Zafgen Inc
Annual Report 2015

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ZAFGEN, INC. FORM 10-K (Annual Report) Filed 03/15/16 for the Period Ending 12/31/15 Address Telephone CIK Symbol SIC Code Fiscal Year 175 PORTLAND STREET 4TH FLOOR BOSTON, MA 02114 617-622-4003 0001374690 ZFGN 2834 - Pharmaceutical Preparations 12/31 http://www.edgar-online.com © Copyright 2016, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use. Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 Form 10-K (Mark One)xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2015or ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to .Commission File Number 001-36510 ZAFGEN, INC.(Exact name of registrant as specified in its charter) Delaware 20-3857670(State or other jurisdiction ofincorporation or organization) (IRS EmployerIdentification No.)Zafgen, Inc.175 Portland Street, 4 th FloorBoston, Massachusetts 02114(Address of principal executive offices, including zip code)Registrant’s Telephone Number, Including Area Code:(617) 622-4003Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.001 Par Value The NASDAQ Global Market(Title of each class) (Name of each exchange on which registered)Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No xIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and postedpursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post suchfiles). Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. xIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in 12b-2 of the Exchange Act. Large accelerated filer ¨ Accelerated filer xNon-accelerated filer ¨ Smaller reporting company ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No xThe aggregate market value of Common Stock held by non-affiliates of the registrant computed by reference to the price of the registrant’s Common Stock as of June 30, 2015, the lastbusiness day of the registrant’s most recently completed second fiscal quarter, was approximately $478.8 million (based on the last reported sale price on the Nasdaq Global Market as of suchdate). As of March 7, 2016 there were 27,268,943 shares of the registrant’s Common Stock, $0.001 par value per share, outstanding.DOCUMENTS INCORPORATED BY REFERENCEThe registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2015. Portions of such definitiveproxy statement are incorporated by reference into Part III of this Annual Report on Form 10-K. Table of ContentsZAFGEN, INC.ANNUAL REPORT ON FORM 10-KFor the Year Ended December 31, 2015 PAGE PART I Item 1. Business 2 Item 1A. Risk Factors 41 Item 1B. Unresolved Staff Comments 72 Item 2. Properties 72 Item 3. Legal Proceedings 73 Item 4. Mine Safety Disclosures 73 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 74 Item 6. Selected Financial Data 76 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 77 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 93 Item 8. Financial Statements and Supplementary Data 94 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 119 Item 9A. Controls and Procedures 119 Item 9B. Other Information 119 PART III Item 10. Directors, Executive Officers and Corporate Governance 120 Item 11. Executive Compensation 120 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 120 Item 13. Certain Relationships and Related Transactions, and Director Independence 120 Item 14. Principal Accounting Fees and Services 120 PART IV Item 15. Exhibits, Financial Statement Schedules 121 SIGNATURES 124 Table of ContentsPART IThis Annual Report on Form 10-K, or Annual Report, contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statementsother than statements of historical facts contained in this Annual Report are forward-looking statements. In some cases, you can identify forward-lookingstatements 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 forward-looking statements include, but are not limited to, statements about: • the accuracy of our estimates regarding expenses, future revenues, cash forecasts and capital requirements; • our ability to overcome the full clinical hold placed on our clinical trials of beloranib under our Investigational New Drug application, or IND, andresume clinical development of beloranib; • our plans to develop and commercialize beloranib as a treatment for obesity that is a co-morbidity of an underlying rare condition such as Prader Willisyndrome, or hypothalamic injury-associated obesity, including craniopharyngioma-associated obesity; • our plans to develop and commercialize a methionine aminopeptidase 2, or MetAP2, inhibitor, as a treatment for severe obesity in the generalpopulation; • our ability to advance our earlier-stage product candidates, including ZFGN-839, into clinical development and successfully complete clinical trials; • regulatory and political developments in the United States and foreign countries; • the performance of our third-party manufacturers and clinical research organizations; • our ability to obtain and maintain intellectual property protection for our proprietary assets; • the size of the potential markets for beloranib and our other product candidates and our ability to serve those markets; • the rate and degree of market acceptance of beloranib and our other product candidates for any indication once approved; • our ability to obtain additional financing when needed; • the success of competing products that are or become available for the indications that we are pursuing; • the loss of key scientific or management personnel; and • other risks and uncertainties, including those listed under Part I, Item 1A. Risk Factors.Any forward-looking statements in this Annual Report reflect our current views with respect to future events or to our future financial performance andinvolve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different fromany future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materiallyfrom current expectations include, among other things, those listed under Part I, Item 1A. Risk Factors and elsewhere in this Annual Report. Given theseuncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revisethese forward-looking statements for any reason, even if new information becomes available in the future.This Annual Report also contains estimates, projections and other information concerning our industry, our business, and the markets for certain diseases,including data regarding the estimated size of those markets, and 1 Table of Contentsthe incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologiesis inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unlessotherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by marketresearch firms and other third parties, industry, medical and general publications, government data and similar sources.ITEM 1. BUSINESSOverviewWe are a biopharmaceutical company dedicated to significantly improving the health and well-being of patients affected by obesity and complex metabolicdisorders. Beloranib, our lead product candidate, is a novel, first-in-class, twice-weekly subcutaneous injection being developed for the treatment of multipleindications, including severe obesity in two rare diseases, Prader-Willi syndrome, or PWS, and hypothalamic injury-associated obesity, or HIAO, includingcraniopharyngioma-associated obesity. We are also developing ZGN-839, a liver-targeted methionine aminopeptidase 2, or MetAP2, inhibitor, for the treatment ofnonalcoholic steatohepatitis, or NASH, and abdominal obesity, as well as other second-generation methionine aminopeptidase 2, or MetAP2, inhibitors for thetreatment of severe obesity. In December 2015, the U.S. Food and Drug Administration, or FDA, placed a full clinical hold on our Investigational New DrugApplication, or IND, for beloranib, as a result of the number of thrombotic events observed in patients treated with beloranib in our clinical trials. We plan topresent to the FDA data from our recently completed Phase 3 clinical trial evaluating beloranib as a treatment for PWS and our recently completed Phase 2bclinical trial evaluating beloranib in severe obesity complicated by type 2 diabetes, a proposal for a risk mitigation strategy for beloranib in PWS, and otherrequested data, in an effort to resolve the full clinical hold.Obesity is a complex medical disorder involving appetite dysregulation and altered lipid and energy metabolism that results in excessive accumulation of fattissue. Weight loss and hunger control are urgently needed for certain subpopulations of obese patients, in which obesity is life-threatening and a co-morbidity ofan underlying condition such as PWS and HIAO that, while rare, occurs most commonly as a consequence of treatment for craniopharyngioma and other mid-braintumors. PWS and HIAO are characterized by severe and intractable obesity resulting from damage to or impaired functioning of the hypothalamus, an area of thebrain 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 hungerand its related behaviors, and obesity. Beloranib is currently in Phase 3 development as a treatment for PWS. In January 2016, we announced the results of our firstPhase 3 clinical trial of beloranib evaluating the safety and efficacy of beloranib in patients with PWS, during a six-month randomized treatment period. Theclinical trial achieved its co-primary efficacy endpoints, as patients treated with beloranib achieved a statistically significant reduction in both body weight andhyperphagia-related behaviors. If the FDA lifts the full clinical hold on the beloranib IND, we anticipate the need to conduct an additional Phase 3 clinical trial ofbeloranib in patients with PWS in the United States and likely in the European Union, after discussing the trial design with the FDA and other applicable regulatoryauthorities. Beloranib received orphan designation for the treatment of PWS from the 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 focusedand less costly clinical trials, relative to those required to develop a MetAP2 inhibitor 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. Thephysiological 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 orunpalatable to others. Unsupervised patients will often eat to the point that it causes serious physical harm or death. As a result, 2 Table of Contentscaregivers 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 adultpatient 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 severeand life-threatening consequences of their condition. Furthermore, existing surgical techniques such as bariatric surgery are contraindicated in PWS, as patientswith PWS often overeat to a point whereby they can rupture their stomachs, which is frequently a cause of death. Since beloranib works through a novelmechanism that does not appear to require a fully functioning hypothalamic control pathway, we believe that obese patients with conditions in which increasedhunger is central to the disease may respond well to treatment with beloranib.HIAO is most commonly caused by damage incurred during removal of a central nervous system tumor called craniopharyngioma, but it can also result fromless common types of hypothalamic injury such as strokes, brain trauma, or radiation therapy to the brain. In January 2015, we announced the results of our Phase 2clinical trial of beloranib administered twice weekly in 14 patients with HIAO caused by the treatment of craniopharyngioma or pituitary macroadenoma. Weobserved 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 kgmean 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. We will decide whether to pursue additional clinical trials of beloranib in patients with HIAO, if the FDA lifts the full clinicalhold on the beloranib IND. In September 2015, beloranib received orphan drug designation from the European Union for the treatment of craniopharyngioma-associated obesity, and we plan to seek orphan drug designation for beloranib for the treatment of HIAO in the United States.Although beloranib is likely to be focused on rare diseases, such as PWS and HIAO, we may pursue clinical development for severely obese patients in thegeneral population, including patients otherwise eligible for bariatric surgery, with our second-generation MetAP2 inhibitors. Bariatric surgery eligibility criteriagenerally 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 asignificant and uncontrolled co-morbid condition. Based on these criteria, it is estimated conservatively that there will be at least 16 million adults in the UnitedStates eligible for bariatric surgery by the time beloranib or another MetAP2 inhibitor could become available commercially. Bariatric surgery results in significantweight loss, but the financial expense and the potential for complications, adverse events and longer-term side effects limit its overall adoption, with only a fewhundred 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 thelimited weight loss potential of currently marketed pharmaceutical products, there is a significant unmet need for the treatment of patients with severe obesity. Webelieve this patient population would benefit from MetAP2 inhibitor treatment through the reduction of body weight and through improvement of other co-morbidconditions.In February 2016, we reported results from our Phase 2b clinical trial evaluating beloranib in the treatment of severe obesity complicated by type 2 diabetes.The clinical trial achieved its primary efficacy endpoint, as treatment with beloranib resulted in statistically significant reductions in body weight compared toplacebo. Patients treated with beloranib also met a key secondary endpoint, achieving a reduction in HbA1c of 2.0 percent compared to a reduction of 0.6 percentfor placebo. Although beloranib is likely to be focused on rare diseases, such as PWS and HIAO, we may pursue clinical development for severely obese patients inthe general population, including patients otherwise eligible for bariatric surgery, with our second-generation MetAP2 inhibitors.MetAP2 inhibitors may also have utility in the treatment of other metabolic diseases, such as nonalcoholic fatty liver disease, or NAFLD, and NASH. In amouse model of diabetes, NAFLD, and NASH, our second product candidate, ZGN-839, a MetAP2 inhibitor, reduced the severity of NAFLD and NASH. ZGN-839 may 3 Table of Contentsprovide patient convenience in the form of oral dosing, or an otherwise improved clinical profile. In January 2016, we withdrew the ZGN-839 IND that wepreviously submitted to the FDA, in order to focus on generating additional data regarding the potential risk of thrombosis. We will decide next steps with regard tothis IND application, following resolution of the full clinical hold on our beloranib IND.Beloranib is a novel, first-in-class injectable small molecule therapy with a unique mechanism of action that reduces hunger while stimulating the use ofstored 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 anobese patient than in a lean person. Beloranib acts through potent inhibition of MetAP2, an enzyme that modulates the activity of key cellular processes that controlmetabolism. MetAP2 inhibitors work, at least in part, by directing MetAP2 binding to cellular stress mediators, thereby reducing the tone of signals that drive lipidsynthesis 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 bodypackages and metabolizes fat and glucose. MetAP2 inhibitors reduce the production of new fatty acid molecules by the liver and help convert stored fats into usefulenergy, while reducing hunger.Product PipelineThe following table summarizes our product pipeline and development status of our product candidates for the treatment of indications we are currentlypursuing: Indication Product Candidate Stage of Development Development StatusObesity and hyperphagia in patients with PWS Beloranib Phase 3 • First Phase 3 clinical trial of beloranib inpatients with PWS completed • Anticipate beginning another Phase 3 clinicaltrial of beloranib in patients with PWS in theUnited States and likely the European Union ifwe are able to reach an agreement with theFDA to support lifting the full clinical hold onthe beloranib IND HIAO Beloranib Phase 2 • Phase 2 clinical trial completed Severe obesity in thegeneral population Beloranib Phase 2b • Phase 2b clinical trial of beloranib in patientswith severe obesity and type diabetescompleted Second-generation MetAP2inhibitors Pre-clinical • Pre-clinical studies ongoingNAFLD, NASH and abdominal obesity ZGN-839 Pre-clinical • Pre-clinical studies ongoing 4 Table of ContentsPopulations of InterestObesity Caused by Rare ConditionsObesity is a complex medical disorder involving appetite dysregulation and altered lipid and energy metabolism that results in excessive accumulation of fattissue. We plan to develop beloranib for the treatment of subpopulations of obese patients, including those with rare conditions such as PWS and HIAO, whereobesity is a co-morbidity of an underlying condition. These conditions frequently are characterized by increased and life-threatening hunger that occurs secondaryto damage to the hypothalamus, genetic conditions affecting embryological development or function of the hypothalamus, or conditions that occur as a result ofcertain drug side effects, radiation therapy, or other impairments to the normal function of the hypothalamus. Regardless of the causative agent or condition, theresultant damage to the hypothalamus impairs its normal function, including the ability to modulate hunger. These conditions are most often associated with asevere 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 hungerand obesity, we believe that beloranib may have utility in the treatment of severe obesity and hyperphagia, or insatiable life-threatening hunger and hunger-relatedbehavior, in human disease settings in which hypothalamic food intake control centers are compromised. We are developing beloranib in these subpopulations ofpatients as a treatment for obesity and hyperphagia in patients with PWS and HIAO, and potentially other rare diseases.PWSPWS is the most common known genetic cause of life-threatening obesity. PWS is a rare and complex non-inherited genetic disorder, which results fromabnormalities of the fifteenth chromosome. Symptoms associated with PWS are believed to result, in part, from a defect in the hypothalamus, an importantsupervisory center in the brain that controls many important bodily functions, such as hunger, metabolism of fats and carbohydrates, regulation of the sleep-wakecycle 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 withPWS 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 andoverwhelming 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 withPWS, including cognitive challenges, intellectual disabilities, growth hormone deficiency/short stature, low sensitivity to pain, hypersomnolence, or excessivesleepiness, 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. Withoutsupervision, patients with PWS are likely to die prematurely as a result of choking, stomach rupture or tissue necrosis, or from complications caused by morbidobesity, such as right heart failure and respiratory failure; in addition, preliminary data suggests that patients with PWS may be at a higher risk of death frompulmonary embolism than the general population. Based on our evaluation of published survival data, the average life expectancy of patients with PWS isapproximately 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 intheir homes and their families undertake substantial effort to create physical barriers to eating. These efforts result in extremely stressful environments as caregiversoften 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 thetypical annual cost of treating a patient with PWS is $100,000 to $200,000, excluding the often 5 Table of Contentssignificant costs of drug therapies related to other medical and psychological conditions, and the costs of any lost time from work experienced by their families dueto 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. PWSis 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 ofpatients 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 furtherinformation regarding the prevalence of PWS will become available through a patient registry that is currently being developed by the Foundation for Prader-WilliResearch.Although there are pharmacological treatments for various symptoms of PWS, such as replacement of human growth hormone in patients with PWS that aredeficient in growth hormone, based on our discussions with physicians who treat patients with PWS, there are currently no effective pharmacological treatments forobesity and hyperphagia in PWS. Furthermore, bariatric surgery is contraindicated in patients with PWS due to poor outcomes related to an increased risk ofrupture of the reduced stomach in the setting of sleeve gastrectomy or gastric bypass procedures, or rupture of the restricted esophagus in the setting of gastricbanding 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 2016, we announced theresults of our first Phase 3 clinical trial of beloranib evaluating the safety and efficacy of beloranib in patients with PWS, during a six-month randomized treatmentperiod. The clinical trial achieved its co-primary efficacy endpoints, as patients treated with beloranib demonstrated a statistically significant reduction in both bodyweight and hyperphagia-related behaviors. If we are able to reach an agreement with the FDA that an appropriate, safe, and effective pathway can be developed tosupport lifting the full clinical hold on the beloranib IND, we anticipate the need to conduct another Phase 3 clinical trial of beloranib in patients with PWS in theUnited States and likely the European Union, after discussing the trial design with applicable regulatory authorities.In January 2013 and July 2014, the FDA and European Commission, respectively, granted orphan designation for our application to treat PWS withbeloranib. Orphan drug designation provides for seven years of marketing exclusivity in the United States and ten years of marketing exclusivity in the EuropeanUnion.HIAOHIAO is most commonly caused by damage incurred during removal of a central nervous system tumor called craniopharyngioma, but it can also result fromless common types of hypothalamic injury such as strokes, brain trauma, or radiation therapy to the brain. Approximately 30% to 50% of cases ofcraniopharyngioma are diagnosed in childhood and adolescence. Manifestations of craniopharyngioma include visual disturbances, headaches and impairment tothe hypothalamus-pituitary axis affecting hormone secretion. Treatment of these tumors commonly involves radical surgical removal of the tumor mass byendoscopy or craniotomy, followed by radiation treatment, which results in disruption or removal of neighboring structures including the hypothalamus. Dependingon the degree of damage to the hypothalamus caused by tumor removal and subsequent radiation, there may be greater variation in hyperphagia and obesityprevalence in patients with craniopharyngioma than patients with PWS. Post-treatment hypothalamic dysfunction results in hyperphagia in approximately 50% ofthese 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 andthe 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 500cases 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 alonger life expectancy than patients with PWS, which contributes to an increased risk of developing obesity-related co-morbid conditions such as type 2 diabetes insuch patients.Currently available therapeutic agents fail to provide satisfactory management of weight or hyperphagia in patients with HIAO, and bariatric surgery is notfrequently employed in this patient population. We believe this 6 Table of Contentsis related to perceived risks of surgical interventions in this population including increased risk of post-surgical complications and minimal impact on theunderlying problems of low metabolic rate and hyperphagia.In January 2015, we reported the results of our Phase 2 clinical trial of beloranib administered twice weekly in 14 patients with HIAO caused by thetreatment 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 weeksof treatment with beloranib, respectively, in contrast to 0.3 kg mean weight loss in patients treated with placebo for four weeks. Improvements in cardiovasculardisease risk factors of lipids and inflammation (as measured by C-reactive protein) were also observed. We will decide whether to pursue additional clinical trialsof beloranib in patients with HIAO, if the FDA lifts the full clinical hold on the beloranib IND. In September 2015, beloranib received orphan drug designationfrom the European Union for the treatment of craniopharyngioma-associated obesity, and plan to seek orphan drug designation for beloranib for the treatment ofHIAO in the United States.Severe Obesity in the General PopulationOur long-term intention is to pursue clinical development of a second-generation MetAP2 inhibitor as a treatment for severely obese patients in the generalpopulation. We believe this patient population would benefit from MetAP2 inhibitor treatment through the reduction of body weight and through improvement ofseverity or symptoms of other co-morbid conditions. We believe that MetAP2 inhibitors have the potential to offer this patient population, most of which is notadequately 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 gastricbanding, 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 aspulmonary 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 35kg/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 millionadults in the United States eligible for bariatric surgery by the time beloranib or another MetAP2 inhibitor could become available commercially. In addition to theBMI 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 haveany known endocrine causes of obesity, a drug or alcohol problem, or an uncontrolled psychological condition, and must understand and appreciate the risks of thesurgical intervention. According to the American Society for Metabolic & Bariatric Surgery and to HealthGrades, the average cost of bariatric surgery in the UnitedStates is approximately $22,000-$38,000. As a result of these limiting criteria and the financial commitments required, only a few hundred thousand patientsundergo 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 bariatricsurgery, pharmaceutical treatments have produced modest efficacy. In addition, existing pharmacotherapeutics for obesity often have undesirable adverse eventprofiles. 7 Table of ContentsThe following table summarizes information from pivotal trials supporting registration for the current pharmacological treatments for severe obesity and thekey 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 Variable • Short-term (a few weeks) use only • Should not be taken during pregnancyXenical ® /alli 3% • Unpleasant gastrointestinal side effects related to dietary fat malabsorption • Should not be taken during pregnancyQsymia ® 6.6% at target dose of7.5mg/46 mg8.6-9.4% at high dose of15mg/92mg • Known human teratogen – cannot be used in women unless contraception can be assuredBelviq ® 3.1-3.3% • Should not be taken during pregnancy or by women who are planning to become pregnantContrave 2.0-4.1% • Patients should be monitored for suicidal thoughts and behaviors (black box warning,antidepressant class labeling) • Should not be taken during pregnancySaxenda ® 3.7-4.5% • Should not be used in patients with a personal or family history of medullary thyroid carcinoma orin patients with multiple endocrine neoplasia syndrome type 2 (black box warning) • Should not be taken during pregnancy *Placebo-adjusted weight loss refers to the difference in mean weight loss observed in drug-treated patients and the weight change within the same trialobserved in placebo-treated patients. This analysis takes into account, at least in part, the impact of diet and lifestyle interventions employed in drugregistration 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 February 2016, we reported results from our Phase 2b clinical trial evaluating beloranib in the treatment of severe obesity complicated by type 2 diabetes.The clinical trial achieved its primary efficacy endpoint, as treatment with beloranib resulted in statistically significant reductions in body weight compared toplacebo. Patients treated with beloranib also met a key secondary endpoint, achieving a reduction in HbA1c of 2.0 percent compared to a reduction of 0.6 percentfor placebo. Although beloranib is likely to be focused on rare diseases, such as PWS and HIAO, we may pursue clinical development for severely obese patients inthe general population, including patients otherwise eligible for bariatric surgery, with our second-generation MetAP2 inhibitors. 8 Table of ContentsOur StrategyOur objective is to be a leader in the discovery, development and commercialization of novel therapies to significantly improve the health and well-being ofpatients 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 leptindeficiency and melanocortin receptor subclass 4 mutations. We believe that rare conditions such as PWS and HIAO afford us an opportunity to rapidlydevelop and commercialize beloranib using smaller, more focused and less costly clinical trials, relative to those required to develop a MetAP2inhibitor for the broader severe obesity population. Beloranib exerts its weight loss effects using a novel mechanism that does not appear to requirefully functioning hypothalamic control pathways. We believe this mechanism is well-suited for patients with obesity that is caused by the failure ofhypothalamic food intake control mechanisms, in particular the control of insatiable life-threatening hunger and hunger-related behavior, orhyperphagia. In January 2016, we announced the results of our first Phase 3 clinical trial of beloranib evaluating the safety and efficacy of beloranib inpatients with PWS, during a six-month randomized treatment period. The clinical trial achieved its co-primary efficacy endpoints, as patients treatedwith beloranib demonstrated a statistically significant reduction in both body weight and hyperphagia-related behaviors. If we are able to reach anagreement with the FDA that an appropriate, safe, and effective pathway can be developed to support lifting the full clinical hold on the beloranibIND, we anticipate the need to conduct another Phase 3 clinical trial of beloranib in patients with PWS in the United States and likely the EuropeanUnion, after discussing the trial design with applicable regulatory authorities. In January 2015, we announced the results of our Phase 2 clinical trial ofbeloranib administered twice weekly in 14 patients with HIAO caused by the treatment of craniopharyngioma or pituitary macroadenoma. Weobserved 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 contrastto 0.3 kg mean weight loss in patients treated with placebo for four weeks. We will decide whether to pursue additional clinical trials of beloranib inpatients with HIAO, if the FDA lifts the full clinical hold on the beloranib IND. We plan to present data to the FDA from our recently completedPhase 3 clinical trial evaluating beloranib as a treatment for PWS and our recently completed Phase 2b clinical trial of evaluating beloranib in severeobesity complicated by type 2 diabetes, a proposal for a risk mitigation strategy for beloranib in PWS, and other requested data, in an effort to resolvethe full clinical hold. • Advance the clinical development of MetAP2 inhibitors for the treatment of severely obese patients in the general population, including those whoare candidates for bariatric surgery. We believe the severely obese patient population would benefit from MetAP2 inhibitor treatment through thereduction of body weight and through improvement of other co-morbid conditions. Bariatric surgery results in significant weight loss, but the financialexpense and the potential for complications, adverse events and longer-term side effects limit its overall adoption, with only a few hundred thousandpatients in the United States undergoing bariatric surgery each year. Existing pharmacotherapies result in less weight loss than surgical options, andthese therapies not only have undesirable side effects, but also have risk of abuse. In February 2016, we reported results from our Phase 2b clinicaltrial evaluating beloranib in the treatment of severe obesity complicated by type 2 diabetes. The clinical trial achieved its primary efficacy endpoint, astreatment with the 1.8 mg and the 1.2 mg doses of beloranib resulted in statistically significant reductions in body weight of 12.7% (p<0.0001) and13.5% (p<0.0001), respectively, compared with a reduction of 3.1% for placebo. Patients treated with beloranib also met a key secondary endpoint,achieving a reduction in HbA1c of 2.0% (p<0.0001) compared to a reduction of 0.6% (p<0.0001) for placebo. 9 Table of Contents • Leverage the knowledge of our experienced team of drug developers that have deep expertise in the field of obesity, the function of MetAP2inhibitors and metabolic diseases. Our management team has deep expertise in obesity and related metabolic diseases, the function of MetAP2inhibitors, the strengths and weaknesses of current treatments for obesity and the ability to recognize the potential of novel therapies for the treatmentof obesity. Our team is complemented by highly experienced external consultants and collaborators in the areas of drug discovery, development andregulatory approval. • Maintain flexibility in commercializing and maximizing the value of our development programs. While we intend to develop and commercializebeloranib for indications such as PWS and other rare conditions causing obesity, we may enter into strategic relationships with biotechnology orpharmaceutical companies to realize the full value of beloranib or our other earlier-stage development programs. For beloranib, we may enter into oneor more strategic relationships to access broader geographic markets or additional indications. These relationships could focus on specific patientpopulations 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 tissuedistribution that shows early promise in animal models of NAFLD, NASH and abdominal obesity. Our lead MetAP2 inhibitor in this class ofmolecules is called ZGN-839. We have been advancing multiple candidate drugs into early development to establish clinical proof of concept, safetyand tolerability of these molecules as a way to leverage our internal know-how in metabolic diseases and the effects of MetAP2 inhibitors. Thesecompounds, typified by ZGN-839 or our other second-generation MetAP2 inhibitors, could provide additional short-term value to our companythrough focused development partnerships and collaborations.Mechanism of ActionBeloranib is a novel, first-in-class injectable small molecule therapy with a unique mechanism of action that reduces hunger while stimulating the use ofstored 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 obesepatient—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 andstored 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 thismanner, MetAP2 inhibition increases metabolism of fats as an energy source. MetAP2 inhibitors also reduce hunger and food intake by novel mechanisms thatrequire 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 2002showing anti-obesity efficacy in animals treated with a prototype MetAP2 inhibitor. These studies showed that MetAP2 inhibitor treatment was associated with lossof 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 foodintake also was observed in treated animals, suggesting either direct effects of the agent on central feeding regulation or activation of a feedback loop linking therelease 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 andextracellular-signal-regulated kinase 1, or ERK1, a cell stress- and growth factor-stimulated kinase. This complex reduces the activation state of ERK1. A 2005publication in Diabetes showed that animals lacking ERK1 resist both high fat diet-induced obesity and insulin resistance, supporting the hypothesis thatattenuation 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 10 Table of Contentsmetabolism are affected by beloranib, including leptin, adiponectin and fibroblast growth factor-21. These 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 mechanisticeffects leads to rapid and sustained reduction of excess body weight with beloranib treatment, such as has been observed in animal studies and our clinical trialexperience to date.Our clinical experience to date shows that beloranib treatment is also associated with improvements in cardiovascular disease risk factors such as plasmatotal cholesterol, high density lipoprotein cholesterol, or HDL, and C-reactive protein, or CRP. Plasma total cholesterol, HDL, CRP, and systolic blood pressure areconsidered to be the most rigorous systemic biomarkers of cardiovascular disease risk. Our clinical experience to date with beloranib suggests that its use is notassociated with an increase in blood pressure or heart rate, which makes it particularly relevant to severely obese patients, in whom a broad spectrum of elevatedcardiovascular risk factors often is seen.An illustration of the MetAP2 inhibitor mechanism of action and therapeutic effects follows: Clinical TrialsThe table below summarizes the structure of and key findings from the eight clinical trials of beloranib that we have conducted as of the date of this AnnualReport. Trial Number Brief Description Treatment Duration BMIRangeofPatients(kg/m2) ObservationsZAF-001Phase 1b • Randomized, double-blind, placebo-controlled trial • Escalating doses of 0.1 mg/m2, 0.3 mg/m2, and 0.9mg/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/m2twice weekly resulting in -3.6 kg weight loss versus-1.2 kg change with placebo over 4 weeks • Metabolic benefits (C-reactive protein and metabolichormones) observed in dose dependent fashion • Safe and well tolerated at all dose levels 11 Table of ContentsTrial Number Brief Description Treatment Duration BMIRangeofPatients(kg/m2) ObservationsZAF-003Phase 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 for4 weeks • 2.5 mg dose given twice weekly for the first weekand once weekly for the subsequent 6 weeks. 4 weeks or 7weeks 30-50 • Dose dependent weight reductions with 6.0 mg doseresulting 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 gastrointestinalside effects and sleep disturbance emerging as doselimiting adverse effects; Doses of 3.0 mg or lowerwere well tolerated and effective • Once-weekly regimen was less effective than bi-weekly administration ZAF-101Phase 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 mgdose resulting in -6.1 kg, 2.0 mg in -4.2 kg, 1.0 mgin -4.3 kg, and placebo in -1.2 kg • Comparable metabolic benefits observed as in priortrials, including body composition improvements;sense of hunger reduced with all doses • 4.0 mg not as well tolerated with similar adverseevent profiles as with 6.0 mg intravenous dose inZAF-003 – mainly gastrointestinal side effects andsleep disturbances; injection site adverse eventsunremarkable 12 Table of ContentsTrial Number Brief Description Treatment Duration BMIRangeofPatients(kg/m2) ObservationsZAF-201Phase 2a • Randomized, placebo controlled, double-blinded,parallel design trial • Fixed beloranib doses including 0.3 mg, 0.6 mg, 1.2mg, 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; bothdoses 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 mggroup, -5.5 kg in the 0.6 mg group, versus -0.4 kg inplacebo • Comparable metabolic and body compositionbenefits observed as with prior studies • Most adverse events, including sleep disturbances,mild-moderate and transient 4 thrombotic events observed in beloranib treatmentgroups (two SAEs and two AEs)ZAF-211Phase 2a • Randomized, double-blind, placebo-controlled paralleldesign trial • 1.2 mg and 1.8 mg doses of beloranib or placebo inpatients with PWS • Subcutaneous injections twice weekly 4 weeks 26-44 • Trend toward reduction in body weight measured byscale 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, or 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 1.8mg dose level only)ZAF-221Phase 2 • Randomized, double-blind, placebo-controlled designtrial • 1.8 mg dose of beloranib or placebo in patients withHIAO • Subcutaneous injections twice weekly 4 weeks with4 weekextension 30-55 • We observed mean weight loss of 3.4 kg and 6.2 kgin patients with HIAO after 4 and 8 weeks oftreatment with beloranib, respectively, in contrast to0.3 kg mean weight loss in patients treated withplacebo for 4 weeks • Safe and well tolerated at all dose levels 13 Table of ContentsTrial Number Brief Description Treatment Duration BMIRangeofPatients(kg/m2) ObservationsZAF-203Phase 2b • Randomized, double-blind, placebo-controlledparallel design trial • 1.2 and 1.8 mg dose of beloranib or placebo inpatients with severe obesity complicated by type 2diabetes • Subcutaneous injections twice weekly 26 weeks withadditional 26week blindedcontrolledtreatmentperiod 31.3-48.6 • Patients completed initial 26 weeks in compliancewith the protocol prior to partial clinical hold • Reduction in body weight ~13% in beloranib-treatedpatients versus 3% reduction in placebo-treatedpatients • We observed that more than 90% of beloranib-treated patients achieved at least 5% weight loss,with more than 60% of such subjects achieving atleast 10% weight loss • Reduction in HbA1c by 2.0% from initial baselinepercentage for beloranib-treated patients, with ~75%of such patients at or below the target HbA1c goal of7% after 26 weeks • 3 thrombotic events observed in beloranib treatmentgroups (one SAE and two AEs)ZAF-311Phase 3 • Randomized, double-blind, placebo-controlledparallel design trial with single-blind placebo lead-in • 2.4 mg and 1.8 mg doses of beloranib or placebo inpatients with PWS • Subcutaneous injections twice weekly 26 weeks with2-weeksingle-blindplacebo lead-in and open-labelextension 29.3-53.1 • 74/107 patients completed full 26 weeks and 27/107patients completed at least 75% of protocol beforefull clinical hold • We observed statistically significant weight loss thatwas progressive and sustained in beloranib-treatedgroups as well as a statistically significant reductionin hyperphagia-related behaviors • 4 thrombotic events observed in beloranib treatmentgroups (two SAEs, one of which resulted in a patientdeath, and two AEs)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 theprobability 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 bychance) generally being used as the threshold to indicate statistical significance. 14 Table of ContentsIn December 2015, the FDA, placed a full clinical hold on our IND for beloranib, as a result of a safety imbalance in the number of thrombotic eventsobserved in patients treated with beloranib in our clinical trials versus placebo. A summary of the adverse events, or AEs, and serious adverse events, or SAEs,related to thrombosis across the ZAF-201, ZAF-203 and ZAF-311 clinical trials is set out below:Overview of Adverse Events and Serious Adverse Events Related to Thrombosis Study Dose Event Causality per Investigator Additional InfoZAF-201(completed) 1.2 mg SAE of pulmonary embolism, or PE,thrombophlebitis Not Related Factor V Leiden mutation 2.4 mg SAE of PE; Deep vein thrombosis, orDVT, Not Related Gout attack and extended immobilization 2.4 mg Moderate AE of thrombophlebitissuperficial Not Related Varicose veins;Implanted contraceptive 2.4 mg Mild AE of thrombophlebitis Not Related Implanted contraceptiveZAF-203(completed) 1.2 mg SAE of PE Not Related Implanted contraceptive;heart failure; systemicpulmonary inflammatorydisease 1.8 mg Moderate AE of DVT Not Related Discovered during VTE screening, 4 weeks after last dose ofstudy drug. Two 8-hour flights occurring 3-4 weeks prior to VTEscreening 1.2 mg Moderate AE of thrombophlebitis Related Discovered during VTE screening, 19 weeks after last dose ofstudy drug. Ongoing medical history of bilateral superficialvenous insufficiencyZAF-311(completed) 1.8 mg Moderate AE of thrombophlebitissuperficial; DVT Related Extended (6 hour) car ride 2.4 mg Moderate AE of DVT Possibly related Androgel 1% transdermal patch 1.8 mg SAE of PE; death Possibly related BMI 55 with multiple co-morbidities 2.4 mg SAE of PE; death Probably related Ongoing thrombophlebitis superficial (prior history); treated withASABelow is a summary of the Phase 2 and Phase 3 clinical trials that we have conducted with beloranib.Phase 2a Clinical TrialsZAF-201—Randomized, Double-Blind, Placebo-Controlled, Dose Ranging Phase 2 Trial of Beloranib (ZGN-440 for Subcutaneous Injection), ANovel Methionine Aminopeptidase 2 Inhibitor, in Obese Subjects to Evaluate Weight Reduction, Safety, and Pharmacokinetics Over 12 WeeksZAF-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 participatingtrial 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 15 Table of Contentsexcluded 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 metabolicbiomarkers over a dose range of beloranib and to assess safety and tolerability of beloranib over 12 weeks in obese patients. This was a randomized, placebocontrolled, 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 toplacebo. 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 pharmacodynamicassessment. As stipulated in the protocol, our Safety Review Committee for this clinical trial, or SRC, reviewed interim safety and PK results after 36 patients fromthe initial part of this clinical trial completed at least 2 weeks of treatment. Laboratory, electrocardiogram, and vital sign reviews were deemed to be unremarkableand 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 thedoses 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 mgdose 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 doselevels was sleep disturbance.As severely obese patients are at an increased risk for cardiovascular disease, we measured systemic biomarkers of cardiovascular disease risk, including lowdensity lipoprotein cholesterol, HDL, CRP, triglycerides and blood pressure in trial participants, to determine beloranib’s impact on such biomarkers. The results ofthese biomarker measurements in this trial, as summarized below, suggest that beloranib treatment does not increase the risk of cardiovascular disease and may beassociated with reduced cardiovascular disease risk. While we included biomarkers of cardiovascular disease risk as an endpoint for our recently completed Phase2b 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 treatmenton 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 16of 24 doses, as follows:12-Week Phase 2a Proof of Concept Clinical Trial in Obese Patients (ZAF-201) Trial Arm Number of Patients PerProtocol Baseline Body Weight (kg) Mean Weight Change (kg) Percent Placebo-AdjustedWeight 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 patientsdosed 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 forpatients 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). 16 Table of Contents • 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 withbeloranib 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 patientstreated 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 and2.4 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). Trendstoward 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 analogscale asking how hungry the participant had been over the prior trial days) 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 ofbeloranib, respectively. • Post hoc analyses suggest that beloranib also may have favorable effects on body fat content.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 weightloss, 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 resultin 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 frequentsevere intensity TEAEs. 21 patients treated with 2.4 mg beloranib prematurely withdrew from the trial, mainly due to sleep disturbance reflective of increased sleeplatency, the time patients reported taking to fall asleep at night. There were no deaths or any SAEs deemed to be possible, probably or definitely related tobeloranib. There were two thrombotic AEs. The most commonly reported TEAEs were gastrointestinal disorders, mainly nausea, diarrhea, or vomiting, nervoussystem disorders, mainly dizziness, and psychiatric disorders, mainly insomnia, sleep disorder, or abnormal dreams. TEAEs were generally mild in severity andtransient. Other frequently reported TEAEs were headaches and injection site bruising/itching, although the incidences were comparable to placebo and notobserved to be dose-related. Laboratory assessments, vital signs and electrocardiograms revealed no unexplained abnormalities or clinically significant trends. Theprimary 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 improvedbody 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), ANovel 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 ExtensionOur 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 1.2mg 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 oneof 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 thegreater access to food experienced in the general PWS population living in family home situations. All patients completed randomized treatment. The primaryobjectives 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 weightchange, changes in body mass and fat content by DEXA, scan analysis, and responses in metabolic biomarkers over a dose range of beloranib, and 17 Table of Contents(iii) evaluate changes in quality of life, PWS- specific hyperphagia-related behaviors and/or psychiatric status. The secondary objective of this clinical trial is toevaluate pharmacodynamics and apparent bioavailability over a dose range of beloranib. The randomized treatment period was followed by an optional open-labelextension 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 (%) BeloranibBaseline (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 *Not statistically significant by ANCOVA, or analysis of covariance, a pre-specified statistical analysis, used to assess changes in all key endpoints. ANCOVA isa 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 of1% 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 anaverage 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 inbehavior was statistically significant from baseline for the patients treated with 1.8 mg beloranib (not statistically significant by ANCOVA; p=0.025by 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, includingplacebo, 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 theunderlying mechanistic pathway of beloranib was engaged in patients with PWS, we measured levels of low density lipoprotein cholesterol and fat mass. MetAP2inhibitors, 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 fatstorage throughout the body, leading to a reduction in cholesterol, evidenced by reduced levels of low density lipoprotein cholesterol and reduced fat mass. In thisclinical trial, patients with PWS treated with beloranib had both reduced levels of low density lipoprotein cholesterol and fat mass, suggesting that patients withPWS respond to beloranib treatment in a similar manner as severely obese patients that are not missing the function of multiple genes. Likewise, exploratory,salutary effects on behaviors were observed, which reached clinical significance for the 1.8 mg beloranib treatment arm. These behavioral changes include a rangeof aspects of the PWS phenotype recorded by the caregiver-administered hyperphagia-related behavior questionnaire, an instrument that measures the frequencyand severity of behavioral issues typical of patients with PWS that we are currently validating with the FDA for support of our pivotal trials. 18 Table of ContentsZAF-221—Randomized, Double-Blind, Placebo Controlled, Phase 2 Trial of ZGN-440 (Subcutaneous Beloranib in Suspension), A Novel MethionineAminopeptidase 2 Inhibitor, in Obese Subjects with Hypothalamic Injury to Evaluate Weight Reduction and Safety Over 4 Weeks Followed by anOptional 4-Week Open-Label ExtensionOur Phase 2 clinical trial of beloranib as a potential treatment of HIAO was designed as a randomized, double-blind, and parallel comparison of 1.8 mg ofbeloranib 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 fivemale, with magnetic resonance imaging confirmed hypothalamic injury and rapid weight gain following resection of craniopharyngioma (n=13) or pituitarymacroadenoma (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 beloranibtreatment, respectively. The average age of patients was approximately 32 years with an average BMI of 43 kg/m2. All patients assigned to beloranib treatmentcompleted randomized treatment, while one patient assigned to placebo discontinued treatment due to apparent sensitivity to the placebo injectate. The primaryobjectives 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 inobese 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 havereceived beloranib, and to assess responses in metabolic biomarkers and plasma exposure to beloranib in obese patients with HIAO. The randomized treatmentperiod was followed by an optional open-label extension offering patients the opportunity to continue for an additional four weeks of treatment with 1.8 mgbeloranib.The key results of this trial are summarized as follows:Four-Week Phase 2 Proof of Concept Trial in Patients with Hypothalamic Injury-AssociatedObesity (ZAF-221) Trial Arm Number of Patients PerProtocol Population Baseline Body Weight (kg) Average Weight Change duringRandomized Treatment (kg) p-value (forrandomizedtreatment 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 *Patients randomized to placebo received beloranib 1.8 mg twice weekly during the open label extension.Beloranib was well-tolerated in this trial. No consistent new or unanticipated safety issues arose during the course of treatment. There were no deaths orserious adverse events reported in this trial. There were no early trial discontinuations in patients treated with beloranib. Key tolerability findings were milddizziness.The results of this trial suggest that beloranib treatment leads to a similar rapid pace of weight loss in patients with disrupted hypothalamic structures, andtherefore provides, further support for the extra-hypothalamic mode of action of beloranib, as well as its differentiation from other weight loss agents that targethypothalamic neuronal activity. 