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Zafgen stock tumbles after hedge fund reveals short position

By Svea Herbst-Bayliss

BOSTON (Reuters) - Zafgen's stock tumbled as much as 11.5 percent on Monday after hedge fund Kerrisdale Capital said it has a short bet on the biopharmaceutical company's stock, arguing that U.S. regulators will not approve the sale of its obesity drug.

"Zafgen's deadly obesity drug (beloranib) has no reasonable chance of FDA approval," the hedge fund wrote in an 11-page report issued on Monday, adding that Zafgen's stock is worth only $3 a share. It was down 6.7 percent to $8.25 in late morning trading on Monday.

Kerrisdale, which manages about $400 million, has made a splash with bets against big-name companies and is one of only a small number of hedge funds to publicly disclose its short positions, in which the stock is borrowed and sold with the expectation it will fall and be bought back at a lower price.

Zafgen's stock has been volatile in the last two months amid news about beloranib. Last week it rallied 79 percent when some investment analysts issued new "buy" ratings after the company released results from late-stage trials that showed some promise in reducing weight in patients suffering from Prader-Willi syndrome.

Some investors were optimistic those results might prompt the Food and Drug Administration to remove the clinical hold on the treatment, which was put on last year after two patients died. In the last 52 weeks, Zafgen's stock has tumbled 78.52 percent.

In its report titled "FDA Approval for a Deadly Drug? Fat Chance," Kerrisdale wrote "Nothing meaningful has changed: beloranib is highly dangerous but only modestly effective."

"The FDA will not approve beloranib, and Zafgen is worth nothing more than the present value of its future cash balance, which we estimate is 65 percent below the current price," the hedge fund added.

Laura Perry, a Zafgen spokeswoman, said the company does not comment on trading activity.

Kerrisdale, run by Sahm Adrangi, is unusual in the secretive hedge fund industry because it makes its short positions public, something most won't do for fear of losing access to a company's management. It announced a number of public shorts in 2015, including Allied Minds and Bavarian Nordic .

The fund was up 18 percent through the end of November, performing far better than many of its bigger and better known rivals in a year the average hedge fund was off roughly 1 percent.

(Reporting by Svea Herbst-Bayliss; Editing by Paul Simao)