearch A/S is also pursuing pharmaceutical treatments for obesity.

Our future growth depends, in part, on our ability to penetrate foreign markets, where we would be subject to additional regulatory burdens and other risks and uncertainties.

Our future profitability will depend, in part, on our ability to commercialize beloranib in foreign markets for which we may rely on collaborations with third parties. If we commercialize beloranib in foreign markets, we would be subject to additional risks and uncertainties, including:

 

    our customers’ ability to obtain reimbursement for beloranib in foreign markets;

 

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    our inability to directly control commercial activities because we are relying on third parties;

 

    the burden of complying with complex and changing foreign regulatory, tax, accounting and legal requirements;

 

    different medical practices and customs in foreign countries affecting acceptance in the marketplace;

 

    import or export licensing requirements;

 

    longer accounts receivable collection times;

 

    longer lead times for shipping;

 

    language barriers for technical training;

 

    reduced protection of intellectual property rights in some foreign countries;

 

    foreign currency exchange rate fluctuations; and

 

    the interpretation of contractual provisions governed by foreign laws in the event of a contract dispute.

Foreign sales of beloranib could also be adversely affected by the imposition of governmental controls, political and economic instability, trade restrictions and changes in tariffs.

We are subject to healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

Healthcare providers, physicians and others will play a primary role in the recommendation and prescription of beloranib, if approved. Our future arrangements with third-party payors will expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute beloranib, if we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include the following:

 

    The federal healthcare anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal healthcare programs such as Medicare and Medicaid.

 

    The federal False Claims Act imposes criminal and civil penalties, including those from civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease, or conceal an obligation to pay money to the federal government.

 

    The federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information.

 

    The federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services.

 

    The federal transparency requirements, sometimes referred to as the “Sunshine Act,” under the Patient Protection and Affordable Care Act, require manufacturers of drugs, devices, biologics and medical supplies to report to the Department of Health and Human Services information related to physician payments and other transfers of value and physician ownership and investment interests.

 

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    Analogous state laws and regulations, such as state anti-kickback and false claims laws and transparency laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other healthcare providers or marketing expenditures and drug pricing.

Ensuring that our future business arrangements with third parties comply with applicable healthcare laws and regulations could be costly. It is possible that governmental authorities will conclude that our business practices do not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations, including anticipated activities to be conducted by our sales team, were found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines and exclusion from government funded healthcare programs, such as Medicare and Medicaid, any of which could substantially disrupt our operations. If any of the physicians or other providers or entities with whom we expect to do business is found not to be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

The FDA and other regulatory agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses. If we are found to have improperly promoted off-label uses, we may become subject to significant liability.

The FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription products, such as beloranib, if approved. In particular, a product may not be promoted for uses that are not approved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling. If we receive marketing approval for beloranib as a treatment for obesity and hyperphagia in patients with PWS or patients with HIAO physicians may nevertheless prescribe beloranib to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we may become subject to significant liability. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed. If we cannot successfully manage the promotion of beloranib, if approved, we could become subject to significant liability, which would materially adversely affect our business and financial condition.

Even if approved, reimbursement policies could limit our ability to sell beloranib.

Market acceptance and sales of beloranib will depend on reimbursement policies and may be affected by healthcare reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels for those medications. Cost containment is a primary concern in the U.S. healthcare industry and elsewhere. Government authorities and these third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. We cannot be sure that reimbursement will be available for beloranib and, if reimbursement is available, the level of such reimbursement. Reimbursement may impact the demand for, or the price of, beloranib. If reimbursement is not available or is available only at limited levels, we may not be able to successfully commercialize beloranib.

In some foreign countries, particularly in Canada and European countries, the pricing of prescription pharmaceuticals is subject to strict governmental control. In these countries, pricing negotiations with governmental authorities can take six to 12 months or longer after the receipt of regulatory approval and product launch. To obtain favorable reimbursement for the indications sought or pricing approval in some countries, we

 

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may be required to conduct a clinical trial that compares the cost-effectiveness of beloranib with other available therapies. If reimbursement for beloranib is unavailable in any country in which we seek reimbursement, if it is limited in scope or amount, if it is conditioned upon our completion of additional clinical trials, or if pricing is set at unsatisfactory levels, our operating results could be materially adversely affected.

Even though we have received orphan drug designation for PWS, we may not receive orphan drug exclusivity for beloranib.

As part of our business strategy, we have obtained orphan drug designation in the United States and the European Union for beloranib for the treatment of patients with PWS. In the United States, the company that first obtains FDA approval for a designated orphan drug for the specified rare disease or condition receives orphan drug marketing exclusivity for that drug for a period of seven years. This orphan drug exclusivity prevents the FDA from approving another application, including a full NDA to market the same drug for the same orphan indication, except in very limited circumstances, including when the FDA concludes that the later drug is safer, more effective or makes a major contribution to patient care. For purposes of small molecule drugs, the FDA defines “same drug” as a drug that contains the same active chemical entity and is intended for the same use as the drug in question. To obtain orphan drug exclusivity for a drug that shares the same active chemical entity as an already orphan designated drug, it must be demonstrated to the FDA that the drug is safer or more effective than the approved orphan designated drug, or that it makes a major contribution to patient care. In addition, a designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. In addition, orphan drug exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition or if another drug with the same active moiety is determined to be safer, more effective, or represents a major contribution to patient care.

In the European Union, orphan drug designation also entitles a party to financial incentives such as reduction of fees or fee waivers. In addition, ten years of market exclusivity is granted following drug product approval, meaning that another application for marketing authorization of a later similar medicinal product for the same therapeutic indication will generally not be approved in the European Union. This period may be reduced to six years if the orphan drug designation criteria are no longer met, including where it is shown that the product is not sufficiently profitable to justify maintenance of market exclusivity.

Our product development programs for candidates other than beloranib may require substantial financial resources and may ultimately be unsuccessful.

In addition to the development of beloranib, we may pursue development of our other early-stage development programs. None of our other potential product candidates has commenced any clinical trials, and there are a number of FDA and certain European regulatory requirements that we must satisfy before we can commence clinical trials. Satisfaction of these requirements will entail substantial time, effort and financial resources. We may never satisfy these requirements. Any time, effort and financial resources we expend on our other early-stage development programs may adversely affect our ability to continue development and commercialization of beloranib, and we may never commence clinical trials of such development programs despite expending significant resources in pursuit of their development. If we do commence clinical trials of our other potential product candidates, such product candidates may never be approved by the FDA or other regulatory authorities.

 

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Risks Relating to Our Intellectual Property Rights

If we are unable to adequately protect our proprietary technology or maintain issued patents which are sufficient to protect beloranib, others could compete against us more directly, which would have a material adverse impact on our business, results of operations, financial condition and prospects.

Our commercial success will depend in part on our success in obtaining and maintaining issued patents and other intellectual property rights in the United States and elsewhere and protecting our proprietary technology. If we do not adequately protect our intellectual property and proprietary technology, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability.

Our owned and licensed patents and patent applications relate to beloranib compositions of matter, formulations, polymorphs, methods of treating obesity using dosing regimens of beloranib, and methods of treating hypothalamic obesity. The issued U.S. and European patents generally directed to beloranib compositions of matter are exclusively licensed and will each expire in 2019. We own two issued U.S. patents relating to beloranib polymorph compositions of matter that will expire in 2031 and two issued U.S. patents to methods of treating obesity that will expire in 2029. We own pending patent applications in Europe to beloranib polymorph composition of matter and methods of treating obesity that we expect to expire, once issued, in 2031.

As of September 30, 2014, we owned four issued U.S. patents, seven pending U.S. patent applications and foreign counterpart applications, and one Patent Cooperation Treaty, or PCT, application that will allow us to seek corresponding protection worldwide, all of which relate to beloranib. We have a license to two U.S. issued patents, one with corresponding issued foreign counterpart patents, that also relate to beloranib. We also co-own one patent application relating to methods of using beloranib.

As of September 30, 2014, we owned nine pending U.S. patent applications with pending foreign counterpart applications and three PCT patent applications, all of which relate to our internal efforts to discover novel MetAP2 inhibitors. Of these, one pending U.S. patent application with pending foreign counterpart patent applications and one PCT patent application relate to our early-stage product candidate ZGN-839.

As of September 30, 2014, we owned one issued U.S. patent, two pending U.S. patent applications with pending foreign counterpart patent applications, one pending PCT patent application and two U.S. provisional patent applications that relate to our second-generation injectable MetAP2 inhibitor program.

We cannot provide any assurances that any of our patents have, or that any of our pending patent applications that mature into issued patents will include, claims with a scope sufficient to protect beloranib or our other product candidates. Other parties have developed technologies that may be related or competitive to our approach, and may have filed or may file patent applications and may have received or may receive patents that may overlap or conflict with our patent applications, either by claiming the same methods or formulations or by claiming subject matter that could dominate our patent position. The patent positions of biotechnology and pharmaceutical companies, including our patent position, involve complex legal and factual questions, and, therefore, the issuance, scope, validity and enforceability of any patent claims that we may obtain cannot be predicted with certainty. Patents, if issued, may be challenged, deemed unenforceable, invalidated, or circumvented. U.S. patents and patent applications may also be subject to interference proceedings, ex parte reexamination, or inter partes review proceedings, supplemental examination and challenges in district court. Patents may be subjected to opposition, post-grant review, or comparable proceedings lodged in various foreign, both national and regional, patent offices. These proceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such proceedings may be costly. Thus, any patents that we may own or exclusively license may not provide any protection against competitors. Furthermore, an adverse decision in an interference proceeding can result in a third party receiving the patent right sought by us, which in turn could affect our ability to develop, market or otherwise commercialize beloranib.

 

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Furthermore, though an issued patent is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability and it may not provide us with adequate proprietary protection or competitive advantages against competitors with similar products. Competitors may also be able to design around our patents. Other parties may develop and obtain patent protection for more effective technologies, designs or methods. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or trade secrets by consultants, vendors, former employees and current employees. The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems in protecting our proprietary rights in these countries. If these developments were to occur, they could have a material adverse effect on our sales.

Our ability to enforce our patent rights depends on our ability to detect infringement. It is difficult to detect infringers who do not advertise the components that are used in their products. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product. Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded if we were to prevail may not be commercially meaningful.

In addition, proceedings to enforce or defend our patents could put our patents at risk of being invalidated, held unenforceable, or interpreted narrowly. Such proceedings could also provoke third parties to assert claims against us, including that some or all of the claims in one or more of our patents are invalid or otherwise unenforceable. If any of our patents covering beloranib are invalidated or found unenforceable, our financial position and results of operations would be materially and adversely impacted. In addition, if a court found that valid, enforceable patents held by third parties covered beloranib, our financial position and results of operations would also be materially and adversely impacted.

The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:

 

    any of our patents, or any of our pending patent applications, if issued, will include claims having a scope sufficient to protect beloranib or any other products or product candidates;

 

    any of our pending patent applications will issue as patents;

 

    we will be able to successfully commercialize beloranib, if approved, before our relevant patents expire;

 

    we were the first to make the inventions covered by each of our patents and pending patent applications;

 

    we were the first to file patent applications for these inventions;

 

    others will not develop similar or alternative technologies that do not infringe our patents;

 

    any of our patents will be found to ultimately be valid and enforceable;

 

    any patents issued to us will provide a basis for an exclusive market for our commercially viable products, will provide us with any competitive advantages or will not be challenged by third parties;

 

    we will develop additional proprietary technologies or product candidates that are separately patentable; or

 

    that our commercial activities or products will not infringe upon the patents of others.

We rely upon unpatented trade secrets, unpatented know-how and continuing technological innovation to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our employees and our collaborators and consultants. We also have agreements with our employees and selected consultants that obligate them to assign their inventions to us and have non-compete agreements with some, but not all, of our consultants. It is possible that technology relevant to our business will be independently developed by a person that is not a party to such an agreement. Furthermore, if the employees and consultants who are parties to these agreements breach or violate the terms of these agreements, we may not have adequate remedies for any such breach or violation, and we could lose our trade secrets through such breaches or violations. Further, our trade secrets could otherwise become known or be independently discovered by our competitors.

 

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We may infringe the intellectual property rights of others, which may prevent or delay our product development efforts and stop us from commercializing or increase the costs of commercializing beloranib, if approved.

Our success will depend in part on our ability to operate without infringing the intellectual property and proprietary rights of third parties. We cannot assure you that our business, products and methods do not or will not infringe the patents or other intellectual property rights of third parties.

The pharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may allege that beloranib or the use of our technologies infringes patent claims or other intellectual property rights held by them or that we are employing their proprietary technology without authorization. Patent and other types of intellectual property litigation can involve complex factual and legal questions, and their outcome is uncertain. Any claim relating to intellectual property infringement that is successfully asserted against us may require us to pay substantial damages, including treble damages and attorney’s fees if we are found to be willfully infringing another party’s patents, for past use of the asserted intellectual property and royalties and other consideration going forward if we are forced to take a license. In addition, if any such claim were successfully asserted against us and we could not obtain such a license, we may be forced to stop or delay developing, manufacturing, selling or otherwise commercializing beloranib.

Even if we are successful in these proceedings, we may incur substantial costs and divert management time and attention in pursuing these proceedings, which could have a material adverse effect on us. If we are unable to avoid infringing the patent rights of others, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court, or redesign our products. Patent litigation is costly and time consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, intellectual property litigation or claims could force us to do one or more of the following:

 

    cease developing, selling or otherwise commercializing beloranib;

 

    pay substantial damages for past use of the asserted intellectual property;

 

    obtain a license from the holder of the asserted intellectual property, which license may not be available on reasonable terms, if at all; and

 

    in the case of trademark claims, redesign, or rename, beloranib to avoid infringing the intellectual property rights of third parties, which may not be possible and, even if possible, could be costly and time-consuming.

Any of these risks coming to fruition could have a material adverse effect on our business, results of operations, financial condition and prospects.

We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property.

We may also be subject to claims that former employees, collaborators or other third parties have an ownership interest in our patents or other intellectual property. Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

The U.S. Patent and Trademark Office, or U.S. PTO, and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the

 

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patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case.

We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time-consuming and unsuccessful.

Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid, is unenforceable and/or is not infringed, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

Interference proceedings provoked by third parties or brought by us may be necessary to determine the priority of inventions with respect to our patents or patent applications or those of our licensors. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Our defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. We may not be able to prevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock.

Issued patents covering our product candidates could be found invalid or unenforceable if challenged in court.

If we or one of our licensing partners initiated legal proceedings against a third party to enforce a patent covering our product candidate, the defendant could counterclaim that the patent covering our product candidate is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge include alleged failures to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for unenforceability assertions include allegations that someone connected with prosecution of the patent withheld relevant information from the U.S. PTO, or made a misleading statement, during prosecution. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post grant review and equivalent proceedings in foreign jurisdictions, e.g., opposition proceedings. Such proceedings could result in revocation or amendment of our patents in such a way that they no longer cover our product candidates or competitive products. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to validity, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our product candidates. Such a loss of patent protection would have a material adverse impact on our business.

We do not seek to protect our intellectual property rights in all jurisdictions throughout the world and we may not be able to adequately enforce our intellectual property rights even in the jurisdictions where we seek protection.

Filing, prosecuting and defending patents on product candidates in all countries and jurisdictions throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the

 

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United States could be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

We are dependent on licensed intellectual property. If we were to lose our rights to licensed intellectual property, we may not be able to continue developing or commercializing beloranib or our other product candidates, if approved.

We have licensed our rights to beloranib from Chong Kun Dang Pharmaceutical Corp. of South Korea, or CKD. Our license with CKD imposes various obligations on us, including a requirement to use commercially reasonable efforts to develop beloranib and provides CKD the right to terminate the license thereunder in the event of a material breach. For example, CKD may allege that we have breached our license agreement and may accordingly seek to terminate our license with them. Termination of our license from CKD could result in our loss of the right to use the licensed intellectual property, which could materially adversely affect our ability to develop and commercialize beloranib, if approved, as well as harm our competitive business position and our business prospects. We also have an exclusive license with Children’s Medical Center Corporation, or Children’s, pursuant to which we exclusively licensed certain patient rights relating to decreasing the growth of fat tissue from Children’s on a worldwide basis.

We may enter into additional license(s) to third-party intellectual property that are necessary or useful to our business. Future licensor(s) may also allege that we have breached our license agreement and may accordingly seek to terminate our license with them. In addition, future licensor(s) may decide to terminate our license at will. If successful, this could result in our loss of the right to use the licensed intellectual property, which could materially adversely affect our ability to develop and commercialize a product candidate or product, if approved, as well as harm our competitive business position and our business prospects.

We have not yet registered trademarks for a commercial trade name for beloranib and failure to secure such registrations could adversely affect our business.

We have not yet registered trademarks for a commercial trade name for beloranib. Any future trademark applications may be rejected during trademark registration proceedings. Although we would be given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the U.S. PTO and in comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation

 

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proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. Moreover, any name we propose to use with our product candidates in the United States must be approved by the FDA, regardless of whether we have registered it, or applied to register it, as a trademark. The FDA typically conducts a review of proposed product names, including an evaluation of potential for confusion with other product names. If the FDA objects to any of our proposed proprietary product names, we may be required to expend significant additional resources in an effort to identify a suitable substitute name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA.

If we do not obtain additional protection under the Hatch-Waxman Amendments and similar foreign legislation by extending the patent terms and obtaining data exclusivity for beloranib, our business may be materially harmed.

Depending upon the timing, duration and specifics of FDA marketing approval of beloranib, one or more of the U.S. patents we license may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, we may not be granted an extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain patent term extension or restoration or the term of any such extension is less than we request, our competitors may obtain approval of competing products following our patent expiration, and our ability to generate revenues could be materially adversely affected.

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.

The United States has recently enacted and is currently implementing the America Invents Act of 2011, which is wide-ranging patent reform legislation. Further, the U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain future patents, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts and the U.S. PTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents or future patents.

We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

Our employees have been previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we are not aware of any claims currently pending against us, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of the former employers of our employees. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying money claims, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to commercialize beloranib, which would materially adversely affect our commercial development efforts.

 

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General Company-Related Risks

We will need to develop and expand our company, and we may encounter difficulties in managing this development and expansion, which could disrupt our operations.

As of September 30, 2014, we had 18 full-time employees and one part-time employee, and as we advance beloranib into later-stage clinical trials, we expect to increase our number of employees and the scope of our operations. To manage our anticipated development and expansion, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Also, our management may need to divert a disproportionate amount of its attention away from its day-to-day activities and devote a substantial amount of time to managing these development activities. Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. This may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. The physical expansion of our operations may lead to significant costs and may divert financial resources from other projects, such as the development of beloranib. If our management is unable to effectively manage our expected development and expansion, our expenses may increase more than expected, our ability to generate or increase our revenue could be reduced and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize beloranib, if approved, and compete effectively will depend, in part, on our ability to effectively manage the future development and expansion of our company.

Our future success depends on our ability to retain our Chief Executive Officer, and to attract, retain and motivate qualified personnel.

We are highly dependent on Dr. Thomas E. Hughes, our Chief Executive Officer. We have entered into an employment agreement with Dr. Hughes, but he may terminate his employment with us at any time. Although we do not have any reason to believe that we will lose the services of Dr. Hughes in the foreseeable future, the loss of his services might impede the achievement of our research, development and commercialization objectives. We also do not have any key-man life insurance on Dr. Hughes. We rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us and may not be subject to our standard non-compete agreements. Recruiting and retaining qualified scientific personnel and sales and marketing personnel will also be critical to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific personnel from universities and research institutions. Failure to succeed in clinical trials may make it more challenging to recruit and retain qualified scientific personnel.

Our employees may engage in misconduct or other improper activities, including violating applicable regulatory standards and requirements or engaging in insider trading, which could significantly harm our business.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with the regulations of the FDA and applicable non-U.S. regulators, provide accurate information to the FDA and applicable non-U.S. regulators, comply with healthcare fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of, including trading on, information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We have adopted a code of conduct, but it is not always possible to identify and deter employee misconduct, and the

 

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precautions we take to detect and prevent this activity may be ineffective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

We face potential product liability exposure, and, if claims are brought against us, we may incur substantial liability.

The use of beloranib in clinical trials and the sale of beloranib, if approved, exposes us to the risk of product liability claims. Product liability claims might be brought against us by patients, healthcare providers or others selling or otherwise coming into contact with beloranib. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, including as a result of interactions with alcohol or other drugs, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we become subject to product liability claims and cannot successfully defend ourselves against them, we could incur substantial liabilities. In addition, regardless of merit or eventual outcome, product liability claims may result in, among other things:

 

    withdrawal of patients from our clinical trials;

 

    substantial monetary awards to patients or other claimants;

 

    decreased demand for beloranib or any future product candidates following marketing approval, if obtained;

 

    damage to our reputation and exposure to adverse publicity;

 

    increased FDA warnings on product labels;

 

    litigation costs;

 

    distraction of management’s attention from our primary business;

 

    loss of revenue; and

 

    the inability to successfully commercialize beloranib or any future product candidates, if approved.

We maintain product liability insurance coverage for our clinical trials with a $10.0 million annual aggregate coverage limit. Nevertheless, our insurance coverage may be insufficient to reimburse us for any expenses or losses we may suffer. Moreover, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses, including if insurance coverage becomes increasingly expensive. If and when we obtain marketing approval for beloranib, we intend to expand our insurance coverage to include the sale of commercial products; however, we may not be able to obtain this product liability insurance on commercially reasonable terms. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. The cost of any product liability litigation or other proceedings, even if resolved in our favor, could be substantial, particularly in light of the size of our business and financial resources. A product liability claim or series of claims brought against us could cause our stock price to decline and, if we are unsuccessful in defending such a claim or claims and the resulting judgments exceed our insurance coverage, our financial condition, business and prospects could be materially adversely affected.

We must maintain effective internal control over financial reporting, and if we are unable to do so, the accuracy and timeliness of our financial reporting may be adversely affected, which could have a material adverse effect on our business and stock price.

We must maintain effective internal control over financial reporting in order to accurately and timely report our results of operations and financial condition. In addition, as a public company, the Sarbanes-Oxley Act of

 

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2002, or the Sarbanes-Oxley Act, requires, among other things, that we assess the effectiveness of our disclosure controls and procedures quarterly and the effectiveness of our internal control over financial reporting at the end of each fiscal year. We anticipate being first required to issue management’s annual report on internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act, in connection with issuing our consolidated financial statements as of and for the year ending December 31, 2015.

During the course of preparing for our initial public offering, or IPO, we determined that material adjustments to various accounts were necessary, which required us to restate our consolidated financial statements as of and for the year ended December 31, 2011 and for the period from inception (November 22, 2005) through December 31, 2011 that had been previously audited by another independent audit firm. These adjustments leading to a restatement of those consolidated financial statements led us to conclude that we had material weaknesses in internal control over financial reporting as of December 31, 2011 as follows: (i) we did not maintain effective controls over accounting policies and application of GAAP—specifically, we did not maintain and communicate sufficient accounting policies, which limited our ability to make accounting decisions and to detect and correct accounting errors; and (ii) we did not maintain a sufficient complement of resources with an appropriate level of accounting knowledge, experience and training commensurate with our structure and financial reporting requirements.

During 2013, we executed on various remediation efforts, including ensuring we had sufficient resources with the appropriate technical accounting expertise and putting in place formalized policies and procedures to ensure complete and accurate consolidated financial statements are prepared. In that year, we hired additional senior accounting and finance employees, including a Chief Financial Officer with significant biotechnology industry experience, and engaged external consultants with significant financial and accounting technical experience. These additional resources have enabled us to (i) implement standardized financial reporting policies and procedures and a more structured close process and (ii) implement financial data reviews that involve separate preparation and review of the monthly, quarterly and annual financial data, reconciliations, analyses and information. Based on our assessment of the additional resources and our enhanced controls and procedures, our management concluded that, as of December 31, 2013, we had remediated the material weaknesses in our internal control over financial reporting described above.

The rules governing the standards that must be met for our management to assess our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act are complex and require significant documentation, testing and possible remediation. These stringent standards require that our audit committee be advised and regularly updated on management’s review of internal control over financial reporting. Our management may not be able to effectively and timely implement controls and procedures that adequately respond to the increased regulatory compliance and reporting requirements that will be applicable to us as a public company. If we fail to staff our accounting and finance function adequately or maintain internal control over financial reporting adequate to meet the demands that will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act, our business and reputation may be harmed and our stock price may decline. Furthermore, investor perceptions of us may be adversely affected, which could cause a decline in the market price of our common stock.

In order to satisfy our obligations as a public company, we will need to hire additional qualified accounting and financial personnel with appropriate public company experience.

As a newly public company, we will need to establish and maintain effective disclosure and financial controls and make changes in our corporate governance practices. We will need to hire additional accounting and financial personnel with appropriate public company experience and technical accounting knowledge, and it may be difficult to recruit and maintain such personnel. Even if we are able to hire appropriate personnel, our existing operating expenses and operations will be impacted by the direct costs of their employment and the indirect consequences related to the diversion of management resources from product development efforts.

 

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Our ability to use our net operating loss carryforwards and certain tax credit carryforwards may be subject to limitation.