19 Table of ContentsZAF-203—Randomized, Double-Blind, Placebo-Controlled, Parallel Design, Phase 2b Trial of ZGN-440 (Subcutaneous Beloranib in Suspension), ANovel Methionine Aminopeptidase 2 Inhibitor, In Severely Obese Subjects Complicated By Type 2 Diabetes To Evaluate Weight Reduction andSafety Over 26 Weeks Followed By 26 Weeks of a Blinded Controlled Treatment PeriodOur Phase 2b clinical trial of beloranib as a potential treatment of severe obesity complicated by type 2 diabetes 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. In the ZAF-203 clinical trial, 152 patients were randomized andreceived twice-weekly subcutaneous injections of either 1.2 mg or 1.8 mg of beloranib or placebo, in addition to a diet and exercise regimen. The average age ofpatients in this trial was approximately 53.5, with patients having an average BMI of 39.9. Sixty-six of the patients completed six months of treatment incompliance with the protocol prior to our suspension of dosing at the time of the partial clinical hold in October 2015. The primary objective of this clinical trialwas to assess body weight changes in patients with severe obesity complicated by type 2 diabetes that received 1.2 mg and 1.8 mg doses of beloranib administeredtwice weekly. The secondary objectives of this clinical trial were to (i) assess the effects of such doses on glycemic parameters by measuring HbA1c levels in thepatient population (ii) evaluate the pharmacokinetics of beloranib, and (iii) assess the proportion of beloranib-treated subjects across weight loss intervals at 26weeks.The key results of this trial are summarized as follows:26 Week Phase 2b Proof of Weight Loss Efficacy Clinical Trial in Patients with Severe Obesity Complicated by Type 2 Diabetes (ZAF-203) Trial Arm Number of Patients PerProtocol Population Baseline Body Weight (kg) Average Weight Change duringRandomized Treatment (kg) Percent Change in Body Weight p-value Placebo 22 103.2 -3.8 -3.1 Beloranib 1.2 mg twice weekly 25 120.4 -15.0 -13.5 <0.0001 Beloranib 1.8 mg twice weekly 19 109.1 -14.2 -12.7 <0.0001 • 95% (p<0.0001) and 92% (p<0.0001) of patients enrolled in the 1.8 mg and 1.2 mg treatment arms achieved a 5% reduction in body weight, versus27% of placebo-treated patients • 74% (p<0.0001) and 64% (p<0.0001) of patients enrolled in the 1.8 mg and 1.2 mg treatment arms achieved a 10% reduction in body weight, versus5% of placebo-treated patients26 Week Phase 2b Proof of HbA1c Reduction Efficacy Clinical Trial in Patients with Severe Obesity Complicated by Type 2 Diabetes (ZAF-203) Trial Arm Number of Patients PerProtocol Population BaselineHbA1c Average HbA1c atWeek 26 Absolute Change inHbA1c p-value Placebo 22 8.1% 7.7% -0.6% Beloranib 1.2 mg twice weekly 25 8.5% 6.3% -2.0% <0.0001 Beloranib 1.8 mg twice weekly 19 8.2% 6.3% -2.0% <0.0001 The most common AEs in the clinical trial were upper respiratory tract infection, diarrhea, and injection site bruising. These were generally mild andtransient in nature and occurred at comparable incidence rates between beloranib and placebo treated patients. Ten patients in the beloranib groups (five in each ofthe 1.8 mg and 1.2 mg groups) withdrew due to AEs compared to two patients in the placebo group. Consistent with prior beloranib 20 Table of Contentsclinical trials in conventional obesity, the most common causes of AEs leading to early withdrawal were sleep related, leading to four withdrawals from the clinicaltrial. In the clinical trial, there were a total of nine SAEs identified in eight patients, one in the 1.8 mg group, six in the 1.2 mg group, and two in the placebo group.One of the SAEs was a pulmonary embolism in the 1.2 mg treatment group. During the VTE screening process that followed the FDA’s partial clinical hold of thebeloranib IND in October 2015, two additional VTEs were identified in patients in this clinical trial: deep vein thrombosis in a patient who had received 1.8 mg ofbeloranib, and superficial thrombophlebitis in a patient who had received 1.2 mg of beloranib.ZAF-311—Randomized, Double-Blind, Placebo Controlled, Parallel Designed Phase 3 Trial of ZGN-440 (for Subcutaneous Injection), A NovelMethionine Aminopeptidase 2 Inhibitor, in Over-weight and Obese Subjects with Prader-Willi Syndrome to Evaluate Weight Reduction andHyperphagia-Related BehaviorsThe ZAF-311 clinical trial of beloranib as a treatment for patients with PWS was designed as a randomized, double-blind, and parallel comparison of each of1.8 mg and 2.4 mg dose levels of beloranib, and placebo. In this trial, 107 patients were randomized and received twice-weekly subcutaneous injections of either1.8 or 2.4 mg of beloranib or placebo. Seventy-four of the 107 patients completed the full 26 weeks of treatment per the trial protocol, and 27 patients completed atleast 75% of the randomized treatment period prior to the suspension of dosing in the trial in October 2015. There were six patients who discontinued early. Inagreement with the FDA, we have analyzed the data using a mixed model repeated measures (MMRM) approach to account for the missing endpoint data of thepatients who did not complete the clinical trial. Patients in the trial were on average 20 years old, had an average BMI of 40 kg/m2 and an average hyperphagiatotal score of 16.9, consistent with moderate to severe hyperphagia, at the beginning of randomized treatment. These baseline characteristics were well-balancedacross the treatment arms. In agreement with the FDA, the primary objectives of this clinical trial were to (i) assess the percent change in body weight across eachof the 1.8 mg and 2.4 mg doses of beloranib, and (ii) evaluate the change in hyperphagia-related behaviors assessed via a Hyperphagia Questionnaire for ClinicalTrials (HQ-CT) total score. The HQ-CT is a PWS-specific study instrument that provides an assessment by caregivers of the food-seeking behaviors exhibited bypatients, with a high total score representing moderate-to-severe hyperphagia. The secondary objectives of the clinical trial were to (i) evaluate changes in totalbody fat massed assessed via DEXA scans in the same patient population, and (ii) assess changes in LDL- and HDL-cholesterol.The key results of this trial are summarized as follows:26 Week Phase 3 Proof of Weight Loss Efficacy Clinical Trial in Patients with Prader-Willi Syndrome (ZAF-311) Trial Arm Number of Patients PerProtocol Population Baseline Body Weight (kg) Percent Change in Body Weight Placebo- Adjusted Change in Body Weight p-value Placebo 34 100.9 +4.15% Beloranib 1.8 mg twice weekly 36 97.5 -4.05% -8.20% <0.0001 Beloranib 2.4 mg twice weekly 37 105.7 -5.30% -9.45% <0.0001 • Patients treated with beloranib, in contrast to placebo, lost weight, with the 2.4 mg dose arm displaying a 5.3 percent reduction from baseline, with aplacebo-adjusted weight loss of 9.45 percent. 21 Table of Contents26 Week Phase 3 Proof of Reduction in Hyperphagia Efficacy Clinical Trial in Patients with Prader-Willi Syndrome (ZAF-311) Trial Arm Number of Patients Per Protocol Population Hyperphagia Questionnaire (HQ-CT) Score at Baseline Unit Change in HQ-CT Score Placebo- Adjusted Change HQ-CT Score p-value Placebo 34 15.0 -0.4 Beloranib 1.8 mg twice weekly 36 17.4 -6.7 -6.3 0.0003 Beloranib 2.4 mg twice weekly 37 18.3 -7.4 -7.0 0.0001 • While hyperphagia-related behaviors were stable over six months of treatment in the placebo arm, both the 2.4 mg and 1.8 mg beloranib arms showedhighly statistically significant reductions in HQ-CT total score, indicative of reduced hunger-associated behaviors.The most common AEs were injection site bruising, aggression, and hyperphagia, generally of mild and transient nature. Of these, only injection site bruisingwas notable as being reported more frequently in patients taking beloranib compared to placebo. There were a total of five SAEs; aggression (placebo, 2.4 mgbeloranib), ankle fracture (placebo), mental status change (1.8 mg beloranib), and pulmonary embolism which resulted in death (1.8 mg beloranib). Four patientswithdrew due to adverse events in the 1.8 mg beloranib treatment group (abnormal behavior, anxiety, mental status changes, and pulmonary embolism) and twopatients in the 2.4 mg beloranib group (injection site pain and psychotic disorder). Many of these AEs, specifically psychiatric disorders, are commonly observed asbackground comorbidities in PWS patients. At the end of the randomized treatment period, there were no clinically significant abnormal patterns regardinglaboratory values, vital signs, or ECG findings. There was a patient death due to pulmonary embolism (1.8 mg beloranib) during the randomized portion of the trial.During the open-label extension portion of the trial, there was a patient death associated with pulmonary embolism (2.4 mg beloranib) and two cases of deep veinthrombosis (1.8 mg and 2.4 mg beloranib).Next StepsWe plan to present to the FDA data from our recently completed Phase 3 clinical trial evaluating beloranib as a treatment for PWS and our recentlycompleted Phase 2b clinical trial of beloranib in severe obesity complicated by type 2 diabetes, a proposal for a risk mitigation strategy for beloranib in PWS, andother requested data, in an effort to resolve the full clinical hold the FDA has placed on the beloranib IND. If we are able to reach an agreement with the FDA thatan appropriate, safe, and effective path can be developed to support lifting the full clinical hold on the beloranib IND, we anticipate the need to conduct anotherPhase 3 clinical trial of beloranib in patients with PWS in the United States and likely the European Union, after discussing the trial design with applicableregulatory authorities.Our discussions with the FDA will be centered on development of a risk mitigation strategy for beloranib. The recent, unequivocal efficacy data from ourPhase 3 trial represent the first of several components needed for our next steps with the FDA to lift the full clinical hold. The FDA is expected to grant us a TypeA meeting, which is an important next step toward enhancing our risk mitigation strategy and toward eventually lifting the full clinical hold. We have been workingto develop a potential risk mitigation strategy for beloranib in PWS. This effort is well underway and is being informed by experts in the areas of PWS, thrombosis,and regulatory strategy. We will then have the Type A meeting with the FDA regarding the potential path forward for beloranib in PWS.Regarding our ongoing data collection to support an integrated benefit/risk assessment, we are in the process of analyzing samples from the ZAF-203 andZAF-311 trials to assess the baseline thrombotic state of the study populations, and their thrombosis parameters during and following treatment with placebo orbeloranib. These analyses will let us dig deeper to see how thrombotic parameters may be influenced during beloranib treatment, and to better understand thecontext in which thrombotic events have occurred. Importantly, we are looking to understand whether safety can be managed with proper screening and monitoringprotocols, or with direct 22 Table of Contentstreatment of thrombotic events with antithrombotic agents, or with prophylactic treatment with antithrombotic agents. We also are running a series of studies invitro and in animals to see if beloranib causes any changes in thrombosis endpoints. These studies and evaluations are in progress, and will inform our next stepsover the coming weeks and months. After we have a full and meaningful view of these results and the Type A meeting with the FDA, we will provide an update.We are also working to understand the incidence of thrombotic events as drivers of mortality and severe morbidity in patients affected by PWS. We are conductingadditional surveys, reviewing the scientific literature and data from a natural history study, as well as mining insurance databases to better understand theimportance of thromboembolism as a driver of morbidity and mortality in this unique population of patients. Given the depth and breadth of these various studiesand analyses, we anticipate that we will have a rich context to draw from regarding thrombosis biology in PWS patients, and regarding any changes that mightoccur following initiation of treatment with beloranib, as well as what blood markers might be of value in monitoring for thrombotic disease.Pre-clinicalWe have conducted toxicology studies of beloranib in support of clinical development. Dose selection and precautions for ongoing clinical trials have beeninformed by toxicology studies in rats, beagle 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 thefindings of toxicological importance were inhibition of spermatogenesis (with testicular atrophy/exfoliation of germ cells in testes/epididymides) and hematopoieticsuppression including significant reductions in platelet and white blood cell counts, including lymphocytes, thymic, lymph node and splenic atrophy or lymphoiddepletion, 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 inclinical trials. A T-cell dependent antibody response study in rats demonstrated that decreases in immunoglobulin responses occurred in males at doses of 0.3mg/kg and higher, and in females at 3 mg/kg and higher. Collectively, the data indicate that beloranib may be immunosuppressive although events suggestingimmunosuppression 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 ongoingclinical trials until we better understand if there is a potential risk in humans. There were no indications of genotoxicity or specific indicators of phototoxicity withbeloranib. Embryo-fetal toxicity findings in rats and rabbits have demonstrated significant embryofetal malformations at exposures similar to those achieved inpatients. 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 andhormones in men, as well as frequent pregnancy testing and requirement for redundant, implanted or surgical methods of birth control in women. To date, theclinical findings have shown no evidence of the hematological or male reproductive findings in humans. We believe that, as with other anti-obesity drugs, ifapproved, 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 which is well underway and have recently completed a six-month transgenic mousecarcinogenicity study for which we expect results in the second quarter of 2016. Given that PWS manifests during childhood, preliminary juvenile safety studieshave been completed. Following discussions of the pediatric investigational plan with regulatory authorities we are planning to conduct a confirmatory juvenilesafety study to support testing and eventual marketing in the pediatric population. 23 Table of ContentsFuture Product CandidatesWe have been working since our inception in 2005 to explore and pursue new molecules leveraging the therapeutic effects of MetAP2 inhibitors in metabolicdiseases including severe obesity, type 2 diabetes, NAFLD, 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 follow-on compounds supporting beloranib, as well as novel inhibitors with improvedpharmacological and physicochemical features. We continue to explore the utility of these molecules as a component of our program, and have identified a range ofcandidate 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 andapplied broadly across multiple areas of unmet medical need. The program delivered over 250 molecules in seven molecular families, and ZGN-839 was selectedfrom 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 oftreatment versus control animals and reduced plasma cholesterol and glucose, along with improvements in liver fat and the weight of abdominal adipose tissue inmice that were otherwise obese and insulin resistant due to long-term exposure to a high fat, obesogenic, diet. Further, in a mouse model of NAFLD and NASH,ZGN-839 treatment for four weeks reduced the severity of NAFLD and NASH and reduced plasma glucose. We believe that compounds like ZGN-839 could haveutility in the treatment of NAFLD and 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 has been developed. In January 2016, we withdrew the ZGN-839 IND that wepreviously submitted to the FDA, in order to focus on generating additional data regarding the potential risk of thrombosis. We will decide on next steps withregard to this IND application, following resolution of the full clinical hold on the beloranib IND.Additionally, we are currently evaluating other second-generation MetAP2 inhibitors as potential development candidates for the treatment of severe obesityin the general population. In particular, we have initiated nonclinical and pharmacological/toxicological IND enabling studies, many of which are in the reportingphase. These studies are anticipated to support an IND application or other regulatory pathways to facilitate the initiation of clinical testing. These strategies andapproaches are required to undergo review by respective health authorities who may require additional work and/or data prior to permitting these clinicaldevelopment from advancing.For information regarding amounts spent during each of the last three fiscal years on company-sponsored research and development activities, see Part II“Item 6—Selected Financial Data” of this Annual Report on Form 10-K.Manufacturing and SupplyBeloranib is a small molecule drug that is synthesized with readily available raw materials using conventional chemical processes. The current process toproduce beloranib for clinical trials involves (i) synthesis of crystalline drug substance, (ii) production of sterile crystalline drug substance, (iii) particle size control,formulation and production of sterile active drug product vials, (iv) production of sterile diluent in prefilled syringes and (v) production of sterile placebo vials. Wecontrol our clinical trial supply chain by periodically meeting to assess clinical trial material needs and status of supply. Clinical trial materials are forecasted on asix month rolling basis taking into account enrollment rates, number of sites, component inventory and clinical kit shelf-life. The clinical supply forecast ismaintained internally and used to aid in decision making for cGMP manufacturing as well as clinical kit packaging and labeling. In addition, the CRO we employmaintains 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-functionalworking group discusses inventory on a regular basis. Distribution of kits to clinical sites is controlled via a validated system thus helping to manage inventory atthe CRO. Resupply of finished drug product is in progress at our drug product CMO. The manufacturing process is under active development and is not yetvalidated. Any delays encountered with manufacturing activities, CMO scheduling or raw material supply could delay the manufacturing of finished drug product.Additionally, 24 Table of Contentsfollowing 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 drugsubstance and drug product required for our clinical trials. No long-term supply agreements are in place with our contractors, and each batch is individuallycontracted under a work order, which is governed by a quality and supply agreement. If we engage new contractors, such contractors must be approved by the FDAand other comparable foreign regulatory agencies. We plan to continue to rely upon contract manufacturers and, potentially, collaboration partners to manufacturecommercial quantities of beloranib, if approved. Our current scale of manufacturing is adequate to support all of our needs for clinical trial supplies and launch fororphan markets. For peak usage in orphan markets and for indications with larger populations, we will need to identify contract manufacturers or partners toproduce beloranib on a larger scale.Sales and MarketingIn early 2014, we hired a Chief Commercial Officer, however, given our stage of development, we have not yet established a broad commercial organizationor distribution capabilities, nor have we entered into any partnership or co-promotion arrangements with an established pharmaceutical company. To develop theappropriate commercial infrastructure to launch beloranib, we may either do so on our own or by establishing alliances with one or more pharmaceutical or otherbiotechnology company collaborators, depending on, among other things, the applicable indications, the related development costs and our available resources.LicensesCKD LicenseIn July 2009, we entered into an Exclusive License Agreement with Chong Kun Dang Pharmaceutical Corp. of South Korea, or CKD, pursuant to which weexclusively licensed beloranib from CKD on a worldwide basis, with the exception of South Korea. In consideration of such exclusive license, we paid an initiallicense 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 $7.5million has been paid, including $3.3 million that was paid in the form of our common stock (valued at $3.6 million) as a result of an amendment to our licenseagreement and entry into a subscription agreement with CKD) to CKD upon the achievement of certain specified events, and agreed to pay a portion ofsublicensing income to CKD. Furthermore, if we receive marketing approval for beloranib, we will pay single-digit royalties to CKD based on annual net sales ofbeloranib 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 theCKD 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 thefirst commercial sale of beloranib in such country. Pursuant to this agreement, we committed to using commercially reasonable efforts to develop andcommercialize beloranib. This agreement will remain in effect on a country-by-country and product-by-product basis until royalties are no longer due in suchcountry, 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 usfor any reason up to 60 days’ prior notice.Children’s LicenseIn January 2007, we entered into an Exclusive License Agreement with Children’s Medical Center Corporation, or Children’s, pursuant to which weexclusively licensed certain patent rights from Children’s on a worldwide basis. The licensed patent rights relate to decreasing the growth of fat tissue, and therebycover 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 ofthe 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 toChildren’s of up to 25 Table of Contents$2.7 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 receivemarketing 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 thelast 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. Thisagreement 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 inthe 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 forany reason upon 120 days’ prior written notice.Intellectual PropertyWe strive to protect and enhance the proprietary technologies that we believe are important to our business, including seeking and maintaining patentsintended 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 relyon 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 thevalid and enforceable patents and proprietary rights of third parties. We also rely on know-how, continuing technological innovation and in-licensing opportunitiesto 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 obesityusing dosing regimens of beloranib and methods of treating hypothalamic obesity. The issued U.S. and European patents generally directed to beloranibcompositions of matter are exclusively licensed and will each expire in 2019. We own two issued U.S. patents relating to beloranib polymorph compositions ofmatter that will expire in 2031 and five issued U.S. patents to methods of treating obesity that will expire in 2029. We own pending patent applications in Europe tobeloranib polymorph compositions and methods of treating obesity that we expect to expire, once issued, in 2031.As of March 7, 2016, we own seven issued U.S. patents, six pending U.S. patent applications and foreign counterpart applications, and one PatentCooperation Treaty, or PCT, application that will allow us to seek corresponding protection worldwide, all of which relate to beloranib. We have a license to twoU.S. issued patents, one with corresponding issued foreign counterpart patents that also relate to beloranib. We also co-own one patent application relating tomethods of using beloranib.As of March 7, 2016, we own five issued U.S. patents, and 12 pending U.S. patent applications with pending foreign counterpart applications all of whichrelate to our internal efforts to discover novel MetAP2 inhibitors. Of these, two pending U.S. patent applications, both with pending foreign counterpart patentapplications, and two U.S. provisional patent applications relate to our early-stage product candidate ZGN-839.As of March 7, 2016, we own two issued patents, three pending U.S. patent applications with pending foreign counterpart patent applications, and four 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, thepatent 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 26 Table of Contentscompensates 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 isterminally 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 lostas 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 restorationperiod must not exceed 14 years following FDA approval. The duration of foreign patents varies in accordance with provisions of applicable local law, but typicallyis also twenty years from the earliest effective filing date. Our issued patents relating to beloranib will expire on dates ranging from 2019 to 2031. However, theactual 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, includingthe type of patent, the scope of its coverage, the availability of regulatory related extensions, the availability of legal remedies in a particular country and thevalidity and enforceability of the patent.Furthermore, the patent positions of biotechnology and pharmaceutical products and processes like those we intend to develop and commercialize aregenerally uncertain and involve complex legal and factual questions. No consistent policy regarding the breadth of claims allowed in such patents has emerged todate 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 lawsin the United States and other countries can diminish our ability to protect our inventions, and enforce our intellectual property rights and more generally, couldaffect 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-partypatents.The biotechnology and pharmaceutical industries are characterized by extensive litigation regarding patents and other intellectual property rights. Our abilityto maintain and solidify our proprietary position for our drugs and technology will depend on our success in obtaining effective claims and enforcing those claimsonce 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. Theissued 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 notprovide us with proprietary protection or competitive advantages against competitors with similar technology. Furthermore, our competitors may be able toindependently develop and commercialize similar drugs or duplicate our technology, business model or strategy without infringing our patents. Because of theextensive time required for clinical development and regulatory review of a drug we may develop, it is possible that, before any of our drugs can becommercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of any suchpatent.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 theother 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 timefrom 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 andcontractors and invention assignment agreements with our employees. We also seek to preserve the integrity and confidentiality of our data and trade secrets bymaintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in theseindividuals, organizations and systems, agreements or security measures may be breached and we may not have adequate remedies for any breach. In addition, ourtrade secrets may otherwise become known or be independently discovered by competitors. To the extent that our consultants, contractors or collaborators useintellectual 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 moreinformation, See “Risk Factors—Risks Related to our Intellectual Property.”Our commercial success will also depend in part on not infringing the proprietary rights of third parties. It is uncertain whether the issuance of any third-party patent would require us to alter our development or commercial 27 Table of Contentsstrategies, or our drugs or processes, obtain licenses or cease certain activities. Our breach of any license agreements or failure to obtain a license to proprietaryrights 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 patentapplications 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, todetermine 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 developmentefforts, which has resulted in third parties having a number of issued patents and pending patent applications. Patent applications in the United States and elsewhereare published only after 18 months from the priority date. The publication of discoveries in the scientific or patent literature frequently occurs substantially laterthan the date on which the underlying discoveries were made. Therefore, patent applications relating to drugs similar to beloranib and any future drugs, discoveriesor technologies we might develop may have already been filed by others without our knowledge.CompetitionThe biopharmaceuticals industry is highly competitive. There are many public and private biopharmaceutical companies, universities, governmental agenciesand other research organizations actively engaged in the research and development of products that may be similar to our product candidates or address similarmarkets. It is probable that the number of companies seeking to develop products and therapies similar to our products will increase. Many of these and otherexisting 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 ConditionsThere are no current pharmacological treatments for regulating hunger and hyperphagia-related behaviors of patients with PWS and patients with HIAO, andbariatric surgery is contraindicated in patients with PWS and not frequently employed in patients with HIAO. We are aware of a clinical trial that has beencompleted 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 andtolerability 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 PopulationSurgical ApproachesSurgical approaches to treat severe obesity are becoming increasingly accepted and are believed to be the main form of competition to beloranib in thisindication. Bariatric surgery, including gastric bypass and gastric banding procedures, is typically employed for obese patients with a BMI exceeding 40 kg/m2 orthose with a BMI greater than 30 kg/m2 who are experiencing obesity-related complications such as diabetes. However, in December 2010, the FDA’s AdvisoryCommittee for Gastroenterology and Urology Devices convened and voted in favor of recommending to the FDA that gastric banding procedures be approved forobese 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 withoutobesity related co-morbidities. Other potential competitors in the severe obesity market include bariatric service providers, and other potential approaches whichutilize various implantable devices or surgical tools that have been approved by the FDA, such as EnteroMedics Inc.’s recently FDA-approved 28 Table of Contents(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.Existing Obesity DrugsIn addition, beloranib will compete with orlistat, lorcaserin, phentermine/topiramate, Contrave and Saxenda, which are approved and currently marketedpharmaceutical 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 itslorcaserin product, which is marketed in the United States under the name Belviq and in September 2012, Vivus, Inc. commercially launched its combinationproduct, phentermine/topiramate, under the trade name Qsymia. In October 2014 Takeda Pharmaceuticals U.S.A., Inc. and Orexigen Therapeutics, Inc. launchedContrave (naltrexone HCI and bupropion HCI) extended-release tablets for chronic weight management in obese adults and in April 2015 Novo Nordisk A/Slaunched 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. Othercompanies pursuing pharmaceutical treatments for obesity include Neurosearch A/S.We are not aware of any clinical trials of drugs specifically targeting patients with severe obesity.Government RegulationGovernment authorities in the United States at the federal, state and local level and in other countries extensively regulate, among other things, the research,development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-approvalmonitoring and reporting, marketing and export and import of drug products such as beloranib. Generally, before a new drug can be marketed, considerable datademonstrating its quality, safety and efficacy must be obtained, organized into a format specific to each regulatory authority, submitted for review and approved bythe regulatory authority.U.S. Drug DevelopmentIn the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and the implementation of its regulations. Drugsare also subject to other federal, state and local statutes and regulations. The process of obtaining regulatory approvals and the subsequent compliance withappropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources. Failure to comply with theapplicable United States requirements at any time during the product development process, approval process or after approval, may subject an applicant toadministrative or judicial sanctions. These sanctions could include, among other actions, the FDA’s refusal to approve pending applications, withdrawal of anapproval, a clinical hold, warning letters, product recalls or withdrawals from the market, product seizures, total or partial suspension of production or distributioninjunctions, fines, refusals of government contracts, restitution, disgorgement, or civil or criminal penalties. Any agency or judicial enforcement action could have amaterial adverse effect on us. 29 Table of ContentsOur product candidates must be approved by the FDA through the NDA process before they may be legally marketed in the United States. The processrequired by the FDA before a drug may be marketed in the United States generally involves the following: • Completion of extensive nonclinical, sometimes referred to as pre-clinical laboratory tests, pre-clinical animal studies and formulation studies inaccordance with applicable regulations, including the FDA’s Good Laboratory Practice, or GLP, regulations; • Submission to the FDA of an IND, which must become effective before human clinical trials may begin; • Performance of adequate and well-controlled human clinical trials in accordance with applicable IND and other clinical trial-related regulations,sometimes referred to as current good clinical practices, or cGCPs, to establish the safety and efficacy of the proposed drug for its proposed indication; • Submission to the FDA of an NDA, for a new drug; • A determination by the FDA within 60 days of its receipt of an NDA to file the NDA for review; • Satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities where the drug is produced to assess compliancewith the FDA’s current good manufacturing practice requirements, or cGMP, to assure that the facilities, methods and controls are adequate topreserve the drug’s identity, strength, quality and purity; • Potential FDA audit of the pre-clinical and/or clinical trial sites that generated the data in support of the NDA; and • FDA review and approval of the NDA prior to any commercial marketing or sale of the drug in the United States.The data required to support an NDA is generated in two distinct development stages: pre-clinical and clinical. For new chemical entities, the pre-clinicaldevelopment stage generally involves synthesizing the active component, developing the formulation and determining the manufacturing process, as well ascarrying out non-human toxicology, pharmacology and drug metabolism studies in the laboratory, which support subsequent clinical testing. The conduct of thepre-clinical tests must comply with federal regulations, including GLPs. The sponsor must submit the results of the pre-clinical tests, together with manufacturinginformation, analytical data, any available clinical data or literature and a proposed clinical protocol, to the FDA as part of the IND. An IND is a request forauthorization from the FDA to administer an investigational drug product to humans. The central focus of an IND submission is on the general investigational planand the protocol(s) for human trials. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA raises concerns or questionsregarding the proposed clinical trials and places the IND on clinical hold within that 30-day time period. In such a case, the IND sponsor and the FDA must resolveany outstanding concerns before the clinical trial can begin. The FDA may also impose clinical holds on a drug candidate at any time before or during clinical trialsdue to safety concerns or non-compliance. Accordingly, we cannot be sure that submission of an IND will result in the FDA allowing clinical trials to begin, orthat, once begun, issues will not arise that could cause the trial to be suspended or terminated.The clinical stage of development involves the administration of the drug candidate to healthy volunteers or patients under the supervision of qualifiedinvestigators, generally physicians not employed by or under the trial sponsor’s control, in accordance with GCPs, which include the requirement that all researchsubjects provide their informed consent for their participation in any clinical trial. Clinical trials are conducted under protocols detailing, among other things, theobjectives of the clinical trial, dosing procedures, subject selection and exclusion criteria, and the parameters to be used to monitor subject safety and assessefficacy. Each protocol, and any subsequent amendments to the protocol, must be submitted to the FDA as part of the IND. Further, each clinical trial must bereviewed and approved by an independent institutional review board, or IRB, at or servicing each institution at which the clinical trial will be conducted. An IRB ischarged with protecting the welfare and 30 Table of Contentsrights of trial participants and considers such items as whether the risks to individuals participating in the clinical trials are minimized and are reasonable in relationto anticipated benefits. The IRB also approves the informed consent form that must be provided to each clinical trial subject or his or her legal representative andmust monitor the clinical trial until completed. There are also requirements governing the reporting of ongoing clinical trials and completed clinical trial results topublic registries.Clinical trials are generally conducted in three sequential phases that may overlap, known as Phase 1, Phase 2 and Phase 3 clinical trials. Phase 1 clinicaltrials generally involve a small number of healthy volunteers who are initially exposed to a single dose and then multiple doses of the product candidate. Theprimary purpose of these clinical trials is to assess the metabolism, pharmacologic action, side effect tolerability and safety of the drug. Phase 2 clinical trialstypically involve studies in disease-affected patients to determine the dose required to produce the desired benefits. At the same time, safety and furtherpharmacokinetic and pharmacodynamic information is collected, as well as identification of possible adverse effects and safety risks and preliminary evaluation ofefficacy. Phase 3 clinical trials generally involve large numbers of patients at multiple sites, in multiple countries (from several hundred to several thousandsubjects) and are designed to provide the data necessary to demonstrate the efficacy of the product for its intended use, its safety in use, and to establish the overallbenefit/risk relationship of the product and provide an adequate basis for product approval. Phase 3 clinical trials may include comparisons with placebo and/orother comparator treatments. The duration of treatment is often extended to mimic the actual use of a product during marketing. Generally, two adequate and well-controlled Phase 3 clinical trials are required by the FDA for approval of an NDA.Post-approval trials, sometimes referred to as Phase 4 clinical trials, may be conducted after initial marketing approval. These trials are used to gainadditional experience from the treatment of patients in the intended therapeutic indication. In certain instances, the FDA may mandate the performance of Phase 4clinical trials.Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and written IND safety reports must be submitted tothe FDA and the investigators for serious and unexpected adverse events or any finding from tests in laboratory animals that suggests a significant risk for humansubjects. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, if at all. The FDA, the IRB, or the sponsor maysuspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptablehealth risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with theIRB’s requirements or if the drug has been associated with unexpected serious harm to patients. Additionally, some clinical trials are overseen by an independentgroup of qualified experts organized by the clinical trial sponsor, known as a data safety monitoring board or committee. This group provides authorization forwhether or not a trial may move forward at designated check points based on access to certain data from the trial. We may also suspend or terminate a clinical trialbased on evolving business objectives and/or competitive climate. Concurrent with clinical trials, companies usually complete additional animal studies and mustalso develop additional information about the chemistry and physical characteristics of the drug as well as finalize a process for manufacturing the product incommercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the drugcandidate and, among other things, must develop methods for testing the identity, strength, quality and purity of the final drug product. Additionally, appropriatepackaging must be selected and tested and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deteriorationover its shelf life.NDA and FDA Review ProcessFollowing trial completion, trial data is analyzed to assess safety and efficacy. The results of pre-clinical studies and clinical trials are then submitted to theFDA as part of an NDA, along with proposed labeling for the product and information about the manufacturing process and facilities that will be used to ensureproduct 31 Table of Contentsquality, results of analytical testing conducted on the chemistry of the drug, and other relevant information. The NDA is a request for approval to market the drugand must contain proof of safety, purity, potency and efficacy, which is demonstrated by extensive pre-clinical and clinical testing. The application includes bothnegative or ambiguous results of pre-clinical and clinical trials as well as positive findings. Data may come from company-sponsored clinical trials intended to testthe safety and efficacy of a use of a product, or from a number of alternative sources, including studies initiated by investigators. To support marketing approval,the data submitted must be sufficient in quality and quantity to establish the safety and efficacy of the investigational drug product to the satisfaction of the FDA.The submission of an NDA is subject to the payment of substantial user fees; a waiver of such fees may be obtained under certain limited circumstances. FDAapproval of an NDA must be obtained before a drug may be offered for sale in the United States.In addition, under the Pediatric Research Equity Act, or PREA, an NDA or supplement to an NDA must contain data to assess the safety and efficacy of thedrug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which theproduct is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers.Under the Prescription Drug User Fee Act, or PDUFA, as amended, each NDA must be accompanied by a user fee. The FDA adjusts the PDUFA user feeson an annual basis. According to the FDA’s fee schedule, effective through December 31, 2016, the user fee for an application requiring clinical data, such as anNDA, is $2.4 million. PDUFA also imposes an annual product fee for human drugs ($0.1 million) and an annual establishment fee ($0.6 million) on facilities usedto manufacture prescription drugs. Fee waivers or reductions are available in certain circumstances, including a waiver of the application fee for the first applicationfiled by a small business. Additionally, no user fees are assessed on NDAs for products designated as orphan drugs, unless the product also includes a non-orphanindication.The FDA reviews all NDAs submitted before it accepts them for filing and may request additional information rather than accepting an NDA for filing. TheFDA must make a decision on accepting an NDA for filing within 60 days of receipt. Once the submission is accepted for filing, the FDA begins an in-depthreview of the NDA. Under the goals and policies agreed to by the FDA under PDUFA, the FDA has 10 months from the filing date in which to complete its initialreview of a standard NDA and respond to the applicant, and six months from the filing date for a priority NDA. The FDA does not always meet its PDUFA goaldates for standard and priority NDAs, and the review process is often significantly extended by FDA requests for additional information or clarification.After the NDA submission is accepted for filing, the FDA reviews the NDA to determine, among other things, whether the proposed product is safe andeffective for its intended use, and whether the product is being manufactured in accordance with cGMP to assure and preserve the product’s identity, strength,quality and purity. The FDA may refer applications for novel drug products or drug products which present difficult questions of safety or efficacy to an advisorycommittee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should beapproved and under what conditions. In the case of obesity drugs, the FDA normally refers such drugs to the Endocrinologic and Metabolic Drugs AdvisoryCommittee. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.The FDA will likely re-analyze the clinical trial data, which could result in extensive discussions between the FDA and us during the review process. The reviewand evaluation of an NDA by the FDA is extensive and time consuming and may take longer than originally planned to complete, and we may not receive a timelyapproval, if at all.Before approving an NDA, the FDA will conduct a pre-approval inspection of the manufacturing facilities for the new product to determine whether theycomply with cGMPs. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with cGMPrequirements and adequate to assure consistent production of the product within required specifications. In addition, before approving an NDA, the FDA may alsoaudit data from clinical trials to ensure compliance with GCP 32 Table of Contentsrequirements. After the FDA evaluates the application, manufacturing process and manufacturing facilities, it may issue an approval letter or a Complete ResponseLetter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. A Complete Response Letterindicates that the review cycle of the application is complete and the application is not ready for approval. A Complete Response Letter usually describes all of thespecific deficiencies in the NDA identified by the FDA. The Complete Response Letter may require additional clinical data and/or an additional pivotal Phase 3clinical trial(s), and/or other significant and time-consuming requirements related to clinical trials, pre-clinical studies or manufacturing. If a Complete ResponseLetter is issued, the applicant may either resubmit the NDA, addressing all of the deficiencies identified in the letter, or withdraw the application. Even if such dataand information is submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data obtained from clinical trials are notalways conclusive and the FDA may interpret data differently than we interpret the same data.There is no assurance that the FDA will ultimately approve a drug product for marketing in the United States and we may encounter significant difficulties orcosts during the review process. If a product receives marketing approval, the approval may be significantly limited to specific diseases and dosages or theindications for use may otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications,warnings or precautions be included in the product labeling or may condition the approval of the NDA on other changes to the proposed labeling, development ofadequate controls and specifications, or a commitment to conduct post-market testing or clinical trials and surveillance to monitor the effects of approved products.For example, the FDA may require Phase 4 testing which involves clinical trials designed to further assess a drug safety and effectiveness and may require testingand surveillance programs to monitor the safety of approved products that have been commercialized. The FDA may also place other conditions on approvalsincluding the requirement for a REMS to assure the safe use of the drug. If the FDA concludes a REMS is needed, the sponsor of the NDA must submit a proposedREMS. The FDA will not approve the NDA without an approved REMS, if required. A REMS could include medication guides, physician communication plans,or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. Any of these limitations on approval ormarketing could restrict the commercial promotion, distribution, prescription or dispensing of products. Product approvals may be withdrawn for non-compliancewith regulatory standards or if problems occur following initial marketing.Orphan Drug DesignationUnder the Orphan Drug Act, the FDA may grant orphan designation to a drug or biological product intended to treat a rare disease or condition, which isgenerally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States and forwhich there is no reasonable expectation that the cost of developing and making a drug or biological product available in the United States for this type of diseaseor condition will be recovered from sales of the product. Orphan product designation must be requested before submitting an NDA. After the FDA grants orphanproduct designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan product designation does notconvey any advantage in or shorten the duration of the regulatory review and approval process.If a product that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has such designation, theproduct is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications to market the same drug or biological productfor the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity.Competitors, however, may receive approval of different products for the indication for which the orphan product has exclusivity or obtain approval for the sameproduct but for a different indication for which the orphan product has exclusivity. Orphan product exclusivity also could block the approval of one of our productsfor seven years if a competitor obtains approval of the same biological product as defined by the FDA or if our product candidate is determined to be containedwithin the competitor’s 33 Table of Contentsproduct for the same indication or disease. If a drug or biological product designated as an orphan product receives marketing approval for an indication broaderthan what is designated, it may not be entitled to orphan product exclusivity. Orphan drug status in the European Union has similar, but not identical, benefits.Expedited Development and Review ProgramsThe FDA has a Fast Track program that is intended to expedite or facilitate the process for reviewing new drugs and biological products that meet certaincriteria. Specifically, new drugs and biological products are eligible for Fast Track designation if they are intended to treat a serious or life-threatening conditionand demonstrate the potential to address unmet medical needs for the condition. Fast Track designation applies to the combination of the product and the specificindication for which it is being studied. The sponsor of a new drug or biologic may request the FDA to designate the drug or biologic as a Fast Track product at anytime during the clinical development of the product. Unique to a Fast Track product, the FDA may consider for review sections of the marketing application on arolling basis before the complete application is submitted, if the sponsor provides a schedule for the submission of the sections of the application, the FDA agreesto accept sections of the application and determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first sectionof the application.Any product submitted to the FDA for marketing, including under a Fast Track program, may be eligible for other types of FDA programs intended toexpedite development and review, such as priority review and accelerated approval. Any product is eligible for priority review if it has the potential to provide safeand effective therapy where no satisfactory alternative therapy exists or a significant improvement in the treatment, diagnosis or prevention of a disease comparedto marketed products. The FDA will attempt to direct additional resources to the evaluation of an application for a new drug or biological product designated forpriority review in an effort to facilitate the review. Additionally, a product may be eligible for accelerated approval. Drug or biological products studied for theirsafety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may receiveaccelerated approval, which means that they may be approved on the basis of adequate and well-controlled clinical trials establishing that the product has an effecton a surrogate endpoint that is reasonably likely to predict a clinical benefit, or on the basis of an effect on a clinical endpoint other than survival or irreversiblemorbidity. As a condition of approval, the FDA may require that a sponsor of a drug or biological product receiving accelerated approval perform adequate andwell-controlled post-marketing clinical trials. If the FDA concludes that a drug shown to be effective can be safely used only if distribution or use is restricted, itwill require such post-marketing restrictions as it deems necessary to assure safe use of the drug, such as: • distribution restricted to certain facilities or physicians with special training or experience; or • distribution conditioned on the performance of specified medical procedures.The limitations imposed would be commensurate with the specific safety concerns presented by the drug. In addition, the FDA currently requires as acondition for accelerated approval, pre-approval of promotional materials, which could adversely impact the timing of the commercial launch of the product. FastTrack designation, priority review and accelerated approval do not change the standards for approval but may expedite the development or approval process.Pediatric TrialsRecently, the Food and Drug Administration Safety and Innovation Act, or FDASIA, which was signed into law on July 9, 2012, amended the FDCA.FDASIA requires that a sponsor who is planning to submit a marketing application for a drug or biological product that includes a new active ingredient, newindication, new dosage form, new dosing regimen or new route of administration submit an initial Pediatric Study Plan, or PSP, within sixty days of an end-of-Phase 2 meeting or as may be agreed between the sponsor and the FDA. The initial PSP must include an outline of the pediatric study or studies that the sponsorplans to conduct, including study 34 Table of Contentsobjectives and design, age groups, relevant endpoints and statistical approach, or a justification for not including such detailed information, and any request for adeferral of pediatric assessments or a full or partial waiver of the requirement to provide data from pediatric studies along with supporting information. The FDAand the sponsor must reach agreement on the PSP. A sponsor can submit amendments to an agreed-upon initial PSP at any time if changes to the pediatric planneed to be considered based on data collected from nonclinical studies, early phase clinical trials, and/or other clinical development programs. Submission of a PSPas defined in FDASIA is not required for programs with orphan drug designation.Post-Marketing RequirementsFollowing approval of a new product, a pharmaceutical company and the approved product are subject to continuing regulation by the FDA, including,among other things, monitoring and recordkeeping activities, reporting to the applicable regulatory authorities of adverse experiences with the product, providingthe regulatory authorities with updated safety and efficacy information, product sampling and distribution requirements, and complying with promotion andadvertising requirements, which include, among others, standards for direct-to-consumer advertising, restrictions on promoting drugs for uses or in patientpopulations that are not described in the drug’s approved labeling (known as “off-label use”), limitations on industry-sponsored scientific and educational activities,and requirements for promotional activities involving the internet. Although physicians may prescribe legally available drugs for off-label uses, manufacturers maynot market or promote such off-label uses. Modifications or enhancements to the product or its labeling or changes of the site of manufacture are often subject tothe approval of the FDA and other regulators, which may or may not be received or may result in a lengthy review process.Prescription drug advertising is subject to federal, state and foreign regulations. In the United States, the FDA regulates prescription drug promotion,including direct-to-consumer advertising. Prescription drug promotional materials must be submitted to the FDA in conjunction with their first use. Anydistribution of prescription drug products and pharmaceutical samples must comply with the U.S. Prescription Drug Marketing Act, or the PDMA, a part of theFDCA.In the United States, once a product is approved, its manufacture is subject to comprehensive and continuing regulation by the FDA. The FDA regulationsrequire that products be manufactured in specific approved facilities and in accordance with cGMP. We rely, and expect to continue to rely, on third parties for theproduction of clinical and commercial quantities of our products in accordance with cGMP regulations. cGMP regulations require among other things, qualitycontrol and quality assurance as well as the corresponding maintenance of records and documentation and the obligation to investigate and correct any deviationsfrom cGMP. Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments withthe FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP andother laws. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMPcompliance. These regulations also impose certain organizational, procedural and documentation requirements with respect to manufacturing and quality assuranceactivities. NDA holders using contract manufacturers, laboratories or packagers are responsible for the selection and monitoring of qualified firms, and, in certaincircumstances, qualified suppliers to these firms. These firms and, where applicable, their suppliers are subject to inspections by the FDA at any time, and thediscovery of violative conditions, including failure to conform to cGMP, could result in enforcement actions that interrupt the operation of any such facilities or theability to distribute products manufactured, processed or tested by them. Discovery of problems with a product after approval may result in restrictions on aproduct, manufacturer, or holder of an approved NDA, including, among other things, recall or withdrawal of the product from the market.The FDA also may require post-approval testing, sometimes referred to as Phase 4 testing, risk minimization action plans and post-marketing surveillance tomonitor the effects of an approved product or place conditions on an approval that could restrict the distribution or use of the product. Discovery of previously 35 Table of Contentsunknown problems with a product or the failure to comply with applicable FDA requirements can have negative consequences, including adverse publicity, judicialor administrative enforcement, warning letters from the FDA, mandated corrective advertising or communications with doctors, and civil or criminal penalties,among others. Newly discovered or developed safety or effectiveness data may require changes to a product’s approved labeling, including the addition of newwarnings and contraindications, and also may require the implementation of other risk management measures. Also, new government requirements, including thoseresulting from new legislation, may be established, or the FDA’s policies may change, which could delay or prevent regulatory approval of our products underdevelopment.Other Regulatory MattersManufacturing, sales, promotion and other activities following product approval are also subject to regulation by numerous regulatory authorities in additionto the FDA, including, in the United States, the Centers for Medicare & Medicaid Services, other divisions of the Department of Health and Human Services, theDrug Enforcement Administration, the Consumer Product Safety Commission, the Federal Trade Commission, the Occupational Safety & Health Administration,the Environmental Protection Agency and state and local governments. In the United States, sales, marketing and scientific/educational programs must also complywith state and federal fraud and abuse laws. Pricing and rebate programs must comply with the Medicaid rebate requirements of the U.S. Omnibus BudgetReconciliation Act of 1990 and more recent requirements in the Health Care Reform Law, as amended by the Health Care and Education AffordabilityReconciliation Act, or ACA. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additionallaws and requirements apply. The handling of any controlled substances must comply with the U.S. Controlled Substances Act and Controlled Substances Importand Export Act. Products must meet applicable child-resistant packaging requirements under the U.S. Poison Prevention Packaging Act. Manufacturing, sales,promotion and other activities are also potentially subject to federal and state consumer protection and unfair competition laws.The distribution of pharmaceutical products is subject to additional requirements and regulations, including extensive record-keeping, licensing, storage andsecurity requirements intended to prevent the unauthorized sale of pharmaceutical products.The failure to comply with regulatory requirements subjects firms to possible legal or regulatory action. Depending on the circumstances, failure to meetapplicable regulatory requirements can result in criminal prosecution, fines or other penalties, injunctions, recall or seizure of products, total or partial suspensionof production, denial or withdrawal of product approvals, or refusal to allow a firm to enter into supply contracts, including government contracts. In addition, evenif a firm complies with FDA and other requirements, new information regarding the safety or efficacy of a product could lead the FDA to modify or withdrawproduct approval. Prohibitions or restrictions on sales or withdrawal of future products marketed by us could materially affect our business in an adverse way.Changes in regulations, statutes or the interpretation of existing regulations could impact our business in the future by requiring, for example: (i) changes toour manufacturing arrangements; (ii) additions or modifications to product labeling; (iii) the recall or discontinuation of our products; or (iv) additional record-keeping requirements. If any such changes were to be imposed, they could adversely affect the operation of our business.U.S. Patent Term Restoration and Marketing ExclusivityDepending upon the timing, duration and specifics of the FDA approval of our drug candidates, some of our U.S. patents may be eligible for limited patentterm extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly 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 FDAregulatory review process. However, patent term restoration cannot extend the 36 Table of Contentsremaining term of a patent beyond a total of 14 years from the product’s approval date. The patent term restoration period is generally one-half the time betweenthe effective date of an IND and the submission date of an NDA plus the time between the submission date of an NDA and the approval of that application. Onlyone patent applicable to an approved drug is eligible for the extension and the application for the extension must be submitted prior to the expiration of the patent.The U.S. PTO, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. In the future, we intend to apply forrestoration of patent term for one of our currently owned or licensed patents to add patent life beyond its current expiration date, depending on the expected lengthof the clinical trials and other factors involved in the filing of the relevant NDA.Marketing exclusivity provisions under the FDCA can also delay the submission or the approval of certain marketing applications. The FDCA provides afive-year period of non-patent marketing exclusivity within the United States to the first applicant to obtain approval of an NDA for a new chemical entity. A drugis a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsiblefor the action of the drug substance. During the exclusivity period, the FDA may not accept for review an abbreviated new drug application, or ANDA, or a 505(b)(2) NDA submitted by another company for another drug based on the same active moiety, regardless of whether the drug is intended for the same indication as theoriginal innovator drug or for another indication, where the applicant does not own or have a legal right of reference to all the data required for approval. However,an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement to one of the patents listed with the FDA bythe innovator NDA holder. The FDCA also provides three years of marketing exclusivity for an NDA, or supplement to an existing NDA if new clinicalinvestigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of theapplication, for example new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the modification for which the drugreceived approval on the basis of the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the active agent forthe original indication or condition of use. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA. However, an applicantsubmitting a full NDA would be required to conduct or obtain a right of reference to all of the pre-clinical studies and adequate and well-controlled clinical trialsnecessary to demonstrate safety and effectiveness. Orphan drug exclusivity, as described above, may offer a seven-year period of marketing exclusivity, except incertain circumstances. Pediatric exclusivity is another type of regulatory market exclusivity in the United States. Pediatric exclusivity, if granted, adds six monthsto existing exclusivity periods and patent terms. This six-month exclusivity, which runs from the end of other exclusivity protection or patent term, may be grantedbased on the voluntary completion of a pediatric trial in accordance with an FDA-issued “Written Request” for such a trial.European Union Drug DevelopmentIn the European Union, our future products may also be subject to extensive regulatory requirements. As in the United States, medicinal products can only bemarketed if a marketing authorization from the competent regulatory agencies has been obtained.Similar to the United States, the various phases of pre-clinical and clinical research in the European Union are subject to significant regulatory controls.Although the EU Clinical Trials Directive 2001/20/EC has sought to harmonize the European Union clinical trials regulatory framework, setting out common rulesfor the control and authorization of clinical trials in the European Union, the European Union Member States have transposed and applied the provisions of theDirective differently. This has led to significant variations in the member state regimes. Under the current regime, before a clinical trial can be initiated it must beapproved in each of the European Union countries where the trial is to be conducted by two distinct bodies: the National Competent Authority, or NCA, and one ormore Ethics Committees, or ECs. Under the current regime all suspected unexpected serious adverse reactions to the investigated drug that occur during the clinicaltrial have to be reported to the NCA and ECs of the Member State where they occurred. 37 Table of ContentsThe European Union clinical trials legislation is currently undergoing a revision process mainly aimed at uniforming and streamlining the clinical trialsauthorization process, simplifying adverse event reporting procedures, improving the supervision of clinical trials, and increasing their transparency.European Union Drug Review and ApprovalIn the European Economic Area, or EEA, (which is comprised of the 27 Member States of the European Union (excluding Croatia) plus Norway, Iceland andLiechtenstein), medicinal products can only be commercialized after obtaining a Marketing Authorization, or MA. There are two types of marketing authorizations:The Community MA, which is issued by the European Commission through the Centralized Procedure, based on the opinion of the Committee for MedicinalProducts for Human Use, or CHMP, of the EMA and which is valid throughout the entire territory of the EEA. The Centralized Procedure is mandatory for certaintypes of products, such as biotechnology medicinal products, orphan medicinal products, and medicinal products containing a new active substance indicated forthe treatment of AIDS, cancer, neurodegenerative disorders, diabetes, auto-immune and viral diseases. The Centralized Procedure is optional for productscontaining a new active substance not yet authorized in the EEA, or for products that constitute a significant therapeutic, scientific or technical innovation or whichare in the interest of public health in the European Union.National MAs, which are issued by the competent authorities of the Member States of the EEA and only cover their respective territory, are available forproducts not falling within the mandatory scope of the Centralized Procedure. Where a product has already been authorized for marketing in a Member State of theEEA, this National MA can be recognized in another Member States through the Mutual Recognition Procedure. If the product has not received a National MA inany Member State at the time of application, it can be approved simultaneously in various Member States through the Decentralized Procedure. Under theDecentralized Procedure an identical dossier is submitted to the competent authorities of each of the Member States in which the MA is sought, one of which isselected by the applicant as the Reference Member State, or RMS. The competent authority of the RMS prepares a draft assessment report, a draft summary of theproduct characteristics, or SPC, and a draft of the labeling and package leaflet, which are sent to the other Member States (referred to as the Member StatesConcerned) for their approval. If the Member States Concerned raise no objections, based on a potential serious risk to public health, to the assessment, SPC,labeling, or packaging proposed by the RMS, the product is subsequently granted a national MA in all the Member States (i.e. in the RMS and the Member StatesConcerned).Under the above described procedures, before granting the MA, the EMA or the competent authorities of the Member States of the EEA make an assessmentof the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.European Union New Chemical Entity ExclusivityIn the European Union, new chemical entities, sometimes referred to as new active substances, qualify for eight years of data exclusivity upon marketingauthorization and an additional two years of market exclusivity. This data exclusivity, if granted, prevents regulatory authorities in the European Union fromreferencing the innovator’s data to assess a generic application for eight years, after which generic marketing authorization can be submitted, and the innovator’sdata may be referenced, but not approved for two years. The overall ten-year period will be extended to a maximum of 11 years if, during the first eight years ofthose ten years, the marketing authorization holder obtains an authorization for one or more new therapeutic indications which, during the scientific evaluationprior to their authorization, are held to bring a significant clinical benefit in comparison with existing therapies. 38 Table of ContentsEuropean Union Orphan Designation and ExclusivityIn the European Union, the EMA’s Committee for Orphan Medicinal Products grants orphan drug designation to promote the development of products thatare intended for the diagnosis, prevention or treatment of life-threatening or chronically debilitating conditions affecting not more than 5 in 10,000 persons in theEuropean Union and for which no satisfactory method of diagnosis, prevention, or treatment has been authorized (or the product would be a significant benefit tothose affected). Additionally, designation is granted for products intended for the diagnosis, prevention, or treatment of a life-threatening, seriously debilitating orserious and chronic condition and when, without incentives, it is unlikely that sales of the drug in the European Union would be sufficient to justify the necessaryinvestment in developing the medicinal product.In the European Union, orphan drug designation entitles a party to financial incentives such as reduction of fees or fee waivers and ten years of marketexclusivity is granted following medicinal product approval. 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 sufficiently profitable not to justify maintenance of market exclusivity. Orphan drug designation must be requestedbefore submitting an application for marketing approval. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatoryreview and approval process.ReimbursementSales of our products will depend, in part, on the extent to which our products will be covered by third-party payors, such as government health programs,commercial insurance and managed healthcare organizations. These third-party payors are increasingly reducing reimbursements for medical products and services.Additionally, the containment of healthcare costs has become a priority of federal and state governments, and the prices of drugs have been a focus in thiseffort. The U.S. government, state legislatures and foreign governments have shown significant interest in implementing cost-containment programs, includingprice controls, restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, andadoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our net revenue and results. Decreases in third-partyreimbursement for our product candidate or a decision by a third-party payor to not cover our product candidate could reduce physician usage of the productcandidate and have a material adverse effect on our sales, results of operations and financial condition.The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MMA, established the Medicare Part D program to provide avoluntary prescription drug benefit to Medicare beneficiaries. Under Part D, Medicare beneficiaries may enroll in prescription drug plans offered by private entitieswhich provide coverage of outpatient prescription drugs. Unlike Medicare Part A and B, Part D coverage is not standardized. Part D prescription drug plansponsors are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and atwhat tier or level. However, Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though notnecessarily all the drugs in each category or class. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy andtherapeutic committee. Government payment for some of the costs of prescription drugs may increase demand for products for which we receive marketingapproval. However, any negotiated prices for our products covered by a Part D prescription drug plan will likely be lower than the prices we might otherwiseobtain. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and paymentlimitations in setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments from non-governmental payors.The American Recovery and Reinvestment Act of 2009 provides funding for the federal government to compare the effectiveness of different treatments forthe same illness. The plan for the research was published in 39 Table of Contents2012 by the Department of Health and Human Services, the Agency for Healthcare Research and Quality and the National Institutes for Health, and periodicreports on the status of the research and related expenditures will be made to Congress. Although the results of the comparative effectiveness studies are notintended to mandate coverage policies for public or private payors, it is not clear what effect, if any, the research will have on the sales of our product candidates, ifany such product or the condition that it is intended to treat is the subject of a trial. It is also possible that comparative effectiveness research demonstrating benefitsin a competitor’s product could adversely affect the sales of our product candidates. If third-party payors do not consider our products to be cost-effective comparedto other available therapies, they may not cover our products after approval as a benefit under their plans or, if they do, the level of payment may not be sufficientto allow us to sell our products on a profitable basis.The Health Care Reform Law, as amended by the Health Care and Education Affordability Reconciliation Act of 2010, or collectively the ACA, enacted inMarch 2010, is expected to have a significant impact on the health care industry. The ACA is expected to expand coverage for the uninsured while at the same timecontaining overall healthcare costs. With regard to pharmaceutical products, among other things, the ACA is expected to expand and increase industry rebates fordrugs covered under Medicaid programs and make changes to the coverage requirements under the Medicare Part D program. We cannot predict the impact of theACA on pharmaceutical companies as many of the ACA reforms require the promulgation of detailed regulations implementing the statutory provisions which hasnot yet occurred. For example, pharmaceutical manufacturers are required to track certain financial arrangements with physicians and teaching hospitals, includingany “transfer of value” made or distributed to such entities, as well as any investment interests held by physicians and their immediate family members.Manufacturers are required by ACA to begin tracking this information in 2013 and to report this information to CMS beginning in 2014.In addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted. On August 2, 2011, the BudgetControl Act of 2011 among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked withrecommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering thelegislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of up to 2% per fiscalyear, started in April 2013. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA, which delayed foranother two months the budget cuts mandated by these sequestration provisions of the Budget Control Act of 2011. The ATRA, among other things, also reducedMedicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for thegovernment to recover overpayments to providers from three to five years. We expect that additional federal healthcare reform measures will be adopted in thefuture, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, and in turn could significantly reducethe projected value of certain development projects and reduce our profitability.In addition, in some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governingdrug pricing vary widely from country to country. For example, the European Union provides options for its member states to restrict the range of medicinalproducts for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member statemay approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing themedicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products willallow favorable reimbursement and pricing arrangements for any of our products. Historically, products launched in the European Union do not follow pricestructures of the United States and generally tend to be significantly lower. 40 Table of ContentsEmployeesAs of March 7, 2016, we employed 45 full-time employees, including 30 in research and development and 15 in general and administrative, and one part-time employee in general and administrative. We have never had a work stoppage, and none of our employees is represented by a labor organization or under anycollective-bargaining arrangements. We consider our employee relations to be good.Our Corporate InformationWe were incorporated under the laws of the State of Delaware in 2005. Our principal executive offices are located at 175 Portland Street, 4th Floor, Boston,MA 02114, and our telephone number is (617) 622-4003. Our website address is www.zafgen.com.Available InformationWe make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K andamendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Wemake these reports available through our website as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC.You can find, copy and inspect information we file at the SEC’s public reference room, which is located at 100 F Street, N.E., Room 1580, Washington, DC 20549.Please call the SEC at 1-800-SEC-0330 for more information about the operation of the SEC’s public reference room. You can review our electronically filedreports and other information that we file with the SEC on the SEC’s web site at http://www.sec.gov. We also make available, free of charge on our website, thereports filed with the SEC by our executive officers, directors and 10% stockholders pursuant to Section 16 under the Exchange Act as soon as reasonablypracticable after copies of those filings are provided to us by those persons. The information contained on, or that can be accessed through, our website is not a partof or incorporated by reference in this Annual Report.ITEM 1A. RISK FACTORSInvesting in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information inthis Annual Report on Form 10-K and in our other public filings before making an investment decision. Our business, prospects, financial condition, or operatingresults could be harmed by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. If any such risks oruncertainties actually occur, our business, financial condition or operating results could differ materially from the plans, projections and other forward-lookingstatements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this reportand in our other public filings. The trading price of our common stock could decline due to any of these risks, and as a result, you may lose all or part of yourinvestment.Risks Related to Product Development, Regulatory Approval and CommercializationDue to an imbalance in the number of thrombotic events observed in patients treated with beloranib in our clinical trials versus placebo, including two deathsfrom pulmonary embolism, we received notice from the FDA in December 2015, that the IND for beloranib had been placed on a full clinical hold. We cannotbe certain that we will be able to obtain the FDA’s agreement to lift the full clinical hold for beloranib, obtain regulatory approval for beloranib, orsuccessfully commercialize beloranib.We have completed ZAF-311, our first Phase 3 clinical trial of beloranib in patients with Prader-Willi syndrome, or PWS. Patient enrollment of 108 patientsin the ZAF-311 clinical trial was completed in May 2015. In late-September 2015, we learned of a patient death in this trial but at that time did not know whetherthe patient’s treatment assignment was beloranib. In October 2015, we learned that the patient was receiving 41 Table of Contentsbeloranib after the patient’s treatment assignment was unblinded per the request of the U.S. Food and Drug Administration, or FDA, and, on October 15, 2015, wereceived notice from the FDA that the Investigational New Drug Application, or IND, for beloranib had been placed on a partial clinical hold. Subsequently, wereceived the patient’s death certificate and learned that the cause of death was determined to be respiratory failure as a consequence of pulmonary emboli. Afterreview of our ongoing clinical trials, we elected to proceed with efficacy and safety data analysis and close the randomized portion of the ZAF-311 trial and ourPhase 2b ZAF-203 clinical trial of beloranib in patients with severe obesity complicated by type 2 diabetes. In early December 2015, we learned that anotherpatient receiving beloranib as part of the open label extension, or OLE, portion of the ZAF-311 trial was diagnosed with bilateral pulmonary emboli and died, andon December 2, 2015, we received a notice from the FDA that our IND for beloranib had been placed on full clinical hold, affecting the ongoing OLE portion ofthe ZAF-311 clinical trial. We plan to present to the FDA data from our recently completed Phase 3 clinical trial evaluating beloranib as a treatment for PWS andour Phase 2b clinical trial evaluating beloranib in severe obesity complicated by type 2 diabetes, a proposal for a risk mitigation strategy for beloranib in PWS, andother reported data, in an effort to address the full clinical hold the FDA has placed on the beloranib IND. However, we can provide no assurances that the FDAwill lift the full clinical hold on the beloranib IND in a timely manner, or at all.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 theFDA’s review, and have several additional studies to complete or that need further evaluation, including human factors studies to demonstrate patients’ ability tocorrectly use the syringe device for dispensing beloranib, abuse potential studies, a thorough QT or tQT study and rat and mouse carcinogenicity studies. However,the FDA may require additional pre-clinical animal studies or clinical studies, labeling statements in the beloranib product labeling, or restrictions.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 resume or start new clinical trials of beloranib; • we may not be able to demonstrate that beloranib is safe and effective in treating obesity and hyperphagia in patients with PWS, obesity in patientswith HIAO or other orphan indications, to the satisfaction of the FDA and EMA; • the results of our clinical trials may not meet the level of statistical or clinical significance required by the FDA and EMA for marketing approval; • the FDA and EMA may disagree with the number, design, size, duration, conduct or implementation of our clinical trials; • the FDA and EMA may require that we conduct additional clinical trials or pre-clinical studies; • the FDA and EMA 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 materiallyadversely impact our clinical trials; • the FDA and EMA may find the data from pre-clinical studies and clinical trials insufficient to demonstrate that beloranib’s clinical and other benefitsoutweigh its safety risks; • the FDA and EMA may disagree with our interpretation of data from our pre-clinical studies and clinical trials; • the FDA and EMA may not accept data generated at our clinical trial sites; • if and when our NDA is submitted and reviewed by an FDA advisory committee, the FDA may have difficulties scheduling an advisory committeemeeting 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; 42 Table of Contents • the FDA will likely require development of a REMS, as a condition of approval or post-approval, or may not agree with our proposed REMS or mayimpose additional requirements that limit the promotion, advertising, distribution, or sales of beloranib; • the FDA and EMA may not approve the manufacturing processes or facilities of third-party manufacturers with which we contract; or • the FDA and EMA 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 and/or maintain regulatory approval for and successfullymarket beloranib.We are focused on developing MetAP2 inhibitors as a treatment for obesity and a variety of complex metabolic diseases, but we may find a relationship betweenMetAP2 inhibitors as a category of drugs and thrombotic events, which may adversely affect our ability to obtain regulatory approvals and commercialize ourproduct candidates.Our lead product candidate, beloranib, is a MetAP2 inhibitor focused on treatment of obesity associated with rare diseases such as PWS and HIAO. Thebeloranib IND is under full clinical hold due to an imbalance in the number of thrombotic events observed in patients treated with beloranib in our clinical trialsversus placebo. The discussion of our clinical trials in the table under “Item 1. Business–Clinic Trials–Overview of Adverse Events and Serious Adverse EventsRelated to Thrombosis” of this Annual Report on Form 10-K includes information about such thrombotic events. We are working to understand the incidence ofthrombotic events in connection with beloranib and MetAP2 inhibitors more broadly. Our other product candidates in early stages of development are also MetAP2inhibitors. We are developing ZGN-839, a liver-targeted MetAP2 inhibitor, for the treatment of nonalcoholic steatohepatitis, or NASH, and abdominal obesity, aswell as other second-generation MetAP2 inhibitors for the treatment of severe obesity. We may not only find a relationship between beloranib and thromboticevents, but also a relationship between MeAP2 inhibitors as a category of drugs and thrombotic events. If a relationship between thrombotic events and MetAP2inhibitors is established, we may neither be able to lift the full clinical hold on beloranib, nor be able to obtain regulatory approvals and commercialize our otherproduct candidates such as ZGN-839 and other second-generation MetAP2 inhibitors.We depend almost entirely on the success of one product candidate, beloranib, which is currently on full clinical hold.We currently have only one product candidate, beloranib, in clinical development, and our business depends almost entirely on its successful clinicaldevelopment, regulatory approval and commercialization. We currently have no drug products for sale and may never be able to develop marketable drug products.Beloranib is currently in Phase 3 clinical development as a treatment for obesity and hyperphagia in patients with PWS and Phase 2 clinical development forHIAO, however, the beloranib IND is currently on full clinical hold, which will need to be lifted before we can continue clinical development. If the FDA lifts thefull clinical hold, beloranib will still require substantial additional clinical development, testing and regulatory approval before we are permitted to commence itscommercialization. Because our business is almost entirely dependent upon this one product candidate, any such setback in our pursuit of regulatory approvalwould have a material adverse effect on our business and prospects.Our other product candidates, including ZGN-839, and our second-generation MetAP2 inhibitors, are still in pre-clinical development stages. The clinicaltrials of our product candidates are, and the manufacturing and marketing of our product candidates will be, subject to extensive and rigorous review and regulationby numerous government authorities in the United States and in other countries where we intend to test and, if approved, market any product candidate. Beforeobtaining regulatory approvals for the commercial sale of any product candidate, we must demonstrate through pre-clinical testing and clinical trials that theproduct candidate is safe and effective for use in each target indication. This process can take many years and will likely include 43 Table of Contentspost-marketing studies or PMS, post-marketing requirements, or PMRs, and surveillance such as Risk Evaluation and Mitigation Strategies, or REMS, which willrequire the expenditure of substantial resources beyond the proceeds we currently have on hand. Of the large number of drugs in development in the United States,only a small percentage will successfully complete the FDA regulatory approval process and be commercialized. Accordingly, even if we are able to obtain therequisite financing to continue to fund our development and clinical trials, we cannot assure you that beloranib or any other of our product candidates will besuccessfully developed or commercialized. Following the full clinical hold the FDA placed on the beloranib IND in December 2015, we plan to present data to theFDA from our recently completed Phase 3 clinical trial evaluating beloranib as a treatment for PWS and our Phase 2b clinical trial of beloranib in severe obesitycomplicated by type 2 diabetes, a proposal for a risk mitigation strategy for beloranib in PWS and other reported data. If we are able to reach an agreement with theFDA that an appropriate, safe, and effective pathway can be developed to support lifting the full clinical hold on the beloranib IND, we anticipate the need toconduct another Phase 3 clinical trial of beloranib in patients with PWS in the United States and likely the European Union before we can submit an NDA, afterdiscussing the trial design with applicable regulatory authorities.We are not permitted to market beloranib in the United States until we receive approval of an NDA from the FDA or in any foreign countries until wereceive the requisite marketing approval from such countries. We recently completed a Phase 3 clinical trial of beloranib in patients with PWS, at least one pivotaltrial before we can submit an NDA for beloranib as a treatment for patients with HIAO. However, meeting the requirements of the FDA or certain Europeanregulatory authorities may require that we conduct additional pivotal trials. We expect that the FDA will also require us to complete at least two Phase 3 clinicaltrials prior to submitting an NDA for another one of our MetAP2 inhibitors as a treatment for severe obesity in the general population, and may require that weconduct a cardiovascular outcomes trial which may include over 10,000 patients and last over the course of multiple years. Pursuant to the FDA’s February 2007draft guidance to industry on the development of weight management drugs, in order to reasonably estimate the safety of a weight-management drug, Phase 3clinical 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.Accordingly, obtaining approval of an NDA is a complex, lengthy, expensive and uncertain process.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 thepositive results from our earlier clinical trials of beloranib in our later-stage clinical trials, we may be unable to successfully develop, obtain regulatoryapproval for and commercialize beloranib. It may further be necessary to validate different or additional instruments for measuring subjective endpoints, suchas hyperphagia, and to show that beloranib has a clinically meaningful impact on those endpoints in order to obtain regulatory approval.Positive results from our earlier-stage clinical trials of beloranib may not necessarily be predictive of the results from required later-stage clinical trials. InJanuary 2016, we announced the results of our first Phase 3 clinical trial of beloranib evaluating the safety and efficacy of beloranib in patients with PWS, during asix-month randomized treatment period. The clinical trial achieved its co-primary efficacy endpoints, as patients treated with beloranib achieved a statisticallysignificant reduction in both body weight and hyperphagia-related behaviors. However, we can provide no assurance that the results of this first Phase 3 clinicaltrial of beloranib in patients with PWS will be replicated in another Phase 3 clinical trial of beloranib in patients with PWS, which we anticipate being required toconduct if the FDA lifts the full clinical hold or in any future clinical trials of beloranib as a treatment for PWS, and of beloranib for HIAO.Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in later-stage clinical trials after achieving positiveresults in early-stage development, and we cannot be certain that we will not continue to face similar setbacks. These setbacks have been caused by, among otherthings, pre-clinical findings made while clinical trials were underway or safety or efficacy observations made in clinical trials, including previously unreportedadverse events. Moreover, pre-clinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that believed theirproduct candidates 44 Table of Contentsperformed satisfactorily in pre-clinical studies and clinical trials nonetheless failed to obtain FDA and/or EMA approval. If we fail to produce positive results in ourfuture Phase 2b or Phase 3 clinical trials of beloranib, the development timeline and regulatory approval and commercialization prospects for our leading productcandidate, and, correspondingly, our business and financial prospects, would be materially adversely affected.Our product candidates may cause undesirable side effects that could delay or prevent their regulatory approval, limit the commercial profile of an approvedlabel, 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 such as the FDA to interrupt, delay or halt clinical trialsand could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other regulatory authorities.In December 2015, the FDA, placed a full clinical hold on our IND for beloranib, as a result of a safety imbalance in the number of thrombotic eventsobserved in patients treated with beloranib in our clinical trials versus those treated with placebo. In our clinical trials to date, we have observed five SAEs and sixAEs related to thrombosis in patients treated with beloranib, including five cases of pulmonary embolism, two of which resulted in patient death, four cases of deepvein thrombosis and five cases of thrombophlebitis. For additional information about these thrombotic events see “Item 1. Business–Clinic Trials–Overview ofAdverse Events and Serious Adverse Events Related to Thrombosis.”Other common AEs observed in patients treated with beloranib include upper respiratory tract infection, diarrhea, injection site bruising, dizziness, nausea,vomiting, and sleep disturbances, principally manifested as delayed onset of sleep, amongst others.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.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 thepublic until such time the various documents submitted to the FDA as part of the approval process are made public. AEs likewise may not have been disclosed tothe public until such time as the various documents submitted to the FDA as part of the approval process are made public. We are unable to determine if thesubsequent disclosure of SAEs or AEs will have an adverse effect on our stock price. In addition, our interpretation of the safety data from our clinical trials iscontingent upon the review and ultimate approval of the FDA or other regulatory authorities. The FDA or other regulatory authorities may not agree with ourmethods of analyses or our interpretation of the results.Further, if beloranib receives marketing approval and we or others identify undesirable side effects caused by the product (or any other similar product) afterthe approval, a number of potentially significant negative consequences could result, including: • regulatory authorities may request that we withdraw the product from the market or may limit their approval of the product through labeling or othermeans; • regulatory authorities may require the addition of labeling statements, such as a “boxed” warning or a contraindication or a precaution; • we may be required to change the way the product is distributed or administered, conduct additional clinical trials or change the labeling of theproduct; • 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. 45 Table of ContentsAny of these events could prevent us from achieving or maintaining market acceptance of the affected product candidate and could substantially increase thecosts of commercializing our product candidates and significantly impact our ability to successfully commercialize our product candidates and generate revenues.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, preventor limit our ability to generate revenue and continue our business.Beloranib is currently in Phase 3 clinical development as a treatment for obesity and hyperphagia in patients with PWS and Phase 2 clinical development forsevere obesity in HIAO, but the beloranib IND is currently on full clinical hold, which will need to be lifted before we can continue clinical development. If theFDA lifts the full clinical hold, beloranib may still require substantial additional clinical development, as we anticipate the need to conduct another Phase 3 clinicaltrial of beloranib in patients with PWS in the United States and likely the European Union, before we can submit an NDA for beloranib in PWS and at least onepivotal trial before we can submit an NDA for beloranib in HIAO.Despite the guidance received from, and to be received from, the FDA and EMA, both of these regulatory authorities can change their positions on theacceptability of our trial designs or the clinical endpoints selected, which may require us to complete additional clinical trials or impose stricter approval conditionsthan we currently expect. Resumption and successful completion of such clinical trials is a prerequisite to submitting an NDA to the FDA and an MAA to the EMAand, consequently, the ultimate approval and commercial marketing of beloranib. We do not know whether any clinical trials will begin or be completed onschedule, 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, EMA or other governing bodies in Europe may deny permission to pursue other clinical trials and/or indications we want to initiate; • delays in regulatory filing or receiving regulatory approvals or additional INDs, or clinical trial applications, or CTAs, that may be required; • negative results from our ongoing pre-clinical and /or non-clinical studies, or the FDA or EMA may require additional pre-clinical and /or non-clinicalstudies; • 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 toextensive 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 ofsufficient supply of finished drug product; • difficulties obtaining Institutional Review Board, or IRB, and/or ethics committee approval to conduct a clinical trial at a prospective site or sites in theUnited States or the European Union; • challenges in recruiting and enrolling patients to participate in clinical trials, including the size and nature of the patient population, the proximity ofpatients to trial sites, eligibility criteria for the clinical trial, the nature of the clinical trial protocol, the availability of approved effective treatments forthe 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 completedclinical trials; • delays in validating the PWS HQ-CT or any other self-reported measures of hunger and related endpoints utilized in a clinical trial, including delayscaused as a result of the need to translate the PWS HQ-CT or other self-reported measures of hunger into European languages other than English; 46 Table of Contents • the FDA or EMA may disagree with our clinical trial design and our interpretation of data from clinical trials, or may change the requirements forapproval even after it has reviewed and commented on the design for our clinical trials; • difficulties in retaining or recruiting clinical investigators and/or patients in our ongoing or future clinical trials; • reports from pre-clinical, non-clinical or clinical testing of other weight loss therapies that raise safety or efficacy concerns; and • 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, sideeffects, current thromboembolic screening and monitoring measures, 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 orterminated by us, the FDA, such as our ZAF-311 clinical trial, other regulatory authorities, the IRBs, or ethics committees, at the sites where the IRBs or ethicscommittees are overseeing a clinical trial, a data and safety monitoring board, or DSMB, or Safety Monitoring Committee, or SMC, overseeing the clinical trial atissue 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 EMA that reveals deficiencies or violations that require us to undertake correctiveaction, including the imposition of a full 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 EMA or unanticipated events during our clinical trials of beloranib may occur, whichmay result in changes to clinical trial protocols or additional clinical trial requirements, which could result in increased costs to us and could delay ourdevelopment timeline.Changes in regulatory requirements, FDA guidance or guidance from EMA or unanticipated events during our clinical trials may force us to adjust ourclinical program or the FDA or EMA may impose additional clinical trial and/or pre-clinical study requirements. For instance, the FDA issued draft guidance ondeveloping products for weight management in February 2007, but this guidance may be revised in the near future. In March 2012, the FDA’s Endocrinologic andMetabolic Drugs Advisory Committee met to discuss possible changes to how the FDA evaluates the cardiovascular safety of weight-management drugs andalthough new guidance has not been issued yet it may occur any time. Amendments to our clinical trial protocols would require resubmission to the FDA or EMA,as well as IRBs and ethics committees for review and approval, which may adversely impact the cost, timing or successful completion of a clinical trial. If weexperience delays completing, or if we terminate, any of our clinical trials, or if we are required to conduct additional clinical trials and/or pre-clinical studies, thecommercial prospects for beloranib may be harmed and our ability to generate product revenue will be delayed. 47 Table of ContentsWe 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 successfullycarry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize beloranib and ourbusiness 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 partiesfor 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 andcompletion 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 ownstaff. Communicating with outside parties can also be challenging, potentially leading to mistakes as well as difficulties in coordinating activities. Outside partiesmay: • have staffing difficulties; • fail to comply with contractual obligations; • experience regulatory compliance issues; • 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 costincreases that are beyond our control. Nevertheless, we are responsible for ensuring that each of our trials 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 complywith requirements for Good Clinical Practice, or cGCPs, which are legal requirements enforced by the FDA, the Competent Authorities of the Member States of theEuropean Economic Area and comparable foreign regulatory authorities for any products in clinical development. The FDA enforces these cGCP regulationsthrough periodic inspections of clinical trial sponsors, principal investigators and trial sites, IRBs, ethics committees, and other vendors that may be involved in theclinical development of new products. If we or our CROs fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemedunreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketingapplications. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply with cGCPs. In addition, our clinical trialsmust be conducted with product produced under current Good Manufacturing Practices, or cGMPs regulations, to assure the identity, strength, quality, and purity ofour drug product candidates being used in the clinical trials, as well as the to-be-marketed formulation and product. Our failure or the failure of our CROs and/orcontract manufacturing organizations, or CMOs, to comply with these regulations may require us to repeat clinical trials, which would delay the regulatoryapproval 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 developmentprograms are outside of our direct control. In addition, the CROs may not perform all of their obligations under arrangements with us or in compliance withregulatory requirements, but we remain responsible and are subject to enforcement action that may include civil penalties up to and including criminal prosecutionfor 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, breachtheir obligations to us, or fail to comply with regulatory requirements, the development and commercialization of beloranib may be delayed or our developmentprogram materially and irreversibly harmed. We cannot control the amount and timing of resources these CROs devote to our program or beloranib. If we areunable 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 couldsignificantly 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 in a timely manner,or at all. If CROs do not successfully carry out their 48 Table of Contentscontractual 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 compromiseddue 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 prospectsfor 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 each of PWS and HIAO is small and has not been established with precision. If the actual number of patients witheither 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, ourrevenue 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 anygeography. 