Here's Why Zafgen Inc. Rose by Double Digits Today

What happened

Shares of Zafgen (NASDAQ: ZFGN) rose more than 16% today after the company announced the pricing of a public offering. The clinical-stage biopharma will offer up to 9.2 million shares at $7.50 apiece, which would provide gross proceeds of up to $69 million. But why would shares rise on news of dilution at a lower price point?

Management is wisely taking advantage of a recent surge in the stock price to raise capital for advancing its three drug candidates. It'll be sorely needed, too, considering Zafgen ended the first quarter of 2018 with $89.1 million in cash, cash equivalents, and marketable securities on its balance sheet. The business is burning about $15 million per quarter, so it now has enough cash to fund over one year of operations, and to push its second-most advanced drug candidate deeper into development.

As of 3:24 p.m. EDT, the stock had settled to a 15.8% gain.

So what

Zafgen stock has gained nearly 50% in the last five trading days following the release of positive results in a phase 2 proof of concept trial of its lead drug candidate, ZGN-1061, as a potential therapy for difficult-to-treat Type 2 diabetes. The drug candidate met all primary objectives for efficacy and safety and established a minimally effective dose.

The company is now proceeding to collect more data while doubling the dose, which will provide more information on how to proceed to a potential phase 3 trial. Zafgen told investors to expect final results for the phase 2 trial in early 2019.

Now what

Investors are hoping ZGN-1061 turns the business' long-term prospects around following a collapse of the previous pipeline focus in late 2015. The company sported a market cap of over $1 billion at that time, compared to less than $300 million as of this writing. With promising new (albeit early) results in hand, and enough cash to complete the phase 2 study in Type 2 diabetes and advance the next drug candidate, investors are dreaming of Zafgen's market cap returning closer to its former glory.

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Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.