As of December 31, 2013, we had federal and state net operating loss carryforwards of $10.5 million and $8.2 million, respectively. Our federal net operating loss carryforwards begin to expire in 2026, and our state net operating loss carryforwards began to expire in 2014. As of December 31, 2013, we also had federal and state research and development tax credit carryforwards of $4.7 million and $1.3 million, respectively, which begin to expire in 2026 and 2021, respectively. Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, changes in our ownership may limit the amount of our net operating loss carryforwards and research and development tax credit carryforwards that could be utilized annually to offset our future taxable income, if any. This limitation would generally apply in the event of a cumulative change in ownership of our company of more than 50% within a three-year period. Any such limitation may significantly reduce our ability to utilize our net operating loss carryforwards and research and development tax credit carryforwards before they expire. The completion of this offering, together with our recent IPO, private placements and other transactions that have occurred since our inception, may trigger such an ownership change pursuant to Section 382. Any such limitation, whether as the result of this offering, our recent IPO, prior private placements, sales of our common stock by our existing stockholders or additional sales of our common stock by us, could have a material adverse effect on our results of operations in future years. We have not completed a study to assess whether an ownership change for purposes of Section 382 has occurred, or whether there have been multiple ownership changes since our inception, due to the significant costs and complexities associated with such study.

Unfavorable global economic conditions could adversely affect our business, financial condition or results of operations.

Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. The recent global financial crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn, such as the recent global financial crisis, could result in a variety of risks to our business, including, weakened demand for our product candidates and our ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could also strain our suppliers, possibly resulting in supply disruption, or cause our customers to delay making payments for our services. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our business.

Our internal computer systems, or those of our third-party CROs or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our beloranib development programs.

Despite the implementation of security measures, our internal computer systems and those of our third-party CROs and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we have not experienced any such system failure, accident, or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our programs. For example, the loss of clinical trial data for beloranib could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of or damage to our data or applications or other data or applications relating to our technology or product candidates, or inappropriate disclosure of confidential or proprietary information, we could incur liabilities and the further development of beloranib could be delayed.

We may not be successful in our efforts to identify or discover additional product candidates.

The success of our business depends primarily upon our ability to identify, develop and commercialize products based on our weight loss platform. Although beloranib is currently in clinical development, our research programs may fail to identify other potential product candidates for clinical development for a number of

 

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reasons. Our research methodology may be unsuccessful in identifying potential product candidates or our potential product candidates may be shown to have harmful side effects or may have other characteristics that may make the products unmarketable or unlikely to receive marketing approval.

If any of these events occur, we may be forced to abandon our development efforts for a program or programs, which would have a material adverse effect on our business and could potentially cause us to cease operations. Research programs to identify new product candidates require substantial technical, financial and human resources. We may focus our efforts and resources on potential programs or product candidates that ultimately prove to be unsuccessful.

We may acquire businesses or products, or form strategic alliances, in the future, and we may not realize the benefits of such acquisitions.

We may acquire additional businesses or products, form strategic alliances or create joint ventures with third parties that we believe will complement or augment our existing business. If we acquire businesses with promising markets or technologies, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate such businesses with our existing operations and company culture. We may encounter numerous difficulties in developing, manufacturing and marketing any new products resulting from a strategic alliance or acquisition that delay or prevent us from realizing their expected benefits or enhancing our business. We cannot assure you that, following any such transaction, we will achieve the expected synergies to justify the transaction.

Risks Related to Our Financial Position and Need for Capital

We are an early stage biopharmaceutical company with a limited operating history and have not generated any revenue from product sales. We have incurred significant operating losses since our inception, and anticipate that we will incur continued losses for the foreseeable future.

We are an early stage company with a limited operating history. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We were incorporated in November 2005. Our operations to date have been limited primarily to organizing and staffing our company and conducting research and development activities for beloranib and ZGN-839. We have never generated any revenue from product sales. We have not obtained regulatory approvals for any of our product candidates.

Since our inception, we have focused substantially all of our efforts and financial resources on developing beloranib, which is currently in Phase 3 clinical development for our lead indication of the treatment of hyperphagia and obesity in patients with PWS and Phase 2 clinical development for HIAO and severe obesity in the general population. We have funded our operations to date through proceeds from sales of redeemable convertible preferred stock, convertible debt and proceeds from our IPO and have incurred losses in each year since our inception. Our net losses were $25.5 million for the nine months ended September 30, 2014. As of September 30, 2014, we had a deficit accumulated of $94.5 million. Substantially all of our operating losses resulted from costs incurred in connection with our development programs for beloranib and ZGN-839, licensing milestone fees and from general and administrative costs associated with our operations. We expect to incur increasing levels of operating losses over the next several years and for the foreseeable future. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ deficit and working capital. We expect our research and development expenses to significantly increase in connection with our additional clinical trials of beloranib and development of ZGN-839 and of any other product candidates we may choose to pursue. In addition, if we obtain marketing approval for beloranib, we will incur significant sales, marketing and outsourced manufacturing expenses. Now that we are a public company, we will incur additional costs associated with operating as a public company. As a result, we expect to continue to incur significant and increasing operating losses for the foreseeable future. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are unable to predict the extent of any future losses or when we will become profitable, if at all. Even if we do become profitable, we may not be able to sustain or increase our profitability on a quarterly or annual basis.

 

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Our ability to become profitable depends upon our ability to generate revenue. To date, we have not generated any revenue from our lead product candidate, beloranib, and we do not know when, or if, we will generate any revenue. We do not expect to generate significant revenue unless and until we obtain marketing approval of, and begin to sell, beloranib. Our ability to generate revenue depends on a number of factors, including, but not limited to, our ability to:

 

    initiate and successfully complete later-stage clinical trials that meet their clinical endpoints;

 

    initiate and successfully complete all safety studies required to obtain U.S. and foreign marketing approval for beloranib as a treatment for obesity and hyperphagia in patients with PWS and HIAO and severely obese patients in the general population;

 

    commercialize beloranib, if approved, by developing a sales force or entering into collaborations with third parties; and

 

    achieve market acceptance of beloranib in the medical community and with third-party payors.

Absent our entering into a collaboration or partnership agreement, we expect to incur significant sales and marketing costs as we prepare to commercialize beloranib. Even if we initiate and successfully complete our pivotal clinical trials of beloranib, and beloranib is approved for commercial sale, and despite expending these costs, beloranib may not be a commercially successful drug. We may not achieve profitability soon after generating product sales, if ever. If we are unable to generate product revenue, we will not become profitable and may be unable to continue operations without continued funding.

Even if this offering is successful, we will need to raise additional funding, which may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate our product development efforts or other operations.

We are currently advancing beloranib through clinical development. Developing small molecule products is expensive, and we expect our research and development expenses to increase substantially in connection with our ongoing activities, particularly as we advance beloranib in later-stage, more costly clinical trials. Depending on the status of regulatory approval or, if approved, commercialization of beloranib, as well as the progress we make in selling beloranib, we may require additional capital to fund operating needs thereafter. We may also need to raise additional funds sooner if we choose to pursue additional indications and/or geographies for beloranib or otherwise expand more rapidly than we presently anticipate.

As of September 30, 2014, our cash and cash equivalents were $127.0 million. We estimate that the net proceeds from this offering will be approximately $93.5 million, based on an assumed public offering price of $35.20 per share, which was the last reported sale price of our common stock on The NASDAQ Global Market on January 15, 2015, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We expect that the net proceeds from this offering, together with our existing cash and cash equivalents, will be sufficient to fund our current operations for at least the next 18 months. However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements or a combination of these approaches. In any event, we will require additional capital to obtain regulatory approval for, and to commercialize, our product candidates. Raising funds in the current economic environment may present additional challenges. Even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital if market conditions are favorable or if we have specific strategic considerations.

Any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all.

 

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Moreover, the terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The sale of additional equity or convertible securities would dilute all of our stockholders. The incurrence of indebtedness would result in increased fixed payment obligations and we may be required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. We could also be required to seek funds through arrangements with collaborative partners or otherwise at an earlier stage than otherwise would be desirable and we may be required to relinquish rights to some of our technologies or product candidate or otherwise agree to terms unfavorable to us, any of which may have a material adverse effect on our business, operating results and prospects.

If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more of our research or development programs or the commercialization of any product candidate or be unable to expand our operations or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition and results of operations.

Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights.

We may seek additional capital through a combination of private and public equity offerings, debt financings, collaborations and strategic and licensing arrangements. To the extent that we raise additional capital through the sale of common stock or securities convertible or exchangeable into common stock, your ownership interest in our company will be diluted. In addition, the terms of any such securities may include liquidation or other preferences that materially adversely affect your rights as a stockholder. Debt financing, if available, would increase our fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration, strategic partnerships and licensing arrangements with third parties, we may have to relinquish valuable rights to beloranib, our intellectual property, future revenue streams or grant licenses on terms that are not favorable to us.

If you purchase our common stock in this offering, you will incur immediate and substantial dilution in the book value of your shares.

You will suffer immediate and substantial dilution in the net tangible book value of the common stock you purchase in this offering. Based on an assumed public offering price of $35.20 per share, which was the last reported sale price of our common stock on The NASDAQ Global Market on January 15, 2015, purchasers of common stock in this offering will experience immediate dilution of $27.19 per share in net tangible book value of the common stock. In addition, investors purchasing common stock in this offering will contribute 31.8% of the total amount invested by stockholders since inception but will only own 11.1% of the shares of common stock outstanding. In the past, we issued options to acquire common stock at prices significantly below the initial public offering price. To the extent these outstanding options are ultimately exercised, investors purchasing common stock in this offering will sustain further dilution. See “Dilution” for a more detailed description of the dilution to new investors in the offering.

Risks Related to Our Common Stock

We expect that our stock price may fluctuate significantly.

Our IPO was completed on June 24, 2014 at a price of $16.00 per share. Therefore, there has been a public market for our common stock for only a short period of time. Although our common stock is listed on the NASDAQ Global Market, an active public market for our common stock may not develop or be sustained.

 

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In addition, the market price of shares of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:

 

    plans for, progress of or results from pre-clinical studies and clinical trials of beloranib;

 

    the failure of the FDA or the EMA to approve beloranib;

 

    announcements of new products, technologies, commercial relationships, acquisitions or other events by us or our competitors;

 

    the success or failure of other weight loss therapies;

 

    regulatory or legal developments in the United States and other countries;

 

    failure of beloranib, if approved, to achieve commercial success;

 

    fluctuations in stock market prices and trading volumes of similar companies;

 

    general market conditions and overall fluctuations in U.S. equity markets;

 

    variations in our quarterly operating results;

 

    changes in our financial guidance or securities analysts’ estimates of our financial performance;

 

    changes in accounting principles;

 

    our ability to raise additional capital and the terms on which we can raise it;

 

    sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;

 

    additions or departures of key personnel;

 

    discussion of us or our stock price by the press and by online investor communities; and

 

    other risks and uncertainties described in these risk factors.

These and other market and industry factors may cause the market price and demand for our common stock to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, the stock market in general, and NASDAQ listed and biopharmaceutical companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. In the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management.

Our executive officers, directors, and principal stockholders will continue to exercise significant control over our company after this offering.

Immediately following the completion of this offering, and disregarding any shares of common stock that they purchase in this offering, the existing holdings of our executive officers, directors, principal stockholders and their affiliates, including investment funds affiliated with Atlas Ventures, or Atlas, investment funds affiliated with Third Rock Ventures, or TRV, investment funds affiliated with Alta Partners, or Alta, and entities affiliated with Fidelity Investment, or Fidelity, will represent beneficial ownership, in the aggregate, of approximately 60.2% of our outstanding common stock, assuming no exercise of the underwriters’ option to acquire additional common stock in this offering and assuming we issue the number of shares of common stock as set forth on the cover page of this prospectus. As a result, these stockholders, if they act together, will be able to influence our management and affairs and control the outcome of matters submitted to our stockholders for approval, including the election of directors and any sale, merger, consolidation, or sale of all or substantially all

 

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of our assets. These stockholders acquired their shares of common stock for substantially less than the price of the shares of common stock being acquired in this offering, and these stockholders may have interests, with respect to their common stock, that are different from those of investors in this offering and the concentration of voting power among these stockholders may have an adverse effect on the price of our common stock. In addition, this concentration of ownership might adversely affect the market price of our common stock by:

 

    delaying, deferring or preventing a change of control of us;

 

    impeding a merger, consolidation, takeover or other business combination involving us; or

 

    discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.

See “Principal Stockholders” in this prospectus for more information regarding the ownership of our outstanding common stock by our executive officers, directors, principal stockholders and their affiliates.

Future sales of our common stock may cause our stock price to decline.

Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur could significantly reduce the market price of our common stock and impair our ability to raise adequate capital through the sale of additional equity securities.

Upon completion of this offering, based on the number of shares of common stock outstanding as of September 30, 2014, there will be 25,547,921 shares of our common stock outstanding assuming no exercise of the underwriters’ option to purchase additional shares. Of these, 2,840,909 shares are being sold in this offering and 13,914,182 will be freely tradable immediately after this offering (except for shares purchased by affiliates) and the remaining 11,633,739 shares may be sold upon expiration of lock-up agreements 60 days after the date of this offering (subject in some cases to volume limitations). A large portion of these shares are held by a small number of persons and investment funds. Moreover, after this offering, Atlas, TRV, Alta, Fidelity and certain of our other stockholders will have rights, subject to some conditions, to require us to file registration statements covering the shares of our common stock they currently hold, or to include these shares in registration statements that we may file for ourselves or other stockholders. See “Description of Capital Stock—Registration Rights” in this prospectus for more information regarding these registration rights.

We have also registered all the shares of common stock that we may currently issue under our equity incentive plans. Such shares can be freely sold in the public market upon issuance, subject to the lock-up agreements referred to above. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our common stock. See “Shares Eligible for Future Sale” for a more detailed description of sales that may occur in the future.

Sales of a substantial number of shares of our common stock in the public market could cause our stock price to fall.

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the lock-up and other legal restrictions on resale discussed in this prospectus lapse, the market price of our common stock could decline. Based on the number of shares of common stock outstanding as of September 30, 2014, upon the completion of this offering, we will have outstanding a total of 25,547,921 shares of common stock, assuming no exercise of the underwriters’ option to purchase additional shares. Of these shares, approximately 13,914,182 shares of our common stock, plus any shares sold upon exercise of the underwriters’ option to purchase additional shares, will not be subject to lock-up agreements. The representatives of the underwriters, however, may, in their sole discretion, permit our officers, directors and other stockholders who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements.

 

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The lock-up agreements pertaining to this offering will expire 60 days from the date of this prospectus. After the lock-up agreements expire, based on the number of shares of common stock outstanding as of September 30, 2014, up to an additional 11,633,739 shares of common stock will be eligible for sale in the public market, which shares are held by directors, executive officers and other affiliates and will be subject to certain limitations of Rule 144 under the Securities Act of 1933, as amended, or the Securities Act.

In addition, as of September 30, 2014, 3,946,574 shares of common stock that are either subject to open outstanding options or reserved for future issuance under our equity incentive plans will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements and Rule 144 and Rule 701 under the Securities Act. If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, the market price of our common stock could decline.

After this offering, based on the number of shares of common stock outstanding as of September 30, 2014, the holders of approximately 12,187,623 shares of our common stock will be entitled to rights with respect to the registration of their shares under the Securities Act, subject to the lock-up agreements described above. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates. Any sales of securities by these stockholders could have a material adverse effect on the market our common stock.

We will have broad discretion in how we use the proceeds of this offering. We may not use these proceeds effectively, which could affect our results of operations and cause our stock price to decline.

We will have considerable discretion in the application of the net proceeds of this offering. We intend to use the net proceeds from this offering to advance the clinical development of beloranib as a treatment for obesity and hyperphagia in PWS patients and HIAO, to develop multiple back-up molecules of beloranib as a treatment for severe obesity in the general population, to continue the development and initiate clinical development of ZGN-839, to develop a pen-injector system for eventual commercial use in PWS, HIAO and severe obesity in the general population and to fund new and ongoing research and development activities, working capital and other general corporate purposes, which may include funding for the hiring of additional personnel, capital expenditures, early commercialization activities and the costs of operating as a public company. As a result, investors will be relying upon management’s judgment with only limited information about our specific intentions for the use of the balance of the net proceeds of this offering. We may use the net proceeds for purposes that do not yield a significant return or any return at all for our stockholders. In addition, pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

After the completion of this offering, we may be at an increased risk of securities class action litigation.

Historically, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology and pharmaceutical companies have experienced significant stock price volatility in recent years. If we were to be sued, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

Investors in this offering will pay a higher price than the book value of our common stock.

If you purchase common stock in this offering, you will pay more for your shares than the amounts paid by existing stockholders for their shares. You will incur immediate and substantial dilution of $27.19 per share, representing the difference between our net tangible book value per share after giving effect to this offering and the assumed public offering price of $35.20 per share, which was the last reported sale price of our common stock on The NASDAQ Global Market on January 15, 2015. In the past, we issued restricted stock and options to acquire capital stock at prices significantly below the public offering price. To the extent any outstanding options are ultimately exercised, you will sustain further dilution.

 

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We are an “emerging growth company” and will be able to avail ourselves of reduced disclosure requirements applicable to emerging growth companies, which could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are electing not to take advantage of such extended transition period, and as a result we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to not take advantage of the extended transition period for complying with new or revised accounting standards is irrevocable. We cannot predict if investors will find our common stock less attractive because we may rely on any of the exemptions available under the JOBS Act. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenue of $1.0 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the completion of our IPO; (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; and (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

We have never paid dividends on our common stock and we do not anticipate paying any dividends in the foreseeable future. Consequently, any gains from an investment in our common stock will likely depend on whether the price of our common stock increases.

We have not paid dividends on any of our common stock to date and we currently intend to retain all of our future earnings, if any, to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future. Consequently, in the foreseeable future, you will likely only experience a gain from your investment in our common stock if the price of our common stock increases.

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.

The trading market for our common stock relies in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. The price of our common stock could decline if one or more equity analysts downgrade our common stock or if analysts issue other unfavorable commentary or cease publishing reports about us or our business.

Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions which could have the effect of rendering more difficult, delaying or preventing an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions:

 

    creating a classified board of directors whose members serve staggered three-year terms;

 

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    authorizing “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend, and other rights superior to our common stock;

 

    limiting the liability of, and providing indemnification to, our directors and officers;

 

    limiting the ability of our stockholders to call and bring business before special meetings;

 

    requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;

 

    controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings; and

 

    providing our board of directors with the express power to postpone previously scheduled annual meetings and to cancel previously scheduled special meetings.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock.

Any provision of our amended and restated certificate of incorporation, amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements in this prospectus include, but are not limited to, statements about:

 

    our use of the net proceeds from this offering;

 

    the accuracy of our estimates regarding expenses, future revenues and capital requirements;

 

    our plans to develop and commercialize beloranib as a treatment for obesity and hyperphagia that is a co-morbidity of an underlying rare condition such as PWS or HIAO, or severe obesity in the general population, or at all;

 

    our ability to advance beloranib into pivotal trials, and successfully complete such clinical trials;

 

    our ability to advance the development of ZGN-839 into clinical trials, and the successful completion of such clinical trials;

 

    regulatory developments in the United States and foreign countries;

 

    the performance of our third-party manufacturers and CROs;

 

    our ability to obtain and maintain intellectual property protection for our proprietary assets;

 

    the size of the potential markets for beloranib and our ability to serve those markets;

 

    the rate and degree of market acceptance of beloranib for any indication once approved;

 

    our ability to obtain additional financing;

 

    the success of competing products that are or become available for the indications that we are pursuing; and

 

    the loss of key scientific or management personnel.

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and elsewhere in this prospectus. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements.

The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this prospectus.

 

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USE OF PROCEEDS

We estimate that our net proceeds from the sale of shares of our common stock in this offering will be approximately $93.5 million, or $107.6 million if the underwriters exercise in full their option to purchase additional shares, based on an assumed public offering price of $35.20 per share, which was the last reported sale price of our common stock on The NASDAQ Global Market on January 15, 2015, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds from this offering, plus, if needed, cash on hand, as follows:

 

    approximately $30.0 million to advance the clinical development of beloranib as a treatment for obesity and hyperphagia in PWS patients by completing two Phase 3 clinical trials, one in the United States and the other in the European Union;

 

    approximately $10 million to initiate and advance the pre-clinical and clinical development of beloranib as a treatment for obesity and hyperphagia in pediatric patients with PWS;

 

    approximately $14.0 million to advance the clinical development of beloranib as a treatment for HIAO by initiating and completing Phase 3 pivotal clinical trials in the United States and the European Union;

 

    approximately $15.0 million to complete IND-enabling studies and initiate Phase 1 clinical development of ZGN-839;

 

    approximately $15.0 million to develop multiple back-up or follow-on molecules of beloranib as a treatment for severe obesity in the general population through preliminary development and an IND;

 

    approximately $6.0 million to develop a pen-injector system for eventual commercial use in PWS, HIAO and the general population; and

 

    the remaining proceeds, if any, to fund new and ongoing research and development activities, working capital, early commercialization activities and other general corporate purposes.

This expected use of the net proceeds from this offering represents our intentions based upon our current plans and business conditions. As of the date of this prospectus, we cannot predict with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering or the amounts that we will actually spend on the uses set forth above. The amounts and timing of our actual expenditures and the extent of clinical development may vary significantly depending on numerous factors, including the progress of our development efforts, the status of and results from pre-clinical studies and any ongoing clinical trials or clinical trials we may commence in the future, as well as any collaborations that we may enter into with third parties for our product candidates and any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering.

Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities.

PRICE RANGE OF COMMON STOCK

Our common stock began trading on The NASDAQ Global Market under the symbol “ZFGN” on June 19, 2014. Prior to that time, there was no public market for our common stock. The following table sets forth the high and low sale prices per share of our common stock, as reported on The NASDAQ Global Market, for the periods indicated.

 

     High      Low  

Year Ended December 31, 2014

     

Second quarter (from June 19, 2014)

   $ 21.01       $ 19.23   

Third quarter

   $ 21.96       $ 17.06   

Fourth quarter

   $ 32.25       $ 16.01   

Year Ending December 31, 2015

     

First quarter (through January 15, 2015)

   $ 41.78       $ 30.56   

 

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On January 15, 2015, the last reported sale price of our common stock as reported on The NASDAQ Global Market was $35.20 per share. As of the date of this prospectus, we had approximately 28 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.

DIVIDEND POLICY

We have never declared or paid dividends on our capital stock. We do not anticipate paying any dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. Any future determination to declare dividends will be subject to the discretion of our board of directors and will depend on various factors, including applicable laws, our results of operations, financial condition, future prospects and any other factors deemed relevant by our board of directors. Investors should not purchase our common stock with the expectation of receiving cash dividends.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of September 30, 2014:

 

    on an actual basis; and

 

    on an as adjusted basis, giving effect to the sale by us of 2,840,909 shares of our common stock in this offering at an assumed public offering price of $35.20 per share, which was the last reported sale price of our common stock on The NASDAQ Global Market on January 15, 2015, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

You should read this table in conjunction with the sections of this prospectus entitled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of September 30, 2014  
     Actual     As Adjusted  
    

(in thousands, except
share and per

share data)

 

Cash and cash equivalents

   $ 127,030      $ 220,530   
  

 

 

   

 

 

 
    

Long-term debt, net of discount, including current portion

   $ 7,503      $ 7,503   

Stockholders’ equity (deficit):

    

Preferred stock, $0.001 par value; no shares authorized, issued or outstanding, actual; 5,000,000 shares authorized and no shares issued or outstanding, as adjusted

     —          —     

Common stock, $0.001 par value; 115,000,000 shares authorized,
22,707,012 shares issued and outstanding, actual; 115,000,000 shares authorized, 25,547,921 shares issued and outstanding, as adjusted

     23        26   

Additional paid-in capital

     205,627        299,124   

Accumulated deficit

     (94,454     (94,454
  

 

 

   

 

 

 

Total stockholders’ equity

     111,196        204,696   
  

 

 

   

 

 

 

Total capitalization

   $ 118,699      $ 212,199   
  

 

 

   

 

 

 

The number of common shares shown as outstanding on an as adjusted basis in the table above is based on 22,707,012 shares of common stock outstanding as of September 30, 2014 and excludes:

 

    1,839,895 shares of common stock issuable upon the exercise of outstanding options as of September 30, 2014 at a weighted average exercise price of $5.26 per share;

 

    1,841,679 shares of our common stock reserved for future issuance under our 2014 Stock Option Plan as of September 30, 2014; and

 

    265,000 shares of our common stock reserved for future issuance under our 2014 Employee Stock Purchase Plan as of September 30, 2014.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be diluted immediately to the extent of the difference between the public offering price per share you will pay in this offering and the as adjusted net tangible book value per share of our common stock immediately after this offering.

Our historical net tangible book value as of September 30, 2014 was $111.2 million, or $4.90 per share of common stock. Our historical net tangible book value is the amount of our total tangible assets less our total liabilities. Historical net tangible book value per share is our historical net tangible book value divided by the number of shares of common stock outstanding as of September 30, 2014.

After giving effect to the sale by us of 2,840,909 shares of common stock in this offering at an assumed public offering price of $35.20 per share, which was the last reported sale price of our common stock on The NASDAQ Global Market on January 15, 2015, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our as adjusted net tangible book value as of September 30, 2014 would have been $204.7 million, or $8.01 per share. This represents an immediate increase in as adjusted net tangible book value of $3.11 per share to existing stockholders and an immediate dilution of $27.19 per share to new investors purchasing common stock in this offering. Dilution per share to new investors is determined by subtracting as adjusted net tangible book value per share after this offering from the public offering price per share paid by new investors. The following table illustrates this dilution on a per share basis:

 

Assumed public offering price per share

      $ 35.20   

Historical net tangible book value per share as of September 30, 2014

   $ 4.90      

Increase in as adjusted net tangible book value per share attributable to new investors purchasing shares in this offering

     3.11      
  

 

 

    

As adjusted net tangible book value per share after this offering

        8.01   
     

 

 

 

Dilution per share to new investors participating in this offering

      $ 27.19   
     

 

 

 

If the underwriters exercise their option to purchase additional shares in full, the as adjusted net tangible book value per share after this offering would be $8.42 per share, representing an increase in as adjusted net tangible book value per share to existing stockholders of $3.52 per share and immediate dilution in as adjusted net tangible book value per share to new investors purchasing shares in this offering of $26.78 per share, based on an assumed public offering price of $35.20 per share, which was the last reported sale price of our common stock on The NASDAQ Global Market on January 15, 2015.