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 approximately400 to 500 cases per year in the United States and 650 to 850 cases per year in the European Union. The total addressable market opportunity for beloranib for thetreatment of patients with PWS or HIAO will ultimately depend upon, among other things, the diagnosis criteria included in the final label for beloranib, ifapproved for sale for these indications, acceptance by the medical community and patient access, product pricing and reimbursement. If the actual number ofpatients 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 thepotential 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 and adult patients, 12 years of age and older, with PWS andadolescent and adult patients with HIAO. We believe that approximately 40-50% of patients with PWS are 12 years of age or older. To support approval forpediatric 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 wedo not yet have plans regarding when these trials will commence. These trials may require new or different formulations of beloranib, which is likely to result inadditional costs over an extended timeframe. As a result, any FDA and EMA approval would likely, at least initially, be limited to use for treating adolescent andadult 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 achieveor 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 producecommercial 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 tomanufacture any product candidates on a clinical or commercial scale. The facilities used by our CMOs to manufacture the active drug substance, sterile drugsubstance and final drug product must be approved by the FDA and other comparable foreign regulatory agencies pursuant to inspections that would be conductedafter 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 drugsubstance, sterile drug substance and finished drug products. If our CMOs cannot successfully manufacture material that conforms to our specifications and theregulatory requirements of the FDA or applicable foreign regulatory agencies, the CMOs will not be able to secure and/or 49 Table of Contentsmaintain regulatory approval for their manufacturing facilities. While we manage our quality expectations through an 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 areengaged with third party vendors to supply and/or manufacture starting materials or components for them, which exposes our CMOs to regulatory risks for theproduction of such materials and components. As a result, failure to satisfy the regulatory requirements for the production of those materials and components mayaffect the regulatory clearance of our CMOs’ facilities generally. If the FDA or an applicable foreign regulatory agency does not approve these facilities for themanufacture of our product candidates or if it withdraws its approval in the future, we may need to find alternative manufacturing facilities, which would adverselyimpact 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 areforecasted on a six month rolling basis taking into account enrollment rates, number of sites, component inventory and clinical kit shelf-life. The clinical supplyforecast is maintained internally and used to aid in decision making for cGMP manufacturing as well as clinical kit packaging and labeling. In addition, the CROswe contract with maintain 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 thus helping tomanage inventory at the CRO. Resupply of finished drug product is in progress at our drug product CMO. The manufacturing process is under active developmentand is not yet validated. Any delays encountered with manufacturing activities, CMO scheduling, or raw material supply could delay the manufacturing of finisheddrug product.Currently each batch of beloranib is individually contracted under a work order, which is governed by a quality and supply agreement. The manufacture ofprimary stability batches for active drug substance, sterile drug substance and drug product have been completed and stability has been initiated, CMOs arecurrently supporting clinical activities, however CMOs that will manufacture commercial cGMP batches for beloranib will need to be approved by the FDA andother applicable foreign regulatory agencies, prior to commercialization. We plan to continue to rely upon CMOs and, potentially, collaboration partners tomanufacture commercial quantities of beloranib, if approved. We are in the process of establishing long-term supply agreements with our current CMOs andvendors. 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 inorphan 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 togenerate any revenue.We do not currently have an established infrastructure for the sales, marketing and distribution of pharmaceutical products. In order to market beloranib, ifapproved by the FDA or any other regulatory body, we must build our sales, marketing, managerial and other non-technical capabilities or make arrangements withthird parties to perform these services. If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with thirdparties, or if we are unable to do so on commercially reasonable terms, our business, results of operations, financial condition and prospects will be materiallyadversely 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 UnitedStates.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 theUnited States, we must establish and comply with the numerous and varying safety, efficacy and other regulatory requirements of other countries, includingpotential additional clinical trials and/or nonclinical studies. Approval procedures vary among countries and can involve additional product candidate testing andadditional administrative review periods. The time required to obtain 50 Table of Contentsapprovals in other countries might differ from that required to obtain FDA approval. The marketing approval processes in other countries may implicate all of therisks 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 mustreceive pricing and reimbursement approval before the product can be commercialized. Obtaining this approval can result in substantial delays in bringing productsto market in such countries. Marketing approval in one country does not necessarily ensure marketing approval in another, but a failure or delay in obtainingmarketing approval in one country may have a negative effect on the regulatory process or commercial activities in others. Failure to obtain marketing approval inother countries or any delay or other setback in obtaining such approval would impair our ability to market beloranib in such foreign markets. Any such impairmentwould 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 itssales.The commercial success of beloranib, if approved for marketing by the FDA or EMA or other applicable regulatory authorities, will depend upon theawareness and acceptance of beloranib among the medical community, including physicians, patients, advocacy groups and healthcare payors. Market acceptanceof 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, obesity in patients with HIAO, and, if required by anyapplicable regulatory authority in connection with the approval for these indications, to provide patients with incremental health benefits, as comparedwith other available weight loss therapies, devices or surgeries; • the relative convenience and ease of subcutaneous injections as the necessary method of administration of beloranib; • the prevalence and severity of any adverse side effects associated with beloranib, such as psychiatric disorders (i.e. sleep disorders), injection sitebruising and venous thromboembolic events; • limitations or warnings contained in the labeling approved for beloranib by the FDA, EMA, or other regulatory authorities, such as a pregnancyCategory X limitation; • availability of alternative treatments, including a number of competitive obesity therapies already approved or expected to be commercially launchedin 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; • 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; • the willingness of patients to pay out-of-pocket in the absence of third-party coverage; and • the likelihood that the FDA may require development of a REMS, as a condition of approval or post-approval or may not agree with our proposedREMS or may impose additional requirements that limit the promotion, advertising, distribution or sales of beloranib. 51 Table of ContentsIf beloranib is approved but does not achieve an adequate level of acceptance by patients, advocacy groups, physicians and payors, we may not generatesufficient revenue from beloranib to become or remain profitable. Before granting reimbursement approval, healthcare payors may require us to demonstrate that,in addition to treating 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.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 ormarketing or impose ongoing requirements for potentially costly post-approval studies. Beloranib will also be subject to ongoing FDA and EMA requirementsgoverning the labeling, packaging, storage and promotion of the product and recordkeeping and submission of safety and other post-market information. The FDAhas significant post-market authority, including, for example, the authority to require labeling changes based on new safety information and to require post-marketstudies 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 andpotential requirements or restrictions on the sale of approved products, all of which could lead to lower sales volume and revenue. Additionally, the FDA mayrequire PMS and/or PMRs, that could represent and result in additional restrictions and/or limitations for the product.Manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities forcompliance with cGMPs and other regulations. If we or a regulatory agency discover problems with beloranib, such as adverse events of unanticipated severity orfrequency, 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 withapplicable 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.Competing technologies could emerge, including devices and surgical procedures, adversely affecting our opportunity to generate revenue from the sale ofbeloranib.The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. We have competitors ina number of jurisdictions, many of which have substantially greater name recognition, commercial infrastructures and financial, technical and personnel resourcesthan 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 52 Table of Contentssafety to be commercially successful. Other competitive factors, including generic competition, could force us to lower prices or could result in reduced sales. Inaddition, new products developed by others could emerge as competitors to beloranib. If we are not able to compete effectively against our current and futurecompetitors, 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 hunger of patients withHIAO, and bariatric surgery is contraindicated in patients with PWS and is not frequently employed in patients with HIAO. We are aware of a Phase 2 clinical trialcompleted 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 Phase 1 clinical trial recently completed by Essentialis, Inc. to evaluate thesafety and tolerability of controlled-release diazoxide in patients with PWS and to explore the effects of diazoxide on hyperphagia-related behaviors and energyexpenditure. We are aware of an ongoing Phase 2 trial sponsored by Rhythm Pharmaceuticals, Inc. to evaluate the effect of treatment with RM-493, a melanocortinreceptor agonist, in patients with PWS and Alize Pharma is conducting a Phase 2 clinical trial in PWS of AZP-531, its unacylated ghrelin analog. In addition, anyof our competitors may develop a drug to treat patients with PWS at any time. We are not aware of any industry sponsored clinical trials of drugs specificallytargeting patients with HIAO.Potential competitors in the severe obesity market include bariatric service providers, and other potential approaches which utilize various implantabledevices or surgical tools that have been cleared by the FDA, such as EnteroMedics Inc.’s VBlock Therapy, or that are in development by companies such asAllergan, Inc., BAROnova, Inc., Boston Scientific Corporation, Covidien Ltd., GI Dynamics, Inc., Gelesis, Neurosearch A/S, Johnson & Johnson and Medtronic,Inc. In addition, if pursued for treatment of obese and overweight patients in the presence of at least one co-morbid condition, beloranib will compete with Xenical(orlistat, Roche Group; also available over-the-counter in the United States at half the prescribed dose by GlaxoSmithKline as Alli), Qsymia(phentermine/topiramate, Vivus Inc.), Belviq (lorcaserin, Eisai), Contrave (naltrexone/bupropion, Takeda Pharmaceuticals U.S.A., Inc. and Orexigen Therapeutics,Inc.), Saxenda (liraglutide, Novo Nordisk) and several older agents indicated for short-term administration, including phentermine, phendimetrazine,benzphetamine and diethylpropion.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 anduncertainties.Our future profitability will depend, in part, on our ability to commercialize beloranib in foreign markets for which we may rely on collaborations with thirdparties. 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; • 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. 53 Table of ContentsForeign sales of beloranib could also be adversely affected by the imposition of governmental controls, political and economic instability, trade restrictionsand changes in tariffs.We are subject to healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm anddiminished profits and future earnings.Healthcare providers, physicians and others will play a primary role in the recommendation and prescription of beloranib, if approved. Our futurearrangements with third-party payors will expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the businessor financial arrangements and relationships through which we market, sell and distribute beloranib, if we obtain marketing approval. Restrictions under applicablefederal 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 orproviding remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order orrecommendation 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 orentities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making afalse 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 andClinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposesobligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiablehealth information. • The federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materiallyfalse 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, requiremanufacturers of drugs, devices, and biologics to report to the Department of Health and Human Services information related to physician paymentsand other transfers of value and physician ownership and investment interests. • Analogous state laws and regulations, such as state anti-kickback and false claims laws and transparency laws, may apply to sales or marketingarrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, andsome state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevantcompliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments tophysicians 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 thatgovernmental authorities will conclude that our business practices do not comply with current or future statutes, regulations or case law involving applicable fraudand abuse or other healthcare laws and regulations. If our operations, including anticipated activities to be conducted by our sales team, were found to be inviolation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrativepenalties, damages, fines and exclusion from government funded healthcare programs, such as Medicare and Medicaid, any of which could substantially disrupt ouroperations. If any of the physicians or other providers or entities with whom we expect 54 Table of Contentsto do business is found not to be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions fromgovernment 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 haveimproperly 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, ifapproved. 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’sapproved labeling. If we receive marketing approval for beloranib as a treatment for obesity and hyperphagia in patients with PWS or patients with HIAOphysicians may nevertheless prescribe beloranib to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted suchoff-label uses, we may become subject to significant liability. The federal government has levied large civil and criminal fines against companies for allegedimproper promotion and has enjoined several companies from engaging in off-label promotion and required that they enter into corporate integrity agreements withthe Office of Inspector General of the Department of Health and Human Services, or OIG. The FDA has also requested that companies enter into consent decrees orpermanent injunctions under which specified promotional conduct is changed or curtailed. If we cannot successfully manage the promotion of beloranib, ifapproved, 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. Governmentauthorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establishreimbursement levels for those medications. Cost containment is a primary concern in the U.S. healthcare industry and elsewhere. Government authorities andthese third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. We cannot be sure thatreimbursement will be available for beloranib and, if reimbursement is available, the level of such reimbursement. Reimbursement may impact the demand for, orthe 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 governmentalcontrol. In these countries, pricing negotiations with governmental authorities can take six to 12 months or longer after the receipt of regulatory approval andproduct launch. To obtain favorable reimbursement for the indications sought or pricing approval in some countries, we may be required to conduct a clinical trialthat compares the cost-effectiveness of beloranib with other available therapies. If reimbursement for beloranib is unavailable in any country in which we seekreimbursement, 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 in the United States and the European Union and orphan drug designation forcraniopharyngioma in the European Union, 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 ofpatients with PWS and we also have obtained orphan drug designation in the European Union for craniopharyngioma. In the United States, the company that firstobtains FDA approval for a designated orphan drug for the specified rare disease or condition receives orphan drug marketing exclusivity for that drug for a periodof seven years. This orphan drug exclusivity prevents the FDA from approving another application, including a full NDA to market the same drug for the sameorphan 55 Table of Contentsindication, except in very limited circumstances, including when the FDA concludes that the later drug is safer, more effective or makes a major contribution topatient 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 thesame 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, itmust 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 patientcare. 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 itreceived orphan designation. In addition, orphan drug exclusive marketing rights in the United States may be lost if the FDA later determines that the request fordesignation 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 orcondition 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 ofmarket exclusivity is granted following drug product approval, meaning that another application for marketing authorization of a later similar medicinal product forthe same therapeutic indication will generally not be approved in the European Union. This period may be reduced to six years if the orphan drug designationcriteria are no longer met, including where it is shown that the product is sufficiently profitable to not 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 potentialproduct candidates has commenced any clinical trials, and there are a number of FDA and certain European regulatory requirements that we must satisfy before wecan commence clinical trials. Satisfaction of these requirements will entail substantial time, effort and financial resources. We may never satisfy theserequirements. Any time, effort and financial resources we expend on our other early-stage development programs may adversely affect our ability to continuedevelopment and commercialization of beloranib, and we may never commence clinical trials of such development programs despite expending significantresources in pursuit of their development. If we do commence clinical trials of our other potential product candidates, such product candidates may never beapproved by the FDA or other regulatory authorities.Risks Relating to Our Intellectual Property RightsIf we are unable to adequately protect our proprietary technology or maintain issued patents which are sufficient to protect beloranib, others could competeagainst 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 UnitedStates and elsewhere and protecting our proprietary technology. If we do not adequately protect our intellectual property and proprietary technology, competitorsmay be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieveprofitability. Our owned and licensed patents and patent applications relate to beloranib compositions of matter, formulations, polymorphs, methods of treatingobesity using dosing regimens of beloranib, and methods of treating hypothalamic obesity. The issued U.S. and European patents generally directed to beloranibcompositions of matter are exclusively licensed and will each expire in 2019. As of March 7, 2016, we own two issued U.S. patents relating to beloranib polymorphcompositions of matter that will expire in 2031 and five issued U.S. patents to methods of treating obesity that will expire in 2029. We own pending patentapplications in Europe to beloranib polymorph compositions and methods of treating obesity that we expect to expire, once issued, in 2031. 56 Table of ContentsAs of March 7, 2016, we own seven issued U.S. patents, and six pending U.S. patent applications and foreign counterpart applications, and one PatentCooperation Treaty, or PCT, application that will allow us to seek corresponding protection worldwide, all of which relate to beloranib. We have a license to twoU.S. issued patents, one with corresponding issued foreign counterpart patents that also relate to beloranib. We also co-own one patent application relating tomethods of using beloranib.As of March 7, 2016, we own five issued U.S. patent, and 12 pending U.S. patent applications with pending foreign counterpart applications, all of whichrelate to our internal efforts to discover novel MetAP2 inhibitors. Of these, two pending U.S. patent applications with pending foreign counterpart patentapplications and two U.S. provisional patent applications , relate to our early-stage product candidate ZGN-839.As of March 7, 2016, we own two issued U.S. patents, three pending U.S. patent applications with pending foreign counterpart patent applications, and fourU.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 toour 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 patentapplications, either by claiming the same methods or formulations or by claiming subject matter that could dominate our patent position. The patent positions ofbiotechnology 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 reviewproceedings, supplemental examination and challenges in district court. Patents may be subjected to opposition, post-grant review, or comparable proceedingslodged 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 orloss 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 thatwe may own or exclusively license may not provide any protection against competitors. Furthermore, an adverse decision in an interference proceeding can resultin a third party receiving the patent right sought by us, which in turn could affect our ability to develop, market or otherwise commercialize beloranib.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 notprovide us with adequate proprietary protection or competitive advantages against competitors with similar products. Competitors may also be able to designaround our patents. Other parties may develop and obtain patent protection for more effective technologies, designs or methods. We may not be able to prevent theunauthorized disclosure or use of our technical knowledge or trade secrets by consultants, vendors, former employees and current employees. The laws of someforeign 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 protectingour 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 componentsthat 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 ourmanagement 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 wewere to prevail may not be commercially meaningful. 57 Table of ContentsIn addition, proceedings to enforce or defend our patents could put our patents at risk of being invalidated, held unenforceable, or interpreted narrowly. Suchproceedings 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 orotherwise unenforceable. If any of our patents covering beloranib are invalidated or found unenforceable, our financial position and results of operations would bematerially and adversely impacted. In addition, if a court found that valid, enforceable patents held by third parties covered beloranib, our financial position andresults 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 otherproducts 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 competitiveadvantages 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 ouremployees 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 theemployees and consultants who are parties to these agreements breach or violate the terms of these agreements, we may not have adequate remedies for any suchbreach or violation, and we could lose our trade secrets through such breaches or violations. Further, our trade secrets could otherwise become known or beindependently discovered by our competitors.We may infringe the intellectual property rights of others, which may prevent or delay our product development efforts and stop us from commercializing orincrease 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 assureyou 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 thatbeloranib or the use of our technologies infringes patent claims or other intellectual property rights held by them or that we are employing their proprietarytechnology without 58 Table of Contentsauthorization. Patent and other types of intellectual property litigation can involve complex factual and legal questions, and their outcome is uncertain. Any claimrelating to intellectual property infringement that is successfully asserted against us may require us to pay substantial damages, including treble damages andattorneys’ fees if we are found to be willfully infringing another party’s patents, for past use of the asserted intellectual property and royalties and otherconsideration 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 alicense, 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 aninfringement action or challenge the validity of the patents in court, or redesign our products. Patent litigation is costly and time consuming. We may not havesufficient 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 thefollowing: • 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 bepossible 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 intellectualproperty. Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If we fail in defending any such claims, inaddition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectualproperty. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could resultin 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 requirementsimposed 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 patent process. There are situations in which noncompliance can result in abandonment or lapse of apatent 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 themarket 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 infringementclaims, which can be expensive and time-consuming. 59 Table of ContentsIn 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 mayrefuse 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 anylitigation 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 atrisk 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 orpatent 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 fromthe 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 orinterference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. We may not be able toprevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights asfully 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 ourconfidential 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 adverseeffect 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 couldcounterclaim that the patent covering our product candidate is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaimsalleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge include alleged failures to meet any of several statutoryrequirements, including lack of novelty, obviousness or non-enablement. Grounds for unenforceability assertions include allegations that someone connected withprosecution of the patent withheld relevant information from the U.S. PTO, or made a misleading statement, during prosecution. Third parties may also raisesimilar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, postgrant review and equivalent proceedings in foreign jurisdictions, e.g., opposition proceedings. Such proceedings could result in revocation or amendment of ourpatents in such a way that they no longer cover our product candidates or competitive products. The outcome following legal assertions of invalidity andunenforceability is unpredictable. With respect to validity, for example, we cannot be certain that there is no invalidating prior act, of which we and the patentexaminer 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, andperhaps 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 intellectualproperty 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, andour intellectual property rights in some countries outside the United States could be less extensive than those in the United States. In addition, the laws of someforeign 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 toprevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions inand into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained 60 Table of Contentspatent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, butenforcement 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 maynot 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 ofcertain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly thoserelating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of ourproprietary rights generally. For example, an April 2014 report from the Office of the United States Trade Representative identified a number of countries,including India and China, where challenges to the procurement and enforcement of patent rights have been reported. Several countries, including India and China,have been listed in the report every year since 1989. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert ourefforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applicationsat 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 otherremedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may beinadequate 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 orcommercializing 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 variousobligations on us, including a requirement to use commercially reasonable efforts to develop beloranib and provides CKD the right to terminate the licensethereunder 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 ourlicense with them. Termination of our license from CKD could result in our loss of the right to use the licensed intellectual property, which could materiallyadversely affect our ability to develop and commercialize beloranib, if approved, as well as harm our competitive business position and our business prospects. Wealso have an exclusive license with Children’s Medical Center Corporation, or Children’s, pursuant to which we exclusively licensed certain patent rights relatingto 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 arenecessary or useful to our business. Future licensor(s) may also allege that we have breached our license agreement and may accordingly seek to terminate ourlicense 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 licensedintellectual property, which could materially adversely affect our ability to develop and commercialize a product candidate or product, if approved, as well as harmour 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 trademarkregistration proceedings. Although we would be given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, inthe U.S. PTO and in comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seekto cancel registered trademarks. Opposition or cancellation 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 61 Table of ContentsFDA, 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 berequired to expend significant additional resources in an effort to identify a suitable substitute name that would qualify under applicable trademark laws, notinfringe 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 obtainingdata 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 forlimited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. TheHatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDAregulatory review process. However, we may not be granted an extension because of, for example, failing to apply within applicable deadlines, failing to applyprior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protectionafforded 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, ourcompetitors may obtain approval of competing products following our patent expiration, and our ability to generate revenues could be materially adverselyaffected.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 circumstancesor weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain future patents, thiscombination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courtsand 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 enforceour 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 formeremployers.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 otherwiseused or disclosed trade secrets or other proprietary information of the former employers of our employees. Litigation may be necessary to defend against theseclaims. 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 indefending such claims, in addition to paying money claims, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their workproduct could hamper or prevent our ability to commercialize beloranib, which would materially adversely affect our commercial development efforts.General Company-Related RisksWe will need to develop and expand our company, and we may encounter difficulties in managing this development and expansion, which could disrupt ouroperations.As of March 7, 2016, we had 46 full-time employees and one part-time employee, and as we advance beloranib into later-stage clinical trials and ifsuccessful, into commercialization, we expect to increase our 62 Table of Contentsnumber of employees and the scope of our operations. To manage our anticipated development and expansion, we must continue to implement and improve ourmanagerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Also, our management mayneed 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 developmentactivities. Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualifiedpersonnel. This may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reducedproductivity among remaining employees. The physical expansion of our operations may lead to significant costs and may divert financial resources from otherprojects, such as the development of beloranib. If our management is unable to effectively manage our expected development and expansion, our expenses mayincrease 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. Ourfuture financial performance and our ability to commercialize beloranib, if approved, and compete effectively will depend, in part, on our ability to effectivelymanage 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 hemay 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 foreseeablefuture, the loss of his services might impede the achievement of our research, development and commercialization objectives. We also do not have any key-manlife insurance on Dr. Hughes. We rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our development andcommercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisorycontracts with other entities that may limit their availability to us and may not be subject to our standard non-compete agreements. Recruiting and retainingqualified 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 onacceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition forthe hiring of scientific personnel from universities and research institutions. Failure to succeed in clinical trials may make it more challenging to recruit and retainqualified scientific personnel.Our employees may engage in misconduct or other improper activities, including violating applicable regulatory standards and requirements or engaging ininsider 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 theregulations of the FDA and applicable non-U.S. regulators, provide accurate information to the FDA and applicable non-U.S. regulators, comply with healthcarefraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately or disclose unauthorized activities to us. Inparticular, 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 andpromotion, 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 haveadopted an insider trading policy and a code of conduct, but it is not always possible to identify and deter employee misconduct, and the precautions we take todetect and prevent this activity may be ineffective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations orother 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 indefending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or othersanctions. 63 Table of ContentsWe 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 mightbe brought against us by patients, healthcare providers or others selling or otherwise coming into contact with beloranib. For example, we may be sued if anyproduct we develop allegedly causes injury or death or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any suchproduct liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, including as aresult of interactions with alcohol or other drugs, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumerprotection acts. If we become subject to product liability claims and cannot successfully defend ourselves against them, we could incur substantial liabilities. Inaddition, 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 insurancecoverage 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 coverageat a reasonable cost or in sufficient amounts to protect us against losses, including if insurance coverage becomes increasingly expensive. If and when we obtainmarketing approval for beloranib, we intend to expand our insurance coverage to include the sale of commercial products; however, we may not be able to obtainthis product liability insurance on commercially reasonable terms. Large judgments have been awarded in class action lawsuits based on drugs that hadunanticipated side effects. The cost of any product liability litigation or other proceedings, even if resolved in our favor, could be substantial, particularly in light ofthe 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 areunsuccessful in defending such a claim or claims and the resulting judgments exceed our insurance coverage, our financial condition, business and prospects couldbe 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 maybe adversely affected, which could have a material adverse effect on our business and stock price.We currently are an “emerging growth company,” as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act, and we have takenadvantage 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.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 64 Table of Contents2002, or the Sarbanes-Oxley Act, requires, among other things, that we assess the effectiveness of our disclosure controls and procedures quarterly and theeffectiveness of our internal control over financial reporting at the end of each fiscal year.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 theSarbanes-Oxley Act are complex and require significant documentation, testing and possible remediation. These stringent standards require that our auditcommittee be advised and regularly updated on management’s review of internal control over financial reporting. Our management may not be able to effectivelyand timely implement controls and procedures that adequately respond to the increased regulatory compliance and reporting requirements that will be applicable tous 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 thedemands 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 andour stock price may decline. Furthermore, investor perceptions of us may be adversely affected, which could cause a decline in the market price of our commonstock.In order to satisfy our obligations as a public company, we will need to hire additional qualified accounting and financial personnel with appropriate publiccompany experience.As a newly public company, we need to establish and maintain effective disclosure and financial controls and make changes in our corporate governancepractices. We will need to hire additional accounting and financial personnel with appropriate public company experience and technical accounting knowledge, andit 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 beimpacted by the direct costs of their employment and the indirect consequences related to the diversion of management resources from product developmentefforts.Our ability to use our net operating loss carryforwards and certain tax credit carryforwards may be subject to limitation.As of December 31, 2015, we had net operating loss carryforwards for federal and state income tax purposes of $42.5 million and $31.2 million,respectively, which begin to expire in 2026 and 2030, respectively. Included within these net operating loss carryforwards are amounts of $12.8 million and $10.6million, respectively, that were attributable to stock option exercises, which will be recorded as an increase in additional paid-in capital once they are realized inaccordance with accounting for stock-based compensation awards. As of December 31, 2015, we also had available tax credit carryforwards for federal and stateincome tax purposes of $10.6 million and $1.5 million, respectively, which begin to expire in 2026 and 2021, respectively. Under Section 382 of the InternalRevenue Code of 1986, as amended, or the Code, changes in our ownership may limit the amount of our net operating loss carryforwards and tax creditcarryforwards that could be utilized annually to offset our future taxable income, if any. This limitation would generally apply in the event of a cumulative changein 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 losscarryforwards and tax credit carryforwards before they expire. Our recent follow-on public offering, initial public offering, or IPO, private placements and othertransactions that have occurred since our inception, may trigger such an ownership change pursuant to Section 382. Any such limitation, whether as the result ofour recent follow-on public offering, IPO, prior private placements, sales of our common stock by our existing stockholders or additional sales of our commonstock 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 changefor purposes of Section 382 has occurred, or whether there have been multiple ownership changes since our inception, due to the significant costs and complexitiesassociated 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. A severe or prolongedeconomic downturn could result in a variety of risks to our 65 Table of Contentsbusiness, including, weakened demand for our product candidates and our ability to raise additional capital when needed on acceptable terms, if at all. A weak ordeclining economy could also strain our suppliers, possibly resulting in supply disruption, or cause our customers to delay making payments for our services. Anyof the foregoing could harm our business and we cannot anticipate all of the ways in which the current economic climate and financial market conditions couldadversely 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 ina 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 arevulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we havenot 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 resultin 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 andsignificantly 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 orapplications or other data or applications relating to our technology or product candidates, or inappropriate disclosure of confidential or proprietary information, wecould 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. Althoughbeloranib is currently in clinical development, our research programs may fail to identify other potential product candidates for clinical development for a numberof reasons. Our research methodology may be unsuccessful in identifying potential product candidates or our potential product candidates may be shown to haveharmful 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 effecton our business and could potentially cause us to cease operations. Research programs to identify new product candidates require substantial technical, financialand 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 or alliances.We may acquire additional businesses or products, form strategic alliances or create joint ventures with third parties that we believe will complement oraugment 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 weare 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 orenhancing our business. We cannot assure you that, following any such transaction, we will achieve the expected synergies to justify the transaction. 66 Table of ContentsRisks Related to Our Financial Position and Need for CapitalWe have not generated any revenue from product sales. We have incurred significant operating losses since our inception, and anticipate that we will incurcontinued losses for the foreseeable future.Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. Our operations to date have beenlimited primarily to organizing and staffing our company and conducting research and development activities for beloranib, ZGN-839 and our second-generationMetAP2 inhibitors. 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 clinicaldevelopment for our lead indication of the treatment of hyperphagia and obesity in patients with PWS and Phase 2 clinical development for the treatment of obesityin patients with HIAO. We have funded our operations to date through proceeds from sales of redeemable convertible preferred stock, convertible debt andproceeds from our IPO and follow-on public offering, and have incurred losses in each year since our inception. Our net losses were $74.3 million for the yearended December 31, 2015. As of December 31, 2015, we had an accumulated deficit of $179.7 million. Substantially all of our operating losses resulted from costsincurred in connection with our development programs for beloranib, ZGN-839 and our second-generation MetAP2 inhibitors, licensing milestone fees and fromgeneral and administrative costs associated with our operations. We expect to incur increasing levels of operating losses over the next several years and for theforeseeable future. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ deficit andworking capital. We expect our research and development expenses to significantly increase in connection with our additional clinical trials of beloranib anddevelopment of ZGN-839, our second-generation MetAP2 inhibitors and of any other product candidates we may choose to pursue. In addition, if we obtainmarketing approval for beloranib, we will incur significant sales, marketing and outsourced manufacturing expenses. Now that we are a public company, we willincur additional costs associated with operating as a public company. As a result, we expect to continue to incur significant and increasing operating losses for theforeseeable future. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are unable to predict the extent of anyfuture 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 quarterlyor annual basis.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 marketingapproval 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 in the indications we arepursuing; • 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 commercializebeloranib. Even if we initiate and successfully complete our pivotal clinical trials of beloranib, and beloranib is approved for commercial sale, and despiteexpending these costs, beloranib may not be a commercially successful drug. We may not achieve profitability soon after generating product sales, if ever. If we areunable to generate sufficient product revenue, we will not become profitable and may be unable to continue operations without continued funding. 67 Table of ContentsWe 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 mayforce 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 anddevelopment expenses to increase substantially in connection with our ongoing activities, particularly as we advance beloranib in later-stage, more costly clinicaltrials. Depending on the status of regulatory approval or, if approved, commercialization of beloranib, as well as the progress we make in selling beloranib, we mayrequire additional capital to fund operating needs thereafter. We may also need to raise additional funds sooner if we choose to pursue additional indications and/orgeographies for beloranib or otherwise expand more rapidly than we presently anticipate.As of December 31, 2015, our cash, cash equivalents and marketable securities were $185.1 million. We expect that our cash, cash equivalents andmarketable securities 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 manyfactors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings, government orother third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements or a combination ofthese approaches. In any event, we will require additional capital to obtain regulatory approval for, and to commercialize, our product candidates. Raising funds inthe current economic environment may present additional challenges. Even if we believe we have sufficient funds for our current or future operating plans, we mayseek 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 andcommercialize our product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, ifat all. Moreover, the terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities, whetherequity 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 securitieswould dilute all of our stockholders. The incurrence of indebtedness would result in increased fixed payment obligations and we may be required to agree to certainrestrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights andother operating restrictions that could adversely impact our ability to conduct our business. We could also be required to seek funds through arrangements withcollaborative 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 orproduct 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 ordevelopment programs or the commercialization of any product candidate or be unable to expand our operations or otherwise capitalize on our businessopportunities, 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 licensingarrangements. To the extent that we raise additional capital through the sale of common stock or securities convertible or exchangeable into common stock, astockholder’s ownership interest in our company will be diluted. In addition, the terms of any such securities may include liquidation or other preferences thatmaterially adversely affect the rights of our stockholders. Debt financing, if available, would increase our fixed payment obligations and may involve agreementsthat include covenants 68 Table of Contentslimiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raiseadditional 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.Risks Related to Our Common StockWe expect that our stock price may fluctuate significantly.The market price of shares of our common stock, similar to the market price of shares of common stock of other biopharmaceutical companies, is subject towide fluctuations. From January 1, 2015 to December 31, 2015 the daily price of our common stock ranged from a high of $55.36 to a low of $5.43 and willcontinue to 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 and/or other product candidates; • the ability to remove the full clinical hold on the beloranib IND; • 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 or therapies for hyperphagia in people with PWS; • 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 actualoperating performance, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity ofour common stock. In addition, the stock market in general, and NASDAQ listed and biopharmaceutical companies in particular, have experienced extreme priceand volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. In the past, when the market price of astock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. 