Small biotech companies with a promising pipeline are always fun to research. They are great for possible takeover plays as well, as large pharmaceutical companies search for the next big money-maker and many blockbuster drugs come off patent. One such company that may hold promise is Zafgen (ZFGN).

ZFGN is a $379 million experimental biopharmaceutical company based in Cambridge, MA that is dedicated to significantly improving the health and well-being of patients affected by obesity. Its lead product candidate Beloranib, an injection for the treatment of obesity and hyperphagia in patients with Prader-Willi Syndrome (PWS), is in Phase II clinical trials.

More than one-third of adults in America are obese and, in June 2013, the American Medical Association labeled obesity a disease for the first time. Unlike appetite-suppressing drugs such as the ones sold by Arena Pharmaceuticals (ARNA) and Vivus (VVUS), Zafgen targets the metabolism of fat.

Scientific evidence shows that those who are obese metabolize fat very differently from lean people. Once the person becomes obese, the body undergoes certain metabolic changes and becomes “programmed” to create and store more fat, making it much more difficult to reduce body weight.  The metabolic adaptations that take place in obese people impair the normal release and breakdown of fatty acids from adipose tissue. Simultaneously, the body becomes much more efficient in diverting calories from food and storing them as fat.

Beloranib is a novel, twice-weekly injection being developed for the treatment of multiple indications, including severe obesity in PWS, craniopharyngioma-associated obesity and severe obesity in the general population.

Beloranib (also known as ZGN-433 and ZGN-440) reduces hunger while stimulating the use of stored fat as an energy source. In simple terms, Beloranib increases metabolism of fat, releasing energy. The company holds exclusive worldwide rights (except South Korea) for development and commercialization of Beloranib.

In January 2013, the U.S. Food and Drug Administration granted Beloranib orphan designation to treat Prader-Willi syndrome. To qualify as an orphan drug in the United States, the drug must treat rare diseases affecting no more than 200,000 people in the U.S. The designation provides seven years of marketing exclusivity in the U.S. after product approval. In addition, the sponsor qualifies for certain benefits, such as reduced taxes, from the federal government.

Then, on Aug. 9, the company announced Beloranib received orphan drug status in the European Union (EU) for the treatment of PWS. To qualify as an orphan drug by the European Commission (EC), the drug must treat rare life-threatening or chronically debilitating diseases affecting no more than five in 10,000 people in the EU and has no satisfactory treatment available. The designation provides 10 years of marketing exclusivity in the EU after product approval.

On April 19, Zafgensold six million shares, one million more than initially planned, to the public for $16 each, at the high end of the expected range of $14 to $16, raising $96 million. Underwriters exercised an option to purchase an additional 900,000 shares of common stock at the IPO price, thus bringing the offering total to 6.9 million.

Zafgen shares opened for trading at $20, and closed the day at $19.75. Only 31% of its outstanding shares were sold in the IPO, valuing the company at $303 million. Just before the IPO, Atlas Partners owned 35.6% of the company, Third Rock Ventures owned 35.4%, Alta Partners owned 7.4%, and Fidelity Investments owned 6.0%. Since its founding, Zafgen had raised $104 million in venture capital.

With the IPO cash, the company aims to start a Phase 3 in Prader-Willi, a Phase 2a trial in craniopharyngioma, and a Phase 2b trial in patients with severe obesity, by the end of this year. It also has a preclinical drug candidate ZFG-839 for nonalcoholic steatohepatitis, nonalcoholic fatty liver disease, abdominal obesity and Type 2 diabetes.

The company has no direct competitors, but Arena Pharmaceuticals and Vivus  have obesity drugs on the market, despite working differently. Orexigen Therapeutics (OREX) is also developing an obesity drug, but one that is more similar to that of Vivus and not Zafgen.

The stock seems undervalued, with positives (green) outnumbering negatives (red) four to one. All numbers look very impressive for a developmental-stage biopharma company. Most impressive is the very high current ratio and low debt, meaning that it is unlikely that investors will face dilution anytime soon. The institutional ownership is not bad either, but a little higher percentage holding would be ideal.

The company will host a conference call on Wednesday, Aug. 13, 2014 at 4:30 p.m. ET to discuss its financial results for the second quarter ended June 30th. It also intends to provide an update on operations.

At the $17.50 level, the stock is way under its low target of $33.14 made by the two analysts recorded by Thomson/First Call. Mean and median target is $40.63, and high target is $48.11.

The short-term graph looks more bullish than bearish. On the bullish side, the price is near support and could rise to resistance. Resistance is at about $18.70. The Stochastic %K and W%R is near or in oversold territory, meaning that the stock may rise. The two times when two or three of the four technical (MFI, RSI, Stochastic %K and W%R) were at similar levels, as indicated by the orange lines in the chart above, the price rose. The MACD seems it will form a bullish upward cross in the near future.

On the bearish side, the price is trending downward. The short-run price will likely be dictated by what the company says on Aug. 13. Options do not trade on this stock as of this writing.