The above discussion and table are based on 22,707,012 shares of common stock outstanding as of September 30, 2014 and exclude:

 

    1,839,895 shares of common stock issuable upon the exercise of outstanding options as of September 30, 2014 at a weighted average exercise price of $5.26 per share;

 

    1,841,679 shares of common stock reserved for future issuance under our 2014 Stock Option Plan as of September 30, 2014; and

 

    265,000 shares of our common stock reserved for future issuance under our 2014 Employee Stock Purchase Plan as of September 30, 2014.

If any additional shares are issued in connection with the exercise of outstanding stock options, there will be further dilution to new investors purchasing shares in this offering.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

You should read the following selected consolidated financial data together with our consolidated financial statements and the related notes appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus. We have derived the consolidated statement of operations data for the years ended December 31, 2011, 2012 and 2013 and the consolidated balance sheet data as of December 31, 2012 and 2013 from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of operations data for the nine months ended September 30, 2013 and 2014 and the consolidated balance sheet data as of September 30, 2014 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus and have been prepared on the same basis as the audited consolidated financial statements. In the opinion of management, the unaudited data reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information in those statements. Our historical results are not necessarily indicative of the results that should be expected in the future, and results for the nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year ending December 31, 2014.

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2011     2012     2013     2013     2014  
     (in thousands, except per share data)  

Statement of Operations Data:

          

Revenue

   $ —        $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development

     11,403        11,544        9,561        7,038        20,046   

General and administrative

     1,751        2,247        4,219        2,981        4,822   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     13,154        13,791        13,780        10,019        24,868   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (13,154     (13,791     (13,780     (10,019     (24,868
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

          

Interest income

     —          —          —          —          2   

Interest expense

     —          (97     —          —          (658

Foreign currency transaction gains (losses), net

     (3     8        (247     (162     (23
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (3     (89     (247     (162     (679
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (13,157     (13,880     (14,027     (10,181     (25,547

Accretion of redeemable convertible preferred stock to redemption value

     (53     (67     (213     (160     (92
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (13,210   $ (13,947   $ (14,240   $ (10,341   $ (25,639
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(1)

   $ (19.17   $ (19.65   $ (19.53   $ (14.19   $ (2.97
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding, basic and diluted(1)

     689        710        729        729        8,619   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     As of December 31,     As of September 30,
2014
 
     2012     2013    
     (in thousands)  

Balance Sheet Data:

      

Cash and cash equivalents

   $ 9,935      $ 35,517      $ 127,030   

Working capital(2)

     7,394        34,443        117,848   

Total assets

     10,986        38,138        129,636   

Long-term debt, net of discount, including current portion

     —          —          7,503   

Redeemable convertible preferred stock

     62,785        103,797        —     

Total stockholders’ deficit

     (54,729     (68,574     111,196   

 

(1) See Note 9 to our audited consolidated financial statements for further details on the calculation of basic and diluted net loss per share attributable to common stockholders.
(2) We define working capital as current assets less current liabilities.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of financial condition and results of operations together with the section entitled “Selected Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and other parts of this prospectus contain forward-looking statements that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section of this prospectus.

Overview

We are a biopharmaceutical company dedicated to significantly improving the health and well-being of patients affected by obesity and complex metabolic disorders. Beloranib, our lead product candidate, is a novel, first-in-class, twice-weekly subcutaneous injection being developed for the treatment of multiple indications, including severe obesity in two rare diseases, Prader-Willi syndrome, or PWS, and hypothalamic injury-associated obesity, or HIAO, including craniopharyngioma-associated obesity; and severe obesity in the general population.

Obesity is a complex medical disorder involving appetite dysregulation and altered lipid and energy metabolism that results in excessive accumulation of fat tissue. Weight loss and hunger control are urgently needed for certain subpopulations of obese patients, in which obesity is life-threatening and a co-morbidity of an underlying condition such as PWS and HIAO that, while rare, occurs most commonly as a consequence of treatment for craniopharyngioma and other mid-brain tumors. PWS and HIAO are characterized by uncontrollable hunger resulting from damage to or impaired functioning of the hypothalamus, an area of the brain responsible for many functions including the neurophysiological drive to eat.

PWS is a rare and complex genetic disorder characterized by physiologic, cognitive and behavioral symptoms, including hyperphagia, uncontrollable hunger and its related behaviors, and obesity. In January 2014, we completed a Phase 2a clinical trial evaluating beloranib’s ability to reduce body weight and to improve hyperphagia in patients with PWS. In this trial, we observed reductions in body weight, body mass and body fat content and reductions in hyperphagia-related behaviors in patients with PWS. Based on the results of this Phase 2a trial, we initiated our Phase 3 clinical program, which is planned to consist of two Phase 3 clinical trials of beloranib in patients with PWS, with the first Phase 3 trial in the United States having started in September 2014. We expect to report six month data from this U.S. clinical trial in late 2015. We plan to initiate our second Phase 3 clinical trial of beloranib in patients with PWS in the European Union in the middle of 2015, with 12-month data anticipated in late 2016. Beloranib received orphan designation for the treatment of PWS by both the U.S. Food and Drug Administration, or FDA, and the European Commission in January 2013 and July 2014, respectively. We believe that rare conditions such as PWS afford us an opportunity to rapidly develop and commercialize beloranib using smaller, more focused and less costly clinical trials, relative to those required to develop beloranib for the broader severe obesity population.

Published population studies estimate that the prevalence of PWS in the United States and in the European Union ranges from 1 in 8,000 to 1 in 50,000. The physiological drive to eat in patients with PWS is so powerful that they will go to great lengths to eat large quantities of food, even if it is spoiled, indigestible or unpalatable to others. Unsupervised patients will often eat to the point that it causes serious physical harm or death. As a result, caregivers are often forced to place locks and alarms on refrigerators and pantries that contain food. Despite attempts to control the access to food, the typical adult patient with PWS is morbidly obese and, based on our evaluation of published survival data, has an average life expectancy of 32 years of age. Unfortunately, neither dietary intervention nor currently available pharmaceutical therapies bring meaningful benefit to patients with PWS and, as a result, they experience severe and life-threatening consequences of their condition. Furthermore, existing surgical techniques such as bariatric surgery are contraindicated in PWS, as patients with PWS often overeat to a point whereby they can rupture their stomachs, which is frequently a cause of death. Since beloranib

 

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works through a novel mechanism that does not appear to require a fully functioning hypothalamic control pathway, we believe that obese patients with conditions in which increased hunger is central to the disease may respond well to treatment with beloranib.

Zafgen was founded in 2005 to explore novel approaches to obesity therapeutics, including agents known to inhibit methionine aminopeptidase 2, or MetAP2, that had been found to drive unprecedented weight loss and metabolic improvements in mice. After performing a wide range of experiments to validate the effects of MetAP2 inhibitors in validated animal models, we committed the full resources of the company to testing the efficacy and safety of MetAP2 inhibition in obese patients and to establishing the feasibility of MetAP2 inhibitors for eventual commercialization. This effort led to our initiation of medicinal chemistry efforts to identify novel MetAP2 inhibitors, and to search for compounds that were more advanced in clinical development. We identified beloranib as a suitable in-licensing candidate, and, in parallel with preparing beloranib for use in otherwise healthy but obese patients, we conducted our own chemistry program to identify compounds with complementary characteristics. After completing studies to establish preliminary safety, mechanism of action, manufacturing feasibility and clinical proof of concept, we advanced beloranib as a clinical development candidate and explored its application in severely obese patient populations. Our early clinical experience highlighted several key aspects of beloranib’s actions, including rapid and robust weight loss, changes in circulating hormones known to impact fat metabolism, clinically significant reductions in cardiovascular disease risk markers and a particularly striking impact on hunger. These benefits may be of particular relevance to patients suffering from severe obesity and life-limiting obesity driven by other underlying conditions, and for whom existing therapies fail to bring needed benefits.

HIAO is most commonly caused by damage incurred during removal of a central nervous system tumor called craniopharyngioma, but it can also result from less common types of hypothalamic injury such as strokes, brain trauma, or radiation therapy to the brain. We recently completed a Phase 2 clinical trial of beloranib administered twice weekly in 14 patients with HIAO caused by the treatment of craniopharyngioma or pituitary macroadenoma. We observed mean weight loss of 3.4 kg and 6.2 kg in patients with HIAO after four and eight weeks of treatment with beloranib, respectively, in contrast to 0.3 kg mean weight loss in patients treated with placebo for four weeks. Improvements in cardiovascular disease risk factors of lipids and inflammation (measured by C-reactive protein) were also observed. The biomarker and other secondary endpoint results of the trial are expected to become available in the first half of 2015. In 2015, we plan to establish the regulatory path for a registration program with U.S. and European Union regulatory authorities for our HIAO program, and will decide whether to pursue additional clinical trials of beloranib in patients with HIAO following completion of our Phase 3 clinical program of beloranib in patients with PWS. We plan to seek orphan drug designation for the treatment of craniopharyngioma-associated obesity in the United States and European Union.

Since our inception in November 2005, we have devoted substantially all of our resources to developing beloranib and ZGN-839, building our intellectual property portfolio, developing our supply chain, business planning, raising capital, and providing general and administrative support for these operations. Prior to our initial public offering, or IPO, in June 2014, we funded our operations primarily through sales of redeemable convertible preferred stock and, to a lesser extent, through the issuances of convertible promissory notes. From our inception through September 30, 2014, we have received gross proceeds of $104.0 million from such transactions. During June 2014, we completed our IPO with net proceeds of $102.7 million.

We have never generated any revenue and have incurred net losses in each year since our inception. We have an accumulated deficit of $94.5 million as of September 30, 2014. Our net loss was $13.2 million, $13.9 million and $14.0 million for the years ended December 31, 2011, 2012 and 2013, respectively, and $25.5 million for the nine months ended September 30, 2014. These losses have resulted principally from costs incurred in connection with in-licensing our product candidates, research and development activities and general and administrative costs associated with our operations. We expect to incur significant expenses and increasing operating losses for the foreseeable future.

 

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We expect that our expenses will increase substantially in connection with our ongoing activities, as we:

 

    advance the clinical development of beloranib as a treatment for obesity and hyperphagia in patients with PWS through our Phase 3 clinical trials;

 

    advance the clinical development of beloranib as a treatment for HIAO;

 

    initiate Investigational New Drug Application, or IND, enabling studies and clinical development of ZGN-839 and our second-generation MetAP2 inhibitors;

 

    advance the clinical development of beloranib as a treatment for severe obesity in the general population through a Phase 2b clinical trial;

 

    seek to identify additional indications for beloranib;

 

    seek to obtain regulatory approvals for our product candidates;

 

    add operational, financial and management information systems;

 

    add personnel, including personnel to support our product development and future commercialization; and

 

    maintain, leverage and expand our intellectual property portfolio.

As a result, we will need additional financing to support our continuing operations. Until such time that we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings or other sources, which may include collaborations with third parties. Arrangements with collaborators or others may require us to relinquish rights to certain of our technologies or product candidates. In addition, we may never successfully complete development of any of our product candidates, obtain adequate patent protection for our technology, obtain necessary regulatory approval for our product candidates or achieve commercial viability for any approved product candidates. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenue to achieve profitability, and we may never do so.

We expect that our existing cash and cash equivalents as of September 30, 2014, together with the anticipated net proceeds of this offering, will enable us to fund our operating expenses and capital expenditure requirements for at least the next 18 months. See “—Liquidity and Capital Resources.”

Financial Operations Overview

Revenue

We have not generated any revenue from product sales since our inception, and do not expect to generate any revenue from the sale of products in the near future. If our development efforts result in clinical success and regulatory approval or collaboration agreements with third parties for our product candidates, we may generate revenue from those product candidates.

Operating Expenses

The majority of our operating expenses since inception have consisted primarily of in-licensing costs of our product candidate beloranib, research and development activities, and general and administrative costs.

Research and Development Expenses

Research and development expenses, which consist primarily of costs associated with our product research and development efforts, are expensed as incurred. Research and development expenses consist primarily of:

 

    personnel costs, including salaries, related benefits and stock-based compensation for employees engaged in scientific research and development functions;

 

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    third-party contract costs relating to research, formulation, manufacturing, pre-clinical studies and clinical trial activities;

 

    external costs of outside consultants;

 

    payments made under our third-party licensing agreements;

 

    laboratory consumables; and

 

    allocated facility-related costs.

We have been developing beloranib, ZGN-839, and our second-generation MetAP2 inhibitors, and typically use our employee, consultant and infrastructure resources across our development programs. We track outsourced development costs by product candidate or development program, but we do not allocate personnel costs, external consultant costs, payments made under our licensing agreements or other internal costs to specific development programs or product candidates. We record our research and development expenses net of any research and development tax incentives we are entitled to receive from government authorities.

The following table summarizes our research and development expenses by program:

 

    Year Ended December 31,     Nine Months Ended
September 30,
 
    2011     2012      2013     2013     2014  
    (in thousands)  

Beloranib

  $ 5,523      $ 6,802       $ 5,881      $ 4,365      $ 15,177   

ZGN-839 and other early-stage development

    2,332        2,193         295        152        668   

Unallocated expenses

    3,548        2,549         3,385        2,521        4,201   
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total research and development expenses

  $ 11,403      $ 11,544       $ 9,561      $ 7,038      $ 20,046   
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Research and development activities are central to our business. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will continue to increase in the foreseeable future as we pursue later stages of clinical development of our product candidates.

We cannot determine with certainty the duration and completion costs of the current or future clinical trials of our product candidates or if, when, or to what extent we will generate revenue from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs, and timing of clinical studies and development of our product candidates will depend on a variety of factors, including:

 

    the scope, rate of progress, and expense of our ongoing as well as any additional clinical trials and other research and development activities;

 

    future clinical trial results;

 

    uncertainties in clinical trial enrollment rate or design;

 

    significant and changing government regulation;

 

    the timing and receipt of any regulatory approvals; and

 

    the FDA’s or other regulatory authority’s influence on trial design.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA, or another regulatory authority were to require us to conduct clinical trials

 

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beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs, consisting of salaries, related benefits and stock-based compensation, of our executive, finance, business and corporate development and other administrative functions. General and administrative expenses also include travel expenses, allocated facility-related costs not otherwise included in research and development expenses, and professional fees for auditing, tax and legal services, including legal expenses to pursue patent protection of our intellectual property.

We expect that general and administrative expenses will increase in the future as we expand our operating activities and incur additional costs associated with operating as a public company. These public company related increases will likely include additional costs related to personnel; legal, accounting and audit services; directors’ and officers’ liability insurance premiums; and investor relations.

Other Income (Expense)

Interest income. Interest income consists of interest earned on our cash and cash equivalents. Our interest income has not been significant due to low interest earned on invested balances. We anticipate that our interest income will increase in the future due to increased balances from cash proceeds received from our IPO in June 2014 and anticipated cash proceeds from this offering.

Interest expense. Interest expense consists of interest expense on our outstanding convertible promissory notes at the stated interest rates and interest expense related to the amortization of deferred financing costs associated with our issuances of the convertible promissory notes. As of December 31, 2012, all of our outstanding convertible promissory notes and accrued interest had been converted into shares of our redeemable convertible preferred stock. As a result, we no longer incur interest expense related to this debt. Since March 2014, we have recorded interest expense for outstanding borrowings under a credit facility that we entered into on March 31, 2014, consisting of the stated interest of 8.1% per year due on outstanding borrowings, a final payment of 6% of amounts drawn down that is being recorded as interest expense over the term through the maturity date using the effective-interest method and the amortization of deferred financing costs and debt discount relating to the credit facility.

Foreign currency transaction gains (losses), net. Foreign currency transaction gains (losses), net consists of the realized and unrealized gains and losses from foreign currency-denominated cash balances, vendor payables and tax-related receivables from the Australian government. We currently do not engage in hedging activities related to our foreign currency-denominated receivables and payables; as such, we cannot predict the impact of future foreign currency transaction gains and losses on our operating results. See “—Quantitative and Qualitative Disclosures about Market Risk.”

Income Taxes

Since our inception in 2005, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in each year or our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items. As of December 31, 2013, we had federal and state net operating loss carryforwards of $10.5 million and $8.2 million, respectively. Our federal net operating loss carryforwards begin to expire in 2026, and our state net operating loss carryforwards began to expire in 2014. We also had federal and state research and development tax credit carryforwards of $4.7 million and $1.3 million, respectively, as of December 31, 2013, which begin to expire in 2026 and 2021, respectively.

 

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Critical Accounting Policies and Significant Judgments and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We believe that the estimates and assumptions involved in the accounting policies described below may have the greatest potential impact on our consolidated financial statements and, therefore, consider these to be our critical accounting policies. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. See also Note 2 of our consolidated financial statements included elsewhere in this prospectus for information about these critical accounting policies as well as a description of our other significant accounting policies.

JOBS Act

On April 5, 2012, the Jumpstart Our Business Startups Act, or the JOBS Act, was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an “emerging growth company.” As an “emerging growth company,” we are electing not to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision not to take advantage of the extended transition period is irrevocable.

In addition, we are in the process of evaluating the benefits of relying on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if as an “emerging growth company” we choose to rely on such exemptions, we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation. These exemptions apply for a period of five years following the completion of our IPO in June 2014 or until we no longer meet the requirements of being an “emerging growth company,” whichever is earlier.

Research and Development Expenses

As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advanced payments. We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. Examples of estimated accrued research and development expenses include fees paid to:

 

    contract research organizations, or CROs, in connection with clinical trials;

 

    investigative sites or other providers in connection with clinical trials;

 

    vendors in connection with pre-clinical development activities; and

 

    vendors related to product manufacturing, development and distribution of clinical supplies.

 

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We base our expenses related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed, enrollment of patients, number of sites activated and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period. To date, we have not made any material adjustments to our prior estimates of accrued research and development expenses.

Stock-Based Compensation

We measure stock-based awards granted to employees and directors at fair value on the date of grant and recognize the corresponding compensation expense of those awards, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. Generally, we issue stock options and restricted stock awards with only service-based vesting conditions and record the expense for these awards using the straight-line method. We have historically granted stock options with exercise prices equivalent to the fair value of our common stock as of the date of grant.

We measure stock-based awards granted to consultants and nonemployees at the fair value of the award on the date at which the related service is complete. Compensation expense is recognized over the period during which services are rendered by such consultants and nonemployees until completed. At the end of each financial reporting period prior to completion of the service, the fair value of these awards is re-measured using the then-current fair value of our common stock and updated assumption inputs in the Black-Scholes option-pricing model.

The fair value of each stock option grant is estimated using the Black-Scholes option-pricing model. Until completion of our IPO in June 2014, we were a private company and lacked company-specific historical and implied volatility information. Therefore, we estimated our expected volatility based on the historical volatility of our publicly traded peer companies and expect to continue to do so until such time as we have adequate historical data regarding the volatility of our traded stock price. The expected term of our options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options, while the expected term of our options granted to consultants and nonemployees has been determined based on the contractual term of the options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeable future.

The assumptions we used to determine the fair value of stock options granted to employees and directors are as follows, presented on a weighted average basis (we did not grant any stock options to employees or directors during the year ended December 31, 2012):

 

     Year Ended December 31,     Nine Months Ended September 30,  
       2011         2013         2013         2014    

Risk-free interest rate

     1.41     1.12     0.89     1.93

Expected term (in years)

     6.25        6.25        6.25        6.25   

Expected volatility

     78     85     85     90

Expected dividend yield

     0     0     0     0

 

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These assumptions represented our best estimates, but the estimates involve inherent uncertainties and the application of our judgment. As a result, if factors change and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different. We recognize compensation expense for only the portion of awards that are expected to vest. In developing a forfeiture rate estimate for pre-vesting forfeitures, we have considered our historical experience of actual forfeitures. If our future actual forfeiture rate is materially different from our estimate, our stock-based compensation expense could be significantly different from what we have recorded in the current period.

The following table summarizes the classification of our stock-based compensation expenses recognized in our consolidated statements of operations:

 

     Year Ended December 31,      Nine Months Ended September 30,  
       2011          2012          2013          2013          2014    
     (in thousands)  

Research and development

   $ 30       $ 68       $ 176       $ 109       $ 259   

General and administrative

     50         53         219         143         651   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 80       $ 121       $ 395       $ 252       $ 910   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Results of Operations

Comparison of Nine Months Ended September 30, 2013 and 2014

The following table summarizes our results of operations for the nine months ended September 30, 2013 and 2014:

 

     Nine Months Ended
September 30,
    Increase
(Decrease)
 
     2013     2014    
    

(in thousands)

 

Revenue

   $ —       $ —       $ —    
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Research and development

     7,038        20,046        13,008   

General and administrative

     2,981        4,822        1,841   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     10,019        24,868        14,849   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (10,019     (24,868     (14,849
  

 

 

   

 

 

   

 

 

 

Other income (expense):

      

Interest income

     —         2        2   

Interest expense

     —         (658     (658

Foreign currency transaction gains (losses), net

     (162     (23     139   
  

 

 

   

 

 

   

 

 

 

Total other expense, net

     (162     (679     (517
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (10,181   $ (25,547   $ (15,366
  

 

 

   

 

 

   

 

 

 

 

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Research and development expenses

 

     Nine Months Ended
September 30,
     Increase
(Decrease)
 
     2013      2014     
     (in thousands)  

Direct research and development expenses by program:

        

Beloranib:

        

Pre-clinical and manufacturing

   $ 1,941       $ 5,947       $ 4,006   

Clinical trials

     2,424         2,530         106   

Licensing, milestone and licensing maintenance fees

     —          6,700         6,700   
  

 

 

    

 

 

    

 

 

 

Subtotal

     4,365         15,177         10,812   

ZGN-839 and other early stage development

     152         668         516   
  

 

 

    

 

 

    

 

 

 

Subtotal

     4,517         15,845         11,328   
  

 

 

    

 

 

    

 

 

 

Unallocated expenses:

        

Personnel related

     913         1,984         1,071   

Consultants

     1,511         1,929         418   

Other

     97         288         191   
  

 

 

    

 

 

    

 

 

 

Subtotal

     2,521         4,201         1,680   
  

 

 

    

 

 

    

 

 

 

Total research and development expenses

   $ 7,038       $ 20,046       $ 13,008   
  

 

 

    

 

 

    

 

 

 

Research and development expenses for the nine months ended September 30, 2014 increased $13.0 million compared to the nine months ended September 30, 2013. The increase was primarily due to increased costs of $10.8 million associated with our beloranib program, $0.5 million associated with ZGN-839 and other early-stage development programs (consisting of our second-generation MetAP2 inhibitors), and $1.7 million in our unallocated expenses. Of the increase in our beloranib program, pre-clinical and manufacturing costs increased by $4.0 million period over period as a result of our focus on drug manufacturing and other pre-clinical activities related to beloranib in order to prepare for clinical trials, as well as toxicology studies required for our NDA submission. Additionally, clinical trial expenses for beloranib increased by $0.1 million period over period as a result of timing of our clinical trials in 2013 and 2014. Clinical trial activities undertaken by our Australian subsidiary are recorded net of a 45% research and development tax incentive from the Australian government. Lastly, licensing, milestone and licensing maintenance fees increased $6.7 million due to the achievement of a milestone related to the initiation of a first Phase 3 clinical trial in beloranib, which we initiated in September 2014. Costs related to ZGN-839 and other early-stage development programs increased in 2014 as a result of our increased focus on our early-stage programs in 2014. Unallocated expenses increased period over period primarily due to an increase in personnel related costs of $1.1 million and an increase in consultant expenses of $0.4 million. Personnel related costs increased period over period primarily due to the hiring of new employees of $0.9 million and increased stock-based compensation of $0.2 million. Consultant costs increased period over period primarily due to expenses incurred in connection with regulatory meetings and preparation work for clinical trials.

General and administrative expenses

 

     Nine Months Ended
September 30,
     Increase
(Decrease)
 
         2013              2014         
     (in thousands)  

Personnel related

   $ 1,016       $ 2,157       $ 1,141   

Professional fees

     1,678         1,772         94   

Travel and other

     287         893         606   
  

 

 

    

 

 

    

 

 

 

Total general and administrative expenses

   $ 2,981       $ 4,822       $ 1,841   
  

 

 

    

 

 

    

 

 

 

 

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General and administrative expenses for the nine months ended September 30, 2014 increased $1.8 million compared to the nine months ended September 30, 2013. The increase was primarily due to increased personnel related costs of $1.1 million and increased travel and other related costs of $0.6 million period over period. Personnel related costs increased primarily due to the hiring of new employees of $0.6 million and increases in stock-based compensation of $0.5 million related to the new employees and to the increase in our common stock value. The increase in travel and other related costs is primarily due to an increase in directors and officer’s insurance of $0.3 million due to becoming a public company, $0.2 million relating to commercial marketing projects as well as various other increases including information technology-related expenses to support our operating as a public company and increased office rent due to the office move in July 2014.