69 Table of ContentsOn October 21, 2015, a purported stockholder of the Company filed a putative class action lawsuit in the U.S. District Court for the District ofMassachusetts, against the Company and Thomas E. Hughes, captioned Aviad Bessler v. Zafgen, Inc. and Thomas E. Hughes, No. 1:15-cv-13618. An amendedcomplaint was filed on February 22, 2016. The amended complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SECRule 10b-5 based on allegedly false and misleading statements and omissions regarding the Company’s clinical trials for its drug beloranib. The lawsuit seeks,among other things, unspecified compensatory damages in connection with the Company’s allegedly inflated stock price between June 19, 2014 and October 16,2015, as a result of those allegedly false and misleading statements, as well as punitive damages, interest, attorneys’ fees and costs. The Company has not yet fileda responsive pleading.Our executive officers, directors, and principal stockholders exercise significant control over our company.As of December 31, 2015, the existing holdings of our executive officers, directors, principal stockholders and their affiliates, including investment fundsaffiliated with Atlas Ventures, or Atlas, investment funds affiliated with Deerfield Mgmt., L.P., or Deerfield, investment funds affiliated with Foresite Capital,investment funds affiliate with Franklin Advisors Inc., investment funds affiliated with State Street Corporation and entities affiliated with Fidelity Investment(FMR LLC), or Fidelity, represent beneficial ownership, in the aggregate, of approximately 68.8% of our common stock. As a result, these stockholders, if they acttogether, are able to influence our management and affairs and control the outcome of matters submitted to our stockholders for approval, including the election ofdirectors and any sale, merger, consolidation, or sale of all or substantially all of our assets. The concentration of voting power among these stockholders may havean 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.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 themarket price of our common stock and impair our ability to raise adequate capital through the sale of additional equity securities.We have broad discretion in how we use the proceeds of our IPO and our follow-on public offering. We may not use these proceeds effectively, which couldaffect our results of operations and cause our stock price to decline.We have considerable discretion in the application of the net proceeds of our IPO and our follow-on public offering. We intend to use the net proceeds toadvance the clinical development of beloranib as a treatment for obesity and hyperphagia in patients with PWS patients and obesity in patients with HIAO, orpatients with severe obesity in the general population and to develop multiple second-generation MetAP2 inhibitors as a treatment for severe obesity in the generalpopulation, to continue the development and initiate clinical development of ZGN-839, and to fund new and ongoing research and development activities, workingcapital and other general corporate purposes, which may include funding for the hiring of additional personnel, capital expenditures, early commercializationactivities, the costs of operating as a public company and potential business development activities. As a result, investors will be relying upon management’sjudgment with only limited information about our specific intentions for the use of the balance of the net proceeds. We may use the net proceeds for purposes thatdo not yield a significant return or any return at all for our stockholders. In addition, pending their use, we may invest the net proceeds in a manner that does notproduce income or that loses value. 70 Table of ContentsWe 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 isespecially relevant for us because biotechnology and pharmaceutical companies have experienced significant stock price volatility in recent years.On October 21, 2015, a purported stockholder of the Company filed a putative class action lawsuit in the U.S. District Court for the District ofMassachusetts, against the Company and Thomas E. Hughes, captioned Aviad Bessler v. Zafgen, Inc. and Thomas E. Hughes, No. 1:15-cv-13618. An amendedcomplaint was filed on February 22, 2016. The amended complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SECRule 10b-5 based on allegedly false and misleading statements and omissions regarding the Company’s clinical trials for its drug beloranib. The lawsuit seeks,among other things, unspecified compensatory damages in connection with the Company’s allegedly inflated stock price between June 19, 2014 and October 16,2015, as a result of those allegedly false and misleading statements, as well as punitive damages, interest, attorneys’ fees and costs. The Company has not yet fileda responsive pleading.We are an “emerging growth company” and have availed ourselves of reduced disclosure requirements applicable to emerging growth companies, which couldmake our common stock less attractive to investors.We are an “emerging growth company,” as defined in the JOBS Act, and we have taken advantage of certain exemptions from various reportingrequirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditorattestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports andproxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any goldenparachute payments not previously approved. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of theextended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, anemerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, weare 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 dateson 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 advantageof the extended transition period for complying with new or revised accounting standards is irrevocable. We cannot predict if investors will find our common stockless 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 exemptionsuntil 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 whichwe 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 ourIPO; (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 deemedto 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 aninvestment 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 developmentand growth of our business. As a result, capital appreciation, if any, of our common stock will be the sole source of gains for our common stockholders for theforeseeable future. Consequently, in the foreseeable future, our common stockholders will likely only experience a gain from their investment in our common stockif the price of our common stock increases. 71 Table of ContentsIf equity research analysts do not continue to publish research or reports about our business or if they issue unfavorable commentary or downgrade ourcommon 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 notcontrol these analysts. The price of our common stock could decline if one or more equity analysts downgrade our common stock or if analysts issue otherunfavorable 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 ofDelaware 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 ofrendering more difficult, delaying or preventing an acquisition deemed undesirable by our board of directors. Our corporate governance documents includeprovisions: • creating a classified board of directors whose members serve staggered three-year terms; • 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 forelection 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 specialmeetings.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, whichprevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of theholders 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 ordeterring 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 theprice that some investors are willing to pay for our common stock.ITEM 1B. UNRESOLVED STAFF COMMENTSNot applicable.ITEM 2. PROPERTIESWe have leased approximately 5,952 square feet of office space at 175 Portland Street, 4th Floor, Boston, Massachusetts from May 15, 2014 to July 31,2017, with an option to extend for three additional years. We have also leased an additional approximately 2,976 square feet of office space on the second floor ofthe same location 72 Table of Contentsfrom April 15, 2015 to July 31, 2017, with two options to extend the lease for three additional years each. We have also leased 3,079 square feet of office space inSan Diego, California, from October 1, 2015 to September 30, 2019, with an option to extend the lease for five additional years. We believe that our existingfacilities are adequate for our current needs. When our leases expire, we may renew the existing leases or look for additional or alternate space for our operations.We believe that any additional space we may require will be available on commercially reasonable terms.ITEM 3. LEGAL PROCEEDINGSOn October 21, 2015, a purported stockholder of the Company filed a putative class action lawsuit in the U.S. District Court for the District ofMassachusetts, against the Company and Thomas E. Hughes, captioned Aviad Bessler v. Zafgen, Inc. and Thomas E. Hughes, No. 1:15-cv-13618. An amendedcomplaint was filed on February 22, 2016. The amended complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SECRule 10b-5 based on allegedly false and misleading statements and omissions regarding the Company’s clinical trials for its drug beloranib. The lawsuit seeks,among other things, unspecified compensatory damages in connection with the Company’s allegedly inflated stock price between June 19, 2014 and October 16,2015, as a result of those allegedly false and misleading statements, as well as punitive damages, interest, attorneys’ fees and costs. The Company has not yet fileda responsive pleading.In the future, we may become party to legal matters and claims arising in the ordinary course of business, the resolution of which we do not anticipate wouldhave a material adverse impact on our financial position, results of operations or cash flows.ITEM 4. MINE SAFETY DISCLOSURESNot applicable. 73 Table of ContentsPART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIESMarket InformationOur common stock commenced trading under the symbol “ZFGN” on the NASDAQ Global Market on June 19, 2014. Prior to that time, there was no publicmarket for our common stock. Our common stock in our initial public offering, or IPO, priced at $16.00 per share on June 18, 2014. The following table sets forthon a per share basis, for the periods indicated, the low and high prices of our common stock as reported by the NASDAQ Global Market. High Low 2014 Second Quarter (from June 19, 2014) $21.01 $19.23 Third Quarter $21.96 $17.06 Fourth Quarter $32.25 $16.01 2015 First Quarter $55.36 $30.56 Second Quarter $41.04 $28.75 Third Quarter $47.98 $30.75 Fourth Quarter $36.09 $5.43 On March 7, 2016, the last reported sales price of our common stock on the Nasdaq Global Market was $7.07 and as of March 7, 2016, there wereapproximately 27 holders of record of our common stock. However, because many of our outstanding shares are held in accounts with brokers and otherinstitutions, we believe we have more beneficial owners.Dividend PolicyWe have never declared or paid dividends on our common stock and do not expect to pay dividends on our common stock for the foreseeable future. Instead,we anticipate that all of our earnings in the foreseeable future will be used for the operation and growth of our business. Any future determination to declaredividends will be subject to the discretion of our board of directors and will depend on various factors, including applicable laws, our results of operations, financialcondition, future prospects, and any other factors deemed relevant by our board of directors. In addition, the terms of our outstanding indebtedness restrict ourability to pay dividends, and any future indebtedness that we may incur could preclude us from paying dividends. 74 Table of ContentsStock Performance GraphThis graph is not “soliciting material,” is not deemed “filed” with the SEC and is not to be incorporated by reference into any of our filings under theSecurities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of anygeneral incorporation language in any such filing.The following graph shows the total stockholder return of an investment of $100 in cash on June 19, 2014 (the first day of trading of our common stock),through December 31, 2015 for (i) our common stock, (ii) the NASDAQ Composite Index and (iii) the NASDAQ Biotechnology Index. Pursuant to applicableSecurities and Exchange Commission rules, all values assume reinvestment of the full amount of all dividends, however no dividends have been declared on ourcommon stock to date. The stockholder return shown on the graph below is not necessarily indicative of future performance, and we do not make or endorse anypredictions as to future stockholder returns. Equity Compensation Plan InformationFor information regarding securities authorized for issuance under equity compensation plans, see Part III “Item 12—Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.”Use of ProceedsOn June 24, 2014, we closed the sale of 6,900,000 shares of common stock to the public (inclusive of 900,000 shares of common stock sold by us pursuant tothe full exercise of an overallotment option granted to the underwriters) at a price of $16.00 per share, before underwriting discounts. The offer and sale of theshares in our IPO was registered under the Securities Act pursuant to registration statements on Form S-1 (File No. 377-00464), which was filed with the SEC onJanuary 31, 2014 and amended subsequently and declared effective by the SEC on June 18, 2014, and Form S-1MEF (File No. 333-196891), which was filed withthe SEC on June 18, 2014 and automatically effective upon filing. There has been no change in the use of proceeds from our IPO.Issuer Purchases of Equity Securities by the Issuer and Affiliated PurchasersNone. 75 Table of ContentsITEM 6. SELECTED FINANCIAL DATAThe selected financial data set forth below has been derived from our audited consolidated financial statements. The information set forth below should beread in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financialstatements, and the notes thereto, and other financial information included herein. Our historical results are not necessarily indicative of our future results. Year Ended December 31, 2015 2014 2013 2012 2011 (in thousands, except per share data) Statement of Operations Data: Revenue $— $— $— $— $— Operating expenses: Research and development 54,618 27,391 9,561 11,544 11,403 General and administrative 19,195 8,141 4,219 2,247 1,751 Total operating expenses 73,813 35,532 13,780 13,791 13,154 Loss from operations (73,813) (35,532) (13,780) (13,791) (13,154) Other income (expense): Interest income 438 28 — — — Interest expense (806) (870) — (97) — Foreign currency transaction gains (losses), net (105) (104) (247) 8 (3) Total other income (expense), net (473) (946) (247) (89) (3) Net loss (74,286) (36,478) (14,027) (13,880) (13,157) Accretion of redeemable convertible preferred stock to redemption value — (92) (213) (67) (53) Net loss attributable to common stockholders $(74,286) $(36,570) $(14,240) $(13,947) $(13,210) Net loss per share attributable to common stockholders, basic and diluted (1) $(2.78) $(3.00) $(19.53) $(19.65) $(19.17) Weighted average common shares outstanding, basic and diluted 26,756 12,189 729 710 689 December 31, 2015 2014 2013 2012 2011 (in thousands) Balance Sheet Data: Cash, cash equivalents and marketable securities $185,079 $115,462 $35,517 $9,935 $1,467 Working capital (2) 171,567 110,297 34,443 7,394 (414) Total assets 189,106 117,519 38,138 10,986 1,628 Notes payable, net of discount, long term 3,453 6,177 — — — Redeemable convertible preferred stock — — 103,797 62,785 40,575 Total stockholders’ equity (deficit) 169,110 104,441 (68,574) (54,729) (40,916) (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 tocommon stockholders.(2)We define working capital as current assets less current liabilities. 76 Table of ContentsITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion and analysis of our financial condition and results of operations should be read together with our “Selected Financial Data” andour consolidated financial statements, related notes, and other financial information included elsewhere in this Annual Report on Form 10-K. This discussioncontains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those described in, or implied by, theforward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussedabove in the section entitled “Risk Factors.”OverviewWe are a biopharmaceutical company dedicated to significantly improving the health and well-being of patients affected by obesity and complex metabolicdisorders. Beloranib, our lead product candidate, is a novel, first-in-class, twice-weekly subcutaneous injection being developed for the treatment of multipleindications, including severe obesity in two rare diseases, Prader-Willi syndrome, or PWS, and hypothalamic injury-associated obesity, or HIAO, includingcraniopharyngioma-associated obesity. We are also developing ZGN-839, a liver-targeted methionine aminopeptidase 2, or MetAP2, inhibitor, for the treatment ofnonalcoholic steatohepatitis, or NASH, and abdominal obesity, as well as other second-generation methionine aminopeptidase 2, or MetAP2, inhibitors for thetreatment of severe obesity. In December 2015, the U.S. Food and Drug Administration, or FDA, placed a full clinical hold on our Investigational New DrugApplication, or IND, for beloranib, as a result of the number of thrombotic events observed in patients treated with beloranib in our clinical trials. We plan topresent to the FDA data from our recently completed Phase 3 clinical trial evaluating beloranib as a treatment for PWS and our recently completed Phase 2bclinical trial evaluating beloranib in severe obesity complicated by type 2 diabetes, a proposal for a risk mitigation strategy for beloranib in PWS, and otherrequested data, in an effort to resolve the full clinical hold.Obesity is a complex medical disorder involving appetite dysregulation and altered lipid and energy metabolism that results in excessive accumulation of fattissue. Weight loss and hunger control are urgently needed for certain subpopulations of obese patients, in which obesity is life-threatening and a co-morbidity ofan underlying condition such as PWS and HIAO that, while rare, occurs most commonly as a consequence of treatment for craniopharyngioma and other mid-braintumors. PWS and HIAO are characterized by severe and intractable obesity resulting from damage to or impaired functioning of the hypothalamus, an area of thebrain responsible for many functions including the neurophysiological drive to eat.Since our inception in November 2005, we have devoted substantially all of our resources to developing beloranib, ZGN-839, and our second-generationmolecules, building our intellectual property portfolio, developing our supply chain, business planning, raising capital, and providing general and administrativesupport for these operations. Prior to our initial public offering, or IPO, in June 2014, we funded our operations primarily through sales of redeemable convertiblepreferred stock and, to a lesser extent, through the issuances of convertible promissory notes. From our inception through our IPO in June 2014, we have receivedgross proceeds of $104.0 million from such transactions. During June 2014, we completed our IPO with net proceeds of $102.7 million after deductingunderwriting discounts and commissions paid by us. We also incurred offering costs of $2.5 million related to the IPO. On January 28, 2015, we completed afollow-on offering of our common stock, which resulted in the sale of 3,942,200 shares at a price of $35.00 per share. We received net proceeds from the follow-onoffering of approximately $129.6 million based upon the price of $35.00 per share and after deducting underwriting discounts and commissions, and offeringexpenses.We have never generated any revenue and have incurred net losses in each year since our inception. We have an accumulated deficit of $179.7 million as ofDecember 31, 2015. Our net loss was $74.3 million, $36.5 million and $14.0 million for the years ended December 31, 2015, 2014 and 2013, respectively. Theselosses have resulted principally from costs incurred in connection with in-licensing our product candidates, research and 77 Table of Contentsdevelopment activities and general and administrative costs associated with our operations. We expect to incur significant expenses and increasing operating lossesfor the foreseeable future.We expect that our expenses will continue to increase 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 following resolution of the full clinicalhold on the beloranib IND; • advance the clinical development of beloranib as a treatment for patients with HIAO following resolution of the full clinical hold on the beloranibIND; • conduct IND enabling studies and clinical development of ZGN-839 and our second-generation MetAP2 inhibitors; • seek to identify additional indications for our product candidates; • 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 productsales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings or other sources, which may includecollaborations 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, obtainnecessary regulatory approval for our product candidates or achieve commercial viability for any approved product candidates. Adequate additional financing maynot 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 ourability 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 and marketable securities as of December 31, 2015, will enable us to fund our operating expenses andcapital expenditure requirements for at least the next 18 months. See “—Liquidity and Capital Resources.”Financial Operations OverviewRevenueWe 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 nearfuture. If our development efforts result in clinical success and regulatory approval or collaboration agreements with third parties for our product candidates, wemay generate revenue from those product candidates or collaborations.Operating ExpensesThe majority of our operating expenses since inception have consisted primarily of in-licensing costs of our product candidate beloranib, research anddevelopment activities, and general and administrative costs.Research and Development ExpensesResearch and development expenses, which consist primarily of costs associated with our product research and development efforts, are expensed asincurred. Research and development expenses consist primarily of: • personnel costs, including salaries, related benefits and stock-based compensation for employees engaged in scientific research and developmentfunctions; 78 Table of Contents • 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 infrastructureresources across our development programs. We track outsourced development costs by product candidate or development program, but we do not allocatepersonnel costs, external consultant costs, payments made under our licensing agreements or other internal costs to specific development programs or productcandidates unless the payments are specifically identifiable to a development program or product candidate. We record our research and development expenses netof 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, 2015 2014 2013 (in thousands) Beloranib $29,569 $19,738 $5,881 ZGN-839 4,854 1,086 295 Second-generation MetAP2 inhibitors 5,842 476 — Unallocated expenses 14,353 6,091 3,385 Total research and development expenses $54,618 $27,391 $9,561 Research and development activities are central to our business. Product candidates in later stages of clinical development generally have higherdevelopment costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect thatour research and development expenses will continue to increase in the foreseeable future as we pursue later stages of clinical development of our productcandidates.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 whatextent we will generate revenue from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed inachieving regulatory approval for any of our product candidates. The duration, costs, and timing of clinical trials and development of our product candidates willdepend 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; • our ability to remove the full clinical hold imposed by the FDA on the beloranib IND; • 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. 79 Table of ContentsA 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 andtiming associated with the development of that product candidate. For example, if the FDA, or another regulatory authority were to require us to conduct clinicaltrials beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate, or if we experience significantdelays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinicaldevelopment.General and Administrative ExpensesGeneral and administrative expenses consist primarily of personnel costs, consisting of salaries, related benefits and stock-based compensation, of ourexecutive, 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, insurance expenses, and professional fees for auditing, tax and legalservices, 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 associatedwith operating as a public company. These public company related increases will likely include additional costs related to personnel; legal, accounting and auditservices; directors’ and officers’ liability insurance premiums and deductibles to these policies; and investor relations. In addition, if we obtain marketing approvalfor beloranib or our other product candidates, we will incur significant sales and marketing expenses.Other Income (Expense)Interest income. Interest income consists of interest earned on our cash equivalents and marketable securities. Our interest income has not been significantdue to low interest earned on invested balances. We anticipate that our interest income will decrease as we incur operating losses.Interest expense. Interest expense relates to outstanding borrowings under a credit facility that we entered into on March 31, 2014, consisting of the statedinterest 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 termthrough the maturity date using the effective-interest method, the amortization of deferred financing costs, the accretion of debt discount relating to the creditfacility, and a fee which was paid to the lender upon the completion of our IPO.Foreign currency transaction gains (losses), net. Foreign currency transaction gains (losses), net consists of the realized and unrealized gains and losses fromforeign currency-denominated cash balances, vendor payables and tax-related receivables from the Australian government. We currently do not engage in hedgingactivities related to our foreign currency-denominated receivables and payables; as such, we cannot predict the impact of future foreign currency transaction gainsand losses on our operating results. See “—Quantitative and Qualitative Disclosures about Market Risk.”Income TaxesSince 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 earnedtax credits, due to our uncertainty of realizing a benefit from those items. As of December 31, 2015, we had net operating loss carryforwards for federal and stateincome tax purposes of $42.5 million and $31.2 million, respectively, which begin to expire in 2026 and 2030, respectively. Included within these net operatingloss carryforwards are amounts of $12.8 million and $10.6 million, respectively, that were attributable to stock option exercises, which will be recorded as anincrease in additional paid-in capital once they are realized in accordance with accounting for stock-based compensation awards. As of December 31, 2015, we alsohad available tax credit carryforwards for federal and state income tax purposes of $10.6 million and $1.5 million, respectively, which begin to expire in 2026 and2021, respectively. 80 Table of ContentsCritical Accounting Policies and Significant Judgments and EstimatesOur consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America. Thepreparation 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 belowmay have the greatest potential impact on our consolidated financial statements and, therefore, consider these to be our critical accounting policies. We evaluate ourestimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. See also Note 2 ofour consolidated financial statements included elsewhere in this Annual Report for information about these critical accounting policies as well as a description ofour other significant accounting policies.JOBS ActOn April 5, 2012, the Jumpstart Our Business Startups Act, or the JOBS Act, was signed into law. The JOBS Act contains provisions that, among otherthings, reduce certain reporting requirements for an “emerging growth company.” As an “emerging growth company,” we are electing not to take advantage of theextended 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 orrevised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBSAct provides that our decision not to take advantage of the extended transition period is irrevocable.As an “emerging growth company” we are relying on other exemptions and reduced reporting requirements provided by the JOBS Act. As such, we haveelected not to (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of thecompensation 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 asupplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclosecertain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief ExecutiveOfficer’s compensation to median employee compensation. These exemptions apply for a period of five years following the completion of our IPO in June 2014 oruntil we no longer meet the requirements of being an “emerging growth company,” whichever is earlier.Research and Development ExpensesAs part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. Thisprocess involves reviewing open contracts and purchase orders, communicating with our personnel and outside vendors to identify services that have beenperformed 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 orotherwise notified of the actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or whencontractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in ourconsolidated financial statements based on facts and circumstances known to us at that time. Examples of estimated accrued research and development expensesinclude 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 candidate manufacturing, development and distribution of clinical supplies. 81 Table of ContentsWe base our expenses related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs thatconduct 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 inuneven 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 theclinical expense, pre-clinical expense, or manufacturing activities. Payments under some of these contracts depend on factors such as the successful enrollment ofpatients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed, enrollment ofpatients, 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 effortvaries from our estimate, we adjust the accrual or prepaid accordingly. Although we do not expect our estimates to be materially different from amounts actuallyincurred, 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 inus 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 accruedresearch and development expenses.Stock-Based CompensationWe have historically issued equity awards to employees, directors and consultants, generally in the form of options to purchase shares of our common stockand, to a lesser extent, shares of restricted common stock. We measure stock-based awards granted to employees and directors at fair value on the date of grant andrecognize the corresponding compensation expense of those awards, net of estimated forfeitures, over the requisite service period, which is generally the vestingperiod of the respective award. Generally, we issue stock options and restricted stock awards with only service-based vesting conditions and record the expense forthese awards using the straight-line method. We measure stock-based awards granted to consultants and nonemployees at the fair value of the award on the date atwhich the related service is complete. Compensation expense is recognized over the period during which services are rendered by such consultants andnonemployees 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 usingthe then-current fair value of our common stock and updated assumption inputs in the Black-Scholes option-pricing model.We estimate the fair value of each stock option grant using the Black-Scholes option-pricing model, which uses as inputs the fair value of our common stockand assumptions we make for the volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximatesthe expected term of our stock options and our expected dividend yield. Until completion of our IPO in June 2014, we were a private company and lackedcompany-specific historical and implied volatility information. Therefore, we estimated our expected volatility based on the historical volatility of our publiclytraded 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. Theexpected term of our options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options, while the expected term ofour options granted to consultants and nonemployees has been determined based on the contractual term of the options. The risk-free interest rate is determined byreference 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 averagebasis: 2015 2014 2013 Risk-free interest rate 1.75% 1.90% 1.12% Expected term (in years) 6.25 6.25 6.25 Expected volatility 87% 90% 85% Expected dividend yield 0% 0% 0% 82 Table of ContentsThese assumptions represented our best estimates, but the estimates involve inherent uncertainties and the application of our judgment. As a result, if factorschange and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different. We recognizecompensation expense for only the portion of awards that are expected to vest. In developing a forfeiture rate estimate for pre-vesting forfeitures, we haveconsidered our historical experience of actual forfeitures. If our future actual forfeiture rate is materially different from our estimate, our stock-based compensationexpense 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 andcomprehensive loss: Year Ended December 31, 2015 2014 2013 Research and development $2,930 $490 $176 General and administrative 5,652 1,063 219 $8,582 $1,553 $395 As of December 31, 2015, we had an aggregate of $27.5 million of unrecognized stock-based compensation cost, which is expected to be recognized over aweighted average period of 2.6 years.Results of OperationsComparison of Years Ended December 31, 2015 and 2014The following table summarizes our results of operations for the years ended December 31, 2015 and 2014: Year Ended December 31, 2015 2014 Increase (Decrease) (in thousands, except per share data) Statement of Operations Data: Revenue $— $— $— Operating expenses: Research and development 54,618 27,391 27,227 General and administrative 19,195 8,141 11,054 Total operating expenses 73,813 35,532 38,281 Loss from operations (73,813) (35,532) (38,281) Other income (expense): Interest income 438 28 410 Interest expense (806) (870) 64 Foreign currency transaction gains (losses), net (105) (104) (1) Total other income (expense), net (473) (946) 473 Net loss $(74,286) $(36,478) $(37,808) 83 Table of ContentsResearch and development expenses Year Ended December 31, Increase (Decrease) 2015 2014 (in thousands) Direct research and development expenses by program: Beloranib: Pre-clinical and manufacturing $11,676 $8,077 $3,599 Clinical trials 17,893 4,642 13,251 Licensing, milestone and licensing maintenance fees — 7,019 (7,019) Subtotal 29,569 19,738 9,831 ZGN-839 4,854 1,086 3,768 Second-generation MetAP2 inhibitors 5,842 476 5,366 Subtotal 40,265 21,300 18,965 Unallocated expenses: Personnel related 6,122 2,771 3,351 Non-cash stock-based compensation 2,930 490 2,440 Consultants 3,772 2,359 1,413 Other 1,529 471 1,058 Subtotal 14,353 6,091 8,262 Total research and development expenses $54,618 $27,391 $27,227 Research and development expenses for the year ended December 31, 2015 increased $27.2 million compared to the year ended December 31, 2014. Theincrease was primarily due to increased costs of $9.8 million associated with our beloranib program, $8.3 million in our unallocated expenses, $5.4 millionassociated with our work on second-generation MetAP2 inhibitors and $3.8 million associated with our ZGN-839 program. Of the increase in our beloranibprogram, clinical trial expenses for beloranib increased by $13.3 million period over period as a result of timing of our clinical trials in 2015 and 2014. During theyear ended December 31, 2015, we had two ongoing clinical trials, our Phase 2b trial in patients with severe obesity complicated by type 2 diabetes (whichachieved full enrollment of 152 patients in August 2015) and our U.S. Phase 3 trial in patients with PWS (which achieved full enrollment of 108 patients in May2015). Prior to the FDA placing the IND for beloranib on full clinical hold in December 2015, we suspended dosing of patients in the randomized portion of both ofthese trials in October 2015, following the partial clinical hold. During the year ended December 31, 2014, we had two ongoing clinical trials, however the numberof patients varied greatly; our Phase 2a trial in patients with obesity caused by injury to the hypothalamus had a total of 14 patients (which achieved full enrollmentin September 2014) and our U.S. Phase 3 trial in patients with PWS which had the first patient dosed in September of 2014 and had 33 patients enrolled as ofDecember 31, 2014. Clinical trial activities undertaken by our Australian subsidiary are recorded net of a 45% research and development tax incentive from theAustralian government. This tax incentive reduced our expenses by $1.4 million and $0.4 million for the years ended December 31, 2015 and 2014, respectively.Additionally, pre-clinical and manufacturing costs increased by $3.6 million over the prior period primarily as a result of increased costs for toxicology studiesrequired for our planned NDA submission. These increases were partially offset by a decrease of $7.0 million in licensing, milestone and license maintenance feesdue to the prior year achievement of a milestone related to the initiation of our Phase 3 clinical trial in beloranib, which we initiated in September 2014.Unallocated expenses increased period over period primarily due to an increase in personnel related costs of $3.4 million, non-cash stock-basedcompensation of $2.4 million, $1.4 million in consultants and $1.1 million in other costs. Personnel related and non-cash stock-based compensation expensesincreases resulted primarily from an increase in hiring. During 2015, we hired 17 new employees in research and development. Non-cash stock-based compensationwas also impacted by our first annual stock option grant to employees during 2015. Other unallocated expenses are also driven by the increase in new hires,primarily travel expenses and facilities expenses. 84 Table of ContentsCosts related to both ZGN-839 and second-generation MetAP2 inhibitors increased as a result of our increased focus on our early-stage programs in 2015,including work in chemistry, toxicology, pharmacology and contract manufacturing costs. Additionally we worked to submit an IND in the fourth quarter of 2015for ZGN-839.General and administrative expenses Year Ended December 31, Increase (Decrease) 2015 2014 (in thousands) Personnel related $4,285 $2,241 $2,044 Non-cash stock-based compensation 5,652 1,063 4,589 Professional fees 7,037 3,314 3,723 Travel and other 2,221 1,523 698 Total general and administrative expenses $19,195 $8,141 $11,054 General and administrative expenses for the year ended December 31, 2015 increased $11.1 million compared to the year ended December 31, 2014. Theincrease was primarily due to increased non-cash stock-based compensation of $4.6 million, increased professional and consulting fees of $3.7 million, personnelrelated costs of $2.0 million and increased travel and other related costs of $0.7 million period over period. The increase in non-cash stock-based compensation wasdue to granting additional stock-based awards to new hires and existing employees as well as an increase in the value of the awards. Professional and consultingfees increased primarily due to increased accounting and legal fees to support our operating as a public company and costs incurred for commercial-readinessactivities related to PWS. Personnel related costs increased period over period primarily due to hiring additional employees. During 2015, we hired eight newemployees in general and administrative roles. Travel and other costs increased primarily due to increased insurance expense, travel, and information technology-related expenses to support our operating as a public company.Other income (expense), netInterest expense. Interest expense for the years ended December 31, 2015 and 2014 of $0.8 million and $0.9 million, respectively, was related to interestexpense on our outstanding borrowings under the credit facility that we entered into in March 2014. Interest expense consists primarily of the stated interest of8.1% per year due on outstanding borrowings. It also includes expense related to the final payment of 6% of amounts drawn down that is being recorded over theterm through the maturity date using the effective-interest method and the amortization of deferred financing costs and debt discount relating to the credit facility.The 2014 expense includes a $0.2 million fee which was due to the lenders upon the completion of our IPO in June 2014.Interest income. Interest income of $0.4 million for the year ended December 31, 2015 was related to interest earned on our marketable securities balances.Foreign currency transaction gains (losses), net. We had foreign currency transaction losses of $0.1 million for the years ended December 31, 2015 and2014. Foreign currency transactions gains and losses consisted of the realized and unrealized gains and losses from foreign currency-denominated cash balances,vendor payables and tax-related receivables from the Australian government, generally reflecting the weakening of the Australian dollar relative to the U.S. dollar. 85 Table of ContentsComparison of Years Ended December 31, 2014 and 2013The following table summarizes our results of operations for the years ended December 31, 2014 and 2013: Year Ended December 31, 2014 2013 Increase (Decrease) (in thousands, except per share data) Statement of Operations Data: Revenue $— $— $— Operating expenses: Research and development 27,391 9,561 17,830 General and administrative 8,141 4,219 3,922 Total operating expenses 35,532 13,780 21,752 Loss from operations (35,532) (13,780) (21,752) Other income (expense): Interest income 28 — 28 Interest expense (870) — (870) Foreign currency transaction gains (losses), net (104) (247) 143 Total other income (expense), net (946) (247) (699) Net loss $(36,478) $(14,027) $(22,451) Research and development expenses Year Ended December 31, Increase (Decrease) 2014 2013 (in thousands) Direct research and development expenses by program: Beloranib: Pre-clinical and manufacturing $8,077 $2,898 $5,179 Clinical trials 4,642 2,983 1,659 Licensing, milestone and licensing maintenance fees 7,019 — 7,019 Subtotal 19,738 5,881 13,857 ZGN-839 1,086 295 791 Second-generation MetAP2 inhibitors 476 — 476 Subtotal 21,300 6,176 15,124 Unallocated expenses: Personnel related 2,771 1,082 1,689 Non-cash stock-based compensation 490 176 314 Consultants 2,359 1,981 378 Other 471 146 325 Subtotal 6,091 3,385 2,706 Total research and development expenses $27,391 $9,561 $17,830 Research and development expenses for the year ended December 31, 2014 increased $17.8 million compared to the year ended December 31, 2013. Theincrease was primarily due to increased costs of $13.9 million associated with our beloranib program, $2.7 million in our unallocated expenses, $0.8 millionassociated with ZGN-839 and $0.5 million associated with other early-stage development programs, consisting of our second-generation MetAP2 inhibitors. Of theincrease in our beloranib program, pre-clinical and manufacturing 86 Table of Contentscosts increased by $5.2 million period over period as a result of our focus on drug manufacturing and other pre-clinical activities related to beloranib in order toprepare for clinical trials, as well as toxicology studies required for our NDA submission. Additionally, clinical trial expenses for beloranib increased by $1.7million period over period as a result of timing of our clinical trials in 2014 and 2013. Clinical trial activities undertaken by our Australian subsidiary are recordednet of a 45% research and development tax incentive from the Australian government. Lastly, licensing, milestone and licensing maintenance fees increased $7.0million 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.Unallocated expenses increased period over period primarily due to an increase in personnel related costs of $1.7 million and an increase in consultantexpenses of $0.4 million. Personnel costs increased due to 11 new employees in 2014, which resulted in a $1.3 million increase in salaries and a $0.4 millionincrease in bonuses. Consultant expenses increased due to additional activity with regard to FDA meetings, initiation of clinical trials, and nonclinical activity.Additionally due to the increase in employees, as well as an increase in the value of the awards, there was a $0.3 million increase in non-cash stock-basedcompensation. Costs related to ZGN-839 and other early-stage development programs increased in 2014 as a result of our increased focus on our early-stageprograms in 2014.General and administrative expenses Year Ended December 31, Increase (Decrease) 2014 2013 (in thousands) Personnel related $2,241 $1,139 $1,102 Non-cash stock-based compensation 1,063 219 844 Professional fees 3,314 2,463 851 Travel and other 1,523 398 1,125 Total general and administrative expenses $8,141 $4,219 $3,922 General and administrative expenses for the year ended December 31, 2014 increased $3.9 million compared to the year ended December 31, 2013. Theincrease was primarily due to increased personnel related costs of $1.1 million, increased travel and other related costs of $1.1 million, non-cash stock-basedcompensation of $0.8 million and increased professional fees of $0.9 million period over period. Of the increase in personnel related expenses the hiring of fournew employees in 2014 (including our President and Chief Commercial Officer) increased $0.8 million and bonuses increased $0.3 million. The increase in traveland other related costs is the result of an increase in directors and officer’s insurance of $0.5 million due to becoming a public company, an increase of $0.4 millionrelating to commercial marketing projects as well as various other increases including information technology-related expenses to support our operating as a publiccompany and increased office rent due to the office move in July 2014. The increase in non-cash stock-based compensation increased $0.8 million related to thenew employees as well as an increase in the value of the awards. Professional fees increase is primarily due to $0.5 million of consulting fees, $0.2 million ofattorney fees, and $0.2 million increase in fees for being a public company.Other income (expense), netInterest expense. Interest expense for the year ended December 31, 2014 was related to interest expense on our outstanding borrowings under the creditfacility that we entered into on March 31, 2014, consisting of $0.9 million of the stated interest of 8.1% per year due on outstanding borrowings, a final payment of6% of amounts drawn down that is being recorded as interest expense over the term through the maturity date using the effective-interest method, the amortizationof deferred financing costs, and the accretion of debt discount relating to the credit facility, both approximately $0.1 million, and $0.2 million related to a fee whichwas due to the lender upon the completion of our IPO. We had no debt outstanding during 2013. 87 Table of ContentsForeign currency transaction gains (losses), net. Net foreign currency transaction losses of $0.1 million for the year ended December 31, 2014 wereprimarily due to the re-measurement of receivables, denominated in Australian dollars, from the Australian government for research and development taxincentives.Liquidity and Capital ResourcesAs of December 31, 2015, we had cash and cash equivalents and marketable securities totaling $185.1 million. We invest our cash in money market funds,U.S. government securities, corporate bonds, and commercial paper, with the primary objectives to preserve principal, provide liquidity and maximize incomewithout significantly increasing risk.Since our inception in November 2005, we have not generated any revenue and have incurred recurring net losses. As of December 31, 2015, we had anaccumulated deficit of $179.7 million. Prior to our IPO in June 2014, we funded our operations primarily through sales of redeemable convertible preferred stockand, to a lesser extent, through the issuances of convertible promissory notes. From our inception through our IPO in June 2014, we have received gross proceedsof $104.0 million from such transactions. During June 2014, we completed our IPO with net proceeds of $102.7 million after deducting underwriting discounts andcommissions paid by us. We also incurred offering costs of $2.5 million related to the IPO. On January 28, 2015, we completed a follow-on offering of ourcommon stock, which resulted in the sale of 3,942,200 shares at a price of $35.00 per share. We received net proceeds from the follow-on offering ofapproximately $129.6 million based upon the price of $35.00 per share and after deducting underwriting discounts and commissions, and estimated offeringexpenses.On March 31, 2014, we entered into a loan and security agreement, or the 2014 Credit Facility, which provided for initial borrowings of $7.5 million andadditional 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 aspart 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 untilSeptember 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 electednot 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 Facilityare collateralized by substantially all of our personal property, other than our intellectual property. There are no financial covenants associated with the debtfacility; however, there are negative covenants restricting our activities, including limitations on dispositions, mergers or acquisitions; encumbering or granting asecurity 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 CreditFacility until December 1, 2014 and, thereafter, to pay 36 consecutive, equal monthly installments of principal and interest from January 1, 2015 throughDecember 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 extendeduntil 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 anyamounts 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 werealso 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 equitysecurities where existing voting stockholders hold less than 50% of voting equity securities after such transaction. During the year ended December 31, 2014, werecorded interest expense of $0.2 million relating to the fee paid to the lender upon completion of our IPO. 88 Table of ContentsThe following table summarizes our sources and uses of cash for each of the periods presented below: Years Ended December 31, 2015 2014 2013 (in thousands) Cash used in operating activities $(59,554) $(28,241) $(15,004) Cash used in investing activities (92,118) (57,315) (17) Cash provided by financing activities 129,164 108,142 40,603 Net (decrease) increase in cash and cash equivalents $(22,508) $22,586 $25,582 Net cash used in operating activitiesDuring the year ended December 31, 2015, operating activities used $59.6 million of cash, resulting from our net loss of $74.3 million, partially offset bynon-cash charges of $8.0 million, and net cash provided by changes in our operating assets and liabilities of $6.7 million. Our net loss was primarily attributed toresearch and development activities related to our beloranib program, licensing milestones and our general and administrative expenses, as we had no revenue inthe period. Our net non-cash charges during the year ended December 31, 2015, consisted primarily of stock-based compensation expense of $8.6 million. Net cashprovided by changes in our operating assets and liabilities during the year ended December 31, 2015, consisted primarily of $4.9 million increase in accountspayable and a $3.2 million increase in accrued expenses, partially offset by a $0.4 million increase in prepaid expenses and other current assets and a $1.0 millionincrease in tax incentive receivable.During the year ended December 31, 2014, operating activities used $28.2 million of cash, resulting from our net loss of $36.5 million, partially offset bynon-cash charges of $5.3 million, and net cash provided by changes in our operating assets and liabilities of $3.2 million. Our net loss was primarily attributed toresearch and development activities related to our beloranib program, licensing milestones and our general and administrative expenses, as we had no revenue inthe period. Our net non-cash charges during the year ended December 31, 2014, consisted primarily of common stock issued in lieu of a milestone payment of $3.6million and stock-based compensation expense of $1.6 million. Net cash provided by changes in our operating assets and liabilities during the year endedDecember 31, 2014, consisted primarily of a $1.1 million decrease in tax incentive receivable, $0.8 million increase in accounts payable and a $2.3 million increasein accrued expenses, partially offset by a $1.1 million increase in prepaid expenses and other current assets.During the year ended December 31, 2013, operating activities used $15.0 million of cash, primarily resulting from our net loss of $14.0 million and fromnet 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 primarilyattributed to research and development activities related to beloranib and our general and administrative expenses, as we had no revenue in the period. Net cashused 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 anddevelopment tax incentive receivable from the Australian government and a $0.8 million decrease in accrued expenses, partially offset by a $0.2 million decrease inprepaid expenses and other current assets and a $0.2 million increase in accounts payable. Our net non-cash charges during the year ended December 31, 2013,consisted primarily of stock-based compensation expense of $0.4 million and unrealized foreign currency transaction losses of $0.3 million.Net cash used in investing activitiesDuring the year ended December 31, 2015, investing activities used $92.1 million of cash resulting from purchases of marketable securities of $287.5 millionand purchases of equipment of $0.6 million. These uses were partially offset by proceeds from maturities of marketable securities of $196.0 million. 