UPDATED: Hedge fund's attack on troubled Zafgen draws blood

These days, while success and victory still have 1,000 fathers, failure and defeat have their outspoken champions as well. 

Take the case of Zafgen ($ZFGN), a biotech company which stumbled badly as it fumbled with the news of patient deaths in its pivotal study of the obesity drug beloranib among patients with rare cases of Prader-Willi syndrome. The Cambridge, MA-based company recently sought a redemption of sorts when it announced the final data from the study, citing evidence of 4% to 5% weight loss for the drug group while a placebo arm gained 4%.

Sahm Adrangi's Kerrisdale Capital, a hedge fund newly cited by the New York Times as a likely 2015 winner in the annual tally of winners and losers on Wall Street, is short Zafgen (translation: it benefits when Zafgen stock goes down), and today issued a scathing report aimed at taking the wind out of Zafgen's battered sails.

Kerrisdale Capital's Sahm Adrangi

That weight loss? Just modest (and nothing close to what was promised), asserts Kerrisdale, which did its own math on the death rate--two out of 73 patients--to claim that Zafgen has no chance of winning an approval. The company can be worth nothing more than what it has in cash, says Kerrisdale, and will likely blow that money in any case.

"Unlike those with late-stage cancer, for whom the health risks of angiogenesis inhibitors like beloranib make sense, PWS patients live relatively long lives, and Zafgen has already proven that, even when it ramps up its screening and monitoring, it does not know how to keep these patients safe," notes Kerrisdale.

Zafgen's stock dropped about 10% this morning, then trimmed those losses to 5%. A spokesperson for the company says Zafgen never remarks on trading activity.

Short sellers are a controversial group in the investment world. While sell-side analysts often get a free ride in asserting a stock's upside price or calculating high odds of success for upcoming studies, the shorts can draw heavy flak from investors and the companies under assault. 

"People can boom and boost and pump all day long and no one even notices or cares, but let someone come out and say that they don't like a stock and that it should be sold, and suddenly people act as if some crime against nature has been committed," noted Derek Lowe today in his influential blog, In the Pipeline. (Lowe says he's pessimistic about Zafgen until he hears something that can change his mind.)

Short sellers may not be universally loved. But everyone's listening. -- John Carroll (email | Twitter)