Other income (expense), net

Interest expense. Interest expense for the nine months ended September 30, 2014 was related to interest expense on our outstanding borrowings under the credit facility that we entered into on March 31, 2014, consisting of the stated interest of 8.1% per year due on outstanding borrowings of $0.3 million, a final payment of 6% of amounts drawn down that is being recorded as interest expense over the term through the maturity date using the effective-interest method and the amortization of deferred financing costs and debt discount relating to the credit facility, both approximately $0.1 million, and $0.2 million related to a fee of which was due upon the completion of our IPO. We had no debt outstanding during 2013.

Foreign currency transaction gains (losses), net. Net foreign currency transaction losses of $0.2 million for the nine months ended September 30, 2013 were primarily due to the re-measurement of receivables, denominated in Australian dollars, from the Australian government for research and development tax incentives, reflecting both a weakening of the Australian dollar relative to the U.S. dollar and an increase in our receivable balances for such tax incentives during the nine months ended September 30, 2013. During the nine months ended September 30, 2014 the Australian dollar strengthened relative to the U.S. dollar during the first eight months and then weakened dramatically during September 2014 leading to a very minimal net impact on foreign currency transaction gains (losses).

 

Comparison of Years Ended December 31, 2012 and 2013

The following table summarizes our results of operations for the years ended December 31, 2012 and 2013:

 

     Year Ended
December 31,
    Increase
(Decrease)
 
     2012     2013    
     (in thousands)  

Revenue

   $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Research and development

     11,544        9,561        (1,983

General and administrative

     2,247        4,219        1,972   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     13,791        13,780        (11
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (13,791     (13,780     11   
  

 

 

   

 

 

   

 

 

 

Other income (expense):

      

Interest expense

     (97     —          97   

Foreign currency transaction gains (losses), net

     8        (247     (255
  

 

 

   

 

 

   

 

 

 

Total other expense, net

     (89     (247     (158
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (13,880   $ (14,027   $ (147
  

 

 

   

 

 

   

 

 

 

 

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Research and development expenses

 

     Year Ended
December 31,
     Increase
(Decrease)
 
     2012      2013     
     (in thousands)  

Direct research and development expenses by program:

        

Beloranib:

        

Pre-clinical and manufacturing

   $ 4,365       $ 2,898       $ (1,467

Clinical trials

     2,437         2,983         546   
  

 

 

    

 

 

    

 

 

 

Subtotal

     6,802         5,881         (921

ZGN-839 and other early-stage development

     2,193         295         (1,898
  

 

 

    

 

 

    

 

 

 

Subtotal

     8,995         6,176         (2,819
  

 

 

    

 

 

    

 

 

 

Unallocated expenses:

        

Personnel related

     902         1,258         356   

Consultants

     1,371         1,981         610   

Licensing, milestone and license maintenance fees

     150         —           (150

Other

     126         146         20   
  

 

 

    

 

 

    

 

 

 

Subtotal

     2,549         3,385         836   
  

 

 

    

 

 

    

 

 

 

Total research and development expenses

   $ 11,544       $ 9,561       $ (1,983
  

 

 

    

 

 

    

 

 

 

Research and development expenses for the year ended December 31, 2012 were $11.5 million, compared to $9.6 million for the year ended December 31, 2013. The decrease of $1.9 million was primarily due to the decreased costs of $1.9 million associated with ZGN-839 and other early-stage development programs (consisting of our second-generation MetAP2 inhibitors) and decreased costs of $0.9 million associated with beloranib, partially offset by an increase in consultant expenses of $0.6 million and an increase in personnel related costs of $0.4 million. During 2013, we focused our research and development efforts primarily on our ongoing clinical trials for beloranib as opposed to our early-stage programs. Expenses related to beloranib decreased year over year as a result of a $1.5 million decrease in pre-clinical and manufacturing expenses, partially offset by an increase of $0.5 million from our clinical trial expenses. Pre-clinical and manufacturing costs decreased year over year as a result of completing a significant portion of our development-enabling toxicology and other pre-clinical activities related to beloranib in 2012. Clinical trial expenses for beloranib increased by $0.5 million year over year as a result of expenses incurred for our 12-week Phase 2a clinical trial for severe obesity and for our 12-week Phase 2a clinical trial for PWS that were both ongoing in 2013, as compared to expenses incurred for our 12-week Phase 2a clinical trial for severe obesity that started in 2012 and for our 4-week Phase 1b clinical trial for severe obesity that was started and completed in 2012. Expenses for our Phase 2a clinical trial for severe obesity, which ran from the third quarter of 2012 through the second quarter of 2013, were recorded net of a 45% research and development tax incentive from the Australian government of $0.6 million and $1.2 million during the years ended December 31, 2012 and 2013, respectively. Consultant costs increased by $0.6 million year over year primarily due to expenses incurred in conjunction with our IND filing for our Phase 2a clinical trial for PWS. Personnel related costs increased by $0.4 million year over year primarily due to the hiring of a new employee of $0.2 million and increased stock-based compensation of $0.1 million.

General and administrative expenses

 

     Year Ended
December 31,
     Increase
(Decrease)
 
     2012      2013     
     (in thousands)  

Personnel related

   $ 910       $ 1,358       $ 448   

Professional fees

     947         2,463         1,516   

Travel and other

     390         398         8   
  

 

 

    

 

 

    

 

 

 

Total general and administrative expenses

   $ 2,247       $ 4,219       $ 1,972   
  

 

 

    

 

 

    

 

 

 

 

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General and administrative expenses for the year ended December 31, 2012 were $2.2 million, compared to $4.2 million for the year ended December 31, 2013. The increase of $2.0 million in general and administrative expenses was primarily due to increased professional fees of $1.5 million and increased personnel related costs of $0.4 million year over year. The increase in professional fees consisted primarily of a $1.0 million increase in accounting and audit, legal and investor relations fees due to ongoing business activities as well as an increase of $0.4 million related to two external market research studies that were conducted in 2013. Personnel related costs increased by $0.4 million year over year primarily due to employee salary and bonus increases of $0.2 million and increases in stock-based compensation of $0.2 million.

Other income (expense), net

Interest expense. Interest expense for the year ended December 31, 2012 was related to interest on convertible promissory notes issued in August 2012 that were subsequently converted into shares of our Series D redeemable convertible preferred stock in November 2012. We had no debt outstanding during 2013.

Foreign currency transaction gains (losses), net. Net foreign currency transaction losses of $0.2 million for the year ended December 31, 2013 were primarily due to the re-measurement of receivables, denominated in Australian dollars, from the Australian government for research and development tax incentives, reflecting both a strengthening of the U.S. dollar relative to the Australian dollar and an increase in our receivable balances for such tax incentives during the year ended December 31, 2013.

Comparison of Years Ended December 31, 2011 and 2012

The following table summarizes our results of operations for the years ended December 31, 2011 and 2012:

 

     Year Ended
December 31,
    Increase
(Decrease)
 
     2011     2012    
     (in thousands)  

Revenue

   $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Research and development

     11,403        11,544        141   

General and administrative

     1,751        2,247        496   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     13,154        13,791        637   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (13,154     (13,791     (637
  

 

 

   

 

 

   

 

 

 

Other income (expense):

      

Interest expense

     —          (97     (97

Foreign currency transaction gains (losses), net

     (3     8        11   
  

 

 

   

 

 

   

 

 

 

Total other expense, net

     (3     (89     (86
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (13,157   $ (13,880   $ (723
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Research and development expenses

 

     Year Ended
December 31,
     Increase
(Decrease)
 
     2011      2012     
     (in thousands)  

Direct research and development expenses by program:

        

Beloranib:

        

Pre-clinical and manufacturing

   $ 4,533       $ 4,365       $ (168

Clinical trials

     990         2,437         1,447   
  

 

 

    

 

 

    

 

 

 

Subtotal

     5,523         6,802         1,279   

ZGN-839 and other early-stage development

     2,332         2,193         (139
  

 

 

    

 

 

    

 

 

 

Subtotal

     7,855         8,995         1,140   
  

 

 

    

 

 

    

 

 

 

Unallocated expenses:

        

Personnel related

     590         902         312   

Consultants

     1,749         1,371         (378

Licensing, milestone and license maintenance fees

     1,055         150         (905

Other

     154         126         (28
  

 

 

    

 

 

    

 

 

 

Subtotal

     3,548         2,549         (999
  

 

 

    

 

 

    

 

 

 

Total research and development expenses

   $ 11,403       $ 11,544       $ 141   
  

 

 

    

 

 

    

 

 

 

Research and development expenses for the year ended December 31, 2011 were $11.4 million, compared to $11.5 million for the year ended December 31, 2012. The increase of $0.1 million was primarily due to the increased costs of $1.3 million associated with our beloranib product candidate and increased personnel related costs of $0.3 million, partially offset by a decrease of $0.9 million in licensing, milestone and license maintenance fees, a decrease of $0.4 million in consultant expenses, and a decrease of $0.1 million in costs associated with ZGN-839 and other early-stage development programs, consisting of our second-generation MetAP2 inhibitors. Expenses related to beloranib increased year over year as a result of a $1.4 million increase from our clinical trial expenses, partially offset by a decrease of $0.2 million in pre-clinical and manufacturing. Clinical trial expenses for beloranib increased by $1.4 million year over year as a result of expenses incurred for our 4-week Phase 1b clinical trial for severe obesity that was started and completed in 2012 and our 12-week Phase 2a clinical trial for severe obesity that we commenced in the third quarter of 2012, as compared to expenses incurred solely for our 4-week Phase 1b clinical trial for severe obesity that was completed during 2011. Expenses for our Phase 2a clinical trial for severe obesity incurred in the fourth quarter of 2012 were recorded net of a 45% research and development tax incentive from the Australian government of $0.6 million. There were no research and development tax incentives recorded during the year ended December 31, 2011. Pre-clinical and manufacturing costs associated with beloranib decreased primarily as a result of decreased drug product costs. Personnel related costs increased by $0.3 million year over year primarily due to increased headcount as a result of the addition of our Chief Medical Officer in September 2011, which had the effect of decreasing consultant expense by a similar amount. Licensing, milestone and license maintenance fees decreased by $0.9 million year over year due primarily to the recognition of a $1.0 million milestone payment in 2011.

General and administrative expenses

 

     Year Ended
December 31,
     Increase
(Decrease)
 
     2011      2012     
     (in thousands)  

Personnel related

   $ 925       $ 910       $ (15

Professional fees

     527         947         420   

Travel and other

     299         390         91   
  

 

 

    

 

 

    

 

 

 

Total general and administrative expenses

   $ 1,751       $ 2,247       $ 496   
  

 

 

    

 

 

    

 

 

 

 

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General and administrative expenses for the year ended December 31, 2011 were $1.8 million compared to $2.2 million for the year ended December 31, 2012. The increase of $0.4 million was primarily attributable to increased professional fees of $0.4 million related to ongoing business activities.

Other income (expense), net

Interest expense. Interest expense for the year ended December 31, 2012 was due to interest on convertible promissory notes issued in August 2012 and November 2012 that were subsequently converted into shares of Series D redeemable convertible preferred stock in November 2012. We had no debt outstanding during 2011.

Foreign currency transaction gains (losses), net. We had a small amount of foreign currency transaction losses during the year ended December 31, 2011 compared to a small amount of foreign currency transaction gains during the year ended December 31, 2012. Foreign currency transaction gains and losses related primarily to the re-measurement of foreign currency accounts and foreign currency denominated vendor payables.

Quarterly Results of Operations Data

The following tables set forth our unaudited quarterly consolidated statements of operations data for each of the eleven quarters in the period January 1, 2012 through September 30, 2014. This information is derived from our unaudited interim financial statements. We have prepared the quarterly data on the same basis as our audited consolidated financial statements. In the opinion of management, the quarterly data contains all adjustments which are necessary to present fairly our financial position and results of operations for such dates. Such adjustments are of a normal and recurring nature. The results of historical periods and any current quarterly period are not necessarily indicative of the results of operations for a full year or any future period. The information set forth below should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this prospectus.

 

    Three Months Ended  
    March 31,
2012
    June 30,
2012
    September 30,
2012
    December 31,
2012
    March 31,
2013
    June 30,
2013
    September 30,
2013
    December 31,
2013
    March 31,
2014
    June 30,
2014
    September 30,
2014
 
    (in thousands, except per share data)  

Revenue

  $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

                     

Research and development

    2,998        3,059        3,083        2,404        2,633        1,961        2,444        2,523        3,275        4,695        12,076   

General and administrative

    548        525        572        602        887        1,014        1,080        1,238        1,246        1,291        2,285   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    3,546        3,584        3,655        3,006        3,520        2,975        3,524        3,761        4,521        5,986        14,361   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (3,546     (3,584     (3,655     (3,006     (3,520     (2,975     (3,524     (3,761     (4,521     (5,986     (14,361
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

                     

Interest income

    —          —          —          —          —          —          —          —          —          1        1   

Interest expense

    —          —          (40     (57     —          —          —          —          (2     (443     (213

Foreign currency transaction gains (losses), net

    4        —          2        2        (21     (161     20        (85     65        28        (116
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

    4        —          (38     (55     (21     (161     20        (85     63        (414     (328
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss and comprehensive loss

    (3,542     (3,584     (3,693     (3,061     (3,541     (3,136     (3,504     (3,846     (4,458     (6,400     (14,689

Accretion of redeemable convertible preferred stock to redemption value

    (12     (14     (16     (25     (53     (54     (53     (53     (49     (43     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (3,554   $ (3,598   $ (3,709   $ (3,086   $ (3,594   $ (3,190   $ (3,557   $ (3,899   $ (4,507   $ (6,443   $ (14,689
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted

  $ (5.09   $ (5.11   $ (5.20   $ (4.31   $ (4.94   $ (4.37   $ (4.88   $ (5.35   $ (6.18   $ (2.96   $ (0.65
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding, basic and diluted

    698        704        713        716        728        729        729        729        729        2,178        22,707   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Liquidity and Capital Resources

As of September 30, 2014, we had cash and cash equivalents totaling $127.0 million. We invest our cash equivalents in money market accounts, with the primary objectives to preserve principal, provide liquidity and maximize income without significantly increasing risk.

Since our inception in November 2005, we have not generated any revenue and have incurred recurring net losses. As of September 30, 2014, we had an accumulated deficit of $94.5 million. We have funded our operations since inception primarily through sales of redeemable convertible preferred stock and, to a lesser extent, through the issuances of convertible promissory notes. In June 2014, we completed an IPO of common stock with net proceeds of $102.7 million.

On March 31, 2014, we entered into a loan and security agreement, or the 2014 Credit Facility, which provides for initial borrowings of $7.5 million and additional borrowings of up to $12.5 million. On that same date, we received proceeds of $7.5 million from the issuance of promissory notes under a term loan as part of the 2014 Credit Facility. Of the additional $12.5 million of borrowings that was available to us, $7.5 million was available to be drawn down until September 30, 2014 and $5.0 million was available to be drawn down for a 30-day period upon the completion of our IPO that occurred in June 2014. We elected not to draw down the $7.5 million or the $5.0 million and these amounts are no longer available to us. All promissory notes issued under the 2014 Credit Facility are collateralized by substantially all of our personal property, other than our intellectual property. There are no financial covenants associated with the debt facility; however, there are negative covenants restricting our activities, including limitations on dispositions, mergers or acquisitions; encumbering or granting a security interest in our intellectual property; incurring indebtedness or liens; paying dividends; making certain investments; and certain other business transactions.

Upon entering into this 2014 Credit Facility, we were obligated to make monthly, interest-only payments on any term loans funded under the 2014 Credit Facility until December 1, 2014 and, thereafter, to pay 36 consecutive, equal monthly installments of principal and interest from January 1, 2015 through December 1, 2017. As per the terms of the agreement, in June 2014, upon the completion of our IPO, the term of monthly, interest-only payments was extended until June 1, 2015. Outstanding term loans under the 2014 Credit Facility bear interest at an annual rate of 8.1%. In addition, a final payment equal to 6.0% of any amounts drawn under the facility is due upon the earlier of the maturity date, acceleration of the term loans or prepayment of all or part of the term loans. We were also obligated to pay a separate fee upon any initial public offering; a sale of substantially all of our assets; or a merger, reorganization or sale of our voting equity securities where existing voting stockholders hold less than 50% of voting equity securities after such transaction. As of September 30, 2014, we recorded interest expense of $0.2 million relating to the fee payable upon completion of our IPO.

The following table summarizes our sources and uses of cash for each of the periods presented below:

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2011     2012     2013     2013     2014  
    

(in thousands)

 

Cash used in operating activities

   $ (12,274   $ (13,589   $ (15,004   $ (10,871   $ (16,527

Cash used in investing activities

     (45     (2     (17     (9     (99

Cash provided by financing activities

     10,069        22,059        40,603     

 

 

 

5,790

 

  

 

 

 

 

108,139

 

  

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ (2,250   $ 8,468      $ 25,582     

 

 

$

 

 

(5,090

 

 

 

 

 

$

 

 

91,513

 

 

  

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in operating activities

During the nine months ended September 30, 2013, operating activities used $10.9 million of cash, primarily resulting from our net loss of $10.2 million and from net cash used by changes in our operating assets

 

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and liabilities of $1.1 million, partially offset by non-cash charges of $0.4 million. Our net loss was primarily attributed to research and development activities related to beloranib and our general and administrative expenses, as we had no revenue in the period. Net cash used by changes in our operating assets and liabilities during the nine months ended September 30, 2013 consisted primarily of a $1.2 million increase in our research and development tax incentive receivable from the Australian government and a $0.2 million decrease in accrued expenses, partially offset by a $0.2 million decrease in prepaid expenses and other current assets and a $0.1 million increase in accounts payable. Our net non-cash charges during the nine months ended September 30, 2013 consisted primarily of stock-based compensation expense of $0.3 million and unrealized foreign currency transaction gains of $0.2 million.

During the nine months ended September 30, 2014, operating activities used $16.5 million of cash, resulting from our net loss of $25.5 million, partially offset by non-cash charges of $1.0 million and net cash provided by changes in our operating assets and liabilities of $8.0 million. Our net loss was primarily attributed to research and development activities related to our beloranib program, licensing milestones and our general and administrative expenses, as we had no revenue in the period. Our net non-cash charges during the nine months ended September 30, 2014 consisted primarily of stock-based compensation expense of $0.9 million. Net cash provided by changes in our operating assets and liabilities during the nine months ended September 30, 2014 consisted primarily of a $9.1 million increase in accrued expenses (of which $6.7 million related to our licensing milestones), partially offset by a $1.0 million increase in prepaid expenses and other current assets.

During the year ended December 31, 2011, operating activities used $12.3 million of cash, primarily resulting from our net loss of $13.2 million, partially offset by cash provided from changes in our operating assets and liabilities of $0.8 million. Our net loss was primarily attributed to research and development activities related to our beloranib and ZGN-839 programs and our general and administrative expenses, as we had no revenue in the period. Net cash provided by changes in our operating assets and liabilities during the year ended December 31, 2011 consisted primarily of an increase in accrued expenses of $0.9 million. Our accrued expense balances were affected by the timing of vendor invoicing and payments.

During the year ended December 31, 2012, operating activities used $13.6 million of cash, primarily resulting from our net loss of $13.9 million, partially offset by non-cash charges of $0.2 million and by cash provided from changes in our operating assets and liabilities of $0.1 million. Our net loss was primarily attributed to research and development activities related to our beloranib and ZGN-839 programs and our general and administrative expenses, as we had no revenue in the period. Our net non-cash charges during the year ended December 31, 2012 primarily consisted of stock-based compensation expense of $0.1 million and non-cash interest expense of $0.1 million. Net cash provided by changes in our operating assets and liabilities during the year ended December 31, 2012 consisted primarily of a $1.0 million increase in accounts payable and accrued expenses, partially offset by a $0.6 million increase in our research and development tax incentive receivable from the Australian government and a $0.3 million increase in prepaid expenses and other current assets. Our prepaid expenses and other current assets, accounts payable and accrued expense balances were affected by the timing of vendor invoicing and payments.

During the year ended December 31, 2013, operating activities used $15.0 million of cash, resulting from our net loss of $14.0 million and from cash used by changes in our operating assets and liabilities of $1.6 million, partially offset by non-cash charges of $0.7 million. Our net loss was primarily attributed to research and development activities related to our beloranib program and our general and administrative expenses, as we had no revenue in the period. Net cash used by changes in our operating assets and liabilities during the year ended December 31, 2013 consisted primarily of a $1.2 million increase in our research and development tax incentive receivable from the Australian government. Our net non-cash charges in the year primarily consisted of stock-based compensation expense of $0.4 million and unrealized foreign currency transaction losses of $0.3 million. Unrealized foreign currency transaction losses related to our outstanding foreign currency-denominated research and development tax incentive receivable from the Australian government.

 

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Net cash used in investing activities

We used a small amount of cash during the years ended December 31, 2011, 2012 and 2013 and the nine months ended September 30, 2013 and 2014 related to purchases of property and equipment. During the nine months ended September 30, 2014, we paid a security deposit on our new office lease of $0.1 million. During the year ended December 31, 2011, we also paid a small deposit related to our office lease which we expect to be returned at the completion of the lease.

Net cash provided by financing activities

During the nine months ended September 30, 2013, net cash provided by financing activities was $5.8 million as a result of net proceeds of $6.0 million from issuances of our Series D redeemable convertible preferred stock, partially offset by payments of $0.2 million of offering costs made prior to our IPO that we completed in June 2014.

During the nine months ended September 30, 2014, net cash provided by financing activities was $108.1 million as a result of proceeds of $102.7 million from our IPO, net of underwriting discounts and commissions, of $7.4 million from the issuance of debt and of $0.4 million from issuances of our Series E redeemable convertible preferred stock, partially offset by payments of $2.3 million of offering costs related to our IPO that were paid during the period.

During the year ended December 31, 2011, net cash provided by financing activities was $10.1 million as a result of net proceeds raised from issuances of our Series B redeemable convertible preferred stock and Series C redeemable convertible preferred stock.

During the year ended December 31, 2012, net cash provided by financing activities was $22.1 million. Net cash provided by financing activities primarily resulted from net proceeds of $16.1 million raised from issuances of our Series C redeemable convertible preferred stock and Series D redeemable convertible preferred stock and net proceeds of $6.0 million from the issuance of convertible promissory notes.

During the year ended December 31, 2013, net cash provided by financing activities was $40.6 million as a result of net proceeds of $6.0 million from issuances of our Series D redeemable convertible preferred stock and $34.8 million from issuances of our Series E redeemable convertible preferred stock, partially offset by payments of $0.2 million of offering costs made prior to our IPO that we completed in June 2014.

Beloranib is still in clinical development and ZGN-839 and our second-generation MetAP2 inhibitors are in pre-clinical development. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our expenses will increase substantially if and as we:

 

    advance the clinical development of beloranib as a treatment for obesity and hyperphagia in patients with PWS through Phase 3 clinical trials;

 

    advance the clinical development of beloranib as a treatment for HIAO;

 

    initiate IND-enabling studies and clinical development of ZGN-839 and our second-generation MetAP2 inhibitors through the initiation of Phase 1 clinical development;

 

    advance the clinical development of beloranib as a treatment for severe obesity in the general population through a Phase 2b clinical trial;

 

    seek to identify additional indications for beloranib;

 

    seek to obtain regulatory approvals for our product candidates;

 

    add operational, financial and management information systems;

 

    add personnel, including personnel to support our product development and future commercialization; and

 

    maintain, leverage and expand our intellectual property portfolio.

 

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We expect that our existing cash and cash equivalents as of September 30, 2014, together with the anticipated net proceeds of this offering, and anticipated cash flow will enable us to fund our operating expenses and capital expenditure requirements for at least the next 18 months. We have based this estimate on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development of beloranib, ZGN-839 and our second-generation MetAP2 inhibitors and because the extent to which we may enter into collaborations with third parties for development of these product candidates is unknown, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our future capital requirements for beloranib, ZGN-839 and our second-generation MetAP2 inhibitors will depend on many factors, including:

 

    the costs, timing and outcome of regulatory review;

 

    the costs of future research and development activities, including clinical trials;

 

    the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;

 

    the extent to which we acquire or in-license other products and technologies; and

 

    our ability to establish any future collaboration arrangements on favorable terms, if at all.

Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may require the issuance of warrants, which could potentially dilute your ownership interest. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs of beloranib, ZGN-839 or our second-generation MetAP2 inhibitors or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market beloranib, ZGN-839 or our second-generation MetAP2 inhibitors that we would otherwise prefer to develop and market ourselves.

Since our inception in 2005, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in each year or our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items. As of December 31, 2013, we had federal and state net operating loss carryforwards of $10.5 million and $8.2 million, respectively. Our federal net operating loss carryforwards begin to expire in 2026, and our state net operating loss carryforwards began to expire in 2014. As of December 31, 2013, we also had federal and state research and development tax credit carryforwards of $4.7 million and $1.3 million, respectively, which begin to expire in 2026 and 2021, respectively. We have not completed a study to assess whether an ownership change, generally defined as a greater than 50% change (by value) in the equity ownership of our corporate entity over a three-year period, has occurred or whether there have been multiple ownership changes since our inception, due to the significant costs and complexities associated with such studies. Accordingly, our ability to utilize our tax carryforwards may be limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be utilized against future taxes. As a result, we may not be able to take full advantage of these carryforwards for federal and state tax purposes.