89 Table of ContentsDuring the year ended December 31, 2014, we purchased marketable securities of $57.2 million. We also purchased equipment of $0.1 million and paid asecurity deposit on our new office lease of $0.1 million. We used an immaterial amount of cash during the year ended December 31, 2013 to purchase property andequipment.Net cash provided by financing activitiesDuring the year ended December 31, 2015, net cash provided by financing activities was $129.2 million as a result of proceeds of $129.6 million from ourfollow-on public offering, net of underwriting discounts and commissions, as well as $1.0 million received from proceeds relating to the exercise of common stockoptions, offset by payments of $1.4 million related to our note payable.During the year ended December 31, 2014, net cash provided by financing activities was $108.1 million as a result of proceeds of $102.7 million from ourIPO, 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 redeemableconvertible preferred stock, the total of which was partially offset by payments of $2.3 million of offering costs related to our IPO that were paid during the year.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 fromissuances of our Series D redeemable convertible preferred stock and $34.8 million from issuances of our Series E redeemable convertible preferred stock, partiallyoffset 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 continueto incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our expenses will continue to increase if and as we: • advance the clinical development of beloranib as a treatment for obesity and hyperphagia in patients with PWS following resolution of the full clinicalhold on the beloranib IND; • advance the clinical development of beloranib as a treatment for patients with HIAO following resolution of the full clinical hold on the beloranibIND; • conduct IND enabling studies and clinical development of ZGN-839 and our second-generation MetAP2 inhibitors; • seek to identify additional indications for our product candidates; • 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.We expect that our existing cash and cash equivalents and marketable securities as of December 31, 2015, will enable us to fund our operating expenses andcapital 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 ouravailable 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 theseproduct candidates is unknown, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the researchand development of our product candidates. Our future capital requirements for beloranib, ZGN-839 and our second-generation MetAP2 inhibitors will depend onmany factors, including: • the costs, timing and outcome of regulatory review; including efforts to lift the full clinical hold on the beloranib IND; • the costs of future research and development activities, including clinical trials; 90 Table of Contents • the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectualproperty-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, debtfinancings, collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debtsecurities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adverselyaffect your rights as a common stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to takespecific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may require the issuance of warrants, which couldpotentially dilute your ownership interest. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, wemay have to relinquish valuable rights to our technologies, future revenue streams, research programs of beloranib, ZGN-839 or our second-generation MetAP2inhibitors 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, wemay 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 earnedtax credits, due to our uncertainty of realizing a benefit from those items. As of December 31, 2015, we had net operating loss carryforwards for federal and stateincome tax purposes of $42.5 million and $31.2 million, respectively, which begin to expire in 2026 and 2030, respectively. Included within these net operatingloss carryforwards are amounts of $12.8 million and $10.6 million, respectively, that were attributable to stock option exercises, which will be recorded as anincrease in additional paid-in capital once they are realized in accordance with accounting for stock-based compensation awards. As of December 31, 2015, we alsohad available tax credit carryforwards for federal and state income tax purposes of $10.6 million and $1.5 million, respectively, which begin to expire in 2026 and2021, 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 equityownership of our corporate entity over a three-year period, has occurred or whether there have been multiple ownership changes since our inception, due to thesignificant costs and complexities associated with such studies. Accordingly, our ability to utilize our tax carryforwards may be limited. Additionally, U.S. tax lawslimit 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 carryforwardsfor federal and state tax purposes.Contractual Obligations and CommitmentsThe following table summarizes our contractual obligations at December 31, 2015 and the effect such obligations are expected to have on our liquidity andcash flow in future periods: Payments Due by Period Total (2) (3) Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years (in thousands) Operating lease commitments (1) $912 $432 $398 $82 $— Debt commitments (4) 7,098 3,324 3,774 — — $8,010 $3,756 $4,172 $82 $— (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 onJuly 31, 2017, and an option to extend the lease for three additional years. In March 2015, we entered into an operating lease for additional office space in 91 Table of Contents Boston, Massachusetts, effective as of April 15, 2015, with a term expiring on July 31, 2017, and two options to extend the lease for three additional yearseach. In October 2015, we entered into an operating lease for office space in San Diego, California, effective as of October 1, 2015, with a term expiring onSeptember 30, 2019, and an option to extend the lease for five 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 alsoresponsible for patent prosecution costs. We are obligated to make future milestone payments under these agreements of up to $12.3 million, upon achievingcertain pre-commercialization milestones, such as clinical trials and government approvals, and up to $12.5 million upon achieving certain productcommercialization milestones. In addition, under one of the license agreements, we are obligated to pay up to $1.3 million with respect to each subsequentlicensed product, if any, that is a new chemical entity. For the year ended December 31, 2014, we recorded an expense of $7.0 million in our consolidatedfinancial statements, for milestones achieved under these licensing agreements during 2014. In addition, we will owe single-digit royalties on sales ofcommercial products developed using these licensed technologies, if any. We are obligated to pay to the licensors a percentage of fees received if and whenwe sublicense the technologies. As of December 31, 2015, we had not yet developed a commercial product using the licensed technologies and we had notentered 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 webelieve that our non-cancelable obligations under these agreements are not material.(4)Debt commitments include principal, interest, and a 6% final payment of the amounts drawn under the credit facility.Off-Balance Sheet ArrangementsWe did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under Securities and ExchangeCommission rules, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purposeentities, established for the purpose of facilitating financing transactions that are not required to be reflected on our balance sheets.Recently Issued Accounting PronouncementsIn August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern . The new guidance addresses management’sresponsibility 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 areissued. 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.In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. This guidance requires companies to classify alldeferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts and allows foradoption on either a prospective or retrospective basis. This guidance will be effective on January 1, 2017. Early adoption is permitted. We have elected to earlyadopt this guidance on a prospective basis and, as a result, prior consolidated balance sheets were not retrospectively adjusted. The adoption of this guidance didnot have a material impact on our consolidated financial statements and related disclosures.In February 2016, the FASB issued ASU No. 2016-02, Leases . This guidance will require that lease arrangements longer than 12 months result in an entityrecognizing an asset and liability equal to the present 92 Table of Contentsvalue of the lease payments in the statement of financial position. This guidance is effective for annual periods beginning after December 15, 2018, and interimperiods therein. This standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, withan option to use certain transition relief. Early adoption is permitted. We are evaluating the effect that this guidance will have on our consolidated financialstatements.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKInterest Rate Fluctuation RiskOur cash, cash equivalents, and marketable securities as of December 31, 2015 consisted of cash, government securities, corporate bonds, commercial paper,and money market accounts. The primary objectives of our investment activities are to preserve principal, provide liquidity and maximize income withoutsignificantly increasing risk. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interestrates. If market interest rates were to increase immediately and uniformly by 50 basis points, or one-half of a percentage point, from levels at December 31, 2015,the net fair value of our interest-sensitive financial instruments would have resulted in a hypothetical decline of $0.4 million.Foreign Currency Exchange RiskForeign currency transaction exposure results primarily from transactions with our CROs and other providers related to our clinical trials that aredenominated in currencies other than the functional currency of the legal entity in which the transaction is recorded by us, primarily the Australian dollar. Anytransaction gains or losses resulting from currency fluctuations is recorded on a separate line in our consolidated statement of operations. Net foreign currencytransaction losses of $0.1 million, $0.1 million, and $0.2 million were recorded for the years ended December 31, 2015, 2014, and 2013, respectively.Currently, our largest foreign currency exposures are those with respect to the Australian dollar. Relative to foreign currency exposures existing as ofDecember 31, 2015, a 10% unfavorable movement in foreign currency exchange rates would expose us an increase in net loss. For the year ended December 31,2015, 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 basedon a sensitivity analysis performed on our financial position as of December 31, 2015. We have experienced and we will continue to experience fluctuations in ournet 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 orliability. At this time, we do not hedge our foreign currency risk. 93 Table of ContentsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAINDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm 95 Consolidated Balance Sheets as of December 31, 2015 and 2014 96 Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2015, 2014 and 2013 97 Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the years ended December 31,2015, 2014 and 2013 98 Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013 99 Notes to Consolidated Financial Statements 100 94 Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders ofZafgen, Inc.:In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive loss, of changes inredeemable convertible preferred stock and stockholders’ equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Zafgen,Inc. and its subsidiaries at December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period endedDecember 31, 2015 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of thesestatements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion./s/ PricewaterhouseCoopers LLPBoston, MassachusettsMarch 15, 2016 95 Table of ContentsZAFGEN, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except share and per share data) December 31, 2015 2014 Assets Current assets: Cash and cash equivalents $35,595 $58,103 Marketable securities 149,484 57,359 Tax incentive receivable 1,323 391 Prepaid expenses and other current assets 1,708 1,345 Total current assets 188,110 117,198 Property and equipment, net 902 79 Other assets 94 242 Total assets $189,106 $117,519 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $7,495 $2,348 Accrued expenses 6,112 3,172 Notes payable, current 2,936 1,381 Total current liabilities 16,543 6,901 Notes payable, net of discount, long-term 3,453 6,177 Total liabilities 19,996 13,078 Commitments and contingencies (Note 10) Stockholders’ equity: Preferred stock; $0.001 par value per share; 5,000,000 shares authorized at December 31, 2015 and 2014; no shares issuedand outstanding at December 31, 2015 and 2014 — — Common stock, $0.001 par value per share; 115,000,000 shares authorized at December 31, 2015 and 2014; 27,242,503 and22,879,160 shares issued and outstanding at December 31, 2015 and 2014, respectively 27 23 Additional paid-in capital 348,961 209,838 Accumulated deficit (179,671) (105,385) Accumulated other comprehensive loss (207) (35) Total stockholders’ equity 169,110 104,441 Total liabilities and stockholders’ equity $189,106 $117,519 The accompanying notes are an integral part of these consolidated financial statements. 96 Table of ContentsZAFGEN, INC.CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(In thousands, except share and per share data) Year Ended December 31, 2015 2014 2013 Revenue $— $— $— Operating expenses: Research and development 54,618 27,391 9,561 General and administrative 19,195 8,141 4,219 Total operating expenses 73,813 35,532 13,780 Loss from operations (73,813) (35,532) (13,780) Other income (expense): Interest income 438 28 — Interest expense (806) (870) — Foreign currency transaction gains (losses), net (105) (104) (247) Total other income (expense), net (473) (946) (247) Net loss (74,286) (36,478) (14,027) Accretion of redeemable convertible preferred stock to redemption value — (92) (213) Net loss attributable to common stockholders $(74,286) $(36,570) $(14,240) Net loss per share attributable to common stockholders, basic and diluted $(2.78) $(3.00) $(19.53) Weighted average common shares outstanding, basic and diluted 26,756,079 12,189,155 729,001 Comprehensive loss: Net loss $(74,286) $(36,478) $(14,027) Other comprehensive loss: Unrealized loss on marketable securities (172) (35) — Total other comprehensive loss (172) (35) — Total comprehensive loss $(74,458) $(36,513) $(14,027) The accompanying notes are an integral part of these consolidated financial statements. 97 Table of ContentsZAFGEN, INC.CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY(DEFICIT)(In thousands, except share data) Series A, B, C, D and E Redeemable Convertible Preferred Stock Common Stock AdditionalPaid-in Capital AccumulatedDeficit Accumulated Other ComprehensiveLoss Total Stockholders’Equity (Deficit) Shares Amount Shares Par Value Balances at December 31, 2012 73,991,017 $62,785 736,026 $1 $150 $(54,880) $— $(54,729) Issuance of Series D redeemable convertible preferred stock, net ofissuance costs of $1 4,381,914 5,955 — — — — — — Issuance of Series E redeemable convertible preferred stock, net ofissuance costs of $156 16,110,473 34,844 — — — — — — Repurchase and retirement of common stock, at cost — — (6,635) — — — — — Stock-based compensation expense — — — — 395 — — 395 Accretion of redeemable convertible preferred stock to redemptionvalue — 213 — — (213) — — (213) Net loss — — — — — (14,027) — (14,027) Balances at December 31, 2013 94,483,404 103,797 729,391 1 332 (68,907) — (68,574) Issuance of Series E redeemable convertible preferred stock, net ofissuance costs of $1 204,101 442 — — — — — — Accretion of redeemable convertible preferred stock to redemptionvalue — 92 — — (92) — — (92) Conversion of redeemable convertible preferred stock to commonstock (94,687,505) (104,331) 15,077,621 15 104,316 — — 104,331 Issuance of common stock — — 6,900,000 7 100,157 — — 100,164 Issuance of common stock upon exercise of stock options — — 398 — 3 — — 3 Issuance of common stock in lieu of milestone payment — — 171,750 — 3,569 — — 3,569 Stock-based compensation expense — — — — 1,553 — — 1,553 Unrealized loss on marketable securities — — — — — — (35) (35) Net loss — — — — — (36,478) — (36,478) Balances at December 31, 2014 — — 22,879,160 23 209,838 (105,385) (35) 104,441 Issuance of common stock — — 3,942,200 4 129,567 — — 129,571 Issuance of common stock upon exercise of stock options andemployee stock purchase plan — — 418,241 — 974 — — 974 Issuance of restricted stock — — 2,902 — — — — — Stock-based compensation expense — — — — 8,582 — — 8,582 Unrealized loss on marketable securities — — — — — — (172) (172) Net loss — — — — — (74,286) — (74,286) Balances at December 31, 2015 — $— 27,242,503 $27 $348,961 $(179,671) $(207) $169,110 The accompanying notes are an integral part of these consolidated financial statements. 98 Table of ContentsZAFGEN, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year Ended December 31, 2015 2014 2013 Cash flows from operating activities: Net loss $(74,286) $(36,478) $(14,027) Adjustments to reconcile net loss to net cash used in operating activities Stock-based compensation expense 8,582 1,553 395 Non-cash interest expense 62 46 — Depreciation expense 70 16 12 Common stock issued in lieu of milestone payment — 3,569 — Unrealized foreign currency transaction losses 82 93 250 Premium on marketable securities, net (2,036) (225) — Amortization of premium on marketable securities 1,243 31 — Changes in operating assets and liabilities: Prepaid expenses and other current assets (363) (1,121) 165 Tax incentive receivable (1,014) 1,133 (1,237) Accounts payable 4,914 815 237 Accrued expenses 3,192 2,327 (799) Net cash used in operating activities (59,554) (28,241) (15,004) Cash flows from investing activities: Proceeds from maturities of marketable securities 195,987 — — Purchases of marketable securities (287,491) (57,200) — Purchases of property and equipment (595) (58) (17) Deposits for leased property (19) (57) — Net cash used in investing activities (92,118) (57,315) (17) Cash flows from financing activities: Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs — 442 40,799 Proceeds from issuance of notes payable, net of issuance costs — 7,386 — Payments of debt offering costs — (49) — Repayments of notes payable (1,381) — — Proceeds from exercise of common stock options and employee stock purchase plan 974 3 — Proceeds from public offerings, net of commissions and underwriting discounts 130,044 102,672 — Payments of public offering costs (473) (2,312) (196) Net cash provided by financing activities 129,164 108,142 40,603 Net (decrease) increase in cash and cash equivalents (22,508) 22,586 25,582 Cash and cash equivalents at beginning of period 58,103 35,517 9,935 Cash and cash equivalents at end of period $35,595 $58,103 $35,517 Supplemental disclosure of non-cash investing and financing activities: Accretion of redeemable convertible preferred stock to redemption values $— $92 $213 Deferred offering costs included in accounts payable and accrued expenses $— $148 $547 Property and equipment included in accounts payable $298 $— $— Conversion of redeemable preferred stock to common stock $— $104,331 $— Conversion of milestone liabilities to common stock $— $3,569 $— Supplemental disclosure of cash flow information: Cash paid for interest $584 $632 $— The accompanying notes are an integral part of these consolidated financial statements. 99 Table of ContentsZAFGEN, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in thousands, except share and per share data)1. Nature of the Business and Basis of PresentationZafgen, Inc. (the “Company”) was incorporated on November 22, 2005 under the laws of the State of Delaware. The Company is a biopharmaceuticalcompany dedicated to significantly improving the health and well-being of patients affected by obesity and complex metabolic disorders. Zafgen is focused ondeveloping novel therapeutics that treat the underlying biological mechanisms through the methionine aminopeptidase 2 (“MetAP2”) pathway. Beloranib, theCompany’s 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 and obesity caused by hypothalamic injury, including craniopharyngioma-associated obesity.Zafgen is also developing ZGN-839, a liver-targeted MetAP2 inhibitor, for the treatment of nonalcoholic steatohepatitis and abdominal obesity, as well as othersecond-generation MetAP2 inhibitors for severe obesity. Since its inception, the Company has devoted substantially all of its efforts to research and development,recruiting management, acquiring operating assets and raising capital.The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, new technological innovations, protectionof proprietary technology, dependence on key personnel, compliance with government regulations and the need to obtain additional financing. Product candidatescurrently under development will require significant additional research and development efforts, including extensive pre-clinical and clinical testing and regulatoryapproval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel infrastructure, and extensive compliance-reporting capabilities.The Company’s product candidates are all in the development stage. There can be no assurance that the Company’s research and development will besuccessfully completed, that adequate protection for the Company’s intellectual property will be obtained, that any products developed will obtain necessarygovernment regulatory approval or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it isuncertain when, if ever, the Company will generate significant revenue from product sales. The Company operates in an environment of rapid change in technologyand substantial competition from pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its employees andconsultants.The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries Zafgen Securities Corporation, ZafgenAustralia Pty Limited, and Zafgen Animal Health, LLC. All significant intercompany balances and transactions have been eliminated.The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States ofAmerica (“GAAP”).On June 24, 2014, the Company completed an initial public offering (“IPO”) of its common stock, which resulted in the sale of 6,900,000 shares at a price of$16.00 per share. The Company received net proceeds from the IPO of approximately $102,672 based upon the price of $16.00 per share and after deductingunderwriting discounts and commissions paid by the Company. The Company also incurred offering costs of $2,508 related to the IPO.On January 28, 2015, the Company completed a follow-on offering of its common stock, which resulted in the sale of 3,942,200 shares at a price of $35.00per share. The Company received net proceeds from the follow-on offering of $130,044 based upon the price of $35.00 per share after deducting underwritingdiscounts and commissions. The Company also incurred offering costs of $473 related to the follow-on offering. 100 Table of Contents2. Summary of Significant Accounting PoliciesUse of EstimatesThe preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amountsof assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of expensesduring the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the accrual ofresearch and development expenses and the valuation of common stock prior to the IPO and stock-based awards. Estimates are periodically reviewed in light ofchanges in circumstances, facts and experience. Actual results could differ from the Company’s estimates.Cash EquivalentsThe Company considers all short-term, highly liquid investments with original maturities of ninety days or less at acquisition date to be cash equivalents.Cash equivalents, which consist of money market funds, U.S. government securities, corporate bonds, and commercial paper, are stated at fair value.Concentration of Credit Risk and of Significant SuppliersFinancial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents and marketablesecurities. The Company has all cash and cash equivalents and marketable securities balances at two accredited financial institutions in amounts that exceedfederally insured limits. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial bankingrelationships.The Company is dependent on third-party manufacturers to supply products for research and development activities in its programs. In particular, theCompany relies and expects to continue to rely on a small number of manufacturers to supply it with its requirements for the active pharmaceutical ingredients andformulated drugs related to these programs. These programs could be adversely affected by a significant interruption in the supply of active pharmaceuticalingredients and formulated drugs.Marketable securitiesMarketable securities consist of investments with original maturities greater than ninety days. The Company has classified its investments with maturitiesbeyond one year as short term, based on their highly liquid nature and because such marketable securities represent the investment of cash that is available forcurrent operations. The Company considers its investment portfolio of investments available-for-sale. Accordingly, these investments are recorded at fair value,which is based on quoted market prices. Unrealized gains and losses are reported as a component of accumulated other comprehensive income (loss) instockholders’ equity (deficit). Realized gains and losses and declines in value judged to be other than temporary are included as a component of other income(expense), net based on the specific identification method. When determining whether a decline in value is other than temporary, the Company considers variousfactors, including whether the Company has the intent to sell the security, and whether it is more likely than not that the Company will be required to sell thesecurity prior to recovery of its amortized cost basis. Fair value is determined based on quoted market prices.Deferred Offering CostsThe Company capitalizes certain legal, accounting and other third-party fees that are directly associated with in-process equity financings as other assetsuntil such financings are consummated. After consummation of the equity financing, these costs are recorded in stockholders’ equity (deficit) as a reduction ofadditional paid-in capital generated as a result of the offering or as a reduction to the carrying value of preferred stock issued. As of December 31, 2014, theCompany recorded $148 of deferred offering costs, included in other assets in the accompanying consolidated balance sheet, in contemplation of the Company’sfollow-on offering of its common stock, which closed in January 2015. 101 Table of ContentsProperty and EquipmentProperty and equipment are stated at cost less accumulated depreciation. Depreciation expense is recognized using the straight-line method over a five-yearestimated useful life for equipment, furniture and fixtures and office equipment. Leasehold improvements are amortized over the shorter of the asset life or the termof the lease agreement. Expenditures for repairs and maintenance of assets are charged to expense as incurred. Upon retirement or sale, the cost and relatedaccumulated depreciation of assets disposed of are removed from the accounts and any resulting gain or loss is included in loss from operations.Impairment of Long-Lived AssetsLong-lived assets consist of property and equipment. Long-lived assets to be held and used are tested for recoverability whenever events or changes inbusiness circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when toperform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends,and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, theCompany compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. Animpairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount.The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows. Todate, the Company has not recorded any impairment losses on long-lived assets.Research and Development CostsResearch and development costs are expensed as incurred. Included in research and development expenses are wages, stock-based compensation and benefitsof employees, third-party license fees and milestones and other operational costs related to the Company’s research and development activities, including facility-related expenses and external costs of outside vendors engaged to conduct pre-clinical studies, manufacturing activities, and clinical trials. The Company recordsresearch and development expenses net of any research and development tax incentives the Company is entitled to receive from government authorities.Research Contract Costs and AccrualsThe Company has entered into various research and development contracts with research institutions and other companies both inside and outside of theUnited States. These agreements are generally cancelable, and related payments are recorded as research and development expenses as incurred. The Companyrecords accruals for estimated ongoing research costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies,including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates are made in determining the accruedbalances at the end of any reporting period. Actual results could differ from the Company’s estimates. The Company’s historical accrual estimates have not beenmaterially different from the actual costs.Patent CostsAll patent-related costs incurred in connection with filing and prosecuting patent applications are recorded as general and administrative expenses asincurred, as recoverability of such expenditures is uncertain.Accounting for Stock-Based CompensationThe Company measures all stock options and other stock-based awards granted to employees and directors at the fair value on the date of the grant using theBlack-Scholes option-pricing model. The fair value of the 102 Table of Contentsawards is recognized as expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. Thestraight-line method of expense recognition is applied to all awards with service-only conditions.For stock-based awards granted to consultants and nonemployees, compensation expense is recognized over the period during which services are rendered bysuch consultants and nonemployees until completed. At the end of each financial reporting period prior to completion of the service, the fair value of these awardsis re-measured using the then-current fair value of the Company’s common stock and updated assumption inputs in the Black-Scholes option-pricing model.The Company classifies stock-based compensation expense in its consolidated statement of operations and comprehensive loss in the same manner in whichthe award recipient’s payroll costs are classified or in which the award recipients’ service payments are classified.The Company recognizes compensation expense for only the portion of awards that are expected to vest. In developing a forfeiture rate estimate, theCompany has considered its historical experience to estimate pre-vesting forfeitures for service-based awards.Income TaxesThe Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for theexpected future tax consequences of events that have been recognized in the consolidated financial statements or in the Company’s tax returns. Deferred taxes aredetermined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which thedifferences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses thelikelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that itis more likely than not that all or a portion of deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense.Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planningstrategies.The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process to determine theamount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination bythe taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit torecognize in the consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood ofbeing realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that areconsidered appropriate as well as the related net interest and penalties.Segment DataThe Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions. The Company’ssingular focus is on advancing novel therapeutics for patients suffering from severe obesity and obesity-related disorders. No revenue has been generated sinceinception, and all tangible assets are held in the United States.Comprehensive LossComprehensive loss includes net loss as well as other changes in stockholders’ equity (deficit) that result from transactions and economic events other thanthose with stockholders. For the years ended December 31, 103 Table of Contents2015 and 2014, the Company’s only element of other comprehensive loss was unrealized loss on marketable securities. For the year ended December 31, 2013,there was no difference between net loss and comprehensive loss.Net Income (Loss) Per ShareUpon the closing of the Company’s IPO in June 2014, all of the Company’s outstanding redeemable convertible preferred shares were converted into sharesof common stock. Prior to this conversion, the Company followed the two-class method when computing net income (loss) per share as the Company had issuedshares that meet the definition of participating securities. The two-class method determines net income (loss) per share for each class of common and participatingsecurities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available tocommon stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if allincome for the period had been distributed. The Company’s redeemable convertible preferred shares contractually entitled the holders of such shares to participatein dividends, but did not contractually require the holders of such shares to participate in losses of the Company. Accordingly, the two-class method did not applyfor periods in which the Company reported a net loss or a net loss attributable to common stockholders resulting from dividends or accretion related to itsredeemable convertible preferred shares.Basic net income (loss) per share attributable to common stockholders is computed by dividing the net income (loss) attributable to common stockholders bythe weighted average number of common shares outstanding for the period. Diluted net income (loss) per share attributable to common stockholders is computedby dividing the diluted net income (loss) attributable to common stockholders by the weighted average number of common shares, including potential dilutivecommon shares assuming the dilutive effect of outstanding stock options and unvested restricted common shares, as determined using the treasury stock method.For periods in which the Company has reported net losses, diluted net loss per common share attributable to common stockholders is the same as basic net loss percommon share attributable to common stockholders, since dilutive common shares are not assumed to have been issued if their effect is antidilutive.Recently Issued and Adopted Accounting PronouncementsIn August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern . The new guidance addresses management’sresponsibility 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 areissued. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early adoption is permitted.The Company is evaluating the effect that this guidance will have on its consolidated financial statements.In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. This guidance requires companies to classify alldeferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. This guidance allowsfor adoption on either a prospective or retrospective basis and will be effective on January 1, 2017. Early adoption is permitted. The Company has elected to earlyadopt this guidance on a prospective basis and, as a result, prior consolidated balance sheets were not retrospectively adjusted. The adoption of this guidance didnot have a material impact on the Company’s consolidated financial statements and related disclosures.In February 2016, the FASB issued ASU No. 2016-02, Leases . This guidance will require that lease arrangements longer than 12 months result in an entityrecognizing an asset and liability equal to the present value of the lease payments in the statement of financial position. This guidance is effective for annualperiods beginning after December 15, 2018, and interim periods therein. This standard requires a modified retrospective 104 Table of Contentstransition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. Early adoption ispermitted. The Company is evaluating the effect that this guidance will have on its consolidated financial statements.3. Fair Value Measurements and Marketable SecuritiesFair Value MeasurementsThe following tables present information about the Company’s financial assets that have been measured at fair value at December 31, 2015 and 2014, andindicate the fair value of the hierarchy of the valuation inputs utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilizequoted prices (unadjusted) in active markets for identical assets or liabilities. Fair value determined by Level 2 inputs utilize observable inputs other than Level 1prices, such as quoted prices, for similar assets or liabilities, quoted market prices in markets that are not active or other inputs that are observable or can becorroborated by observable market data for substantially the full term of the related assets or liabilities. Fair values determined by Level 3 inputs are unobservabledata points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability.The following tables summarize the Company’s cash equivalents and marketable securities as of December 31, 2015 and 2014: December 31, 2015 Total Quoted Prices inActive Markets (Level 1) Significant Other ObservableInputs (Level 2) Significant UnobservableInputs (Level 3) Cash equivalents: Money market funds $13,231 $13,231 $— $— U.S. government securities 4,999 — 4,999 — Commercial paper 4,697 — 4,697 — Corporate bonds 3,000 — 3,000 — Total cash equivalents 25,927 13,231 12,696 — Marketable securities: Corporate bonds 125,516 — 125,516 — Commercial paper 19,468 — 19,468 — U.S. government securities 4,500 — 4,500 — Total marketable securities 149,484 — 149,484 — Total cash equivalents and marketable securities $175,411 $13,231 $162,180 $— 105 Table of Contents December 31, 2014 Total Quoted Prices inActive Markets (Level 1) Significant Other ObservableInputs (Level 2) Significant UnobservableInputs (Level 3) Cash equivalents: Money market funds $14,742 $14,742 $— $— U.S. government securities 27,767 — 27,767 — Total cash equivalents 42,509 14,742 27,767 — Marketable securities: U.S. government securities 34,191 — 34,191 — Corporate bonds 22,168 — 22,168 — Commercial paper 1,000 — 1,000 — Total marketable securities 57,359 — 57,359 — Total cash equivalents and marketable securities $99,868 $14,742 $85,126 $— The carrying amounts reflected in the consolidated balance sheets for tax incentive receivable, accounts payable, and accrued expenses approximate fairvalue due to their short-term maturities. The carrying value of the Company’s outstanding notes payable approximates fair value (a level 2 fair value measurement),reflecting discount rates currently available to the Company.Marketable SecuritiesThe following table summarizes the Company’s marketable securities as of December 31, 2015 and 2014: December 31, 2015 AmortizedCost Gross UnrealizedGains Gross UnrealizedLosses Fair Value Assets: Corporate bonds (due within 1 year) $112,825 $1 $(166) $112,660 Corporate bonds (due after 1 year through 2 years) 12,884 3 (31) 12,856 Commercial paper (due within 1 year) 19,478 — (10) 19,468 U.S. government securities (due within 1 year) 4,500 — — 4,500 $149,687 $4 $(207) $149,484 December 31, 2014 AmortizedCost Gross UnrealizedGains Gross UnrealizedLosses Fair Value Assets: U.S. government securities (due within 1 year) $34,200 $— $(9) $34,191 Corporate bonds (due within 1 year) 18,716 — (18) 18,698 Corporate bonds (due after 1 year through 2 years) 3,478 — (8) 3,470 Commercial paper (due within 1 year) 1,000 — — 1,000 $57,394 $— $(35) $57,359 106 Table of Contents4. Property and Equipment, netProperty and equipment, net consisted of the following as of December 31, 2015 and 2014: December 31, Useful Life 2015 2014 Office equipment 5 years $359 $79 Furniture and fixtures 5 years 186 50 Equipment 5 years 71 — Leasehold improvements * 406 — 1,022 129 Less: Accumulated depreciation (120) (50) $902 $79 *shorter of asset life or lease termDepreciation expense was $70, $16 and $12 for the years ended December 31, 2015, 2014 and 2013, respectively.5. Accrued ExpensesAccrued expenses consisted of the following as of December 31, 2015 and 2014: December 31, 2015 2014 Accrued payroll and related expenses $1,802 $1,239 Accrued research and development expenses 3,727 1,180 Accrued professional fees 422 585 Accrued other 161 168 $6,112 $3,172 6. Notes PayableOn March 31, 2014, the Company entered into a loan and security agreement with Oxford Finance LLC and Midcap Financial (the “Credit Facility”). TheCredit Facility provided for initial borrowings of $7,500 under a term loan (“Term Loan A”) and additional borrowings of up to $12,500 under other term loans, fora maximum of $20,000. On March 31, 2014, the Company received proceeds of $7,500 from the issuance of promissory notes under the Term Loan A. Of theadditional $12,500 amount that was available, $7,500 (“Term Loan B”) was available to be drawn down until September 30, 2014 and $5,000 (“Term Loan C”)was available to be drawn down for a 30-day period upon the completion of the Company’s IPO that occurred in June 2014. The Company elected not to drawdown Term Loan B or Term Loan C and these amounts are no longer available to the Company. All promissory notes issued under the Credit Facility arecollateralized by substantially all of the Company’s personal property, other than its intellectual property.Upon entering into this Credit Facility, the Company was obligated to make monthly, interest-only payments on any term loans funded under the CreditFacility until December 1, 2014 and, thereafter, to pay 36 consecutive, equal monthly installments of principal and interest from January 1, 2015 throughDecember 1, 2017. As per the terms of the agreement, in June 2014, upon the completion of the Company’s IPO, the term of 107 Table of Contentsmonthly, interest-only payments were extended until June 1, 2015. Outstanding term loans under the Credit Facility bear interest at an annual rate of 8.1%. Inaddition, a final payment equal to 6.0% of any amounts drawn under the Credit Facility is due upon the earlier of the maturity date, acceleration of the term loans orprepayment of all or part of the term loans. The Company accrues the final payment amount due relating to Term Loan A of $450, to outstanding debt by charges tointerest expense using the effective-interest method from the date of issuance through the maturity date.Term Loan A was recorded in the balance sheet net of debt discount of $114 that was related to fees assessed by the lender at the time of borrowing. Thedebt discount is being accreted to the principal amount of the debt. In addition, deferred financing costs of $49 are being amortized to interest expense using theeffective-interest method over the same term. For the years ended December 31, 2015 and 2014, the company recorded additional interest expense of $62 and $50,respectively, related to the accretion of debt discount and amortization of deferred financing costs. The effective annual interest rate of the outstanding debt underthe Credit Facility is approximately 10.8%.The Company was obligated to pay a separate fee upon any IPO; a sale of substantially all of the Company’s assets; or a merger, reorganization or sale of theCompany’s voting equity securities where existing voting stockholders hold less than 50% of voting equity securities after such transaction.There are no financial covenants associated with the debt facility; however, there are negative covenants restricting the Company’s activities, includinglimitations on dispositions, mergers or acquisitions; encumbering or granting a security interest in its intellectual property; incurring indebtedness or liens; payingdividends; making certain investments; and certain other business transactions.The Credit Facility also includes events of default, the occurrence and continuation of any of which provides the lenders the right to exercise remediesagainst the Company and the collateral securing the loans under the Credit Facility, including cash in the amount of the outstanding balance. These events ofdefault include, among other things, failure to pay any amounts due under the Credit Facility, insolvency, the occurrence of a material adverse event, the occurrenceof any default under certain other indebtedness and a final judgment against the Company in an amount greater than $250.Notes payable consist of the following: December 31, 2015 2014 Notes payable $6,119 $7,500 Less: current portion (2,936) (1,381) Notes payable, net of current portion 3,183 6,119 Debt discount, net of accretion (36) (79) Accretion related to final payment 306 137 Notes payable, net of discount, long term $3,453 $6,177 Estimated future principal payments due under the Term Loan A are as follows: Years Ending December 31, 2016 $2,936 2017 3,183 Total $6,119 During the years ended December 31, 2015 and 2014, the Company recognized $806 and $870 of interest expense related to the Credit Facility. 108 Table of Contents7. Stockholders’ EquityOn June 5, 2014, the Company effected a 1-for-6.28 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustmentto the existing conversion ratios for each series of redeemable convertible preferred stock. Accordingly, all share and per share amounts for all periods presented inthese consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustment of theredeemable convertible preferred stock conversion ratios.On June 24, 2014, the Company completed an IPO of its common stock, which resulted in the sale of 6,900,000 shares at a price of $16.00 per share. TheCompany received net proceeds from the IPO of $102,672 based upon the price of $16.00 per share and after deducting underwriting discounts and commissionspaid by the Company. The Company also incurred offering costs of $2,508 related to the IPO.Upon closing of the IPO, all outstanding shares of the Company’s redeemable convertible preferred stock were converted into 15,077,621 shares of commonstock.On January 28, 2015, the Company completed a follow-on offering of its common stock, which resulted in the sale of 3,942,200 shares at a price of $35.00per share. The Company received net proceeds from the follow-on offering of $130,044 based upon the price of $35.00 per share after deducting underwritingdiscounts and commissions. The Company also incurred offering costs of $473 related to the follow-on offering.As of December 31, 2015 and 2014, the Company’s Certificate of Incorporation, as amended and restated, authorizes the Company to issue 5,000,000 sharesof $0.001 par value preferred stock. The rights, preferences, restrictions, qualifications and limitations of such stock are to be determined by the Company’s boardof directors.As of December 31, 2015 and 2014, the Company’s Certificate of Incorporation, as amended and restated, authorizes the Company to issue 115,000,000shares of $0.001 par value common stock.8. Stock-Based AwardsStock Option PlansThe Company’s Amended and Restated 2006 Stock Option Plan (the “2006 Plan”) provided for the Company to sell or issue common stock or restrictedcommon stock, or to grant incentive stock options or nonqualified stock options for the purchase of common stock, to employees, members of the board ofdirectors and consultants of the Company. The 2006 Plan was administered by the board of directors, or at the discretion of the board of directors, by a committeeof the board. The exercise prices, vesting and other restrictions were determined at the discretion of the board of directors, or a committee of the board of directorsif so delegated, except that the exercise price per share of stock options could not be less than 100% of the fair market value of the share of common stock on thedate of grant and the term of stock option could not be greater than ten years. The total number of shares of common stock that could have been issued under the2006 Plan was 1,889,150 shares. Upon closing of the Company’s IPO, 168,221 shares reserved and not then subject to outstanding options were transferred to the2014 Stock Option and Incentive Plan, and no further awards will be made under the 2006 Plan.On June 5, 2014, the Company’s stockholders approved the 2014 Stock Option and Incentive Plan (the “2014 Stock Option Plan”), which became effectiveupon the completion of the IPO of the Company’s shares of common stock in June 2014. The 2014 Stock Option Plan provides for the grant of stock options, stockappreciation rights, restricted stock awards, restricted stock units, unrestricted stock awards, performance-share awards, cash-based awards and dividend equivalentrights. The number of shares initially reserved for issuance under the 2014 Stock Option Plan is 2,168,221 shares of common stock and may be increased by thenumber of shares under the 2006 Plan that are not needed to fulfill the Company’s obligations for awards issued under the 109 Table of Contents2006 Plan as a result of forfeiture, expiration, cancellation, termination or net issuances of awards thereunder. The number of shares of common stock that may beissued under the 2014 Stock Option Plan is also subject to increase on the first day of each fiscal year by the lesser of (i) 4% of the Company’s outstanding sharesof common stock as of that date, or (ii) an amount determined by the board of directors. As of December 31, 2015, 1,625,761 shares are available for grant underthe 2014 Stock Option Plan, including 915,166 shares automatically added to the 2014 Stock Option Plan on January 1, 2015 as a result of a provision in the 2014Stock Option Plan.The Company generally grants stock-based awards with service conditions only (“service-based” awards).As required by the 2006 Plan and 2014 Stock Option Plan, the exercise price for stock options granted is not to be less than the fair value of common sharesas of the date of grant. Prior to the IPO, the value of common stock was determined by the board of directors by taking into consideration its most recently availablevaluation of common shares performed by management and the board of directors as well as additional factors which might have changed since the date of the mostrecent contemporaneous valuation through the date of grant.During the year ended December 31, 2015, the Company granted stock options for the purchase of 992,505 shares of common stock, of which options for thepurchase of 988,505 shares were granted to employees and directors and options for the purchase of 4,000 shares were granted to a consultant.During the year ended December 31, 2014, the Company granted stock options for the purchase of 698,642 shares of common stock, of which options for thepurchase of 697,050 shares were granted to employees and options for the purchase of 1,592 shares were granted to a consultant.2014 Employee Stock Purchase PlanOn June 5, 2014, the Company’s stockholders approved the 2014 Employee Stock Purchase Plan (the “ESPP”). A total of 265,000 shares of common stockwere reserved for issuance under this plan. The ESPP became effective upon the completion of the IPO of the Company’s shares of common stock. The firstoffering period commenced on September 1, 2014 and ended on December 31, 2014. During 2015 there were two offering periods, January 1, 2015 throughJune 30, 2015 and July 1, 2015 through December 31, 2015. The per share purchase price for offerings is equal to the lesser of 85% of the closing market price ofthe Company’s common stock on the first day or last day of the offering period. The Company issued 7,540 shares during the year ended December 31, 2015; thiswas the first year the Company issued shares from the ESPP. As of December 31, 2015 and 2014, there are 257,460 and 265,000 shares, respectively, of commonstock available for issuance to participating employees under the ESPP.The weighted-average fair value of stock purchase rights granted as part of the ESPP was $11.31 per share for the year ended December 31, 2015. The fairvalue was estimated using the Black-Scholes option-pricing model. During the year ended December 31, 2015, the Company used a weighted-average stock-pricevolatility of approximately 66%, expected option life assumption of six months and a risk-free interest rate of 0.09%.Stock Option ValuationThe fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Prior to its IPO in June 2014, theCompany was a private company and lacks company-specific historical and implied volatility information. Therefore, the Company estimates its expected stockvolatility based on the historical volatility of a publicly traded set of peer companies and expects to continue to do so until such time as it has adequate historicaldata regarding the volatility of its own traded stock price. The expected term of the Company’s stock options has been determined utilizing the “simplified” methodfor awards that qualify as “plain-vanilla” options. The expected term of stock options granted to nonemployees is equal to the contractual term of the option award.