 

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Contractual Obligations and Commitments

The following table summarizes our contractual obligations at September 30, 2014 and the effect such obligations are expected to have on our liquidity and cash flow in future periods:

 

     Payments Due By Period  
     Total      Less Than
1 Year
     1-3 Years      3-5 Years      More Than
5 Years
 

Operating lease commitments(1)

   $ 660       $ 227       $ 433       $ —        $ —    

Debt commitments

     9,216         1,287         6,648         1,281         —    

Licensing milestone fees(2)

     6,700         6,700         —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total(2) (3)

   $ 16,576       $ 8,214       $ 7,081       $ 1,281       $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) We entered into an operating lease for new office space in Boston, Massachusetts on May 15, 2014, effective as of July 28, 2014, with a term expiring on July 31, 2017, and an option to extend the lease for three additional years.
(2) We have acquired exclusive rights to develop patented compounds and related know-how under licensing agreements for beloranib with two third parties. The licensing rights obligate us to make payments to the licensors for license fees, milestones, license maintenance fees and royalties. We are also responsible for patent prosecution costs. We are obligated to make future milestone payments under these agreements of up to $19.0 million, including $6.7 million accrued as of September 30, 2014, upon achieving certain pre-commercialization milestones, such as clinical trials and government approvals, and up to $12.5 million upon achieving certain product commercialization milestones. In addition, under one of the license agreements, we are obligated to pay up to $1.3 million with respect to each subsequent licensed product, if any, that is a new chemical entity. As of September 30, 2014, we recorded a liability of $6.7 million in our consolidated financial statements for milestones achieved under these licensing agreements during September 2014. In addition, we will owe single-digit royalties on sales of commercial products developed using these licensed technologies, if any. We are obligated to pay to the licensors a percentage of fees received if and when we sublicense the technologies. As of September 30, 2014, we have not yet developed a commercial product using the licensed technologies and we have not entered into any sublicense agreements for the technologies.
(3) We enter into contracts in the normal course of business with clinical research organizations for clinical trials, pre-clinical research studies and testing, manufacturing and other services and products for operating purposes. These contracts generally provide for termination upon notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under Securities and Exchange Commission rules, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for the purpose of facilitating financing transactions that are not required to be reflected on our balance sheets.

Recently Issued Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-10, Development Stage Entities. The amendments in this guidance remove all incremental financial reporting requirements for development stage entities. Among other changes, this guidance will no longer require development stage entities to present inception-to-date information about income statement line items, cash flows, and equity transactions. This guidance is effective for public companies in the first annual period beginning after December 15, 2014. Early application is permitted for interim and annual periods for which financial statements have not yet been issued. We elected to early adopt this guidance in the three months ended June 30, 2014 and, as a result, we no longer disclose inception-to-date information in our consolidated statements of operations and comprehensive loss, cash flows and stockholders’ equity (deficit) and the related notes thereto.

 

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In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements — Going Concern. The new guidance addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early adoption is permitted. We are evaluating the effect that this guidance will have on our consolidated financial statements.

Quantitative and Qualitative Disclosure about Market Risk

Interest Rate Fluctuation Risk

Our cash and cash equivalents as of September 30, 2014 consisted of cash and money market accounts. The primary objectives of our investment activities are to preserve principal, provide liquidity and maximize income without significantly increasing risk. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. However, because of the short-term nature of the instruments in our portfolio, a sudden change in market interest rates would not be expected to have a material impact on our financial condition and/or results of operation.

Foreign Currency Exchange Risk

Foreign currency transaction exposure results primarily from transactions with our contract research organizations and other providers related to our clinical trials that are denominated in currencies other than the functional currency of the legal entity in which the transaction is recorded by us, primarily the Australian dollar. Any transaction gains or losses resulting from currency fluctuations is recorded on a separate line in our consolidated statement of operations. Net foreign currency transaction losses of $0.1 million were recorded for the nine months ended September 30, 2014.

Currently, our largest foreign currency exposures are those with respect to the Australian dollar. Relative to foreign currency exposures existing as of September 30, 2014, a 10% unfavorable movement in foreign currency exchange rates would expose us to losses in earnings. For the nine months ended September 30, 2014, we estimated that a 10% unfavorable movement in foreign currency exchange rates would have increased our net loss by $0.1 million. This amount is based on a sensitivity analysis performed on our financial position as of September 30, 2014. We have experienced and we will continue to experience fluctuations in our net income (loss) as a result of revaluing our assets and liabilities that are not denominated in the functional currency of the entity that recorded the asset or liability. At this time, we do not hedge our foreign currency risk.

Changes in Accounting Firm Relationships

We dismissed Edelstein and Company LLP as our independent registered public accounting firm on July 12, 2013, and therefore the firm was not asked to report on our consolidated financial statements for the year ended December 31, 2012. Our board of directors approved our change in accountants. The reports of Edelstein and Company LLP on our consolidated financial statements for the fiscal years ended December 31, 2011 and 2010 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to audit scope, accounting principle or uncertainty, except that the reports of Edelstein and Company LLP included an emphasis of matter regarding the Company’s ability to continue as a going concern. During the fiscal years December 31, 2011 and 2010 and through July 12, 2013 there were no disagreements with Edelstein and Company LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which if not resolved to the satisfaction of Edelstein and Company LLP would have caused Edelstein and Company LLP to make reference thereto in their reports on our consolidated financial statements for such years.

We subsequently engaged PricewaterhouseCoopers LLP, or PwC, as our independent registered public accounting firm in July 2013. Our audit committee of our board of directors approved this engagement. Prior to Edelstein and Company LLP’s dismissal and prior to the appointment of PwC, we did not consult with PwC regarding the application of accounting principles to a specific completed or contemplated transaction or regarding the type of audit opinion that might be rendered on our consolidated financial statements.

 

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BUSINESS

Overview

We are a biopharmaceutical company dedicated to significantly improving the health and well-being of patients affected by obesity and complex metabolic disorders. Beloranib, our lead product candidate, is a novel, first-in-class, twice-weekly subcutaneous injection being developed for the treatment of multiple indications, including severe obesity in two rare diseases, Prader-Willi syndrome, or PWS, and hypothalamic injury-associated obesity, or HIAO, including craniopharyngioma-associated obesity; and severe obesity in the general population.

Obesity is a complex medical disorder involving appetite dysregulation and altered lipid and energy metabolism that results in excessive accumulation of fat tissue. Weight loss and hunger control are urgently needed for certain subpopulations of obese patients, in which obesity is life-threatening and a co-morbidity of an underlying condition such as PWS and HIAO that, while rare, occurs most commonly as a consequence of treatment for craniopharyngioma and other mid-brain tumors. PWS and HIAO are characterized by uncontrollable hunger resulting from damage to or impaired functioning of the hypothalamus, an area of the brain responsible for many functions including the neurophysiological drive to eat.

PWS is a rare and complex genetic disorder characterized by physiologic, cognitive and behavioral symptoms, including hyperphagia, uncontrollable hunger and its related behaviors, and obesity. In January 2014, we completed a Phase 2a clinical trial evaluating beloranib’s ability to reduce body weight and to improve hyperphagia in patients with PWS. In this trial, we observed reductions in body weight, body mass and body fat content and reductions in hyperphagia-related behaviors in patients with PWS. Based on the results of this Phase 2a trial, we initiated our Phase 3 clinical program, which is planned to consist of two Phase 3 clinical trials of beloranib in patients with PWS, with the first Phase 3 trial in the United States having started in September 2014. We expect to report six month data from this U.S. clinical trial in late 2015. We plan to initiate our second Phase 3 clinical trial of beloranib in patients with PWS in the European Union in the middle of 2015, with 12-month data anticipated in late 2016. Beloranib received orphan designation for the treatment of PWS by both the U.S. Food and Drug Administration, or FDA, and the European Commission in January 2013 and July 2014, respectively. We believe that rare conditions such as PWS afford us an opportunity to rapidly develop and commercialize beloranib using smaller, more focused and less costly clinical trials, relative to those required to develop beloranib for the broader severe obesity population.

Published population studies estimate that the prevalence of PWS in the United States and in the European Union ranges from 1 in 8,000 to 1 in 50,000. The physiological drive to eat in patients with PWS is so powerful that they will go to great lengths to eat large quantities of food, even if it is spoiled, indigestible or unpalatable to others. Unsupervised patients will often eat to the point that it causes serious physical harm or death. As a result, caregivers are often forced to place locks and alarms on refrigerators and pantries that contain food. Despite attempts to control the access to food, the typical adult patient with PWS is morbidly obese and, based on our evaluation of published survival data, has an average life expectancy of 32 years of age. Unfortunately, neither dietary intervention nor currently available pharmaceutical therapies bring meaningful benefit to patients with PWS and, as a result, they experience severe and life-threatening consequences of their condition. Furthermore, existing surgical techniques such as bariatric surgery are contraindicated in PWS, as patients with PWS often overeat to a point whereby they can rupture their stomachs, which is frequently a cause of death. Since beloranib works through a novel mechanism that does not appear to require a fully functioning hypothalamic control pathway, we believe that obese patients with conditions in which increased hunger is central to the disease may respond well to treatment with beloranib.

Zafgen was founded in 2005 to explore novel approaches to obesity therapeutics, including agents known to inhibit methionine aminopeptidase 2, or MetAP2, that had been found to drive unprecedented weight loss and metabolic improvements in mice. After performing a wide range of experiments to validate the effects of

 

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MetAP2 inhibitors in validated animal models, we committed the full resources of the company to testing the efficacy and safety of MetAP2 inhibition in obese patients and to establishing the feasibility of MetAP2 inhibitors for eventual commercialization. This effort led to our initiation of medicinal chemistry efforts to identify novel MetAP2 inhibitors, and to search for compounds that were more advanced in clinical development. We identified beloranib as a suitable in-licensing candidate, and, in parallel with preparing beloranib for use in otherwise healthy but obese patients, we conducted our own chemistry program to identify compounds with complementary characteristics. After completing studies to establish preliminary safety, mechanism of action, manufacturing feasibility and clinical proof of concept, we advanced beloranib as a clinical development candidate and explored its application in severely obese patient populations. Our early clinical experience highlighted several key aspects of beloranib’s actions, including rapid and robust weight loss, changes in circulating hormones known to impact fat metabolism, clinically significant reductions in cardiovascular disease risk markers and a particularly striking impact on hunger. These benefits may be of particular relevance to patients suffering from severe obesity and life-limiting obesity driven by other underlying conditions, and for whom existing therapies fail to bring needed benefits.

HIAO is most commonly caused by damage incurred during removal of a central nervous system tumor called craniopharyngioma, but it can also result from less common types of hypothalamic injury such as strokes, brain trauma, or radiation therapy to the brain. We recently completed a Phase 2 clinical trial of beloranib administered twice weekly in 14 patients with HIAO caused by the treatment of craniopharyngioma or pituitary macroadenoma. We observed mean weight loss of 3.4 kg and 6.2 kg in patients with HIAO after four and eight weeks of treatment with beloranib, respectively, in contrast to 0.3 kg mean weight loss in patients treated with placebo for four weeks. Improvements in cardiovascular disease risk factors of lipids and inflammation (measured by C-reactive protein) were also observed. The biomarker and other secondary endpoint results of the trial are expected to become available in the first half of 2015. In 2015, we plan to establish the regulatory path for a registration program with U.S. and European Union regulatory authorities for our HIAO program, and will decide whether to pursue additional clinical trials of beloranib in patients with HIAO following completion of our Phase 3 clinical program of beloranib in patients with PWS. We plan to seek orphan drug designation for the treatment of craniopharyngioma-associated obesity in the United States and European Union.

We are pursuing clinical development of beloranib as a treatment for severely obese patients in the general population, including patients otherwise eligible for bariatric surgery. Bariatric surgery eligibility criteria generally identify surgical candidates as those patients with body mass indices, or BMIs, greater than 40 kg/m2, or those with BMIs over 35 kg/m2 who also have a significant and uncontrolled co-morbid condition. Based on these criteria, it is estimated conservatively that there will be at least 16 million adults in the United States eligible for bariatric surgery by the time beloranib or another MetAP2 inhibitor could become available commercially. Bariatric surgery results in significant weight loss, but the financial expense and the potential for complications, adverse events and longer-term side effects limit its overall adoption, with only a few hundred thousand patients in the United States undergoing bariatric surgery each year. Existing pharmacotherapies result in less weight loss than surgical options, and these therapies not only have undesirable side effects, but also have risk of abuse. Due to the significant barriers associated with bariatric surgery and the limited weight loss potential of currently marketed pharmaceutical products, there is a significant unmet need for the treatment of patients with severe obesity. We believe this patient population would benefit from MetAP2 inhibitor treatment through the reduction of body weight and through improvement of other co-morbid conditions.

In 2013, we completed a 12-week Phase 2a clinical trial of beloranib administered twice weekly in obese patients. We observed placebo-adjusted weight loss of up to 10.3% after 12 weeks of treatment with beloranib. In addition, we observed reductions in levels of low density lipoprotein cholesterol, C-reactive protein and systolic blood pressure. Patients treated with beloranib also reported reduced hunger, as assessed using a visual analog scale, a widely used self-reported measure of hunger and related endpoints. We initiated a Phase 2b clinical trial of beloranib as a treatment for severe obesity in the general population in patients who also have type 2 diabetes in December 2014. We expect to report interim six month data from this clinical trial in late 2015 or early 2016. We are also evaluating additional proprietary MetAP2 inhibitors beyond beloranib as potential development

 

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candidates that would provide increased patient convenience in the form of oral dosing, or an otherwise improved clinical profile. A decision on whether to subsequently advance beloranib into pivotal trials for severe obesity or to leverage the opportunity to advance another MetAP2 inhibitor into early development for severe obesity is anticipated to be made on the basis of results obtained from our Phase 3 clinical trial of beloranib in patients with PWS and discussions with regulatory authorities. MetAP2 inhibitors may also have utility in the treatment of other metabolic diseases, such as nonalcoholic steatohepatitis, or NASH. In a mouse model of diabetes and NASH, our second product candidate, ZGN-839, a MetAP2 inhibitor, reduced the severity of NASH.

Beloranib is a novel, first-in-class injectable small molecule therapy with a unique mechanism of action that reduces hunger while stimulating the use of stored fat as an energy source. Beloranib is the first anti-obesity agent with the potential to address two important abnormalities that are present in the obese patient—hunger that is inappropriate relative to the amount of energy stored as fat and dysregulation of fat metabolism, which causes more fat to be made and stored in an obese patient than in a lean person. Beloranib acts through potent inhibition of MetAP2, an enzyme that modulates the activity of key cellular processes that control metabolism. MetAP2 inhibitors work, at least in part, by directing MetAP2 binding to cellular stress mediators, thereby reducing the tone of signals that drive lipid synthesis by the liver and fat storage throughout the body. In this manner, MetAP2 inhibition serves the purpose of re-establishing balance to the ways the body packages and metabolizes fat and glucose. MetAP2 inhibitors reduce the production of new fatty acid molecules by the liver and help convert stored fats into useful energy, while reducing hunger.

We have completed six clinical trials, including three Phase 2 clinical trials, evaluating beloranib in over 200 patients. Although these clinical trials were of short duration and designed to demonstrate safety and tolerability, significant decreases in both body weight and sense of hunger were observed in patients treated with beloranib when compared to the placebo group. Additional clinical trials of longer-term treatment with beloranib designed to demonstrate efficacy are required before we can submit an NDA for beloranib as a treatment for any indication that we are pursuing. In our ongoing Phase 2b clinical trial of beloranib as a treatment for severe obesity in the general population and our ongoing Phase 3 clinical program of beloranib as a treatment for obesity and hyperphagia patients with PWS, patients are being treated with beloranib for a substantially longer period of time than as treated in our earlier clinical trials. In addition, we observed improvements in cardiovascular disease risk factors such as plasma total cholesterol, low density lipoprotein cholesterol and C-reactive protein. Across our completed clinical trials, beloranib has been well-tolerated at doses in the range of 1.0 mg to 2.0 mg administered twice weekly, and has not been associated with serious side effects. Laboratory safety measures, vital signs and electrocardiograms have been unremarkable in all completed clinical trials for all doses of beloranib tested.

 

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Product Pipeline

The following table summarizes our product pipeline and development status of our product candidates for the treatment of indications we are currently pursuing:

 

Indication

   Product Candidate      Stage of
Development
  

Development Status

Obesity and hyperphagia in patients with PWS

     Beloranib       Phase 3   

•  Phase 2a clinical trial completed

 

•  Phase 3 clinical trial of beloranib in patients with PWS began in the United States in September 2014, with six month data anticipated in late 2015

 

•  Phase 3 clinical trial of beloranib in patients with PWS in the European Union expected to begin in the middle of 2015, with 12-month data anticipated in late 2016

HIAO

     Beloranib       Phase 2   

•  Phase 2 clinical trial recently completed

Severe obesity in the

general population

     Beloranib       Phase 2b   

•  Phase 2a clinical trial completed

 

•  Phase 2b clinical trial began in December 2014 with interim six month data anticipated in late 2015 or early 2016

 

•  Advancement into pivotal trials under consideration

      
 
Second-generation
MetAP2 inhibitors
  
  
   Pre-clinical   

•  Development candidates under consideration

Nonalcoholic steatohepatitis, or NASH, nonalcoholic fatty liver disease and abdominal obesity      ZGN-839        Pre-clinical   

•  Pre-clinical studies ongoing

 

•  Investigational New Drug Application, or IND, filing anticipated by the middle of 2015

Populations of Interest

Obesity Caused by Rare Conditions

Obesity is a complex medical disorder involving appetite dysregulation and altered lipid and energy metabolism that results in excessive accumulation of fat tissue. We initially plan to develop beloranib for the treatment of subpopulations of obese patients, including those with rare conditions such as PWS and HIAO, where obesity is a co-morbidity of an underlying condition. These conditions frequently are characterized by increased and life-threatening hunger that occurs secondary to damage to the hypothalamus, genetic conditions affecting embryological development or function of the hypothalamus, or conditions that occur as a result of certain drug side effects, radiation therapy, or other impairments to the normal function of the hypothalamus. Regardless of the causative agent or condition, the resultant damage to the hypothalamus impairs its normal function, including the ability to modulate hunger. These conditions are most often associated with a severe and life-limiting form of obesity and neither dietary interventions nor currently available pharmaceutical therapies bring meaningful benefit to these patients, for whom bariatric surgery is generally contra-indicated. Based on results from animal experiments in which compromised hypothalamic function caused hunger and obesity, we believe that beloranib may have utility in the treatment of severe obesity and hyperphagia, or insatiable life-threatening hunger and hunger-related behavior, in human disease settings in which hypothalamic food intake control centers are compromised. We are developing beloranib in these subpopulations of patients as a treatment for obesity and hyperphagia in patients with PWS and HIAO, and are continuing to explore the use of beloranib as a treatment for severe obesity in the general population.

 

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PWS

PWS is the most common known genetic cause of life-threatening obesity. PWS is a rare and complex non-inherited genetic disorder, which results from abnormalities of the fifteenth chromosome. Symptoms associated with PWS are believed to result, in part, from a defect in the hypothalamus, an important supervisory center in the brain that controls many important bodily functions, such as hunger, metabolism of fats and carbohydrates, regulation of the sleep-wake cycle and expression of emotions.

Beginning in childhood, the brain of a patient with PWS fails to regulate metabolism and appetite normally. As a result, the vast majority of patients with PWS suffer from hyperphagia and obesity. Patients with PWS are constantly preoccupied with food and an unrelenting and overriding physiological drive to eat. Hyperphagia, a leading symptom of PWS, has a significant negative impact on the patients’ quality of life as well as drives obesity and a range of associated co-morbidities. Normal satiety, or the feeling of fullness after eating, does not exist in a person with PWS. The physiological drive to eat is so powerful and overwhelming that most patients with PWS will go to great lengths to eat large quantities of food, even if it is spoiled, indigestible, or unpalatable to others. Furthermore, patients with PWS have a reduced propensity for nausea and vomiting. In addition to obesity, a variety of other symptoms can be associated with PWS, including cognitive challenges, intellectual disabilities, growth hormone deficiency/short stature, low sensitivity to pain, hypersomnolence, or excessive sleepiness, and infertility due to hypogonadism, or insufficient production of sex hormones.

Hyperphagia impairs a patient with PWS’s ability to live independently, requiring costly and constant supervision to prevent overeating. Without supervision, patients with PWS are likely to die prematurely as a result of choking, stomach rupture or tissue necrosis, or from complications caused by morbid obesity, such as right heart failure and respiratory failure. Based on our evaluation of published survival data, the average life expectancy of patients with PWS is approximately 32 years of age. While a small number of patients with PWS are cared for in costly group homes, the majority of patients with PWS are cared for in their homes and their families undertake substantial effort to create physical barriers to eating. These efforts result in extremely stressful environments as caregivers often place locks and alarms on cabinets and refrigerators that contain food to impede a patient with PWS’s efforts to obtain food at all times. We estimate the typical annual cost of treating a patient with PWS is $100,000 to $200,000, excluding the often significant costs of drug therapies related to other medical and psychological conditions, and the costs of any lost time from work experienced by their families due to responsibilities related to the care of a patient with PWS.

Published population studies estimate that the prevalence of PWS in the United States and in the European Union ranges from 1 in 8,000 to 1 in 50,000. PWS is diagnosed at an early age, typically in the first year of life, and we believe that, due to the severity of the condition and its unique attributes, the vast majority of patients affected by PWS are diagnosed. We believe that approximately 40-50% of patients with PWS are 12 years of age or older. We believe that further information regarding the prevalence of PWS will become available through a patient registry that is currently being developed by the Foundation for Prader-Willi Research.

Although there are pharmacological treatments for various symptoms of PWS, such as replacement of human growth hormone in patients with PWS that are deficient in growth hormone, based on our discussions with physicians who treat patients with PWS, there are currently no effective pharmacological treatments for obesity and hyperphagia in PWS. Furthermore, bariatric surgery is contraindicated in patients with PWS due to poor outcomes related to an increased risk of rupture of the reduced stomach in the setting of sleeve gastrectomy or gastric bypass procedures, or rupture of the restricted esophagus in the setting of gastric banding procedures with the consequence of life-threatening gastric perforation. Apart from restricted access to food and constant supervision to prevent both life-threatening overeating and morbid obesity, there is currently no treatment for obesity and hyperphagia in patients with PWS. In January 2014, we completed a Phase 2a clinical trial evaluating beloranib’s ability to reduce body weight and to improve hyperphagia in patients with PWS. In this clinical trial, we observed reductions in body weight, body mass, body fat content and hyperphagia-related behaviors in patients with PWS treated with beloranib. Based on the results of this Phase 2a trial, we initiated our Phase 3 clinical program, which is planned to consist of two Phase 3 clinical trials, of beloranib in patients with PWS,

 

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with the first Phase 3 trial in the United States having started in September 2014. We expect to report six month data from this U.S. clinical trial in late 2015. We plan to initiate our second Phase 3 clinical trial of beloranib in patients with PWS in the European Union in the middle of 2015, with 12-month data anticipated in late 2016.

In January 2013 and July 2014, the FDA and European Commission, respectively, granted orphan designation for our application to treat PWS with beloranib. Orphan drug designation provides for seven years of marketing exclusivity in the United States and ten years of marketing exclusivity in the European Union.

HIAO

HIAO is most commonly caused by damage incurred during removal of a central nervous system tumor called craniopharyngioma, but it can also result from less common types of hypothalamic injury such as strokes, brain trauma, or radiation therapy to the brain. Approximately 30% to 50% of cases of craniopharyngioma are diagnosed in childhood and adolescence. Manifestations of craniopharyngioma include visual disturbances, headaches and impairment to the hypothalamus-pituitary axis affecting hormone secretion. Treatment of these tumors commonly involves radical surgical removal of the tumor mass by endoscopy or craniotomy, followed by radiation treatment, which results in disruption or removal of neighboring structures including the hypothalamus. Depending on the degree of damage to the hypothalamus caused by tumor removal and subsequent radiation, there may be greater variation in hyperphagia and obesity prevalence in patients with craniopharyngioma than patients with PWS. Post-treatment hypothalamic dysfunction results in hyperphagia in approximately 50% of these patients, resulting in obesity and a worsened quality of life.

Craniopharyngioma is a rare form of benign brain tumor that occurs most commonly during childhood and infiltrates near the optic nerve, pituitary gland and the hypothalamus. Published population studies estimate that the incidence of craniopharyngioma is 0.13 to 0.17 per 100,000 per year, or approximately 400 to 500 cases per year in the United States and 650 to 850 cases per year in the European Union. We believe patients with craniopharyngioma-associated obesity have a longer life expectancy than patients with PWS, which contributes to an increased risk of developing obesity-related co-morbid conditions such as type 2 diabetes in such patients.

Currently available therapeutic agents fail to provide satisfactory management of weight or hyperphagia in patients with HIAO, and bariatric surgery is not frequently employed in this patient population. We believe this is related to perceived risks of surgical interventions in this population including increased risk of post-surgical complications and minimal impact on the underlying problems of low metabolic rate and hyperphagia.

We plan to seek orphan drug designation for the treatment of craniopharyngioma-associated obesity in the United States and the European Union. We recently completed a Phase 2 clinical trial of beloranib administered twice weekly in 14 patients with HIAO caused by the treatment of craniopharyngioma or pituitary macroadenoma. We observed mean weight loss of 3.4 kg and 6.2 kg in patients with HIAO after four and eight weeks of treatment with beloranib, respectively, in contrast to 0.3 kg mean weight loss in patients treated with placebo for four weeks. Improvements in cardiovascular disease risk factors of lipids and inflammation (measured by C-reactive protein) were also observed. The biomarker and other secondary endpoint results of the trial are expected to become available in the first half of 2015. In 2015, we plan to establish the regulatory path for a registration program with U.S. and European Union regulatory authorities for our HIAO program, and will decide whether to pursue additional clinical trials of beloranib in patients with HIAO following completion of our Phase 3 clinical program of beloranib in patients with PWS. We plan to seek orphan drug designation for the treatment of craniopharyngioma-associated obesity in the United States and European Union.

Severe Obesity in the General Population

Our long-term intention is to pursue clinical development of beloranib or another MetAP2 inhibitor as a treatment for severely obese patients in the general population. We believe this patient population would benefit from MetAP2 inhibitor treatment through the reduction of body weight and through improvement of severity or

 

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symptoms of other co-morbid conditions. We believe that MetAP2 inhibitors have the potential to offer this patient population, most of which is not adequately responsive to available therapies, substantial health and quality of life benefits.

The most effective current treatment for severe obesity is bariatric surgery, including procedures such as the Roux-en-Y gastric bypass, adjustable gastric banding, sleeve gastrectomy and biliopancreatic diversion. Bariatric surgery produces dramatic and sustained weight loss, ranging on average from 20% to 35% one year post-procedure and reduces overall mortality, but it can result in numerous complications and adverse events including thrombotic events, such as pulmonary embolism, infection, internal bleeding, pulmonary disease and gastrointestinal obstruction, which sometimes require reoperation during the post-operative period. Longer-term side effects of bariatric surgery, such as poor nutrient absorption, strictures and hernias, have also been observed.

Bariatric surgery eligibility criteria generally identify surgical candidates as those patients with BMIs, greater than 40 kg/m2, or those with BMIs over 35 kg/m2 who also have a significant and uncontrolled co-morbid condition. Based on these criteria, it is estimated conservatively that there will be at least 16 million adults in the United States eligible for bariatric surgery by the time beloranib or another MetAP2 inhibitor could become available commercially. In addition to the BMI and co-morbidity eligibility criteria, patients need to satisfy a number of other criteria in order to have bariatric surgery; a severely obese patient must not have any known endocrine causes of obesity, a drug or alcohol problem, or an uncontrolled psychological condition, and must understand and appreciate the risks of the surgical intervention. According to the American Society for Metabolic & Bariatric Surgery and to HealthGrades, the average cost of bariatric surgery in the United States is approximately $22,000-$38,000. As a result of these limiting criteria and the financial commitments required, only a few hundred thousand patients undergo bariatric surgery each year even though over 16 million patients in the United States are eligible for the surgery based on BMI alone.

The pharmaceutical industry has undertaken several waves of activity to discover and develop new drugs for the treatment of obesity. Relative to bariatric surgery, pharmaceutical treatments have produced modest efficacy. In addition, existing pharmacotherapeutics for obesity often have undesirable adverse event profiles.

 

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The following table summarizes information from pivotal trials supporting registration for the current pharmacological treatments for severe obesity and the key limitations of these treatments, and unless specified otherwise in the table below, weight loss data is based on one year or longer treatment with the drug:

 

Treatment

  

% Placebo-Adjusted
Weight Loss*

  

Key Limitations**

Phentermine

   3.8-4.4% over 6 months   

•   Short-term use only

 

•   Cannot be used in pregnant women

 

Xenical®/ alli

   2-5%   

•   Unpleasant gastrointestinal side effects related to dietary fat malabsorption

 

Qsymia®

  

6.6% at target dose of 7.5mg/46 mg

8.6% at high dose of 15mg/92mg

 

  

•   Known human teratogen – cannot be used in women unless contraception can be assured

Belviq®

   3.0-3.3%   

•   Should not be taken during pregnancy or by women who are planning to become pregnant

 

Saxenda®

   3.7-4.5%   

•   Should not be used in patients with a personal or family history of medullary thyroid carcinoma or in patients with multiple endocrine neoplasia syndrome type 2

 

•   Serious side effects include pancreatitis, gallbladder disease, renal impairment, and suicidal thoughts

 

•   Can also raise heart rate and should be discontinued in patients who experience a sustained increase in resting heart rate

 

* Placebo-adjusted weight loss refers to the difference in mean weight loss observed in drug-treated patients and the weight change within the same trial observed in placebo-treated patients. This analysis takes into account, at least in part, the impact of diet and lifestyle interventions employed in drug registration trials.
** Some patients in our clinical trials of beloranib have reported gastrointestinal side effects, such as nausea, diarrhea or vomiting as well as sleep disturbance. In addition, beloranib will likely carry a Category X label and therefore be contraindicated in pregnant women or women looking to become pregnant.

In 2013, we completed a 12-week Phase 2a clinical trial of beloranib administered twice weekly in obese patients. We observed placebo-adjusted weight loss, or weight loss observed beyond that seen in the control arm, of up to 10.3% after 12 weeks of treatment with beloranib. In addition, we observed reductions in levels of low density lipoprotein cholesterol, C-reactive protein and systolic blood pressure. Patients treated with beloranib also reported reduced hunger, as assessed using a visual analog scale, a widely used self-reported measure of hunger and related endpoints. We initiated a Phase 2b clinical trial of beloranib as a treatment for severe obesity in the general population in patients who also have type 2 diabetes in December 2014. We expect to report interim six month data from this clinical trial in late 2015 or early 2016. We are also evaluating additional proprietary MetAP2 inhibitors beyond beloranib as potential development candidates that would provide increased patient convenience in the form of oral dosing, or an otherwise improved clinical profile. A decision on whether to subsequently advance beloranib into pivotal trials for severe obesity or to leverage the opportunity to advance another MetAP2 inhibitor into early development for severe obesity is anticipated to be made on the basis of results obtained from our Phase 3 clinical program of beloranib in patients with PWS and discussions with regulatory authorities. Future clinical development may address the impact of beloranib or a related drug on type 2 diabetes and other common co-morbid conditions associated with obesity.

 

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Our Strategy

Our objective is to be a leader in the discovery, development and commercialization of novel therapies to significantly improve the health and well-being of patients affected by obesity and complex metabolic disorders. Key elements of our strategy include:

 

    Advance the clinical development of beloranib in subpopulations of obese patients, including those with rare conditions, where obesity is a co-morbidity of an underlying condition. Diseases in this category include PWS, HIAO and monogenic loss of function mutations, including leptin deficiency and melanocortin receptor subclass 4 mutations. We believe that rare conditions such as PWS and HIAO afford us an opportunity to rapidly develop and commercialize beloranib using smaller, more focused and less costly clinical trials, relative to those required to develop beloranib for the broader severe obesity population. Beloranib exerts its weight loss effects using a novel mechanism that does not appear to require fully functioning hypothalamic control pathways. We believe this mechanism is well-suited for patients with obesity that is caused by the failure of hypothalamic food intake control mechanisms, in particular the control of insatiable life-threatening hunger and hunger-related behavior, or hyperphagia. In January 2014, we completed a Phase 2a clinical trial of beloranib as a treatment for obesity and hyperphagia in patients with PWS, the most common known genetic cause of life-threatening obesity. In this clinical trial, we observed reductions in body weight, body mass, body fat content and hyperphagia-related behaviors in patients with PWS treated with beloranib. Based on the results of this Phase 2a trial, we initiated our Phase 3 clinical program, which is planned to consist of two Phase 3 clinical trials of beloranib in patients with PWS, with the first Phase 3 trial in the United States having started in September 2014. We expect to report six month data from this U.S. clinical trial in late 2015. We plan to initiate our second Phase 3 clinical trial of beloranib in patients with PWS in the European Union in the middle of 2015, with 12-month data anticipated in late 2016. We recently completed a Phase 2 clinical trial of beloranib administered twice weekly in 14 patients with HIAO caused by the treatment of craniopharyngioma or pituitary macroadenoma. We observed mean weight loss of 3.4 kg and 6.2 kg in patients with HIAO after four and eight weeks of treatment with beloranib, respectively, in contrast to 0.3 kg mean weight loss in patients treated with placebo for four weeks. In 2015, we plan to establish the regulatory path for a registration program with U.S. and European Union regulatory authorities for our HIAO program, and will decide whether to pursue additional clinical trials of beloranib in patients with HIAO following completion of our Phase 3 clinical program of beloranib in patients with PWS.

 

    Advance the clinical development of MetAP2 inhibitors for the treatment of severely obese patients in the general population, including those who are candidates for bariatric surgery. We believe the severely obese patient population would benefit from MetAP2 inhibitor treatment through the reduction of body weight and through improvement of other co-morbid conditions. Bariatric surgery results in significant weight loss, but the financial expense and the potential for complications, adverse events and longer-term side effects limit its overall adoption, with only a few hundred thousand patients in the United States undergoing bariatric surgery each year. Existing pharmacotherapies result in less weight loss than surgical options, and these therapies not only have undesirable side effects, but also have risk of abuse. We completed a 12-week Phase 2a clinical trial of beloranib administered twice weekly in obese patients. We observed placebo-adjusted weight loss of up 10.3% after 12 weeks of treatment with beloranib in addition to reductions in levels of low density lipoprotein cholesterol, C-reactive protein and systolic blood pressure. We initiated a Phase 2b clinical trial of beloranib as a treatment for severe obesity in the general population in patients who also have type 2 diabetes in December 2014. We expect to report interim six month data from this clinical trial in late 2015 or early 2016. A decision on whether to subsequently advance beloranib into pivotal trials for severe obesity or to leverage the opportunity to advance another MetAP2 inhibitor into early development for severe obesity is anticipated to be made on the basis of results obtained from our Phase 3 clinical program of beloranib in patients with PWS and discussions with regulatory authorities.

 

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    Leverage the knowledge of our experienced team of drug developers that have deep expertise in the field of obesity, the function of MetAP2 inhibitors and metabolic diseases. Our management team has deep expertise in obesity and related metabolic diseases, the function of MetAP2 inhibitors, the strengths and weaknesses of current treatments for obesity and the ability to recognize the potential of novel therapies for the treatment of obesity. Our team is complemented by highly experienced external consultants and collaborators in the areas of drug discovery, development and regulatory approval.

 

    Maintain flexibility in commercializing and maximizing the value of our development programs. While we intend to develop and commercialize beloranib for indications such as PWS and other rare conditions causing obesity, we may enter into strategic relationships with biotechnology or pharmaceutical companies to realize the full value of beloranib or our other earlier-stage development programs. For beloranib, we may enter into one or more strategic relationships to access broader geographic markets or additional indications. These relationships could focus on specific patient populations and their caregivers, on regional development, or on distribution and sales of beloranib.

 

    Development of other potential product candidates. We have a second program focused on the delivery of MetAP2 inhibitors with targeted tissue distribution that shows early promise in animal models of NASH, nonalcoholic fatty liver disease and abdominal obesity. Our lead MetAP2 inhibitor in this class of molecules is called ZGN-839. We plan to advance multiple candidate drugs into early development to establish clinical proof of concept, safety and tolerability of these molecules as a way to leverage our internal know-how in metabolic diseases and the effects of MetAP2 inhibitors. These compounds, typified by ZGN-839, could provide additional short-term value to our company through focused development partnerships and collaborations.

Mechanism of Action

Beloranib is a novel, first-in-class injectable small molecule therapy with a unique mechanism of action that reduces hunger while stimulating the use of stored fat as an energy source. Beloranib is the first new anti-obesity agent with the potential to address two important abnormalities that are present in the obese patient—hunger that is inappropriate relative to the amount of energy stored as fat and dysregulation of fat metabolism, which causes more fat to be made and stored in an obese patient than in a lean person.

Beloranib is a potent inhibitor of MetAP2, an enzyme that modulates the activity of key cellular processes that control metabolism. MetAP2 inhibitors work, at least in part, by directing MetAP2 binding to cellular stress mediators, and, thus, reducing fat synthesis by the liver and fat storage throughout the body. In this manner, MetAP2 inhibition increases metabolism of fats as an energy source. MetAP2 inhibitors also reduce hunger and food intake by novel mechanisms that require further study to be fully understood.

Beloranib was evaluated for its potential for treating obesity following publication of studies in the Proceedings of the National Academy of Sciences in 2002 showing anti-obesity efficacy in animals treated with a prototype MetAP2 inhibitor. These studies showed that MetAP2 inhibitor treatment was associated with loss of fat tissue accompanied by an increase in fat oxidation, indicating a redirection of fuel usage toward utilization of stored fats as a source of energy. Reduced food intake also was observed in treated animals, suggesting either direct effects of the agent on central feeding regulation or activation of a feedback loop linking the release and oxidation of stored fat to appetite.

The MetAP2 inhibitor fumagillin, a structural analog of beloranib, was shown in 2004 to induce a novel protein-protein interaction involving MetAP2 and extracellular-signal-regulated kinase 1, or ERK1, a cell stress- and growth factor-stimulated kinase. This complex reduces the activation state of ERK1. A 2005 publication in Diabetes showed that animals lacking ERK1 resist both high fat diet-induced obesity and insulin resistance, supporting the hypothesis that attenuation of ERK activity could be an important component of the beneficial metabolic effects of MetAP2 inhibitor treatment. Several hormones well-documented to be involved in energy metabolism are affected by beloranib, including leptin, adiponectin and fibroblast growth factor-21. These

 

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hormones are thought to contribute to the weight-reducing effects of beloranib and also are known to be involved in control of body weight, fat metabolism and glucose metabolism. This series of mechanistic effects leads to rapid and sustained reduction of excess body weight with beloranib treatment, such as has been observed in animal studies and our clinical trial experience to date.

Our clinical experience to date shows that beloranib treatment is also associated with improvements in cardiovascular disease risk factors such as plasma total cholesterol, high density lipoprotein cholesterol, or HDL, and C-reactive protein, or CRP. Plasma total cholesterol, HDL, CRP, and systolic blood pressure are considered to be the most rigorous systemic biomarkers of cardiovascular disease risk. Our clinical experience to date with beloranib suggests that its use is not associated with an increase in blood pressure or heart rate, which makes it particularly relevant to severely obese patients, in whom a broad spectrum of elevated cardiovascular risk factors often is seen.

An illustration of the MetAP2 inhibitor mechanism of action and therapeutic effects follows:

 

LOGO

Clinical Trials

Beloranib was initially formulated for intravenous administration to facilitate early clinical efforts. Our clinical program has been oriented to first establish whether beloranib would lead to weight loss at tolerated and safe doses, and then to transition to the more convenient subcutaneous injection method of administration for development in our indications of interest, including PWS, HIAO and severe obesity.

We have completed six clinical trials evaluating beloranib in over 200 patients. Our first three clinical trials, ZAF-001, ZAF-003 and ZAF-101, established a working dose range for beloranib above 0.65 mg and below 3 mg. To further explore the efficacy, safety, tolerability and impact of beloranib on severe obesity, we conducted ZAF-201, a 12-week clinical trial of beloranib administered twice weekly to 124 obese patients at doses of 0.6 mg, 1.2 mg, and 2.4 mg. This placebo-controlled, double-blinded trial, established that the efficacy of beloranib continued beyond four weeks and was associated with sustained impact on key biomarkers of effect.

These clinical trials set the stage for continued evaluation of beloranib, by subcutaneous administration, in patients with PWS and HIAO. ZAF-211 was a placebo-controlled, double-blinded trial evaluating safety and tolerability as well as the effects of 1.2 mg or 1.8 mg doses of beloranib in patients with PWS on body weight, body composition and hyperphagia-related behaviors. ZAF-221 was a randomized, double-blind placebo-controlled trial comparing the effects of a 1.8 mg dose of beloranib versus placebo on body weight, body composition and hunger and related parameters in patients with HIAO.

 

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The table below summarizes the structure of and key findings from these five clinical trials of beloranib.

 

Trial
Number

  

Brief Description

  

Treatment
Duration

  

BMI
Range
of
Patients
(kg/m2)

  

Observations

ZAF-001 Phase 1b   

•  Randomized, double-blind, placebo-controlled trial

 

•  Escalating doses of 0.1 mg/m2, 0.3 mg/m2, and 0.9 mg/m2, or approx. 0.2 mg, 0.6 mg, and 2 mg

 

•  1-hour intravenous infusion twice weekly

   4 weeks    32-45   

•  Dose dependent weight reductions with 0.9 mg/m2 twice weekly resulting in -3.6 kg weight loss versus -1.2 kg change with placebo over 4 weeks

 

•  Metabolic benefits (C-reactive protein and metabolic hormones) observed in dose dependent fashion

 

•  Safe and well tolerated at all dose levels

ZAF-003 Phase 1b   

•  Randomized, double-blind, placebo-controlled trial

 

•  Static dosing scheme of 3.0 mg, 6.0 mg, and 2.5 mg

 

•  1-hour intravenous infusion

 

•  3.0 mg and 6.0 mg doses given twice weekly for 4 weeks

 

•  2.5 mg dose given twice weekly for the first week and once weekly for the subsequent 6 weeks.

   4 weeks or 7 weeks    30-50   

•  Dose dependent weight reductions with 6.0 mg dose resulting in -6.7 kg weight loss, 3.0 mg in -4.7 kg, and placebo in -0.3 kg over 4 weeks

 

•  Once weekly 2.5 mg dose resulted in weight loss of -3.1 kg over 7 weeks and with greater variability

 

•  6.0 mg not very well tolerated with gastrointestinal side effects and sleep disturbance emerging as dose limiting adverse effects; Doses of 3.0 mg or lower were well tolerated and effective

 

•  Once-weekly regimen was less effective than bi-weekly administration

ZAF-101

Phase 1b

  

•  Randomized, double-blind, placebo-controlled trial

 

•  1.0 mg, 2.0 mg, and 4.0 mg were evaluated

 

•  Subcutaneous injection twice weekly

   4 weeks    30-45   

•  Significant weight reduction with all doses; 4.0 mg dose resulting in -6.1 kg, 2.0 mg in -4.2 kg, 1.0 mg in -4.3 kg, and placebo in -1.2 kg

 

•  Comparable metabolic benefits observed as in prior trials, including body composition improvements; sense of hunger reduced with all doses

 

•  4.0 mg not as well tolerated with similar adverse event profiles as with 6.0 mg intravenous dose in ZAF-003 – mainly gastrointestinal side effects and sleep disturbances; injection site adverse events unremarkable

ZAF-201 Phase 2a   

•  Randomized, placebo controlled, double-blinded, parallel design trial

 

•  Fixed beloranib doses including 0.3 mg, 0.6 mg, 1.2 mg, 2.4 mg, and 3.2 mg or placebo

 

•  Subcutaneous injections twice weekly

   12 weeks    30-50   

•  0.3 mg not effective, 3.2 mg not well tolerated; both doses eliminated after first 2-4 weeks of dosing (pre-defined)

 

•  Progressive and dose dependent weight reduction; -10.9 kg in the 2.4 mg group, -6.9 kg in the 1.2 mg group, -5.5 kg in the 0.6 mg group, versus -0.4 kg in placebo

 

•  Comparable metabolic and body composition benefits observed as with prior studies

 

•  Most adverse events, including sleep disturbances, mild-moderate and transient

 

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ZAF-211 Phase 2a   

•  Randomized, double-blind, placebo-controlled parallel design trial

 

•  1.2 mg and 1.8 mg doses of beloranib or placebo in patients with PWS

 

•  Subcutaneous injections twice weekly

   4 weeks    26-44   

•  Trend toward reduction in body weight measured by scale weight; -1.27% in beloranib-treated patients (pooled analysis of 1.2 and 1.8 mg treatment groups) versus +0.34% change in placebo-treated patients

 

•  Reduction in body mass assessed by dual-energy x-ray absorptiometry (DEXA); -2.1% in beloranib-treated patients versus +2.0% change in placebo-treated patients

 

•  Reduction in total fat mass assessed by DEXA; -2.9% in beloranib-treated patients versus +3.6% change in placebo-treated patients

 

•  Reduction in hyperphagia related behaviors (at 1.8 mg dose level only).

ZAF-221

Phase 2a

  

•  Randomized, double-blind, placebo-controlled design trial

 

•  1.8 mg dose of beloranib or placebo in patients with HIAO

 

•  Subcutaneous injections twice weekly

   4 weeks    30-55   

•  Significant weight reduction with 1.8 mg beloranib resulting in -3.4 kg vs. -0.3 kg in placebo

 

•  Safe and well tolerated at all dose levels

Across all our clinical trials, beloranib has been well-tolerated at doses we would expect to explore in the future. There have been no serious adverse events, or SAEs, attributed to beloranib in our clinical trials. The main adverse events, or AEs, including those leading to drop-outs, in patients dosed with beloranib have been sleep disturbances, principally manifested as delayed onset of sleep, nausea and vomiting. For certain of our clinical trials, we performed statistical analysis of our results and report the p-value, which is a statistical calculation that relates to the probability that a difference between groups happened by chance, with a p-value of less than 0.05 (i.e., less than 5% probability that the difference happened by chance) generally being used as the threshold to indicate statistical significance. We expect that the FDA will perform its own independent statistical analyses to determine if our data support regulatory approval. Each of our clinical trials is discussed in more detail below.

Phase 1b Clinical Trials

ZAF-001—A Randomized, Double-Blind, Placebo-Controlled Multiple Dose Study, to Assess Safety, Tolerability, Pharmacokinetics and Pharmacodynamics of ZGN-433 (Beloranib for Intravenous Infusion) in Obese Volunteers

ZAF-001 was a four-week double-blind, placebo controlled, dose escalation and multiple dose trial conducted in Australia. The primary clinical endpoints of this clinical trial were safety, tolerability, pharmacokinetics and pharmacodynamics of beloranib administered by intravenous administration. 31 Caucasian female patients, with an average age of 52.2 years and BMI range of 32-45 kg/m2, were enrolled in this clinical trial. 22 patients received beloranib and nine patients received placebo. The patients were divided into three different cohorts, with each cohort receiving 0.10 mg/m2, 0.30 mg/m2, or 0.90 mg/m2 of beloranib or placebo via intravenous infusion twice weekly for four weeks. The primary objectives of this clinical trial were to (i) evaluate the safety and tolerability of beloranib in obese patients and (ii) determine the plasma pharmacokinetics and pharmacodynamics of beloranib in obese patients. A secondary objective was to obtain information on weight loss in obese patients exposed to beloranib for eight intravenous doses over a one-month period. A total of 26 of the 31 enrolled patients completed this clinical trial as planned, receiving all eight infusions of study drug. Three placebo patients and two beloranib-treated patients withdrew from this clinical trial because of loss of venous access and other reasons unrelated to drug treatment.

 

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The key results of this clinical trial are summarized for the Per Protocol population, patients completing the full dosing period and receiving a minimum of six doses, as follows:

4-week Phase 1b Proof of Concept Clinical Trial in Obese Patients (ZAF-001)

 

Trial Arm

   Number of
Patients Per
Protocol
   Baseline Body
Weight (kg)
   Average
Weight
Change (kg)
   p-value*

Placebo

   6    96.0    -1.2    —  

Beloranib 0.1 mg/m2

   6    105.3    -0.9    —  

Beloranib 0.3 mg/m2

   6    100.3    -1.3    —  

Beloranib 0.9 mg/m2

   8    104.2    -3.6    —  

 

* statistical analysis was not performed in this proof of concept trial

 

    Post hoc analyses suggested that beloranib had favorable effects on other parameters, including body fat content, C-reactive protein, low density lipoprotein cholesterol and hunger.

There were no drug-related SAEs or treatment emergent adverse events, or TEAEs. Headaches and gastrointestinal symptoms were the most common TEAEs in all groups including placebo and tended to be mild in intensity and transient. Contusions or bruising which occurred at infusion sites, often due to difficulty in IV access, were reported. There were no clinically significant changes reported as TEAEs in hematology, serum chemistry or urinalysis values for any of the patients in any of the dose groups. The objectives of this clinical trial were met. Weight loss was a secondary clinical endpoint and was not subjected to statistical analysis.

ZAF-003—Phase 1b Trial of Beloranib, a Novel Methionine Aminopeptidase 2 (MetAP-2) Inhibitor for Treatment of Extreme Obesity: Randomized, Double-Blind, Placebo-Controlled, Escalating Doses in Female Volunteers

ZAF-003 was a double-blind, placebo controlled, dose escalation and multiple dose trial conducted in Australia. A static dosing scheme of 3.0 mg, 6.0 mg, and 2.5 mg was evaluated and all doses were administered via 1-hour intravenous infusion, with 3.0 mg and 6.0 mg doses given twice weekly for four weeks, and the 2.5 mg dose given twice weekly for the first week and once weekly for the subsequent six weeks for total of seven weeks of treatment. Patients who qualified after the screening round were randomized 2:1 to treatment with beloranib or placebo. 25 obese female patients were enrolled, and 22 patients completed this clinical trial. Three patients withdrew from this clinical trial, two from the 6.0 mg treatment group, due to tolerability limitations and one from the 2.5 mg treatment group due to an adverse event deemed not to be related to study drug. 92% of the patients were Caucasian, 4% of the patients were Asian and 4% of the patients were Pacific Islanders. The average ages were between 44.0 and 51.3 years for the various treatment groups. The primary objective of this clinical trial was to demonstrate safe doses of intravenous infusion of beloranib for reduction of body weight in female obese patients with baseline BMIs ranging from 30 to 50 kg/m2. The secondary objectives of this clinical trial were to (i) confirm the safety profile of beloranib in obese female patients receiving incrementally larger fixed doses than the dose regimen previously tested in ZAF-001, (ii) evaluate the tolerance, weight loss and ease of administration for continuing a safe dose of beloranib on a weekly schedule, (ii) correlate higher dose levels of beloranib with measures of reduction in body weight and hunger, (iii) confirm the pharmacokinetic profile of beloranib, and (iv) correlate exposure of beloranib with changes in biomarkers for fasting plasma lipids, lipid metabolism, fasting insulin and thyroid function.