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 approximatelyequal to the expected term 110 Table of Contentsof the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in theforeseeable future. The assumptions that the Company used to determine the fair value of the stock options granted to employees and directors are as follows,presented on a weighted average basis: 2015 2014 2013 Risk-free interest rate 1.75% 1.90% 1.12% Expected term (in years) 6.25 6.25 6.25 Expected volatility 87% 90% 85% Expected dividend yield 0% 0% 0% The following table summarizes the Company’s stock option activity since December 31, 2014: Shares IssuableUnder Options WeightedAverage Exercise Price Average Remaining ContractualTerm AggregateIntrinsic Value (In years) Outstanding as of December 31, 2014 2,008,574 $6.65 Granted 992,505 $39.37 Exercised (410,701) $1.95 Forfeited (35,268) $32.41 Outstanding as of December 31, 2015 2,555,110 $19.76 7.9 $3,918 Options vested and expected to vest as of December 31, 2015 2,555,110 $19.76 7.9 $3,918 Options exercisable as of December 31, 2015 995,324 $5.60 6.5 $3,243 The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of theCompany’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock. The aggregate intrinsic valueof stock options exercised was $13,949 and $195 during the years ended December 31, 2015 and 2014, respectively.The Company received cash proceeds from the exercise of stock options of $799 and $3 during the years ended December 31, 2015 and 2014, respectively.The weighted average grant-date fair value of stock options granted to employees and directors during the years ended December 31, 2015, 2014 and 2013was $28.97, $11.73 and $1.83 per share, respectively.As of December 31, 2015 and 2014, there were outstanding unvested service-based stock options held by nonemployees for the purchase of 9,363 and13,205 shares of common stock, respectively. Additionally as of December 31, 2014, there were outstanding unvested performance-based stock options held bynonemployees for the purchase of 796 shares of common stock.Restricted Stock AwardsThe 2006 Plan provides for the award of restricted stock awards. The Company has granted restricted stock awards with time-based vesting conditions.Unvested shares of restricted stock awards may not be sold or transferred by the holder. These restrictions lapse according to the time-based vesting conditions ofeach award. The Company values restricted stock awards on the grant-date using the grant-date market price of the Company’s common stock. 111 Table of ContentsThere were no restricted stock awards that vested in the years ended December 31, 2015 and 2014. The aggregate intrinsic value of restricted stock awardsthat vested during the year ended December 31, 2013 was $38. The aggregate intrinsic value of restricted stock awards is calculated as the fair value of theCompany’s common stock on the date it vests and is released. The Company did not grant any restricted stock awards during the years ended December 31, 2015,2014 or 2013. As of December 31, 2015, 2014 and 2013, there were no unvested restricted stock awards subject to repurchase.Restricted Stock UnitsThe 2014 Stock Option Plan provides for the award of restricted stock units. The Company has granted restricted stock units with time-based vestingconditions. The restrictions lapse according to the time based vesting conditions of each award. The Company values restricted stock units on the grant-date usingthe grant-date market price of the Company’s common stock.The aggregate intrinsic value of restricted stock units that vested during the year ended December 31, 2015 was $115. There were no restricted stock unitsthat vested in the years ended December 31, 2014 or 2013. The aggregate intrinsic value of restricted stock units is calculated as the fair value of the Company’scommon stock on the date it vests and is released. During the year ended December 31, 2015, the Company granted 4,769 restricted stock units, all of which vestedduring 2015, at a weighted average grant-date fair value of $34.46. The Company did not grant any restricted stock units during the years ended December 31, 2014or 2013. As of December 31, 2015, 2014 and 2013, there were no unvested restricted stock units outstanding.Stock-based CompensationThe Company recorded stock-based compensation expense related to stock options and restricted common stock in the following expense categories withinits consolidated statements of operations: Year Ended December 31, 2015 2014 2013 Research and development $2,930 $490 $176 General and administrative 5,652 1,063 219 $ 8,582 $ 1,553 $ 395 As of December 31, 2015, the Company had an aggregate of $27,515 of unrecognized stock-based compensation cost, which is expected to be recognizedover a weighted average period of 2.6 years. 112 Table of Contents9. Net Loss Per ShareBasic and diluted net loss per share attributable to common stockholders was calculated as follows: Year Ended December 31, 2015 2014 2013 Basic and diluted net loss per share attributable to common stockholders: Numerator: Net loss $(74,286) $(36,478) $(14,027) Accretion of redeemable convertible preferred stock to redemption value — (92) (213) Net loss attributable to common stockholders $(74,286) $(36,570) $(14,240) Denominator: Weighted average common shares outstanding, basic and diluted 26,756,079 12,189,155 729,001 Net loss per share attributable to common stockholders, basic and diluted $(2.78) $(3.00) $(19.53) The Company excluded the following common stock equivalents, outstanding as of December 31, 2015, 2014 and 2013, from the computation of diluted netloss per share attributable to common stockholders for the years ended December 31, 2015, 2014 and 2013 because they had an anti-dilutive impact due to the netloss attributable to common stockholders incurred for the periods: As of December 31, 2015 2014 2013 Options to purchase common stock 2,555,110 2,008,574 1,310,330 10. Commitments and ContingenciesLeasesThe Company has a lease for office space in Boston, Massachusetts, effective as of July 28, 2014, with a term expiring July 31, 2017 and an option to extendthe lease for three additional years. In March 2015, the Company entered into an operating lease for additional office space in Boston, Massachusetts, effective asof April 15, 2015, with a term expiring on July 31, 2017, and two options to extend the lease for three additional years each. In October 2015, the Company enteredinto an operating lease for office space in San Diego, California, effective as of October 1, 2015, with a term expiring on September 30, 2019, and an option toextend the lease for five additional years.Future minimum lease payments for its operating leases as of December 31, 2015 were as follows: Years Ending December 31, 2016 $432 2017 292 2018 106 2019 82 $912 During the years ended December 31, 2015, 2014 and 2013, the Company recognized $326, $160 and $105, respectively, of rental expense related to officespace. 113 Table of ContentsIntellectual Property LicensesThe Company has acquired exclusive rights to develop patented compounds and related know-how for beloranib under two licensing agreements with twothird parties in the course of its research and development activities. The licensing rights obligate the Company to make payments to the licensors for license fees,milestones, license maintenance fees and royalties. The Company is also responsible for patent prosecution costs. Related to these license agreements, theCompany recorded research and development expenses in its consolidated statements of operations as follows: Year Ended December 31, 2015 2014 2013 License, milestone, and license maintenance fees $— $7,019 $— $— $7,019 $— As of December 31, 2015, the Company is obligated to make additional milestone payments of up to $12,250 upon reaching certain pre-commercializationmilestones, such as clinical trials and government approvals (including the U.S. Food and Drug Administration (“FDA”), approval of a New Drug Application(“NDA”), and up to $12,500 upon reaching certain product commercialization milestones. Under one of the license agreements, the Company is also obligated topay up to $1,250 with respect to each subsequent licensed product, if any, that is a new chemical entity. In addition, the Company will owe single-digit royalties onsales of commercial products developed using these licensed technologies, if any.During the year ended December 31, 2014, the Company recorded expenses of $7,019 relating to milestones achieved in September 2014 upon the initiationof a first Phase 3 clinical trial including the cost of the issuance of common stock valued at $3,569. There were no milestones achieved during the years endedDecember 31, 2015 or 2013. The Company is also obligated to pay to the licensors a percentage of fees received if and when the Company sublicenses thetechnology. As of December 31, 2015, the Company has not yet developed a commercial product using the licensed technologies and it has not entered into anysublicense agreements for the technologies.Indemnification AgreementsIn the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners, and otherparties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claimsmade by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors that will require the Company,among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potentialamount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company hasnot incurred any material costs as a result of such indemnifications. The Company does not believe that the outcome of any claims under indemnificationarrangements will have a material effect on its financial position, results of operations or cash flows, and it has not accrued any liabilities related to such obligationsin its consolidated financial statements as of December 31, 2015.Legal ProceedingsThe Company accrues a liability for legal contingencies when it believes that it is both probable that a liability has been incurred and that the Company canreasonably estimate the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice oflegal counsel and other relevant information. To the extent new information is obtained and the views on the probable outcomes of claims, suits, assessments,investigations or legal proceedings change, changes in the Company’s accrued liabilities would be recorded in the period in which such determination is made. Inaddition, in 114 Table of Contentsaccordance with the relevant authoritative guidance, for any matters in which the likelihood of material loss is at least reasonably possible, the Company willprovide disclosure of the possible loss or range of loss. If a reasonable estimate cannot be made, however, the Company will provide disclosure to that effect. TheCompany expenses legal costs as they are incurred.On October 21, 2015, a purported stockholder of the Company filed a putative class action lawsuit in the U.S. District Court for the District ofMassachusetts, against the Company and Thomas E. Hughes, captioned Aviad Bessler v. Zafgen, Inc. and Thomas E. Hughes, No. 1:15-cv-13618. An amendedcomplaint was filed on February 22, 2016. The amended complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SECRule 10b-5 based on allegedly false and misleading statements and omissions regarding the Company’s clinical trials for its drug beloranib. The lawsuit seeks,among other things, unspecified compensatory damages in connection with the Company’s allegedly inflated stock price between June 19, 2014 and October 16,2015, as a result of those allegedly false and misleading statements, as well as punitive damages, interest, attorneys’ fees and costs. The Company has not yet fileda responsive pleading. Since an estimate of the possible loss or range of loss cannot be made at this time, no accruals have been recorded as of December 31, 2015.The Company may periodically become subject to other legal proceedings and claims arising in connection with ongoing business activities, includingclaims or disputes related to patents that have been issued or that are pending in the field of research on which the Company is focused. Other than the aboveaction, the Company is not aware of any other material claims as of December 31, 2015.11. Income TaxesDuring the years ended December 31, 2015, 2014 and 2013, the Company recorded no income tax benefits for the net operating losses incurred in each yeardue to its uncertainty of realizing a benefit from those items.The domestic and foreign components of loss before income taxes are as follows: 2015 2014 2013 Domestic $(72,147) $(35,818) $(12,325) Foreign (2,139) (660) (1,702) Loss before income taxes $(74,286) $(36,478) $(14,027) A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows: Year Ended December 31, 2015 2014 2013 Federal statutory income tax rate (34.0%) (34.0%) (34.0%) Federal and state research and development tax credit (3.9) (1.9) (3.7) State taxes, net of federal benefit (3.9) (4.0) (3.9) Orphan drug tax credit (3.5) (3.2) (3.1) Stock compensation expense 0.9 0.6 0.6 Nondeductible Australia research and development expenses 1.0 0.6 4.1 Other items 0.1 2.4 — Change in deferred tax asset valuation allowance 43.3 39.5 40.0 Effective income tax rate 0.0% 0.0% 0.0% 115 Table of ContentsNet deferred tax assets as of December 31, 2015 and 2014 consisted of the following: December 31, 2015 2014 Current deferred tax assets: Accrued expenses $— $431 Other temporary differences — 6 Total current deferred tax assets — 437 Noncurrent deferred tax assets: Capitalized research and development expenses 46,568 29,048 Net operating loss carryforwards 11,186 6,328 Tax credit carryforwards 11,570 4,928 Capitalized legal expenses 1,773 1,229 Stock-based compensation 2,780 428 Accrued expenses 648 — Other temporary differences 16 — Total noncurrent deferred tax assets 74,541 41,961 Total gross deferred tax assets 74,541 42,398 Valuation allowance (74,541) (42,398) Net deferred tax assets $— $— In 2015, the Company identified a misstatement related to the research and development credits that the Company had previously calculated and claimed onits tax returns. The Company previously had been assuming that all prior research and development credits would result in a higher credit whereas the Companyhas now determined that certain actual costs only qualify for a reduced credit. The net impact of the misstatement was to overstate gross deferred tax assets by $3.5million and overstate the valuation allowance by $3.5 million with no impact to net deferred tax assets or the provision for income taxes. In addition, themisstatement had an impact of 2.5% and 5.4% to the 2014 and 2013 rate reconciliation, respectively, for the federal and state R&D tax credits that each had anoffsetting adjustment to the change in valuation allowance. The misstatement was determined to be immaterial and had no effect on the Company’s consolidatedbalance sheets, statements of operations, statements of changes in stockholders’ equity (deficit) or statements cash flows for any period presented. As a result, the2014 amounts in the deferred tax table and the 2014 and 2013 amounts in the rate reconciliation table presented herein have been revised to correct for thismisstatement.In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. This guidance requires companies to classify alldeferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. This guidance allowsfor adoption on either a prospective or retrospective basis and will be effective on January 1, 2017. Early adoption is permitted. The Company has elected to earlyadopt this guidance on a prospective basis and, as a result, prior consolidated balance sheets were not retrospectively adjusted. The adoption of this guidance didnot have a material impact on the Company’s consolidated financial statements and related disclosures.Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2015, 2014 and 2013 related primarily to the increase in netoperating loss carryforwards, capitalized research and development expenses and tax credit carryforwards and were as follows: Year Ended December 31, 2015 2014 2013 Valuation allowance as of beginning of year $42,398 $27,831 $22,229 Decreases recorded as benefit to income tax provision — — — Increases recorded to income tax provision 32,143 14,567 5,602 Valuation allowance as of end of year $74,541 $42,398 $27,831 116 Table of ContentsAs of December 31, 2015, the Company had net operating loss carryforwards for federal and state income tax purposes of $42,493 and $31,249, respectively,which begin to expire in 2026 and 2030, respectively. Included within these net operating loss carryforwards are amounts of $12,812 and $10,642, respectively,that were attributable to stock option exercises, which will be recorded as an increase in additional paid-in capital once they are realized in accordance withaccounting for stock-based compensation awards. As of December 31, 2015, the Company also had available tax credit carryforwards for federal and state incometax purposes of $10,555 and $1,537, respectively, which begin to expire in 2026 and 2021, respectively. Utilization of the net operating loss carryforwards and taxcredit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership changes that haveoccurred previously or that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset futuretaxable income.In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in thestock of a corporation by more than 50% over a three-year period. The Company has not conducted a study to assess whether a change of control has occurred orwhether there have been multiple changes of control since inception due to the significant complexity and cost associated with such a study. If the Company hasexperienced a change of control, as defined by Section 382, at any time since inception, utilization of the net operating loss carryforwards or tax creditcarryforwards would be subject to an annual limitation under Section 382, which is determined by first multiplying the value of the Company’s stock at the time ofthe ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result inexpiration of a portion of the net operating loss carryforwards or tax credit carryforwards before utilization. Further, until a study is completed and any limitation isknown, no amounts are being presented as an uncertain tax position.As of December 31, 2015 and 2014, the Company’s gross deferred tax asset balance of $74,541 and $42,398, respectively, was comprised principally of netoperating loss carryforwards, capitalized research and development expenses and tax credit carryforwards. During the years ended December 31, 2015, 2014 and2013, gross deferred tax assets increased due to additional net operating loss carryforwards, research and development tax credits generated and additional researchand development expenses capitalized for tax purposes.The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered theCompany’s history of cumulative net losses incurred since inception and its lack of commercialization of any products or generation of any revenue from productsales since inception and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, a fullvaluation allowance has been established against the deferred tax assets as of December 31, 2015 and 2014. Management reevaluates the positive and negativeevidence at each reporting period.The Company has not recorded any amounts for unrecognized tax benefits as of December 31, 2015 or 2014.The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company issubject to examination by federal and state jurisdictions, where applicable. There are currently no pending income tax examinations. The Company’s tax years arestill open under statute from 2011 to the present. Earlier years may be examined to the extent that tax credit or net operating loss carryforwards are used in futureperiods. The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision.The Company considers only the direct effects of windfall tax deductions. 117 Table of Contents12. Retirement PlanThe Company has a Savings Incentive Match Plan for employees. Under the terms of the plan, the Company contributes 2% of an employee’s annual basesalary, up to a maximum of the annual Internal Revenue Service compensation limits, for all full-time employees.During the years ended December 31, 2015, 2014 and 2013, the Company recognized $144, $61 and $26, respectively, of expense related to its contributionsto the plan.13. Australia Research and Development Tax IncentiveThe Company’s wholly owned subsidiary, Zafgen Australia Pty Limited, which conducts core research and development activities on behalf of theCompany, is eligible to receive a 45% refundable tax incentive for qualified research and development activities. For the years ended December 31, 2015, 2014 and2013, $1,357, $424 and $1,237, respectively, was recorded as a reduction to research and development expenses in the consolidated statements of operations. Theseamounts represented 45% of the Company’s qualified research and development spending in Australia. The refund is denominated in Australian dollars and,therefore, the related receivable is re-measured into U.S. dollars as of each reporting date. For the years ended December 31, 2015, 2014 and 2013, the Companyrecorded in its consolidated statements of operations unrealized foreign currency exchange losses of $82, $104 and $250, respectively, related to this tax incentivereceivable. As of December 31, 2015 and 2014, the Company’s tax incentive receivable from the Australian government was $1,323 and $391, respectively.14. Quarterly Financial Data (Unaudited)The following information has been derived from unaudited consolidated financial statements that, in the opinion of management, include all recurringadjustments necessary for a fair statement of such information. Three Months Ended March 31, 2015 June 30, 2015 September 30,2015 December 31,2015 (in thousands, except per share data) Revenue $— $— $— $— Operating expenses 13,240 17,610 19,717 23,246 Net loss attributable to common stockholders (13,472) (17,756) (19,884) (23,174) Net loss per share attributable to commonstockholders, basic and diluted $(0.53) $(0.66) $(0.73) $(0.85) Weighted average common sharesoutstanding,basic and diluted 25,615,282 27,011,960 27,138,667 27,238,079 Three Months Ended March 31, 2014 June 30, 2014 September 30,2014 December 31,2014 (in thousands, except per share data) Revenue $— $— $— $— Operating expenses 4,521 5,986 14,361 10,664 Net loss attributable to common stockholders (4,507) (6,443) (14,689) (10,931) Net loss per share attributable to commonstockholders, basic and diluted $(6.18) $(2.96) $(0.65) $(0.48) Weighted average common sharesoutstanding,basic and diluted 729,391 2,178,465 22,707,012 22,783,817 118 Table of ContentsITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresDisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) are designed only to provide reasonable assurance that theywill meet their objectives. Under the supervision and with the participation of our management, including our principal executive officer and principal financialofficer, we conducted an evaluation of the effectiveness, as of December 31, 2015, of the design and operation of our disclosure controls and procedures, as suchterm is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our principal executive officer and principal financial officer haveconcluded that, as of such date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in our Exchange Actreports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulatedand communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regardingrequired disclosure.Management’s Annual Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under theExchange Act. Our internal control system is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding thepreparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore,even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2015. In making this assessment,management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its 2013 Internal Control—Integrated Framework. Based on this assessment, our management has concluded that as of December 31, 2015 our internal control over financial reporting iseffective.As an Emerging Growth Company, as defined under the terms of the Jobs Act of 2012, our independent registered accounting firm is not required to issue anattestation report on the internal control over financial reporting.Changes in Internal Control Over Financial ReportingThere were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(d) under the Exchange Act) during the fourthquarter of the year ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financialreporting.ITEM 9B. OTHER INFORMATIONNone. 119 Table of ContentsPART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, whichproxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year endedDecember 31, 2015.ITEM 11. EXECUTIVE COMPENSATIONThe information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, whichproxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year endedDecember 31, 2015.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, whichproxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year endedDecember 31, 2015.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, whichproxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year endedDecember 31, 2015.ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESThe information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, whichproxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year endedDecember 31, 2015. 120 Table of ContentsPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a)1. Consolidated Financial Statements.For a list of the consolidated financial statements included herein, see Index on page 90 of this report.2. Financial Statement Schedules.All required information is included in the financial statements or notes thereto.3. List of Exhibits.See the Exhibit Index in Item 15(b) below. (b)Exhibit Index. Exhibit No. Description 3.1 Ninth Amended and Restated Certificate of Incorporation of the Registrant, as currently in effect (incorporated by reference to Exhibit 3.1of the Registrant’s Form 8-K filed on June 24, 2014) 3.2 Amended and Restated By-laws of the Registrant, as currently in effect (incorporated by reference to Exhibit 3.2 of the Registrant’s Form8-K filed on June 24, 2014) 4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the Registrant’s Registration Statement on Form S-1 (FileNo. 333-195391) filed on June 18, 2014) 4.2 Third Amended and Restated Investors’ Rights Agreement by and among the Registrant and certain of its stockholders dated November 25,2013 (incorporated by reference to Exhibit 4.2 of the Registrant’s Registration Statement on Form S-1 (File No. 333-195391) filed on June18, 2014)10.1# Amended and Restated 2006 Stock Option Plan and forms of award agreements thereunder (incorporated by reference to Exhibit 10.1 of theRegistrant’s Registration Statement on Form S-1 (File No. 333-195391) filed on June 18, 2014)10.2# 2014 Stock Option and Incentive Plan and forms of award agreements thereunder (incorporated by reference to Exhibit 10.2 of theRegistrant’s Registration Statement on Form S-1 (File No. 333-195391) filed on June 18, 2014)10.3(a)† Exclusive License Agreement by and between the Registrant and Chong Kun Dang Pharmaceutical Corp. of South Korea, dated July 6,2009, as amended (incorporated by reference to Exhibit 10.3 of the Registrant’s Registration Statement on Form S-1 (File No. 333-195391)filed on June 18, 2014)10.3(b) Amendment No. 4 to Exclusive License Agreement by and between the Registrant and Chong Kun Dang Pharmaceutical Corporation,dated October 29, 2014 (incorporated by reference to Exhibit 10.3(b) of the Registrant’s Registration Statement on Form S-1 (File No. 333-201439) filed on January 12, 2015)10.4 Subscription Agreement by and between the Registrant and Chong Kun Dang Pharmaceutical Corporation, dated November 20, 2014(incorporated by reference to Exhibit 10.4 of the Registrant’s Registration Statement on Form S-1 (File No. 333-201439) filed on January12, 2015)10.5 Letter by and between the Registrant and Thomas E. Hughes, dated July 25, 2008 (incorporated by reference to Exhibit 10.5 of theRegistrant’s Registration Statement on Form S-1 (File No. 333-195391) filed on June 18, 2014) 121 Table of ContentsExhibit No. Description10.6 Employee Non-Competition, Non-Solicitation, Confidentiality and Assignment Agreement by and between the Registrant and Thomas E.Hughes, dated July 29, 2008 (incorporated by reference to Exhibit 10.6 of the Registrant’s Registration Statement on Form S-1 (File No.333-195391) filed on June 18, 2014)10.7 Letter by and between the Registrant and Dennis D. Kim, dated August 23, 2011 (incorporated by reference to Exhibit 10.7 of theRegistrant’s Registration Statement on Form S-1 (File No. 333-195391) filed on June 18, 2014)10.8 Employee Non-Competition, Non-Solicitation, Confidentiality and Assignment Agreement by and between the Registrant and Dennis D.Kim, dated August 29, 2013 (incorporated by reference to Exhibit 10.8 of the Registrant’s Registration Statement on Form S-1 (File No.333-195391) filed on June 18, 2014)10.9 Letter by and between the Registrant and Patricia L. Allen, dated December 10, 2012 (incorporated by reference to Exhibit 10.9 of theRegistrant’s Registration Statement on Form S-1 (File No. 333-195391) filed on June 18, 2014)10.10 Employee Non-Competition, Non-Solicitation, Confidentiality and Assignment Agreement by and between the Registrant and Patricia L.Allen, dated August 29, 2013 (incorporated by reference to Exhibit 10.10 of the Registrant’s Registration Statement on Form S-1 (File No.333-195391) filed on June 18, 2014)10.11(a) Form of Indemnification Agreement, to be entered into between the Registrant and its directors (incorporated by reference to Exhibit10.11(a) of the Registrant’s Registration Statement on Form S-1 (File No. 333-195391) filed on June 18, 2014)10.11(b) Form of Indemnification Agreement, to be entered into between the Registrant and its officers (incorporated by reference to Exhibit 10.11(b)of the Registrant’s Registration Statement on Form S-1 (File No. 333-195391) filed on June 18, 2014)10.12# Senior Executive Cash Incentive Bonus Plan (incorporated by reference to Exhibit 10.12 of the Registrant’s Registration Statement on FormS-1 (File No. 333-195391) filed on June 18, 2014)10.13† Exclusive License Agreement by and between the Registrant and Children’s Medical Center Corporation, dated January 4, 2007, as amendedJanuary 15, 2007 (incorporated by reference to Exhibit 10.13 of the Registrant’s Registration Statement on Form S-1 (File No. 333-195391)filed on June 18, 2014)10.14 Commercial Lease by and between the Registrant and Minerva Holdings, LLC, dated May 15, 2014 (incorporated by reference to Exhibit10.14 of the Registrant’s Registration Statement on Form S-1 (File No. 333-195391) filed on June 18, 2014)10.15 Commercial Lease by and between the Company and Contour LLC, dated March 30, 2015 (incorporated by reference to Exhibit 10.1 of theRegistrant’s Quarterly Report on Form 10-K (File No. 001-36510) filed on May 14, 2015)10.16* Lease between LJ Gateway Office LLC and the Company, dated as of October 2, 201510.17# 2014 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.15 of the Registrant’s Registration Statement on Form S-1(File No. 333-195391) filed on June 18, 2014)10.18 Letter by and between the Registrant and Patrick Loustau, dated June 3, 2014 (incorporated by reference to Exhibit 10.16 of the Registrant’sRegistration Statement on Form S-1 (File No. 333-195391) filed on June 18, 2014)16.1 Letter of Edelstein and Company LLP (incorporated by reference to Exhibit 16.1 of the Registrant’s Registration Statement on Form S-1(File No. 333-201439) filed on January 12, 2015) 122 Table of ContentsExhibit No. Description21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 of the Registrant’s Registration Statement on Form S-1 (File No.333-195391) filed on June 18, 2014)23.1* Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm31.1* Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, asadopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2* Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, asadopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1** Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002101* Interactive Data Files regarding (a) our Consolidated Balance Sheets as of December 31, 2015 and 2014, (b) our Consolidated Statementsof Operations and Comprehensive Loss for the Years Ended December 31, 2015, 2014 and 2013, (c) our Consolidated Statements ofChanges in Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit), (d) our Consolidated Statements of Cash Flowsfor the Years Ended December 31, 2015, 2014 and 2013 and (e) the Notes to such Consolidated Financial Statements *Filed herewith.**Furnished herewith.†Application has been made to the Securities and Exchange Commission for confidential treatment of certain provisions. Omitted material for whichconfidential treatment has been requested has been filed separately with the Securities and Exchange Commission.#Represents management compensation plan. 123 Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. ZAFGEN, INC.Date: March 15, 2016 By: /s/ Thomas E. Hughes, Ph.D.Thomas E. Hughes, Ph.D. Chief Executive Officer( Principal Executive Officer )Date: March 15, 2016 By: /s/ Patricia L. AllenPatricia L. Allen Chief Financial Officer( Principal Financial and Accounting Officer )Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrantand in the capacities and on the dates indicated. Name Title Date/s/ Thomas E. Hughes, Ph.D.Thomas E. Hughes, Ph.D. Chief Executive Officer andDirector(Principal Executive Officer) March 15, 2016/s/ Patricia L. AllenPatricia L. Allen Chief Financial Officer(Principal Financial andAccounting Officer) March 15, 2016/s/ Peter Barrett, Ph.D.Peter Barrett, Ph.D. Chairman of the Board of Directors March 15, 2016/s/ Bruce Booth, Ph.D.Bruce Booth, Ph.D. Director March 15, 2016/s/ Robert J. PerezRobert J. Perez Director March 15, 2016/s/ Frances K. HellerFrances K. Heller Director March 15, 2016/s/ John L. LaMattina, Ph.D.John L. LaMattina, Ph.D. Director March 15, 2016/s/ Cameron Geoffrey McDonough, M.D.Cameron Geoffrey McDonough, M.D. Director March 15, 2016/s/ Frank E. ThomasFrank E. Thomas Director March 15, 2016/s/ Thomas O. Daniel, M.D.Thomas O. Daniel, M.D. Director March 15, 2016 124 Exhibit 10.16LEASEBETWEENLJ GATEWAY OFFICE LLCANDZAFGEN, INC. LEASE(Short Form)THIS LEASE is made as of October 2, 2015, by and between LJ GATEWAY OFFICE LLC, a Delaware limited liability company, hereafter called “Landlord ,” and ZAFGEN, INC. , a Delaware corporation, hereafter called “ Tenant .”ARTICLE 1. BASIC LEASE PROVISIONSEach reference in this Lease to the “ Basic Lease Provisions ” shall mean and refer to the following collective terms, the application of which shall begoverned by the provisions in the remaining Articles of this Lease. 1.Tenant’s Trade Name : N/A 2.Premises: Suite No. L103Address of Building: 9191 Towne Centre Drive, San Diego, CA 92122Project Description: La Jolla Gateway(The Premises are more particularly described in Section 2.1). 3.Use of Premises : General office and for no other use. 4.Estimated Commencement Date : October 1, 2015, as more fully described in Section 3.1 of this Lease 5.Lease Term : 48 months, plus such additional days as may be required to cause this Lease to expire on the final day of the calendar month. 6.Basic Rent : Months of Termor Period Monthly Rate Per RentableSquare Foot Monthly Basic Rent (rounded tothe nearest dollar)1 to 12 $2.60 $8,005.0013 to 24 $2.72 $8,375.0025 to 36 $2.84 $8,744.0037 to 48 $2.97 $9,145.00 7.Property Tax Base : The Property Taxes per rentable square foot incurred by Landlord and attributable to the twelve month period ending June 30, 2016(the “ Base Year ”).Project Cost Base : The Project Costs per rentable square foot incurred by Landlord and attributable to the Base Year.Expense Recovery Period : Every twelve month period during the Term (or portion thereof during the first and last Lease years) ending June 30. 8.Floor Area of Premises : approximately 3,079 rentable square feet (Landlord and Tenant stipulate and agree that the Floor Area of Premises is correct).Floor Area of Building : approximately 181,317 rentable square feet 9.Security Deposit : $18,619.00 10.Broker(s) : Irvine Realty Company (“ Landlord’s Broker ”) is the agent of Landlord exclusively and Colliers International/San Diego—La Jolla Village Dr(“ Tenant’s Broker ”) is the agent of Tenant exclusively. 11.Parking : a minimum of 10, but no more than 20 parking passes in accordance with the provisions set forth in Exhibit F to this Lease. 1 12.Address for Payments and Notices : LANDLORD TENANTPayment Address: LJ GATEWAY OFFICE LLCPO Box #846785Los Angeles, CA 90084-6785 ZAFGEN, INC.9191 Towne Centre Drive, Suite L103San Diego, CA 92122Attn: Kevin DushneyNotice Address: The Irvine Company LLC9191 Towne Center Drive,Suite 125 San Diego, CA, 92122Attn: Building Manager with a copy of notices to: THE IRVINE COMPANY LLC550 Newport Center DriveNewport Beach, CA 92660Attn: Senior Vice President, Property Operations Irvine Office Properties 13.List of Lease Exhibits (all exhibits, riders and addenda attached to this Lease are hereby incorporated into and made a part of this Lease): Exhibit A Description of PremisesExhibit B Operating ExpensesExhibit C Utilities and ServicesExhibit D Tenant’s InsuranceExhibit E Rules and RegulationsExhibit F ParkingExhibit G Additional ProvisionsExhibit X Work Letter 2 ARTICLE 2. PREMISES2.1. LEASED PREMISES . Landlord leases to Tenant and Tenant leases from Landlord the Premises shown in Exhibit A (the “ Premises ”), containingapproximately the floor area set forth in Item 8 of the Basic Lease Provisions (the “ Floor Area ”). The Premises are located in the building identified in Item 2 ofthe Basic Lease Provisions (the “ Building ”), which is a portion of the project described in Item 2 (the “ Project ”).2.2. ACCEPTANCE OF PREMISES . Tenant acknowledges that neither Landlord nor any representative of Landlord has made any representation orwarranty with respect to the Premises, the Building or the Project or the suitability or fitness of either for any purpose, except as set forth in this Lease. The takingof possession or use of the Premises by Tenant for any purpose other than construction shall conclusively establish that the Premises and the Building were insatisfactory condition and in conformity with the provisions of this Lease in all respects. Nothing contained in this Section 2.2 shall affect the commencement ofthe Term or the obligation of Tenant to pay rent.ARTICLE 3. TERM3.1. GENERAL . The term of this Lease (“ Term ”) shall commence (“ Commencement Date ”) on the earlier of (a) the date the Premises are deemed“ready for occupancy” (as hereinafter defined) and possession thereof is delivered to Tenant, or (b) the date Tenant commences its business activities within thePremises and shall expire (“ Expiration Date ”) at the end of the period set forth in Item 5 of the Basic Lease Provisions. Promptly following request by Landlord,the parties shall memorialize on a form provided by Landlord (the “ Commencement Memorandum ”) the actual Commencement Date and the Expiration Date ofthis Lease; should Tenant fail to execute and return the Commencement Memorandum to Landlord within 5 business days (or provide specific written objectionsthereto within that period), then Landlord’s determination of the Commencement and Expiration Dates as set forth in the Commencement Memorandum shall beconclusive. The Premises shall be deemed “ ready for occupancy ” if and when Landlord, to the extent applicable, (i) has substantially completed all the workrequired to be completed by Landlord pursuant to the Work Letter (if any) attached to this Lease but for minor punch list matters, and has obtained the requisitegovernmental approvals for Tenant’s occupancy in connection with such work, (ii) has provided reasonable access to the Premises for Tenant so that the Premisesmay be used without unreasonable interference, and (iii) has put into operation all building services required to be provided by Landlord under this Lease andessential for the use of the Premises by Tenant.3.2. DELAY IN POSSESSION . If Landlord, for any reason whatsoever, cannot deliver possession of the Premises to Tenant on or before theCommencement Date set forth in Item 4 of the Basic Lease Provisions, this Lease shall not be void or voidable nor shall Landlord be liable to Tenant for anyresulting loss or damage. However, Tenant shall not be liable for any rent until the Commencement Date occurs as provided in Section 3.1 above, except that ifLandlord’s failure to substantially complete all work required of Landlord pursuant to Section 3.1(i) above is attributable to any action or inaction by Tenant(including without limitation any Tenant Delay described in the Work Letter, if any, attached to this Lease), then the Premises shall be deemed ready foroccupancy, and Landlord shall be entitled to full performance by Tenant (including the payment of rent), as of the date Landlord would have been able tosubstantially complete such work and deliver the Premises to Tenant but for Tenant’s delay(s).ARTICLE 4. RENT AND OPERATING EXPENSES4.1. BASIC RENT . From and after the Commencement Date, Tenant shall pay to Landlord without deduction or offset a Basic Rent for the Premises in thetotal amount shown (including subsequent adjustments, if any) in Item 6 of the Basic Lease Provisions (the “ Basic Rent ”). If the Commencement Date is otherthan the first day of a calendar month, any rental adjustment shown in Item 6 shall be deemed to occur on the first day of the next calendar month following thespecified monthly anniversary of the Commencement Date. The Basic Rent shall be due and payable in advance commencing on the Commencement Date andcontinuing thereafter on the first day of each successive calendar month of the Term, as prorated for any partial month. No demand, notice or invoice shall berequired. An installment in the amount of 1 full month’s Basic Rent at the initial rate specified in Item 6 of the Basic Lease Provisions shall be delivered toLandlord concurrently with Tenant’s execution of this Lease.4.2. OPERATING EXPENSES . Tenant shall pay Tenant’s Share of Operating Expenses in accordance with Exhibit B of this Lease. 4.3. SECURITY DEPOSIT . Concurrently with Tenant’s delivery of this Lease, Tenant shall deposit with Landlord the sum, if any, stated in Item 9 of theBasic Lease Provisions (the “ Security Deposit ”), to be held by Landlord as security for the full and faithful performance of Tenant’s obligations under this Lease,to pay any rental sums, including without limitation such additional rent as may be owing under any provision hereof, and to maintain the Premises as required bythis Lease. Upon any breach of the foregoing obligations by Tenant beyond all applicable notice and cure periods, Landlord may apply all or part of the SecurityDeposit as full or partial compensation. If any portion of the Security Deposit is so applied, Tenant shall within 5 days after written demand by Landlord depositcash with Landlord in an amount sufficient to restore the Security Deposit to its original amount. Landlord shall not be required to keep this Security Depositseparate from its general funds, and Tenant shall not be entitled to interest on the Security Deposit. In no event may Tenant utilize all or any portion of the SecurityDeposit as a payment toward any rental sum due under this Lease. Any unapplied balance of the Security Deposit shall be returned to Tenant or, at Landlord’soption, to the last assignee of Tenant’s interest in this Lease within 30 days following the termination of this Lease and Tenant’s vacation of the Premises. Tenanthereby waives the provisions of Section 1950.7 of the California Civil Code, or any similar or successor laws now or hereafter in effect.ARTICLE 5. USES5.1. USE . Tenant shall use the Premises only for the purposes stated in Item 3 of the Basic Lease Provisions and for no other use whatsoever. Tenant shallnot do or permit anything to be done in or about the Premises which will in any way interfere with the rights or quiet enjoyment of other occupants of the Buildingor the Project, or use or allow the Premises to be used for any unlawful purpose, nor shall Tenant permit any nuisance in the Premises or the Project. Tenant shallcomply at its expense with all present and future laws, ordinances and requirements of all governmental 3 authorities that pertain to Tenant or its use of the Premises, and with all energy usage reporting requirements of Landlord. As of the date of this Lease, there hasbeen no inspection of the Building and Project by a Certified Access Specialist as referenced in Section 1938 of the California Civil Code.5.2. SIGNS . Landlord, at Landlord’s sole cost, shall affix and maintain a sign (restricted solely to Tenant’s name as set forth herein or such other name asLandlord may consent to in writing) adjacent to the entry door of the Premises, together with a directory strip listing Tenant’s name as set forth herein in the lobbydirectory of the Building and a directional sign within the corridor. Any subsequent changes to that initial signage shall be at Tenant’s sole expense. Tenant shallnot place or allow to be placed any other sign, decoration or advertising matter of any kind that is visible from the exterior of the Premises.5.3 HAZARDOUS MATERIALS. Tenant shall not generate, handle, store or dispose of hazardous or toxic materials (as such materials may be identified inany federal, state or local law or regulation) in the Premises or Project without the prior written consent of Landlord. Tenant acknowledges that it has read,understands and, if applicable, shall comply with the provisions of Exhibit H to this Lease, if that Exhibit is attached.ARTICLE 6. LANDLORD SERVICES6.1. UTILITIES AND SERVICES . Landlord and Tenant shall be responsible to furnish those utilities and services to the Premises to the extent provided inExhibit C, subject to the conditions and payment obligations and standards set forth in this Lease. Landlord’s failure to furnish, or any interruption, diminishmentor termination of, services due to the application of laws, the failure of any equipment, the performance of repairs, improvements or alterations, utility interruptionsor the occurrence of an event of force majeure (defined in Section 20.8) shall not render Landlord liable to Tenant, constitute a constructive eviction of Tenant, giverise to an abatement of Rent, nor relieve Tenant from the obligation to fulfill any covenant or agreement. However, if the Premises, or a material portion of thePremises, are made untenantable for a period in excess of 5 consecutive business days as a result of a service interruption or repair that is reasonably within thecontrol of Landlord to correct and through no fault of Tenant and for reasons other than as contemplated in Article 11, then Tenant, as its sole remedy, shall beentitled to receive an abatement of Rent payable hereunder during the period beginning on the 6th consecutive business day of the service interruption or repair andending on the day the service has been restored.6.2. OPERATION AND MAINTENANCE OF COMMON AREAS . During the Term, Landlord shall operate all Common Areas within the Building andthe Project. The term “ Common Areas ” shall mean all areas within the Building, Project and other buildings in the Project which are not held for exclusive useby persons entitled to occupy space.6.3. USE OF COMMON AREAS . The occupancy by Tenant of the Premises shall include the use of the Common Areas in common with Landlord andwith all others for whose convenience and use the Common Areas may be provided by Landlord, subject, however, to compliance with Rules and Regulationsdescribed in Article 17 below. Landlord shall at all times during the Term have exclusive control of the Common Areas, and may restrain or permit any use oroccupancy. Landlord may temporarily close any portion of the Common Areas for repairs, remodeling and/or alterations, to prevent a public dedication or theaccrual of prescriptive rights, or for any other reasonable purpose. Landlord’s temporary closure of any portion of the Common Areas for such purposes shall notdeprive Tenant of reasonable access to the Premises.ARTICLE 7. REPAIRS AND MAINTENANCE7.1. TENANT’S MAINTENANCE AND REPAIR . Subject to Articles 11 and 12, Tenant at its sole expense shall make all repairs necessary to keep thePremises and all improvements and fixtures therein in good condition and repair, excepting ordinary wear and tear. Tenant’s maintenance obligation shall includewithout limitation all appliances, interior glass, doors, door closures, hardware, fixtures, electrical, plumbing, fire extinguisher equipment and other equipmentinstalled in the Premises, together with any supplemental HVAC equipment servicing only the Premises. Should Landlord or its management agent agree to make arepair on behalf of Tenant and at Tenant’s request, Tenant shall promptly reimburse Landlord as additional rent for all reasonable costs incurred (including thestandard supervision fee) upon submission of an invoice. 7.2. LANDLORD’S MAINTENANCE AND REPAIR . Subject to Articles 11 and 12, Landlord shall provide service, maintenance and repair with respectto the heating, ventilating and air conditioning (“ HVAC ”) equipment of the Building (exclusive of any supplemental HVAC equipment servicing only thePremises) and shall maintain in good repair the Common Areas, roof, foundations, footings, the exterior surfaces of the exterior walls of the Building (includingexterior glass), and the structural, electrical, mechanical and plumbing systems of the Building (including elevators, if any, serving the Building), except to theextent provided in Section 7.1 above. Notwithstanding any provision of the California Civil Code or any similar or successor laws to the contrary, Tenantunderstands that it shall not make repairs at Landlord’s expense or by rental offset. Except as provided in Section 11.1 and Article 12 below, there shall be noabatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant’s business arising from the making of any repairs, alterationsor improvements to any portion of the Building, including repairs to the Premises, nor shall any related activity by Landlord constitute an actual or constructiveeviction. Tenant hereby waives any and all rights under and benefits of subsection 1 of Section 1932, and Sections 1941 and 1942 of the California Civil Code, orany similar or successor laws now or hereafter in effect.7.3. ALTERATIONS . Except for cosmetic alteration projects that do not exceed $10,000.00 during each calendar year and that do not affect the structural,electrical or mechanical components or systems of the Building, are not visible from the exterior of the Premises, do not change the basic floor plan of thePremises, and utilize only Landlord’s building standard materials (which work shall require notice to Landlord but not Landlord’s consent), Tenant shall make noalterations, additions, decorations or improvements (collectively referred to as “ Alterations ”) to the Premises without the prior written consent of Landlord, itbeing understood that Tenant’s installation of audio visual equipment and wiring shall not be considered Alterations. Landlord may impose, as a condition to itsconsent, any requirements that Landlord in its discretion may deem reasonable or desirable. Tenant shall use Landlord’s designated mechanical and electricalcontractors, obtain all required permits for the Alterations and shall perform the work in compliance with all applicable laws, regulations and ordinances withcontractors reasonably acceptable to Landlord. Except for cosmetic Alterations not requiring a permit, Landlord shall be entitled to a supervision fee in the amountof 5% of the cost of the Alterations. 