 

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The key results of this clinical trial are summarized for the Per Protocol population, patients completing the full dosing period and receiving a minimum of six doses, as follows:

4-week Phase 1b Proof of Concept Clinical Trial in Obese Patients (ZAF-003)

 

Trial Arm

   Number of
Patients Per
Protocol
   Baseline Body
Weight (kg)
   Average
Weight
Change (kg)
   p-value*

Placebo

   8    104.6    -0.1    —  

Beloranib 3.0 mg twice weekly

   6    102.3    -4.7    —  

Beloranib 6.0 mg twice weekly

   3    105.5    -6.7    —  

Beloranib 2.5 mg once weekly

   5    94.0    -2.7    —  

 

* statistical analysis was not performed in this proof of concept trial

 

    Post hoc analyses suggested that beloranib had favorable effects on other parameters, including body fat content, C-reactive protein, low density lipoprotein cholesterol and hunger.

The primary and secondary objectives of this clinical trial were met, showing the maximally tolerated dose of 3.0 mg of beloranib administered by intravenous infusion was identified, weight loss was uniformly observed at both 3.0 mg and 6.0 mg dose levels of beloranib, and a visual analog scale of hunger revealed reduction in hunger at both doses. Further, a once-weekly regimen was evaluated with 2.5 mg of beloranib, which was well-tolerated and showed limited evidence of weight loss efficacy or reduction in hunger despite being well-tolerated.

ZAF-101- ZGN-440 (Beloranib for Subcutaneous Injection), A Novel Methionine Aminopeptidase 2 Inhibitor for Treatment of Obesity: A Randomized Double-Blind Placebo Controlled Dose Escalation Phase 1b Trial to Evaluate Safety, Pharmacokinetics, Pharmacodynamics and Initial Weight Loss

ZAF-101 was a four-week, multi-dose trial using beloranib formulated for subcutaneous, or SC, injection in obese, otherwise healthy females, conducted in Australia. This clinical trial was a double-blind, placebo controlled, dose escalation and multiple dose study. Doses of 1.0 mg, 2.0 mg, and 4.0 mg of beloranib were evaluated and all doses were administered by SC injection twice weekly for four weeks. Patients who qualified after the screening were randomized 1:1:1:1 to treatment with the three dose levels of beloranib or placebo. 25 female Caucasian patients were enrolled. Four patients withdrew from this clinical trial, three from the 4.0 mg treatment group and one from the 2.0 mg treatment group due to sleep disturbance. The average ages were 46.0 to 49.9 years for the various treatment groups and the BMI range of the patients was 30-45 kg/m2. This clinical trial was designed to evaluate the safety and tolerability of beloranib administered SC in obese female patients. Secondary objectives of this clinical trial were to assess weight loss and responses in metabolic biomarkers over a dose range of beloranib in obese female patients and to compare weight loss due to beloranib administered SC to that previously observed by beloranib administered intravenously.

The key results of this clinical trial are summarized for the Per Protocol population, patients completing the four-week dosing period and receiving a minimum of six doses, as follows:

4-week Phase 1b Proof of Concept Clinical Trial in Obese Patients (ZAF-101)

 

Trial Arm

   Number of
Patients Per
Protocol
     Baseline
Body
Weight (kg)
   Average
Weight
Change (kg)
     p-value  

Placebo

     6       97.3      -1.2         —     

Beloranib 1.0 mg

     6       99.1      -4.3         <0.001   

Beloranib 2.0 mg

     5       92.7      -4.2         <0.001   

Beloranib 4.0 mg

     4       93.9      -6.1         <0.001   

 

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There were no clinically significant changes in laboratory parameters, electrocardiograms, or vital signs with any of the doses. There were no deaths or severe AEs reported in this clinical trial. Aside from mild and transient injection site reactions, which were observed across all treatment groups, including placebo, SC administration of the drug appeared to be locally well-tolerated. However, the highest dose, or 4.0 mg of beloranib, appeared to be less well-tolerated systemically and led to more frequent moderate intensity TEAEs and premature trial withdrawals, mainly due to gastrointestinal events and sleep disturbance. Sleep disturbance AEs were reported by 100% of subjects in the 2.0 mg group (6 events), 85.7% of subjects in the 4.0 mg group (6 events), 83.3% of subjects in the 1.0 mg treatment group (5 events) and 16.7% of subjects in the placebo treatment group (1 event). All events of sleep disturbance were deemed to be probably related to study drug. Abnormal dreams, mostly vivid dreams, were the other frequently reported sleep abnormalities reported as TEAEs reported by 83.3% of subjects in the 2.0 mg dose group, 85.7% in the 4.0 mg dose group and 66.7% in the 1.0 mg dose group. No subjects reported abnormal dreams in the placebo group. The majority of sleep disorders were of mild severity—83.3% in the 2.0 mg dose group, 33.3% in the 4.0 mg dose group, 100% in the 1.0 mg dose group; as were the majority of abnormal dreams—83.3% in the 2.0 mg dose group, 85.7% in the 4.0 mg dose group, and 66.7% in the 1.0 mg dose group. All remaining events were moderate in severity. A total of four subjects including one subject in the 2.0 mg dose group and three subjects from the 4.0 mg dose group withdrew from the trial due to sleep disturbance. The increased incidence of early trial withdrawal due to sleep disturbance in the 4.0 mg treatment group suggested that this dose was less well tolerated. Gastrointestinal disorders were frequently reported across all dose groups. The greatest percentage of subjects to report gastrointestinal adverse events, such as diarrhea and nausea, were in the placebo group, 50.0% (3 events in 3 subjects) and 33.3% (2 events in 2 subjects), respectively. Occurrence of diarrhea in beloranib-treated subjects ranged between 16.7% (1 event in 1 subject) for the 2.0 mg dose group, and 42.9% (3 events in 3 subjects) in the 4.0 mg dose group. Occurrence of nausea in beloranib-treated subjects ranged from 14.3% (1 event in 1 subject) for the 4.0 mg dose group, and 16.7% (1 event in 1 subject) in both the 1.0 and 2.0 mg dose groups.

Phase 2a Clinical Trials

ZAF-201—Randomized, Double-Blind, Placebo-Controlled, Dose Ranging Phase 2 Trial of Beloranib (ZGN-440 for Subcutaneous Injection), A Novel Methionine Aminopeptidase 2 Inhibitor, in Obese Subjects to Evaluate Weight Reduction, Safety, and Pharmacokinetics Over 12 Weeks

ZAF-201 was a 12-week Phase 2a proof-of-concept clinical trial in 160 obese patients, of whom 122 were dosed with beloranib, across eight participating trial sites in Australia. 93.8% of patients were female, 97.5% were Caucasian, the average age was 48.4 years and patients had a BMI range of 30-54 kg/m2. Patients were excluded from this clinical trial if they had been involved recently in another weight loss trial, or if they had clinically significant liver, renal, pulmonary, cardiovascular, oncologic, gastrointestinal disease, or severe mental illness. This clinical trial was designed to evaluate weight loss and responses in metabolic biomarkers over a dose range of beloranib and to assess safety and tolerability of beloranib over 12 weeks in obese patients. This was a randomized, placebo controlled, double-blinded, parallel design trial to evaluate a range of fixed beloranib doses, including 0.3 mg, 0.6 mg, 1.2 mg, 2.4 mg and 3.2 mg, in comparison to placebo. All doses were administered as SC injections twice weekly for 12 weeks.

Trial endpoints included safety and tolerability, weight loss, body composition by bio-impedence, pharmacokinetic, or PK, and pharmacodynamic assessment. As stipulated in the protocol, our Safety Review Committee for this clinical trial, or SRC, reviewed interim safety and PK results after 36 patients from the initial part of this clinical trial completed at least 2 weeks of treatment. Laboratory, electrocardiogram, and vital sign reviews were deemed to be unremarkable and lacking any significant safety concerns. The SRC recommended to eliminate the lowest and highest active dose groups, 0.3 mg and 3.2 mg, thus leaving the doses of 0.6 mg, 1.2 mg, 2.4 mg or placebo to be studied in the remainder of this clinical trial. This was based on the conclusion that the weight loss for the 0.3 mg dose was not clinically meaningful and the 3.2 mg dose was not well-tolerated. The most common AE leading to early termination at the 2.4 mg and 3.2 mg dose levels was sleep disturbance.

 

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As severely obese patients are at an increased risk for cardiovascular disease, we measured systemic biomarkers of cardiovascular disease risk, including low density lipoprotein cholesterol, HDL, CRP, trigylcerides and blood pressure in trial participants, to determine beloranib’s impact on such biomarkers. The results of these biomarker measurements in this trial, as summarized below, suggest that beloranib treatment does not increase the risk of cardiovascular disease and may be associated with reduced cardiovascular disease risk. While we plan to include biomarkers of cardiovascular disease risk as an endpoint for our planned Phase 2b clinical trial of beloranib as a treatment for severe obesity in the general population, this trial will not be designed to establish the impact of beloranib treatment on cardiovascular disease risks.

The key results of this trial are summarized for the Per Protocol population, patients completing the 12-week dosing period and receiving a minimum of 16 of 24 doses, as follows:

12-week Phase 2a Proof of Concept Clinical Trial in Obese Patients (ZAF-201)

 

Trial Arm

   Number of
Patients Per
Protocol
   Baseline
Body
Weight (kg)
   Mean
Weight
Change (kg)
   Percent
Placebo-
Adjusted
Weight
Change
   p-value

Placebo

   36    102.3    -0.4    —      —  

Beloranib 0.6 mg

   34    102.6    -5.5    -5.0    <0.0001

Beloranib 1.2 mg

   31    102.6    -6.9    -6.4    <0.0001

Beloranib 2.4 mg

   15    102.2    -10.9    -10.3    <0.0001

 

    Levels of the cardiovascular disease risk marker C-reactive protein were reduced by an average of 2.5, 2.3 and 1.9 µg/ml, or 23%, 22% and 37%, respectively, for patients treated with beloranib at 0.6 mg, 1.2 mg and 2.4 mg, respectively, compared to an average increase of 1.0 µg/ml for patients dosed with placebo (p<0.0001).

 

    Levels of low density lipoprotein cholesterol, or LDL-c, were reduced by an average of 0.3, 0.5 and 1.0 mmol/l, or 9.4%, 14.5% and 29.7%, respectively, for patients treated with beloranib at 0.6 mg, 1.2 mg and 2.4 mg, respectively, compared to an average reduction of 0.3 mmol/l for patients dosed with placebo (p<0.001 for patients treated with 2.4 mg beloranib).

 

    Levels of high density lipoprotein cholesterol, or HDL-c, were increased by an average of 0.1, 0.1 and 0.2 mmol/l, or 7.6%, 11.6% and 14.6%, respectively, for patients treated with beloranib at 0.6 mg, 1.2 mg and 2.4 mg, respectively, compared to no change for patients dosed with placebo (p<0.05 for patients treated with 1.2 mg and 2.4 mg beloranib).

 

    Levels of triglycerides were reduced by an average of 0.2, 0.3 and 0.4 mmol/l, or 8.8%, 9.0% and 20.3%, respectively, for patients treated with beloranib at 0.6 mg, 1.2 mg and 2.4 mg, respectively, compared to a reduction of 0.3 mmol/l for patients dosed with placebo (p<0.05 for patients treated with 1.2 mg and 2.4 mg beloranib).

 

    Systolic blood pressure was reduced by an average of 6.3 mmHg, 6.3 mmHg and 13.6 mmHg for patients treated with beloranib at 0.6 mg, 1.2 mg and 2.4 mg, respectively, compared to an average of 1.4 mmHg reduction for patients dosed with placebo (p<0.05 for 1.2 mg and 2.4 mg doses). Trends toward reduction in diastolic blood pressure also were observed, although these changes did not reach statistical significance.

 

    Sense of hunger was reduced by an average of 1.5 cm, 2.2 cm and 3.3 cm (out of a maximum number of 10 cm using a standardized visual analog scale asking how hungry the participant had been over the prior trial days) and compared to an average reduction of 0.1 cm in placebo, respectively (p<0.05 for all doses). Baseline values were, on average, 5.0 cm, 5.3 cm, 5.8 cm and 6.4 cm for placebo, for doses of 0.6 mg, 1.2 mg and 2.4 mg of beloranib, respectively.

 

    Post hoc analyses suggest that beloranib also may have favorable effects on body fat content.

 

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While results from this clinical trial showed that beloranib doses ranging from 0.6 mg to 2.4 mg administered by SC injection resulted in dose-related weight loss, the highest dose, 2.4 mg, was associated with the most significant and rapid onset of weight loss whereas the lower doses, 0.6 mg and 1.2 mg, tended to result in slower initiation of weight reduction. However, the highest dose, 2.4 mg, of beloranib appeared to be less well-tolerated systemically and led to more frequent severe intensity TEAEs. 21 patients treated with 2.4 mg beloranib prematurely withdrew from the trial, mainly due to sleep disturbance reflective of increased sleep latency, the time patients reported taking to fall asleep at night. There were no deaths or any SAEs deemed to be possibly, probably, or definitely related to beloranib, although there were two serious thrombotic adverse events which, while not attributed to beloranib treatment, may point to the utility of assessment of prior history of thrombotic events in patients enrolled in subsequent trials and added vigilance for AEs related to blood clotting during future clinical trials. The most commonly reported TEAEs were gastrointestinal disorders, mainly nausea, diarrhea, or vomiting, nervous system disorders, mainly dizziness, and psychiatric disorders, mainly insomnia, sleep disorder, or abnormal dreams. TEAEs were generally mild in severity and transient. Other frequently reported TEAEs were headaches and injection site bruising/itching, although the incidences were comparable to placebo and not observed to be dose-related. Laboratory assessments, vital signs and electrocardiograms revealed no unexplained abnormalities or clinically significant trends. The primary objectives of this clinical trial were met, including demonstration of continued weight loss beyond the four-week trial duration evaluated in prior trials, demonstration of the tolerability profile at effective doses, and demonstration of reductions in key cardiometabolic risk parameters and hunger as well as improved body composition (reduced waist circumference and fat mass) as assessed by bioelectrical impedance.

ZAF-211—Randomized, Double-Blind, Placebo Controlled, Parallel Dose Ranging Phase 2a Trial of ZGN-440 (for Subcutaneous Injection), A Novel Methionine Aminopeptidase 2 Inhibitor, in Over-weight and Obese Subjects with Prader-Willi Syndrome to Evaluate Weight Reduction, Food-related Behavior, Safety, and Pharmacokinetics Over 4 Weeks Followed by Optional 4-Week Open-Label Extension

Our Phase 2a clinical trial of beloranib as a potential treatment of PWS was designed as a randomized, double-blind, and parallel comparison of each of 1.2 mg and 1.8 mg dose levels of beloranib, and placebo. 17 adult patients with PWS living in closely-controlled PWS-specific group homes were randomized to one of the three dosing arms, with 6, 5, and 6 patients being randomized to placebo, 1.2 mg beloranib and 1.8 mg beloranib treatment. During the course of the trial, including a two week placebo run-in phase, daily calorie allowances were increased in all patients by 50 percent to drive modest weight gain and simulate the greater access to food experienced in the general PWS population living in family home situations. All patients completed randomized treatment. The primary objectives of this clinical trial were to (i) assess the safety and tolerability of beloranib administered twice weekly SC in patients with PWS, (ii) assess body weight change, changes in body mass and fat content by DEXA, scan analysis, and responses in metabolic biomarkers over a dose range of beloranib, and (iii) evaluate changes in quality of life, PWS- specific hyperphagia-related behaviors and/or psychiatric status. The secondary objective of this clinical trial is to evaluate pharmacodynamics and apparent bioavailability over a dose range of beloranib. The randomized treatment period was followed by an optional open-label extension offering patients the opportunity to continue for an additional four weeks of treatment with 1.8 mg beloranib.

The key results of this clinical trial are summarized as follows. Both doses of beloranib have been combined as shown below, as a component of the pre-specified statistical analysis:

Four-Week Phase 2a Proof of Concept Clinical Trial in Patients with Prader-Willi Syndrome (ZAF-211)

 

Endpoint

   Placebo
Baseline

(N=6)
   Placebo
Change (%)
   Beloranib
Baseline

(N=11)
   Beloranib
Change (%)
   p value
(Beloranib vs.
Placebo)

Body weight (kg) (Scale weight)

   70.1    0.34    72.0    -1.3    0.17*

Body mass (kg) (DEXA)

   69.7    2.0    72.1    -2.1    0.002

Fat mass (kg) (DEXA)

   31.1    3.6    34.6    -2.9    0.013

 

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* not statistically significant by ANCOVA, or analysis of covariance, a pre-specified statistical analysis, used to assess changes in all key endpoints. ANCOVA is a standard statistical test that takes into account the baseline measurements for each subject.

 

    Levels of high density lipoprotein cholesterol were increased by an average of 26% in beloranib-treated patients, compared to an average increase of 1% in patients dosed with placebo (p=0.005).

 

    Levels of low density lipoprotein cholesterol were reduced by an average of 27% in beloranib-treated patients, compared to an average increase of 3% in patients dosed with placebo (p=0.005).

 

    Hyperphagia related behaviors typical of patients with PWS were reduced by an average of 52.4% by treatment with 1.8 mg beloranib, compared to an average increase of 40.5% in patients dosed with placebo and an average increase of 1.8% in patients treated with 1.2 mg beloranib. The change in behavior was statistically significant from baseline for the patients treated with 1.8 mg beloranib (not statistically significant by ANCOVA; p=0.025 by post hoc paired t-test).

There were no clinically significant changes in laboratory parameters, electrocardiograms and vital signs with any of the doses. There were no deaths, SAEs, or severe AEs reported in this clinical trial. Aside from mild and transient injection site reactions, which were observed across all treatment groups, including placebo, SC administration of the drug appeared to be locally well-tolerated.

Unlike patients with severe obesity in the general population, patients with PWS are missing the function of multiple genes. In order to determine if the underlying mechanistic pathway of beloranib was engaged in patients with PWS, we measured levels of low density lipoprotein cholesterol and fat mass. MetAP2 inhibitors, such as beloranib, work, at least in part, by directing MetAP2 binding to cellular stress mediators, and, thus, reducing fat synthesis by the liver and fat storage throughout the body, leading to a reduction in cholesterol, evidenced by reduced levels of low density lipoprotein cholesterol and reduced fat mass. In this clinical trial, patients with PWS treated with beloranib had both reduced levels of low density lipoprotein cholesterol and fat mass, suggesting that patients with PWS respond to beloranib treatment in a similar manner as severely obese patients that are not missing the function of multiple genes. Likewise, while exploratory, salutary effects on behaviors were observed, which reached clinical significance for the 1.8 mg beloranib treatment arm. These behavioral changes include a range of aspects of the PWS phenotype recorded by the caregiver-administered hyperphagia-related behavior questionnaire, an instrument that measures the frequency and severity of behavioral issues typical of patients with PWS that we are currently validating with the FDA for support of our pivotal trials.

ZAF-221—Randomized, Double-Blind, Placebo Controlled, Phase 2a Trial of ZGN-440 (Subcutaneous Beloranib in Suspension), A Novel Methionine Aminopeptidase 2 Inhibitor, in Obese Subjects with Hypothalamic Injury to Evaluate Weight Reduction and Safety Over 4 Weeks Followed by an Optional 4-Week Open-Label Extension

Our Phase 2a clinical trial of beloranib as a potential treatment of HIAO was designed as a randomized, double-blind, and parallel comparison of 1.8 mg of beloranib and placebo. This clinical trial was conducted at four trial sites, two in the United States and two in Australia. 14 adult patients, nine female and five male, with magnetic resonance imaging confirmed hypothalamic injury and rapid weight gain following resection of craniopharyngioma (n=13) or pituitary macroadenoma (n=1) were randomized to one of the two dosing arms in a 3:4 ratio, with six and eight patients being randomized to placebo and 1.8 mg beloranib treatment, respectively. The average age of patients was approximately 32 years with an average BMI of 43 kg/m2. All patients assigned to beloranib treatment completed randomized treatment, while one patient assigned to placebo discontinued treatment due to apparent sensitivity to the placebo injectate. The primary objectives of this trial were to (i) assess the safety and tolerability of beloranib administered twice weekly SC, and (ii) assess weight loss effects of beloranib in obese patients with HIAO. The secondary objectives of this trial were to evaluate changes in quality of life and hunger in obese patients with HIAO who have received beloranib, and to assess responses in metabolic biomarkers and plasma exposure to beloranib in obese patients with HIAO. The randomized treatment

 

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period was followed by an optional open-label extension offering patients the opportunity to continue for an additional four weeks of treatment with 1.8 mg beloranib. The biomarker and other secondary endpoint results of the trial, are expected to become available in the middle of 2015.

The key results of this trial are summarized as follows:

Four-Week Phase 2a Proof of Concept Trial in Patients with Hypothalamic Injury-Associated Obesity (ZAF-221)

 

Trial Arm

   Number of
Patients Per
Protocol
Population
     Baseline
Body
Weight (kg)
     Average
Weight
Change during
Randomized
Treatment (kg)
     p-value (for
randomized
treatment
period)
     Average
Weight
Change from
Baseline to
End of Open
Label
Extension (kg)
 

Placebo

     4         128.0         -0.3         —           -3.0   

Beloranib 1.8 mg twice weekly

     8         118.7         -3.4         0.01         -6.2   

Beloranib was well-tolerated in this trial. No consistent new or unanticipated safety issues arose during the course of treatment. There were no deaths or serious adverse events reported in this trial. There were no early trial discontinuations due to adverse events in patients treated with beloranib. Key tolerability findings were mild increase in sleep onset and mild dizziness.

The results of this trial suggest that beloranib treatment leads to a similar rapid pace of weight loss in patients with disrupted hypothalamic structures, and therefore provides, further support for the extra-hypothalamic mode of action of beloranib, as well as its differentiation from other weight loss agents that target hypothalamic neuronal activity.

Clinical Trial Summary

Our clinical trials suggest that administration of beloranib by IV infusion twice weekly for four weeks, or eight doses, at dose levels of up to 3.0 mg was safe and well-tolerated. The incidence and severity of AEs was similar across all dose groups in this range. While these clinical trials were of short duration and designed to demonstrate safety and tolerability, significant decreases in body weight and large decreases in sense of hunger were observed in beloranib-treated patients when compared to the placebo group. Additional clinical trials of longer-term treatment with beloranib designed to demonstrate efficacy are required before we can submit an NDA for beloranib as a treatment for any indication that we are pursuing. In our ongoing Phase 2b clinical trial of beloranib as a treatment for severe obesity in the general population and our ongoing Phase 3 clinical program of beloranib as a treatment for patients with PWS, patients are being treated with beloranib for a substantially longer period of time than as treated in our earlier clinical trials. A SC formulation of beloranib for human use was developed and completed human testing in a Phase 1b clinical trial, which showed that doses ranging from 1.0 mg to 4.0 mg administered by SC injection resulted in statistically significant dose-related weight loss. While the highest dose of 4.0 mg was associated with the most significant weight loss, it appeared to be less well-tolerated systemically and led to more frequent moderate intensity TEAEs and premature trial withdrawals, mainly due to gastrointestinal events and sleep disturbance. There have been no deaths or drug-related SAEs. Laboratory safety measures, vital signs and electrocardiograms have been unremarkable in all completed clinical trials for all doses tested. A 12-week Phase 2a clinical trial, ZAF-201, using subcutaneously administered doses of 0.6 mg, 1.2 mg and 2.4 mg of beloranib has confirmed these earlier observations, and we have observed continued weight loss with maintenance of the key favorable drug effects on body composition, hunger and C-reactive protein levels. A further salutary effect on blood pressure has been identified, strengthening our view that beloranib will have a favorable impact on cardiovascular disease risk.

 

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ZAF-211 was our first clinical trial in patients with PWS using doses of 1.2 mg and 1.8 mg beloranib administered by subcutaneous injection twice weekly for four weeks. This initial clinical trial has generated promising results, with beloranib-treated patients showing reductions in body mass and body fat content, along with improvements in hyperphagia-related behavior. ZAF-221 was our first clinical trial in patients with HIAO using 1.8 mg beloranib administered by subcutaneous injection. This initial clinical trial, similar to our Phase 2a clinical trial in patients with PWS, has generated promising results, with beloranib-treated patients showing reductions in placebo-adjusted body weight. Taken together with the results of our previous clinical trials, we believe there is a very compelling basis for continued development of beloranib for the treatment for rare conditions such as PWS and HIAO, where obesity is a co-morbidity of an underlying condition, and severe obesity in the general population.

Next Steps

Pivotal Phase 3 Program of Beloranib for the Treatment of Patients with PWS

Based on discussions with the regulatory authorities to date, we currently expect that our pivotal Phase 3 clinical program will consist of two Phase 3 clinical trials, one in the United States and the other in the European Union. The U.S. trial, ZAF-311, will evaluate the efficacy, safety and tolerability of 1.8 mg and 2.4 mg beloranib versus placebo over six months of randomized, double-blinded treatment in approximately 102 patients with PWS. This trial will be followed by an open label extension to allow for further evaluation of beloranib’s efficacy and safety following an additional six months of treatment for those patients who have completed the six month randomized treatment period and who agree to remain on treatment.

The European trial, ZAF-312, is projected to evaluate the efficacy, safety and tolerability of 1.8 mg and 2.4 mg beloranib versus placebo over twelve months of randomized, double-blinded treatment in approximately 150 patients with PWS. This trial will be followed by an open label extension to allow for further evaluation of beloranib’s efficacy and safety following an additional six months of treatment.

As planned, both of these trials will be conducted in outpatient settings, including patients living in family home settings and in group home settings specializing in the care of residents with developmental disabilities, providing they live in a family home setting at least fifty percent of the time and have a consistent caregiver to provide input to the assessment of hyperphagia-related behaviors.

Pivotal Phase 3 Clinical Program Endpoints

Based on our communications with the FDA and European health authorities, to support an NDA submission to the FDA and an MAA submission to the EMA, we must demonstrate in two Phase 3 clinical trials a statistically significant and clinically meaningful improvement in either (i) hyperphagia-related behaviors or (ii) total body weight in patients treated with beloranib compared to patients receiving placebo. In order to assess efficacy of these dual endpoints, each will be evaluated for treatment effect of beloranib 2.4 mg at a significance level of p less than 0.025. If the comparison between 2.4mg and placebo is statistically significant for an endpoint, that endpoint will be evaluated for treatment effect of beloranib 1.8mg at a significance level of p=0.025.

Hyperphagia-related behaviors will be measured by a slightly modified version of the PWS-HQ that was used in our Phase 2a clinical trial of beloranib in patients with PWS. Per discussion with the FDA, this questionnaire has been revised since our Phase 2a trial to remove one question. The PWS-HQ is undergoing validation under guidance of the FDA Study Endpoints and Labeling Development staff, which we expect to be completed during the course of our Phase 3 program but prior to regulatory filing. If we fail to validate the PWS-HQ in time for it to be an effective tool to support the data from our Phase 3 clinical trial, our Phase 3 program and, in turn, our regulatory filing may be delayed until we validate the tool or develop a new one. The PWS-HQ will need to be further validated for use in multiple countries with different native languages in support of the ZAF-312 study. This validation work may be possible outside of the context of beloranib treatment, per se, or may require additional validation in the context of beloranib treatment. A discussion specifically related to the validation of the PWS-HQ in Europe is planned for the first quarter of 2015.

 

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Total body fat mass, a key physical derangement of obesity that is substantially and pathologically increased in patients with PWS, will be assessed in both ZAF-311 and ZAF-312 as a key secondary endpoint, and is defined as a percentage change in body fat content as measured using dual emission X-ray absorptiometry, or DEXA, from baseline to the end of randomized treatment with beloranib treatment compared to a change from baseline to end of randomized treatment in patients treated with placebo. We also will include change in total body mass, measured by DEXA, as a secondary endpoint in both of our pivotal Phase 3 clinical trials. In addition, we will include other secondary endpoints such as the evaluation of changes in key biomarkers of beloranib response, including low density lipoprotein cholesterol, high density lipoprotein cholesterol, C-reactive protein concentrations, number of active skin lesions related to skin-picking behavior, and quality of life.

In addition to efficacy endpoints, our Phase 3 clinical trial protocols assume that in order to support an NDA submission to the FDA and an MAA submission to the EMA, we must demonstrate the safety and tolerability of beloranib over one year of dosing.

Pivotal Phase 3 Clinical Program Trials’ Design

Each of our pivotal Phase 3 clinical trials is a double-blinded, randomized placebo-controlled trial. We are identifying patients through interactions with physicians specializing in the medical management of PWS and to screen all patients for eligibility at their first visit. Patients who qualify for enrollment and who agree to participate in the trial receive subcutaneous injections of beloranib or placebo twice weekly. We refer to the time at which patients are enrolled and initiate trial drug treatment as baseline.

The eligibility criteria for inclusion of patients in our pivotal Phase 3 clinical trials include the following:

 

    Genetically confirmed diagnosis of PWS.

 

    Age of at least 12 years but not older than 65 years.

 

    BMI greater than 30 kg/m2 but less than 60 kg/m2, except that for patients between 12 and 18 years of age, we will require a BMI Z-score ³ 2, which means the juveniles’ BMI will be in the 95th percentile or higher for children of their age. These BMI criteria define obesity in adult and adolescent individuals, respectively, and we believe that they encompass most patients with PWS to allow for a clear assessment of beloranib’s impact on body weight and fat content.

 

    Baseline PWS-HQ score of 13 or greater. A PWS-HQ score of 13 corresponds to moderate behavioral derangement associated with hunger-related behavior typical of PWS. The possible range of scores in the PWS-HQ employed in our Phase 3 clinical trials, is 0-36. During our Phase 2a clinical trial of beloranib in patients with PWS, we observed a floor effect of the PWS-HQ in the clinical response in patients who had lower PWS-HQ scores, which indicates that the instrument may lose sensitivity to drug responses in patients with nominally expressed hyperphagia-related behaviors. As a result, we expect to only include patients with baseline scores of 13 or above. We believe this criterion will reduce variability in clinical response and further improve our ability to detect differences between the beloranib treatment groups and the placebo group for this primary endpoint.

We plan to include in our pivotal Phase 3 clinical trials those patients with type 2 diabetes, a common co-morbid condition in PWS, particularly in older patients, and those patients being treated with growth hormone, a common treatment for patients with PWS to assist in their growth and management of body composition, particularly lean body mass. As in our Phase 2 trial for PWS, ZAF-311 was initiated using single use vials for the drug product; matching placebo, and diluent. In the ZAF-311 extension trial, ZAF-312 and all subsequent Phase 2 and 3 studies, we plan to test a pre-filled diluent syringe instead of single use glass vials, which were used in our Phase 2a clinical trial.

 

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Timing of the Planned Pivotal Phase 3 Clinical Program

We initiated our pivotal Phase 3 clinical trial in the United States in September 2014.

We anticipate that it will take at least six months to fully enroll up to 102 patients with PWS in this trial. We anticipate that the six-month data from this trial will be available in late 2015. We anticipate initiating our Phase 3 clinical trial in the European Union in the middle of 2015, with 12-month data anticipated in late 2016. After initiation, we anticipate that it will take at least six months to fully enroll up to 150 patients with PWS in this trial.

As of December 31, 2014, we had ten active trial sites in the United States with plans to open five additional trial sites. We anticipate a similar number of trial sites in the European Union.

Other Clinical Trials

Currently we are also conducting a Phase 2b clinical trial of beloranib as a treatment for severe obesity in the general population in patients who also have type 2 diabetes. This trial is being conducted in severely obese adult patients with type 2 diabetes at 16 trial sites located in Australia. We anticipate enrolling approximately 150 patients. Patients in this trial will be treated with either beloranib or placebo for a period of 52 weeks. We plan to test a pre-filled diluent syringe instead of single use glass vials, which were used in our Phase 2a trial. All patients that complete the 52-week randomized, controlled period will have the opportunity to participate in an open-label treatment extension study where all patients will be able to receive at least six months treatment with beloranib. The primary efficacy endpoint of this trial is change in body weight. Secondary endpoints are proportion of patients achieving certain change in body weight benchmarks and changes in key biomarkers related to glycemic control and other cardiometabolic parameters. Interim six month data from this trial is anticipated in late 2015 or early 2016.

Pre-clinical

We have conducted toxicology studies of beloranib in support of clinical development. Dose selection and precautions for ongoing clinical trials have been informed by toxicology studies in beagle rats, dogs, and rabbits. Toxicological studies of up to six months in rat and nine months duration in dogs using single, daily or intermittent dosing have established no observed adverse effect levels at higher exposures relative to those in humans. At higher doses in rats and dogs the findings of toxicological importance were inhibition of spermatogenesis (with testicular atrophy/exfoliation of germ cells in testes/epididymides) and hematopoietic suppression including significant reductions in platelet and white blood cell counts, including lymphocytes, thymic, lymph node and splenic atrophy or lymphoid depletion, mild liver and kidney tubular epithelia cell toxicity, gastrointestinal de-epithelialization, hemorrhage/discoloration and diarrhea, and clonic convulsion. Injection site tolerability in both rats and dogs has been demonstrated with several formulations of beloranib and injection site tolerability has been corroborated in clinical trials. A T-cell dependent antibody response study in rats demonstrated that decreases in immunoglobulin responses occurred in males at doses of 0.3 mg/kg and higher, and in females at 3 mg/kg and higher. Collectively, the data indicate that beloranib may be immunosuppressive although events suggesting immunosuppression have not been noted in the clinical trials to date. We plan to measure T-cell and B-cell subpopulations and lymphocyte counts in our ongoing clinical trials until we better understand if there is a potential risk in humans. There were no indications of genotoxicity or specific indicators of phototoxicity with beloranib. Embryo-fetal toxicity findings in rats and rabbits have demonstrated significant embryofetal malformations at exposures similar to those achieved in patients. Therefore, female subjects of child bearing potential should take appropriate measures to avoid pregnancy while on treatment.

Based on the safety findings in animals, clinical trials of beloranib have included monitoring for blood cell changes, sperm counts, sperm morphology and hormones in men, as well as frequent pregnancy testing and requirement for redundant, implanted or surgical methods of birth control in women. To date, the clinical

 

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findings have shown no evidence of the hematological or male reproductive findings in humans. We believe that, as with other anti-obesity drugs, if approved, beloranib will carry a Category X label and be contraindicated in pregnant women or women looking to become pregnant.

We have initiated a two-year carcinogenicity study in the rat and a protocol for a transgenic mouse carcinogenicity study is under review at the FDA. Given that PWS manifests during childhood, preliminary juvenile safety studies have been initiated that will potentially support testing and eventual marketing in the juvenile population.

Future Product Candidates

We have been working since our inception in 2005 to explore and pursue new molecules leveraging the therapeutic effects of MetAP2 inhibitors in metabolic diseases including severe obesity, type 2 diabetes and NASH. As a direct result of medicinal chemistry efforts oriented to the identification of best in class MetAP2 inhibitors, we have identified compounds of use as potential back-up or follow-on compounds supporting beloranib, as well as novel inhibitors with improved pharmacological and physicochemical features. We continue to explore the utility of these molecules as a component of our program, and have identified a range of candidate molecules being prepared for advancement into early development.

As a part of this effort, we conducted a medicinal chemistry discovery program to find reversible inhibitors of MetAP2 that could be delivered orally and applied broadly across multiple areas of unmet medical need. The program delivered over 250 molecules in seven molecular families, and ZGN-839 was selected from this collection as a potent inhibitor with drug-like properties. In pre-clinical studies, ZGN-839 lowered body weight by approximately 9% after 16 days of treatment versus control animals and reduced plasma cholesterol and glucose, along with improvements in liver fat and the weight of abdominal adipose tissue in mice that were otherwise obese and insulin resistant due to long-term exposure to a high fat, obesogenic, diet. Further, in a mouse model of NASH, ZGN-839 treatment for four weeks reduced the severity of NASH and reduced plasma glucose. We believe that compounds like ZGN-839 will have utility in the treatment of NASH, and will further cause improvements in cardiovascular risk factors including low density lipoprotein cholesterol.

A synthetic process to produce ZGN-839 for safety testing and clinical trials is currently under development. We are currently, conducting IND-enabling studies of ZGN-839 and to file an IND in the United States to begin clinical development of ZGN-839 beginning in the middle of 2015. Additionally, we are currently evaluating other second-generation MetAP2 inhibitors as potential development candidates for the treatment of severe obesity in the general population.

Manufacturing and Supply

Beloranib is a small molecule drug that is synthesized with readily available raw materials using conventional chemical processes. The current process to produce beloranib for clinical trials involves (i) synthesis of crystalline drug substance, (ii) production of sterile crystalline drug substance, (iii) particle size control, formulation and vialing of active drug product, (iv) production and vialing of a sterile diluent and (v) production and vialing of a sterile placebo. We control our clinical trial supply chain by periodically meeting to assess clinical trial material needs and status of supply. Clinical trial materials are forecasted on a six month rolling basis taking into account enrollment rates, number of sites, component inventory and clinical kit shelf-life. The clinical supply forecast is maintained internally and used to aid in decision making for cGMP manufacturing as well as clinical kit packaging and labeling. In addition the CRO we employ maintains an inventory of all clinical kits that are allocated for a clinical study as well as all components needed for the clinical kits. Our internal cross-functional working group discusses inventory on a regular basis. Distribution of kits to clinical sites is controlled via a validated system thus helping to manage inventory at the CRO. Resupply of finished drug product is in progress at our drug product CMO. The manufacturing process is under active development and is not yet validated. Any delays encountered with manufacturing activities, CMO scheduling or raw material supply could delay the manufacturing of finished

 

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drug product. Additionally, following commercialization, we plan to establish a convenient dosing form of beloranib to improve the utility, look, convenience and feel of beloranib for patients—for example a pen injector system with single-use disposable cartridges.

We currently have no manufacturing facilities and limited personnel with manufacturing experience. We rely on contract manufacturers to produce both drug substance and drug product required for our clinical trials. No long-term supply agreements are in place with our contractors, and each batch is individually contracted under a quality and supply agreement. If we engage new contractors, such contractors must be approved by the FDA and other comparable foreign regulatory agencies. We plan to continue to rely upon contract manufacturers and, potentially, collaboration partners to manufacture commercial quantities of beloranib, if approved. Our current scale of manufacturing is adequate to support all of our needs for clinical trial supplies and launch for orphan markets. For peak usage in orphan markets and for indications with larger populations, we will need to identify contract manufacturers or partners to produce beloranib on a larger scale.

Sales and Marketing

We recently hired a Chief Commercial Officer, however, given our stage of development, we have not yet established a commercial organization or distribution capabilities, nor have we entered into any partnership or co-promotion arrangements with an established pharmaceutical company. To develop the appropriate commercial infrastructure to launch beloranib, we may either do so on our own or by establishing alliances with one or more pharmaceutical company collaborators, depending on, among other things, the applicable indications, the related development costs and our available resources.

Licenses

CKD License

In July 2009, we entered into an Exclusive License Agreement with Chong Kun Dang Pharmaceutical Corp. of South Korea, or CKD, pursuant to which we exclusively licensed beloranib from CKD on a worldwide basis, with the exception of South Korea. In consideration of such exclusive license, we paid an initial license fee to CKD, paid a one-time fee following initiation of a proof of concept trial, agreed to make milestone payments of up to $30.0 million (of which $7.5 million has been paid, including $3.3 million that was paid in the form of our common stock as a result of an amendment to our license agreement and entry into a subscription agreement with CKD) to CKD upon the achievement of certain specified events, and agreed to pay a portion of sublicensing income to CKD. Furthermore, if we receive marketing approval for beloranib, we will pay single-digit royalties to CKD based on annual net sales of beloranib on a country-by-country and product-by-product basis until the later to occur of (i) the expiration of the last to expire patent in such country within the CKD patent rights containing a valid claim covering beloranib or its use for which regulatory approval has been obtained in such country, or (ii) ten years from the first commercial sale of beloranib in such country. Pursuant to this agreement, we committed to using commercially reasonable efforts to develop and commercialize beloranib. This agreement will remain in effect on a country-by-country and product-by-product basis until royalties are no longer due in such country, subject to earlier termination by either party upon mutual consent, or in the event of uncured breach or insolvency on the part of the other party, or by us for any reason up to 60 days’ prior notice.

Children’s License

In January 2007, we entered into an Exclusive License Agreement with Children’s Medical Center Corporation, or Children’s, pursuant to which we exclusively licensed certain patent rights from Children’s on a worldwide basis. The licensed patent rights relate to decreasing the growth of fat tissue, and thereby cover the use of beloranib and related molecules as anti-obesity agents. In consideration of such exclusive license, we paid an initial license fee upon execution of the license to Children’s and annual maintenance fees through the fifth anniversary of the date of the license. We also agreed to make milestone payments to Children’s of up to $2.7

 

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million (of which $0.4 million has been paid) with respect to the first licensed product and up to $1.3 million with respect to each subsequent licensed product, if any, that is a new chemical entity upon the achievement of certain specified events and to pay a portion of sublicensing income to Children’s. If we receive marketing approval for beloranib, we will pay single-digit royalties to Children’s based on net sales of beloranib until the later to occur of (i) the expiration of the last to expire patent in such country within the licensed patents containing a valid claim covering beloranib or (ii) 15 years from the date of the agreement. This agreement will remain in effect for the longer of (i) 15 years and (ii) the life of the last expiring licensed patent, subject to earlier termination (x) by Children’s in the event of our insolvency or our failure to cure a breach within 60 days (30 days in the case of non-payment) of receiving written notice thereof, or (y) by us for any reason upon 120 days’ prior written notice.

Intellectual Property

We strive to protect and enhance the proprietary technologies that we believe are important to our business, including seeking and maintaining patents intended to cover our products and compositions, their methods of use and any other inventions that are important to the development of our business. We also rely on trade secrets to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection.

Our success will depend significantly on our ability to obtain and maintain patent and other proprietary protection for commercially important technology, inventions and know-how related to our business, defend and enforce our patents, preserve the confidentiality of our trade secrets and operate without infringing the valid and enforceable patents and proprietary rights of third parties. We also rely on know-how, continuing technological innovation and in-licensing opportunities to develop, strengthen and maintain the proprietary position of beloranib and our other development programs.

Our owned and licensed patents and patent applications relate to beloranib compositions of matter, formulations, polymorphs, methods of treating obesity using dosing regimens of beloranib and methods of treating hypothalamic obesity. The issued U.S. and European patents generally directed to beloranib compositions of matter are exclusively licensed and will each expire in 2019. We own two issued U.S. patents relating to beloranib polymorph compositions of matter that will expire in 2031 and two issued U.S. patents to methods of treating obesity that will expire in 2029. We own pending patent applications in Europe to beloranib polymorph composition of matter and methods of treating obesity that we expect to expire, once issued, in 2031.

As of September 30, 2014, we owned four issued U.S. patents, seven pending U.S. patent applications and foreign counterpart applications, and one Patent Cooperation Treaty, or PCT, application that will allow us to seek corresponding protection worldwide, all of which relate to beloranib. We have a license to two U.S. issued patents, one with corresponding issued foreign counterpart patents, that also relate to beloranib. We also co-own one patent application relating to methods of using beloranib.

As of September 30, 2014, we owned nine pending U.S. patent applications with pending foreign counterpart applications and three PCT patent applications, all of which relate to our internal efforts to discover novel MetAP2 inhibitors. Of these, one pending U.S. patent application with pending foreign counterpart patent applications and one PCT patent application relate to our early-stage product candidate ZGN-839.

As of September 30, 2014, we owned one issued patent, two pending U.S. patent applications with pending foreign counterpart patent applications, one pending PCT patent application and two U.S. provisional patent applications that relate to our second-generation injectable MetAP2 inhibitor program.

The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained. In most countries in which we file, the patent term is 20 years from the date of filing the non-provisional application. In the United States, a patent’s term may be lengthened by patent term adjustment, which

 

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compensates a patentee for administrative delays by the U.S. Patent and Trademark Office, or U.S. PTO, in granting a patent, or may be shortened if a patent is terminally disclaimed over an earlier-filed patent. In addition, in certain instances, a patent term can be extended to recapture a portion of the term effectively lost as a result of the FDA regulatory review period. However, the restoration period cannot be longer than five years and the total patent term including the restoration period must not exceed 14 years following FDA approval. The duration of foreign patents varies in accordance with provisions of applicable local law, but typically is also twenty years from the earliest effective filing date. Our issued patents will expire on dates ranging from 2019 to 2031. However, the actual protection afforded by a patent varies on a claim by claim and country to country basis for each applicable product and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory related extensions, the availability of legal remedies in a particular country and the validity and enforceability of the patent.

Furthermore, the patent positions of biotechnology and pharmaceutical products and processes like those we intend to develop and commercialize are generally uncertain and involve complex legal and factual questions. No consistent policy regarding the breadth of claims allowed in such patents has emerged to date in the United States. The patent situation outside the United States is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the United States and other countries can diminish our ability to protect our inventions, and enforce our intellectual property rights and more generally, could affect the value of intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents.

The biotechnology and pharmaceutical industries are characterized by extensive litigation regarding patents and other intellectual property rights. Our ability to maintain and solidify our proprietary position for our drugs and technology will depend on our success in obtaining effective claims and enforcing those claims once granted. We do not know whether any of the patent applications that we may file or license from third parties will result in the issuance of any patents. The issued patents that we own or may receive in the future, may be challenged, invalidated or circumvented, and the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Furthermore, our competitors may be able to independently develop and commercialize similar drugs or duplicate our technology, business model or strategy without infringing our patents. Because of the extensive time required for clinical development and regulatory review of a drug we may develop, it is possible that, before any of our drugs can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of any such patent.

As a result of the America Invents Act of 2011, the United States transitioned to a first-inventor-to-file system in March 2013, under which, assuming the other requirements for patentability are met, the first inventor to file a patent application will be entitled to the patent. This will require us to minimize the time from invention to the filing of a patent application.

We may rely, in some circumstances, on trade secrets and unpatented know-how to protect our technology. However, trade secrets can be difficult to protect. We seek to protect our proprietary technology and processes, in part, by entering into confidentiality agreements with our consultants, scientific advisors and contractors and invention assignment agreements with our employees. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our consultants, contractors or collaborators use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. For more information, See “Risk Factors—Risks Related to our Intellectual Property.”

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strategies, or our drugs or processes, obtain licenses or cease certain activities. Our breach of any license agreements or failure to obtain a license to proprietary rights that we may require to develop or commercialize our future drugs may have a material adverse impact on us. If third parties prepare and file patent applications in the United States that also claim technology to which we have rights, we may have to participate in interference proceedings in the U.S. PTO, to determine priority of invention.

In addition, substantial scientific and commercial research has been conducted for many years in the areas in which we have focused our development efforts, which has resulted in third parties having a number of issued patents and pending patent applications. Patent applications in the United States and elsewhere are published only after 18 months from the priority date. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries were made. Therefore, patent applications relating to drugs similar to beloranib and any future drugs, discoveries or technologies we might develop may have already been filed by others without our knowledge.

Competition

The biopharmaceuticals industry is highly competitive. There are many public and private biopharmaceutical companies, universities, governmental agencies and other research organizations actively engaged in the research and development of products that may be similar to our product candidates or address similar markets. It is probable that the number of companies seeking to develop products and therapies similar to our products will increase. Many of these and other existing or potential competitors have substantially greater financial, technical and human resources than we do and may be better equipped to develop, manufacture and market products. These competitors may develop and introduce products and processes comparable or superior to ours.

Obesity Caused by Rare Conditions

There are no current pharmacological treatments for regulating hunger and hyperphagia-related behaviors of patients with PWS and patients with HIAO, and bariatric surgery is contraindicated in patients with PWS and not frequently employed in patients with HIAO. We are aware of a clinical trial currently recruiting patients by Ferring Pharmaceuticals, Inc. to evaluate the use of carbetocin, an analogue of a brain peptide hormone oxytocin hypothesized to increase trust, reduce anxiety and improve behavior in patients with PWS. We also are aware of a clinical trial being conducted by Essentialis, Inc. to evaluate the safety and tolerability of controlled-release diazoxide in patients with PWS and to explore the effects of diazoxide on hyperphagia-related behaviors and energy expenditure. We are aware of an exploratory trial being planned, or in its early phase of execution, by Rhythm Pharmaceuticals, Inc. to evaluate the effect of treatment with RM-493, a melanocortin receptor agonist, in patients with PWS. We are not aware of any clinical trials of drugs specifically targeting patients with HIAO.

Severe Obesity in the General Population

Surgical Approaches

Surgical approaches to treat severe obesity are becoming increasingly accepted and are believed to be the main form of competition to beloranib in this indication. Bariatric surgery, including gastric bypass and gastric banding procedures, is typically employed for obese patients with a BMI exceeding 40 kg/m2 or those with a BMI greater than 30 kg/m2 who are experiencing obesity-related complications such as diabetes. However, in December 2010, the FDA’s Advisory Committee for Gastroenterology and Urology Devices convened and voted in favor of recommending to the FDA that gastric banding procedures be approved for obese patients with a BMI greater than 30 kg/m2 who are experiencing obesity related co-morbidities or patients with a BMI greater than 35 kg/m2 with or without obesity related co-morbidities. Other potential competitors in the severe obesity market include bariatric service providers, and other potential approaches which utilize various implantable devices or surgical tools that have been approved by the FDA, such as EnteroMedics Inc.’s recently FDA-approved (January 2015) VBlock Therapy, or that are in development by companies such as Allergan, Inc., Boston Scientific Corporation, Covidien Ltd., EnteroMedics, Inc., GI Dynamics, Inc., Johnson & Johnson and Medtronic, Inc.

 

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Existing Obesity Drugs

In addition, beloranib will compete with orlistat, phentermine/topiramate and lorcaserin, three recently approved and currently marketed pharmaceutical products in the United States for the treatment of obesity, and several older agents, indicated for short-term administration, phentermine, phendimetrazine, benzphetamine and diethylpropion. Orlistat is marketed in the United States by the Roche Group under the brand name Xenical and over-the-counter in the United States at half the prescribed dose by GlaxoSmithKline under the brand name alli. In June 2013, Arena Pharmaceuticals, Inc. launched its lorcaserin product, which is marketed in the United States under the name Belviq and in September 2012, Vivus, Inc. commercially launched its combination product, phentermine/topiramate, under the trade name Qsymia.

Despite the large market opportunity for anti-obesity agents, there are relatively few competitive products in late-stage clinical development. Other companies pursuing pharmaceutical treatments for obesity include Neurosearch A/S is also pursuing pharmaceutical treatments for obesity. In October 2014 Takeda Pharmaceuticals U.S.A., Inc. and Orexigen Therapeutics, Inc. launched Contrave (naltrexone HCI and bupropion HCI) extended-release tablets for chronic weight management in obese adults and in December 2014, the FDA approved Novo Nordisk A/S’s Saxenda for weight management in obese and overweight patients in the presence of at least one related co-morbid condition.

We are not aware of any clinical trials of drugs specifically targeting patients with severe obesity.