4 Landlord may elect to cause its architect to review Tenant’s architectural plans, and the reasonable cost of that review shall be reimbursed by Tenant. Should theAlterations proposed by Tenant and consented to by Landlord change the floor plan of the Premises, then Tenant shall, at its expense, furnish Landlord with as-builtdrawings and CAD disks compatible with Landlord’s systems. Unless Landlord otherwise agrees in writing, all Alterations affixed to the Premises, includingwithout limitation all Tenant Improvements constructed pursuant to the Work Letter (except as otherwise provided in the Work Letter), but excluding moveabletrade fixtures and furniture, shall become the property of Landlord and shall be surrendered with the Premises at the end of the Term, except that Landlord may, bynotice to Tenant given at least 30 days prior to the Expiration Date, require Tenant to remove by the Expiration Date, or sooner termination date of this Lease, all orany Alterations (including without limitation all telephone and data cabling) installed either by Tenant or by Landlord at Tenant’s request (collectively, the “Required Removables ”). In connection with its removal of Required Removables, Tenant shall repair any damage to the Premises arising from that removal andshall restore the affected area to its pre-existing condition, reasonable wear and tear excepted.7.4. MECHANIC’S LIENS . Tenant shall keep the Premises free from any liens arising out of any work performed, materials furnished, or obligationsincurred by or for Tenant. In the event that Tenant shall not, within 15 days following the imposition of any lien, cause the lien to be released of record by paymentor posting of a proper bond in accordance with California Civil Code Section 8424 or any successor statute, Landlord shall have, in addition to all other availableremedies, the right to cause the lien to be released by any means it deems proper, including payment of or defense against the claim giving rise to the lien. Allexpenses so incurred by Landlord shall be reimbursed by Tenant promptly following Landlord’s demand. Tenant shall give Landlord no less than 20 days’ priornotice in writing before commencing construction of any kind on the Premises.7.5. ENTRY AND INSPECTION . Landlord shall at all reasonable times and with reasonable prior verbal notice, except in emergencies or to provideBuilding services, have the right to enter the Premises to inspect them, to supply services in accordance with this Lease, to make repairs and renovations asreasonably deemed necessary by Landlord, and to submit the Premises to prospective or actual purchasers or encumbrance holders (or, during the final twelvemonths of the Term or when an uncured Default exists, to prospective tenants), all without being deemed to have caused an eviction of Tenant and withoutabatement of rent except as provided elsewhere in this Lease.ARTICLE 8. SPACE PLANNING AND SUBSTITUTION[Intentionally omitted.]ARTICLE 9. ASSIGNMENT AND SUBLETTING9.1. RIGHTS OF PARTIES . Tenant shall not, directly or indirectly, assign, sublease, transfer or encumber any interest in this Lease or allow any thirdparty to use any portion of the Premises (collectively or individually, a “Transfer”) without the prior written consent of Landlord, which consent shall not beunreasonably withheld if Landlord does not exercise its recapture rights. Tenant agrees that it is not unreasonable for Landlord to withhold consent to a Transfer toa proposed assignee or subtenant who is an existing tenant or occupant of the Building or Project or to a prospective tenant with whom Landlord or Landlord’saffiliate has been actively negotiating. Within 30 days after receipt of executed copies of the transfer documentation and such other information as Landlord mayrequest, Landlord shall either: (a) consent to the Transfer by execution of a consent agreement in a form reasonably designated by Landlord; (b) refuse to consent tothe Transfer; or (c) recapture the portion of the Premises that Tenant is proposing to Transfer. Tenant hereby waives the provisions of Section 1995.310 of theCalifornia Civil Code, or any similar or successor Laws, now or hereinafter in effect, and all other remedies, including, without limitation, any right at law or equityto terminate this Lease, on its own behalf and, to the extent permitted under all applicable laws, on behalf of the proposed transferee. In no event shall any Transferrelease or relieve Tenant from any obligation under this Lease, as same may be amended. Tenant shall pay Landlord a review fee of $1,000.00 for Landlord’sreview of any requested Transfer. Tenant shall pay Landlord, as additional Rent, 50% of all rent and other consideration which Tenant receives as a result of aTransfer that is in excess of the Rent payable to Landlord for the portion of the Premises and Term covered by the Transfer. For purposes herein, such transfer costsshall include all reasonable and customary expenses directly incurred by Tenant attributable to the Transfer, including brokerage fees, legal fees, construction costs,and Landlord’s review fee. If Tenant is in Default, Landlord may require that all sublease payments be made directly to Landlord, in which case Tenant shallreceive a credit against Rent in the amount of Tenant’s share of payments received by Landlord.9.2. PERMITTED TRANSFER . Notwithstanding the foregoing, Tenant may assign this Lease to a successor to Tenant by merger, consolidation or thepurchase of substantially all of Tenant’s assets, or assign this Lease or sublet all or a portion of the Premises to an Affiliate (defined below), without the consent ofLandlord, provided that all of the following conditions are satisfied (a “ Permitted Transfer ”): (i) Tenant is not then in Default hereunder; (ii) Tenant givesLandlord written notice prior to such Permitted Transfer; and (iii) the successor entity resulting from any merger or consolidation of Tenant or the sale of all orsubstantially all of the assets of Tenant, has a net worth at the time of the Permitted Transfer that is at least equal to the net worth of Tenant immediately before thePermitted Transfer. “ Affiliate ” shall mean an entity controlled by, controlling or under common control with Tenant.ARTICLE 10. INSURANCE AND INDEMNITY10.1. TENANT’S INSURANCE . Tenant, at its sole cost and expense, shall provide and maintain in effect the insurance described in Exhibit D . Evidenceof that insurance must be delivered to Landlord prior to the Commencement Date.10.2. TENANT’S INDEMNITY . To the fullest extent permitted by law, but subject to Section 10.4 below, Tenant shall defend, indemnify and holdharmless Landlord and Landlord’s agents, employees, lenders, and affiliates, from and against any and all negligence, claims, liabilities, damages, costs or expensesarising either before or after the Commencement Date which arise from or are caused by Tenant’s use or occupancy of the Premises, the Building or the CommonAreas of the Project, or from the conduct of Tenant’s business, or from any activity, work, or thing done, permitted or suffered by Tenant or Tenant’s agents,employees, subtenants, vendors, contractors, invitees or licensees in or about the Premises, the Building or the Common Areas of the Project, or from any Defaultin the performance of any obligation on Tenant’s part to be performed under this Lease, or from any act, omission or negligence on the part of 5 Tenant or Tenant’s agents, employees, subtenants, vendors, contractors, invitees or licensees. Landlord may, at its option, require Tenant to assume Landlord’sdefense in any action covered by this Section 10.2 through counsel reasonably satisfactory to Landlord. Notwithstanding the foregoing, Tenant shall not beobligated to indemnify Landlord against any liability or expense to the extent it is ultimately determined that the same was caused by the sole negligence or willfulmisconduct of Landlord, its agents, contractors or employees.10.3. LANDLORD’S NONLIABILITY . Landlord shall not be liable to Tenant, its employees, agents and invitees, and Tenant hereby waives all claimsagainst Landlord, its employees and agents for loss of or damage to any property, or any injury to any person, resulting from any condition including, but notlimited to, acts or omissions (criminal or otherwise) of third parties and/or other tenants of the Project, or their agents, employees or invitees, fire, explosion, fallingplaster, steam, gas, electricity, water or rain which may leak or flow from or into any part of the Premises or from the breakage, leakage, obstruction or otherdefects of the pipes, sprinklers, wires, appliances, plumbing, air conditioning, electrical works or other fixtures in the Building, whether the damage or injuryresults from conditions arising in the Premises or in other portions of the Building, regardless of the negligence of Landlord, its agents or any and all affiliates ofLandlord in connection with the foregoing. Notwithstanding anything to the contrary contained in this Lease, in no event shall Landlord be liable for Tenant’s lossor interruption of business or income (including without limitation, Tenant’s consequential damages, lost profits or opportunity costs), or for interference with lightor other similar intangible interests.10.4. WAIVER OF SUBROGATION . Landlord and Tenant each hereby waives all rights of recovery against the other on account of loss and damageoccasioned to the property of such waiving party to the extent that the waiving party is entitled to proceeds for such loss and damage under any property insurancepolicies carried or otherwise required to be carried by this Lease; provided however, that the foregoing waiver shall not apply to the extent of Tenant’s obligation topay deductibles under any such policies and this Lease.ARTICLE 11. DAMAGE OR DESTRUCTION11.1. RESTORATION .(a) If the Building of which the Premises are a part is damaged as the result of an event of casualty, then subject to the provisions below, Landlordshall repair that damage as soon as reasonably possible unless Landlord reasonably determines that: (i) the Premises have been materially damaged and there is lessthan 1 year of the Term remaining on the date of the casualty; (ii) any Mortgagee (defined in Section 13.1) requires that the insurance proceeds be applied to thepayment of the mortgage debt; or (iii) proceeds necessary to pay the full cost of the repair are not available from Landlord’s insurance, including without limitationearthquake insurance. Should Landlord elect not to repair the damage for one of the preceding reasons, Landlord shall so notify Tenant in the “Casualty Notice” (asdefined below), and this Lease shall terminate as of the date of delivery of that notice.(b) As soon as reasonably practicable following the casualty event but not later than 60 days thereafter, Landlord shall notify Tenant in writing (“Casualty Notice ”) of Landlord’s election, if applicable, to terminate this Lease. If this Lease is not so terminated, the Casualty Notice shall set forth theanticipated period for repairing the casualty damage. If the anticipated repair period exceeds 270 days and if the damage is so extensive as to reasonably preventTenant’s substantial use and enjoyment of the Premises, then either party may elect to terminate this Lease by written notice to the other within 10 days followingdelivery of the Casualty Notice.(c) In the event that neither Landlord nor Tenant terminates this Lease pursuant to Section 11.1(b), Landlord shall repair all material damage to thePremises or the Building as soon as reasonably possible and this Lease shall continue in effect for the remainder of the Term. Upon notice from Landlord, Tenantshall assign or endorse over to Landlord (or to any party designated by Landlord) all property insurance proceeds payable to Tenant under Tenant’s insurance withrespect to any Alterations. Within 15 days of demand, Tenant shall also pay Landlord for any additional excess costs that are determined during the performance ofthe repairs to such Alterations.(d) From and after the casualty event, the rental to be paid under this Lease shall be abated in the same proportion that the Floor Area of the Premisesthat is rendered unusable by the damage from time to time bears to the total Floor Area of the Premises.11.2. LEASE GOVERNS . Tenant agrees that the provisions of this Lease, including without limitation Section 11.1, shall govern any damage ordestruction and shall accordingly supersede any contrary statute or rule of law.ARTICLE 12. EMINENT DOMAIN Either party may terminate this Lease if any material part of the Premises is taken or condemned for any public or quasi-public use under Law, by eminentdomain or private purchase in lieu thereof (a “ Taking ”). Landlord shall also have the right to terminate this Lease if there is a Taking of any portion of theBuilding or Project which would have a material adverse effect on Landlord’s ability to profitably operate the remainder of the Building. The termination shall beeffective as of the effective date of any order granting possession to, or vesting legal title in, the condemning authority. All compensation awarded for a Takingshall be the property of Landlord. Tenant agrees that the provisions of this Lease shall govern any Taking and shall accordingly supersede any contrary statute orrule of law.ARTICLE 13. SUBORDINATION; ESTOPPEL CERTIFICATE13.1. SUBORDINATION . Tenant accepts this Lease subject and subordinate to any mortgage(s), deed(s) of trust, ground lease(s) or other lien(s) now orsubsequently arising upon the Premises, the Building or the Project, and to renewals, modifications, refinancings and extensions thereof (collectively referred to asa “ Mortgage ”). The party having the benefit of a Mortgage shall be referred to as a “ Mortgagee .” This clause shall be self-operative, but upon request from aMortgagee, Tenant shall execute a commercially reasonable subordination and attornment agreement in favor of the Mortgagee, provided such agreement providesa non-disturbance covenant benefitting Tenant. Alternatively, a Mortgagee shall have the right at any time to subordinate its Mortgage to this Lease. Upon request,Tenant, without charge, shall attorn to any successor to Landlord’s interest in this Lease in the event of a foreclosure of any mortgage. Tenant agrees that any purchaser at a foreclosure sale or lender taking title under a deed in lieu of foreclosure shall not 6 be responsible for any act or omission of a prior landlord, shall not be subject to any offsets or defenses Tenant may have against a prior landlord, and shall not beliable for the return of the Security Deposit not actually recovered by such purchaser nor bound by any rent paid in advance of the calendar month in which thetransfer of title occurred; provided that the foregoing shall not release the applicable prior landlord from any liability for those obligations. Tenant acknowledgesthat Landlord’s Mortgagees and their successors-in-interest are intended third party beneficiaries of this Section 13.1.13.2. ESTOPPEL CERTIFICATE . Tenant shall, within 10 days after receipt of a written request from Landlord, execute and deliver a commerciallyreasonable estoppel certificate in favor of those parties as are reasonably requested by Landlord (including a Mortgagee or a prospective purchaser of the Buildingor the Project).ARTICLE 14. DEFAULTS AND REMEDIES14.1. TENANT’S DEFAULTS . In addition to any other event of default set forth in this Lease, the occurrence of any one or more of the following eventsshall constitute a “ Default ” by Tenant:(a) The failure by Tenant to make any payment of Rent required to be made by Tenant, as and when due, where the failure continues for a period of 3business days after written notice from Landlord to Tenant. The term “ Rent ” as used in this Lease shall be deemed to mean the Basic Rent and all other sumsrequired to be paid by Tenant to Landlord pursuant to the terms of this Lease.(b) Except where a specific time period is otherwise set forth for Tenant’s performance in this Lease (in which event the failure to perform by Tenantwithin such time period shall be a Default), the failure or inability by Tenant to observe or perform any of the covenants or provisions of this Lease to be observedor performed by Tenant, other than as specified in any other subsection of this Section 14.1, where the failure continues for a period of 30 days after written noticefrom Landlord to Tenant.The notice periods provided herein are in lieu of, and not in addition to, any notice periods provided by law, and Landlord shall not be required to give anyadditional notice under California Code of Civil Procedure Section 1161, or any successor statute, in order to be entitled to commence an unlawful detainerproceeding.14.2. LANDLORD’S REMEDIES .(a) Upon the occurrence of any Default by Tenant, then in addition to any other remedies available to Landlord, Landlord may exercise the followingremedies:(i) Landlord may terminate Tenant’s right to possession of the Premises by any lawful means, in which case this Lease shall terminate andTenant shall immediately surrender possession of the Premises to Landlord. Such termination shall not affect any accrued obligations of Tenant under this Lease.Upon termination, Landlord shall have the right to reenter the Premises and remove all persons and property. Landlord shall also be entitled to recover fromTenant:(1) The worth at the time of award of the unpaid Rent which had been earned at the time of termination;(2) The worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until thetime of award exceeds the amount of such loss that Tenant proves could have been reasonably avoided;(3) The worth at the time of award of the amount by which the unpaid Rent for the balance of the Term after the time of award exceedsthe amount of such loss that Tenant proves could be reasonably avoided;(4) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant’s failure to perform itsobligations under this Lease or which in the ordinary course of things would be likely to result from Tenant’s default, including, but not limited to, the cost ofrecovering possession of the Premises, commissions and other expenses of reletting, including necessary repair, renovation, improvement and alteration of thePremises for a new tenant, reasonable attorneys’ fees, and any other reasonable costs; and(5) At Landlord’s election, all other amounts in addition to or in lieu of the foregoing as may be permitted by law. Any sum, other thanBasic Rent, shall be computed on the basis of the average monthly amount accruing during the 24 month period immediately prior to Default, except that if itbecomes necessary to compute such rental before the 24 month period has occurred, then the computation shall be on the basis of the average monthly amountduring the shorter period. As used in subparagraphs (1) and (2) above, the “worth at the time of award” shall be computed by allowing interest at the rate of10% per annum. As used in subparagraph (3) above, the “worth at the time of award” shall be computed by discounting the amount at the discount rate of theFederal Reserve Bank of San Francisco at the time of award plus 1%. (ii) Employ the remedy described in California Civil Code § 1951.4 (Landlord may continue this Lease in effect after Tenant’s breach andabandonment and recover Rent as it becomes due, if Tenant has the right to sublet or assign, subject only to reasonable limitations).(b) The various rights and remedies reserved to Landlord in this Lease or otherwise shall be cumulative and, except as otherwise provided byCalifornia law, Landlord may pursue any or all of its rights and remedies at the same time. No delay or omission of Landlord to exercise any right or remedy shallbe construed as a waiver of the right or remedy or of any breach or Default by Tenant. The acceptance by Landlord of rent shall not be a (i) waiver of any precedingbreach or Default by Tenant of any provision of this Lease, other than the failure of Tenant to pay the particular rent accepted, regardless of Landlord’s knowledgeof the preceding breach or Default at the time of acceptance of rent, or (ii) a waiver of Landlord’s right to exercise any remedy available to Landlord by virtue ofthe breach or Default. No payment by Tenant or receipt by Landlord of a lesser amount than the rent required by this Lease shall be deemed to be other than apartial payment on account of the earliest due stipulated rent, nor shall any endorsement or statement on any 7 check or letter be deemed an accord and satisfaction and Landlord shall accept the check or payment without prejudice to Landlord’s right to recover the balance ofthe rent or pursue any other remedy available to it. Tenant hereby waives any right of redemption or relief from forfeiture under California Code of Civil ProcedureSection 1174 or 1179, or under any successor statute, in the event this Lease is terminated by reason of any Default by Tenant. No act or thing done by Landlord orLandlord’s agents during the Term shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept a surrender shall be valid unless inwriting and signed by Landlord.14.3. LATE PAYMENTS . Any Rent due under this Lease that is not paid to Landlord within 5 days of the date when due shall bear interest at themaximum rate permitted by law from the date due until fully paid and if any Rent due from Tenant shall not be received by Landlord or Landlord’s designee within5 days after the date due, then Tenant shall pay to Landlord, in addition to the interest, a late charge for each delinquent payment equal to the greater of (i) 5% ofthat delinquent payment or (ii) $100.00.14.4. DEFAULT BY LANDLORD . Landlord shall not be deemed to be in default in the performance of any obligation under this Lease unless and until ithas failed to perform the obligation within 30 days after written notice by Tenant to Landlord specifying in reasonable detail the nature and extent of the failure;provided, however, that if the nature of Landlord’s obligation is such that more than 30 days are required for its performance, then Landlord shall not be deemed tobe in default if it commences performance within the 30 day period and thereafter diligently pursues the cure to completion.14.5. EXPENSES AND LEGAL FEES . Should either Landlord or Tenant bring any action in connection with this Lease, the prevailing party shall beentitled to recover as a part of the action its reasonable attorneys’ fees, and all other reasonable costs. The prevailing party for the purpose of this paragraph shall bedetermined by the trier of the facts.14.6. WAIVER OF JURY TRIAL/JUDICIAL REFERENCE .(a) LANDLORD AND TENANT EACH ACKNOWLEDGES THAT IT IS AWARE OF AND HAS HAD THE ADVICE OF COUNSEL OFITS CHOICE WITH RESPECT TO ITS RIGHT TO TRIAL BY JURY, AND EACH PARTY DOES HEREBY EXPRESSLY AND KNOWINGLYWAIVE AND RELEASE ALL SUCH RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BYEITHER PARTY HERETO AGAINST THE OTHER (AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ORSUBSIDIARY OR AFFILIATED ENTITIES) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THISLEASE, TENANT’S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY CLAIM OF INJURY OR DAMAGE.(b) In the event that the jury waiver provisions of Section 14.6(a) are not enforceable under California law, then, unless otherwise agreed to by theparties, the provisions of this Section 14.6(b) shall apply. Landlord and Tenant agree that any disputes arising in connection with this Lease (including but notlimited to a determination of any and all of the issues in such dispute, whether of fact or of law) shall be resolved (and a decision shall be rendered) by way of ageneral reference as provided for in Part 2, Title 8, Chapter 6 (§§ 638 et. seq.) of the California Code of Civil Procedure, or any successor California statutegoverning resolution of disputes by a court appointed referee. Nothing within this Section 14.6 shall apply to an unlawful detainer action.14.7. SATISFACTION OF JUDGMENT . The obligations of Landlord do not constitute the personal obligations of the individual partners, trustees,directors, officers, members or shareholders of Landlord or its constituent partners or members. Should Tenant recover a money judgment against Landlord, suchjudgment shall be satisfied only from the interest of Landlord in the Project and out of the rent or other income from such property receivable by Landlord, and noaction for any deficiency may be sought or obtained by Tenant.ARTICLE 15. END OF TERM15.1. HOLDING OVER . If Tenant holds over for any period after the Expiration Date (or earlier termination of the Term), such tenancy shall constitute atenancy at sufferance only and possession shall be subject to all of the terms of this Lease, except that the monthly rental shall be 150% of the total monthly rentalfor the month immediately preceding the date of termination. The acceptance by Landlord of monthly hold-over rental in a lesser amount shall not constitute awaiver of Landlord’s right to recover the full amount due unless otherwise agreed in writing by Landlord. If Tenant fails to surrender the Premises upon theexpiration of this Lease despite demand to do so by Landlord, Tenant shall indemnify and hold Landlord harmless from all loss or liability, including withoutlimitation, any claims made by any succeeding tenant relating to such failure to surrender. The foregoing provisions of this Section 15.1 are in addition to and donot affect Landlord’s right of re-entry or any other rights of Landlord under this Lease or at law. 15.2. SURRENDER OF PREMISES; REMOVAL OF PROPERTY . Upon the Expiration Date or upon any earlier termination of this Lease, Tenant shallquit and surrender possession of the Premises to Landlord in as good order, condition and repair as when received or as hereafter may be improved by Landlord orTenant, reasonable wear and tear and repairs which are Landlord’s obligation excepted, and shall remove or fund to Landlord the cost of removing all wallpapering,voice and/or data transmission cabling installed by or for Tenant and Required Removables, together with all personal property and debris, and shall perform allwork required under Section 7.3 of this Lease. If Tenant shall fail to comply with the provisions of this Section 15.2, Landlord may effect the removal and/or makeany repairs, and the cost to Landlord shall be additional rent payable by Tenant upon demand.ARTICLE 16. PAYMENTS AND NOTICESAll sums payable by Tenant to Landlord shall be paid, without deduction or offset, in lawful money of the United States to Landlord at its address set forth inItem 12 of the Basic Lease Provisions, or at any other place as Landlord may designate in writing. Unless this Lease expressly provides otherwise, all paymentsshall be due and payable within 5 business days after written demand. All payments requiring proration shall be prorated on the basis of the number of days in thepertinent calendar month or year, as applicable. Any notice, election, demand, consent or approval to be given or other document to be delivered by either party tothe other may be delivered to the other party, at the address set forth in Item 12 of the Basic Lease Provisions, by personal service or by any courier or “overnight”express mailing service. Either party may, by written notice to the other, served in the manner provided in this Article, designate a 8 different address. The refusal to accept delivery of a notice, or the inability to deliver the notice (whether due to a change of address for which notice was not dulygiven or other good reason), shall be deemed delivery and receipt of the notice as of the date of attempted delivery.ARTICLE 17. RULES AND REGULATIONSTenant agrees to comply with the Rules and Regulations attached as Exhibit E , and any reasonable and nondiscriminatory amendments, modificationsand/or additions as may be adopted by Landlord from time to time.ARTICLE 18. BROKER’S COMMISSIONThe parties recognize as the broker(s) who negotiated this Lease the firm(s) whose name(s) is (are) stated in Item 10 of the Basic Lease Provisions, and agreethat Landlord shall be responsible for the payment of brokerage commissions to those broker(s) unless otherwise provided in this Lease. Tenant agrees toindemnify and hold Landlord harmless from any cost, expense or liability (including reasonable attorneys’ fees) for any compensation, commissions or chargesclaimed by any other real estate broker or agent employed or claiming to represent or to have been employed by Tenant in connection with the negotiation of thisLease.ARTICLE 19. TRANSFER OF LANDLORD’S INTERESTLandlord shall have the right to transfer and assign, in whole or in part, all of its ownership interest, rights and obligations in the Building, Project or Lease,including the Security Deposit, and upon transfer Landlord shall be released from any further obligations hereunder, and Tenant agrees to look solely to thesuccessor in interest of Landlord for the performance of such obligations and the return of any Security Deposit.ARTICLE 20. INTERPRETATION20.1. NUMBER . Whenever the context of this Lease requires, the words “Landlord” and “Tenant” shall include the plural as well as the singular.20.2. JOINT AND SEVERAL LIABILITY . If more than one person or entity is named as Tenant, the obligations imposed upon each shall be joint andseveral and the act of or notice from, or notice or refund to, or the signature of, any one or more of them shall be binding on all of them with respect to the tenancyof this Lease, including, but not limited to, any renewal, extension, termination or modification of this Lease.20.3. SUCCESSORS . The expiration of the Term, whether by lapse of time, termination or otherwise, shall not relieve either party of any obligations whichaccrued prior to or which may continue to accrue after the expiration or termination of this Lease.20.4. TIME OF ESSENCE . Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is afactor.20.5. CONTROLLING LAW/VENUE . This Lease shall be governed by and interpreted in accordance with the laws of the State of California.20.6. SEVERABILITY . If any term or provision of this Lease, the deletion of which would not adversely affect the receipt of any material benefit by eitherparty or the deletion of which is consented to by the party adversely affected, shall be held invalid or unenforceable to any extent, the remainder of this Lease shallnot be affected and each term and provision of this Lease shall be valid and enforceable to the fullest extent permitted by law.20.7. WAIVER . One or more waivers by Landlord or Tenant of any breach of any term, covenant or condition contained in this Lease shall not be a waiverof any subsequent breach of the same or any other term, covenant or condition. Consent to any act by one of the parties shall not be deemed to render unnecessarythe obtaining of that party’s consent to any subsequent act. No breach of this Lease shall be deemed to have been waived unless the waiver is in a writing signed bythe waiving party. 20.8. INABILITY TO PERFORM . In the event that either party shall be delayed or hindered in or prevented from the performance of any work or inperforming any act required under this Lease by reason of any cause beyond the reasonable control of that party, then the performance of the work or the doing ofthe act shall be excused for the period of the delay and the time for performance shall be extended for a period equivalent to the period of the delay. The provisionsof this Section 20.8 shall not operate to excuse Tenant from the prompt payment of Rent.20.9. ENTIRE AGREEMENT . This Lease constitutes the entire agreement between the parties and supersedes all prior agreements and understandingsrelated to the Premises. This Lease may be modified only by a written agreement signed by Landlord and Tenant.20.10. QUIET ENJOYMENT . Upon the observance and performance of all the covenants, terms and conditions on Tenant’s part to be observed andperformed, and subject to the other provisions of this Lease, Tenant shall have the right of quiet enjoyment and use of the Premises for the Term without hindranceor interruption by Landlord or any other person claiming by or through Landlord.20.11. SURVIVAL . All covenants of Landlord or Tenant which reasonably would be intended to survive the expiration or sooner termination of this Lease,including without limitation any warranty or indemnity hereunder, shall so survive and continue to be binding upon and inure to the benefit of the respective partiesand their successors and assigns. 9 ARTICLE 21. EXECUTION21.1. COUNTERPARTS; DIGITAL SIGNATURES . This Lease may be executed in one or more counterparts, each of which shall constitute an originaland all of which shall be one and the same agreement. The parties agree to accept a digital image (including but not limited to an image in the form of a PDF,JPEG, GIF file, or other e-signature) of this Lease, if applicable, reflecting the execution of one or both of the parties, as a true and correct original.21.2. CORPORATE AND PARTNERSHIP AUTHORITY . Tenant represents and warrants to Landlord, and agrees, that each individual executing thisLease on behalf of Tenant is authorized to do so on behalf of Tenant.21.3. EXECUTION OF LEASE; NO OPTION OR OFFER . The submission of this Lease to Tenant shall be for examination purposes only, and shall notconstitute an offer to or option for Tenant to lease the Premises unless and until Landlord has executed and delivered this Lease to Tenant.21.4. BROKER DISCLOSURE . By the execution of this Lease, each of Landlord and Tenant hereby acknowledge and confirm (a) receipt of a copy of aDisclosure Regarding Real Estate Agency Relationship conforming to the requirements of California Civil Code 2079.16, and (b) the agency relationships specifiedin Section 10 of the Basic Lease Provisions, which acknowledgement and confirmation is expressly made for the benefit of Tenant’s Broker identified in Section 10of the Basic Lease Provisions. If there is no Tenant’s Broker so identified in Section 10 of the Basic Lease Provisions, then such acknowledgement andconfirmation is expressly made for the benefit of Landlord’s Broker. By the execution of this Lease, Landlord and Tenant are executing the confirmation of theagency relationships set forth in Section 10 of the Basic Lease Provisions.ARTICLE 22. MISCELLANEOUS22.1. MORTGAGEE PROTECTION . No act or failure to act on the part of Landlord which would otherwise entitle Tenant to be relieved of itsobligations hereunder or to terminate this Lease shall result in such a release or termination unless (a) Tenant has given notice by registered or certified mail to anyMortgagee of a Mortgage covering the Building whose address has been furnished to Tenant and (b) such Mortgagee is afforded a reasonable opportunity to curethe default by Landlord. Tenant shall comply with any written directions by any Mortgagee to pay Rent due hereunder directly to such Mortgagee withoutdetermining whether a default exists under such Mortgagee’s Mortgage.22.2. SDN LIST . Tenant hereby represents and warrants that neither Tenant nor any officer, director, employee, partner, member or other principal ofTenant (collectively, “ Tenant Parties ”) is listed as a Specially Designated National and Blocked Person (“ SDN ”) on the list of such persons and entities issuedby the U.S. Treasury Office of Foreign Assets Control (OFAC). In the event Tenant or any Tenant Party is or becomes listed as an SDN, Tenant shall be deemed inbreach of this Lease and Landlord shall have the right to terminate this Lease immediately upon written notice to Tenant. LANDLORD: TENANT:LJ GATEWAY OFFICE LLC, ZAFGEN, INC.,a Delaware limited liability company a Delaware corporationBy /s/ Steven M. Case By /s/ Thomas Hughes Steven M. case Thomas Hughes EVP CEO Office Properties By /s/ Pamela Van Nort By /s/ Patricia Allen Pamela Van NortVice President, OperationsOffice Properties Patricia AllenCFO 10 EXHIBIT ADESCRIPTION OF PREMISES9191 Towne Centre DriveSuite L103 EXHIBIT BOperating Expenses and Taxes(Base Year)(a) Tenant shall pay Landlord, as additional rent, for Tenant’s Share of the amount, if any, by which “ Project Costs ” (defined below) for eachExpense Recovery Period during the Term exceed Project Costs for the Project Cost Base and the amount, if any, by which “ Property Taxes” (defined below) foreach Expense Recovery Period during the Term exceed Property Taxes for the Property Tax Base. Property Taxes and Project Costs are mutually exclusive andmay be billed separately or in combination as determined by Landlord. “ Tenant’s Share ” shall mean that portion of any Operating Expenses determined bymultiplying the cost of such item by a fraction, the numerator of which is the Floor Area and the denominator of which is the total rentable square footage, asdetermined from time to time by Landlord, of (i) the Floor Area of the Building as defined in Item 8 of the Basic Lease Provisions, for expenses determined byLandlord to benefit or relate substantially to the Building rather than the entire Project, or (ii) all or some of the buildings in the Project, for expenses determined byLandlord to benefit or relate substantially to all or some of the buildings in the Project rather than any specific building. Tenant acknowledges Landlord’s rights tomake changes or additions to the Building and/or Project from time to time, in which event the total rentable square footage within the Building and/or Project maybe adjusted. For convenience of reference, Property Taxes and Project Costs may sometimes be collectively referred to as “ Operating Expenses .”Notwithstanding the foregoing, Landlord hereby agrees that Tenant shall not be responsible for Tenant’s Share of Operating Expense excess accruing during the 12month period commencing as of the Commencement Date.(b) Commencing prior to the start of the first full “ Expense Recovery Period ” of the Lease (as defined in Item 7 of the Basic Lease Provisions)following the Base Year, and prior to the start of each full or partial Expense Recovery Period thereafter, Landlord shall give Tenant a written estimate of theamount of Tenant’s Share of Project Costs and Property Taxes for the Expense Recovery Period or portion thereof. Tenant shall pay the estimated amounts toLandlord in equal monthly installments, in advance, with Basic Rent. Landlord may from time to time change the Expense Recovery Period to reflect a calendaryear or a new fiscal year of Landlord, as applicable, in which event Tenant’s share of Operating Expenses shall be equitably prorated for any partial year. Fromtime to time during an Expense Recovery Period, Landlord may revise the estimate based on increases in any of the Operating Expenses.(c) Within 180 days after the end of each Expense Recovery Period, Landlord shall furnish to Tenant a statement setting forth the actual or proratedProperty Taxes and Project Costs attributable to that period, and the parties shall within 30 days thereafter make any payment or allowance necessary to adjustTenant’s estimated payments, if any, to Tenant’s actual Tenant’s Share as shown by the annual statement. If actual Property Taxes or Project Costs allocable toTenant during any Expense Recovery Period are less than the Property Tax Base or the Project Cost Base, respectively, Landlord shall not be required to pay thatdifferential to Tenant, although Landlord shall refund any applicable estimated payments collected from Tenant. Should Tenant fail to object in writing toLandlord’s determination of actual Operating Expenses within 60 days following delivery of Landlord’s expense statement, Landlord’s determination of actualOperating Expenses for the applicable Expense Recovery Period shall be conclusive and binding on Tenant.(d) Even though the Lease has terminated and the Tenant has vacated the Premises, when the final determination is made of Tenant’s share of PropertyTaxes and Project Costs for the Expense Recovery Period in which the Lease terminates, Tenant shall upon notice pay the entire increase due over the estimatedexpenses paid; conversely, any overpayment made in the event expenses decrease shall be rebated by Landlord to Tenant. (e) The term “ Project Costs ” shall include all charges and expenses pertaining to the operation, management, maintenance and repair of the Buildingand the Project, together with all appurtenant Common Areas (as defined in Section 6.2), and shall include the following charges by way of illustration but notlimitation: water and sewer charges; insurance premiums and deductibles and/or reasonable premium equivalents and deductible equivalents should Landlord electto self-insure any risk that Landlord is authorized to insure hereunder; license, permit, and inspection fees; heat; light; power; janitorial services; the cost ofequipping, staffing and operating an on-site and/or off-site management office for the Building and Project; all labor and labor-related costs for personnelapplicable to the Building and Project, including both Landlord’s personnel and outside personnel; a commercially reasonable Landlord overhead/management fee;reasonable fees for consulting services; access control/security costs, inclusive of the reasonable cost of improvements made to enhance access control systems andprocedures; repairs; air conditioning; supplies; materials; equipment; tools; tenant services; programs instituted to comply with transportation managementrequirements; any expense incurred pursuant to Sections 6.1, 6.2, 7.2, and Exhibits C and F below; costs incurred (capital or otherwise) on a regular recurring basisevery 3 or more years for normal maintenance projects (e.g., parking lot slurry coat or replacement of lobby, corridor and elevator cab carpets and coverings); andthe amortized cost of capital improvements (as distinguished from replacement parts or components installed in the ordinary course of business) which are intendedto reduce other operating costs or increases thereof, or upgrade Building and/or Project security, or which are required to bring the Building and/or Project intocompliance with applicable laws and building codes. Landlord shall amortize the cost of capital improvements on a straight-line basis over the lesser of thePayback Period (as defined below) or the useful life of the capital improvement as reasonably determined by Landlord. Any amortized Project Costs item mayinclude, at Landlord’s option, an actual or imputed interest rate that Landlord would reasonably be required to pay to finance the cost of the item, applied on theunamortized balance. “ Payback Period ” shall mean the reasonably estimated period of time that it takes for the cost savings, if any, resulting from a capitalimprovement item to equal the total cost of the capital improvement. It is understood that Project Costs shall include competitive charges for direct servicesprovided by any subsidiary or division of Landlord. If any Project Costs are applicable to one or more buildings or properties in addition to the Building, then thatcost shall be equitably prorated and apportioned among the Building and such other buildings or properties. The term “ Property Taxes ” as used herein shallinclude the following: (i) all real estate taxes or personal property taxes, as such property taxes may be increased from time to time due to a reassessment orotherwise; and (ii) other taxes, charges and assessments which are levied with respect to this Lease or to the Building and/or the Project, and any improvements,fixtures and equipment and other property of Landlord located in the Building and/or the Project, except that general net income and franchise taxes imposedagainst Landlord shall be excluded; and (iii) any tax, surcharge or assessment which shall be levied in addition to or in lieu of real estate or personal property taxes;and (iv) costs and expenses incurred in contesting the amount or validity of any Property Tax by appropriate proceedings. A copy of Landlord’s unauditedstatement of expenses shall be made available to Tenant upon request. The Project Costs, inclusive of those for the Base Year, shall be extrapolated by Landlord toreflect at least 95% occupancy of the rentable area of the Building. 1 (f) Notwithstanding the foregoing, Operating Expenses shall exclude the following: (1) Any ground lease rental;(2) Costs incurred by Landlord with respect to goods and services (including utilities sold and supplied to tenants and occupants of theBuilding) to the extent that Landlord is reimbursed for such costs other than through the Operating Expense pass-through provisions of such tenants’ lease;(3) Costs incurred by Landlord for repairs, replacements and/or restoration to or of the Building to the extent that Landlord is reimbursed byinsurance or condemnation proceeds or by tenants (other than through Operating Expense pass-throughs), warrantors or other third persons;(4) Costs, including permit, license and inspection costs, incurred with respect to the installation of tenant improvements made for othertenants in the Building or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for tenants or other occupants of theBuilding;(5) Costs arising from Landlord’s charitable or political contributions;(6) Attorneys’ fees and other costs and expenses incurred in connection with negotiations or disputes with present or prospective tenants orother occupants of the Building, except those attorneys’ fees and other costs and expenses incurred in connection with negotiations, disputes or claims relating toitems of Operating Expenses, enforcement of rules and regulations of the Building and such other matters relating to the maintenance of standards required ofLandlord under this Lease;(7) Capital expenditures as determined in accordance with generally accepted accounting principles, consistently applied, and as generallypracticed in the real estate industry (“ GAAP ”), except as otherwise provided above;(8) Brokers commissions, finders’ fees, attorneys’ fees, entertainment and travel expenses and other costs incurred by Landlord in leasing orattempting to lease space in the Building;(9) Expenses in connection with services or other benefits which are not offered to Tenant or for which Tenant is charged for directly butwhich are provided to another tenant or occupant of the Building;(10) Costs incurred by Landlord due to the violation by Landlord of any law, code, regulation, or ordinance;(11) Overhead and profit increments paid to subsidiaries or affiliates of Landlord for services provided to the Building to the extent the sameexceeds the costs that would generally be charged for such services if rendered on a competitive basis (based upon a standard of similar office buildings in thegeneral market area of the Premises) by unaffiliated third parties capable of providing such service;(12) Interest on debt or amortization on any mortgage or mortgages encumbering the Building;(13) Landlord’s general corporate overhead, except as it relates to the specific management, operation, repair, replacement and maintenance ofthe Building or Project;(14) Costs of installing the initial landscaping and the initial sculpture, paintings and objects of art for the Building and Project;(15) Advertising expenditures;(16) Any bad debt loss, rent loss, or reserves for bad debts or rent loss;(17) Costs associated with the operation of the business of the partnership or entity which constitutes the Landlord, as the same aredistinguished from the costs of the operation, management, repair, replacement and maintenance of the Project, including partnership accounting and legal matters,costs of defending any lawsuits with any mortgagee (except as the actions of Tenant may be in issue), costs of selling, syndicating, financing, mortgaging orhypothecating any of Landlord’s interest in the Project, and costs incurred in connection with any disputes between Landlord and its employees, between Landlordand Project management, or between Landlord and other tenants or occupants; (18) The wages and benefits of any employee who does not devote substantially all of his or her employed time to the Project unless suchwages and benefits are prorated to reflect time spent on operating and managing the Project vis-à-vis time spent on matters unrelated to operating and managing theProject; provided that in no event shall Project Costs include wages and/or benefits attributable to personnel above the level of portfolio property manager or chiefengineer;(19) Costs incurred by Landlord for improvements or replacements (including structural additions), repairs, equipment and tools which are ofa “capital” nature and/or which are considered “capital” improvements or replacements under GAAP, except to the extent included in Project Costs pursuant to thedefinition above or by other express terms of this Lease; and(20) Legal fees and costs, settlements, judgments or awards paid or incurred because of disputes between Landlord and other tenants orprospective occupants or prospective tenants/occupants or providers of goods and services to the Project. 2 EXHIBIT CUTILITIES AND SERVICESThe following standards for utilities and services shall be in effect at the Building. Landlord reserves the right to adopt nondiscriminatory modifications andadditions to these standards. In the case of any conflict between these standards and the Lease, the Lease shall be controlling. Subject to all of the provisions of theLease, the following shall apply:1. Landlord shall make available to the Premises during the hours of 8:00 a.m. to 6:00 p.m., Monday through Friday, and from 9:00 a.m. to 1:00 p.m. onSaturday (“ Building Hours ”), generally recognized national holidays excepted, reasonable HVAC services. Subject to the provisions set forth below, Landlordshall also furnish the Building with elevator service (if applicable), reasonable amounts of electric current for normal lighting by Landlord’s standard overheadfluorescent and incandescent fixtures and for the operation of office equipment consistent in type and quantity with that utilized by typical office tenants of theBuilding and Project, and water for lavatory purposes. Tenant will not, without the prior written consent of Landlord, connect any apparatus, machine or devicewith water pipes or electric current (except through existing electrical outlets in the Premises) for the purpose of using electric current or water.2. Upon written request from Tenant delivered to Landlord prior to the period for which service is requested, but during normal business hours, Landlord willprovide any of the foregoing building services to Tenant at such times when such services are not otherwise available. Tenant agrees to pay Landlord for thoseafter-hour services at rates that Landlord may establish from time to time. If Tenant requires electric current in excess of that which Landlord is obligated to furnishunder this Exhibit C , Tenant shall first obtain the consent of Landlord, and Landlord may cause an electric current meter to be installed in the Premises to measurethe amount of electric current consumed. The cost of installation, maintenance and repair of the meter shall be paid for by Tenant, and Tenant shall reimburseLandlord promptly upon demand for all electric current consumed for any special power use as shown by the meter.3. Landlord shall furnish water for drinking, personal hygiene and lavatory purposes only.4. In the event that any utility service to the Premises is separately metered or billed to Tenant, Tenant shall pay all charges for that utility service to thePremises and the cost of furnishing the utility to tenant suites shall be excluded from the Operating Expenses as to which reimbursement from Tenant is required inthe Lease.5. Landlord shall provide janitorial services 5 days per week, equivalent to that furnished in comparable buildings, and window washing as reasonablyrequired; provided, however, that Tenant shall pay for any additional or unusual janitorial services.6. Tenant shall have access to the Building 24 hours per day, 7 days per week, 52 weeks per year; provided that Landlord may install access control systemsas it deems advisable for the Building. Landlord may impose a reasonable charge for access control cards and/or keys issued to Tenant.7. The costs of operating, maintaining and repairing any supplemental air conditioning unit serving only the Premises shall be borne solely by Tenant. Suchinstallation shall be subject to Landlord’s prior written approval, at Tenant’s sole expense and shall include installation of a separate meter for the operation of theunit. Landlord may require Tenant to remove at Lease expiration any such unit installed by or for Tenant and to repair any resulting damage to the Premises orBuilding. 1 EXHIBIT DTENANT’S INSURANCEThe following requirements for Tenant’s insurance shall be in effect during the Term, and Tenant shall also cause any subtenant to comply with therequirements. Landlord reserves the right to adopt reasonable nondiscriminatory modifications and additions to these requirements.1. Tenant shall maintain, at its sole cost and expense, during the entire Term: (i) commercial general liability insurance with respect to the Premises and theoperations of Tenant in, on or about the Premises, on a policy form that is at least as broad as Insurance Service Office (ISO) CGL 00 01 (if alcoholic beverages aresold on the Premises, liquor liability shall be explicitly covered), which policy(ies) shall be written on an “occurrence” basis and for not less than $2,000,000combined single limit per occurrence for bodily injury, death, and property damage liability; (ii) workers’ compensation insurance coverage as required by law,together with employers’ liability insurance coverage of at least $1,000,000 each accident and each disease; (iii) with respect to Alterations constructed by Tenantunder this Lease, builder’s risk insurance, in an amount equal to the replacement cost of the work; and (iv) insurance against fire, vandalism, malicious mischiefand such other additional perils as may be included in a standard “special form” policy, insuring all Alterations, trade fixtures, furnishings, equipment and items ofpersonal property in the Premises, in an amount equal to not less than 90% of their replacement cost (with replacement cost endorsement), which policy shall alsoinclude business interruption coverage in an amount sufficient to cover 1 year of loss. In no event shall the limits of any policy be considered as limiting theliability of Tenant under this Lease.2. All policies of insurance required to be carried by Tenant pursuant to this Exhibit D shall be written by insurance companies authorized to do business inthe State of California and with a general policyholder rating of not less than “A -” and financial rating of not less than “VIII” in the most current Best’s InsuranceReport. The deductible or other retained limit under any policy carried by Tenant shall be commercially reasonable, and Tenant shall be responsible for payment ofsuch deductible or retained limit with waiver of subrogation in favor of Landlord. Any insurance required of Tenant may be furnished by Tenant under any blanketpolicy carried by it or under a separate policy. A certificate of insurance, certifying that the policy has been issued, provides the coverage required by this Exhibitand contains the required provisions, together with endorsements acceptable to Landlord evidencing the waiver of subrogation and additional insured provisionsrequired below, shall be delivered to Landlord prior to the date Tenant is given the right of possession of the Premises. Proper evidence of the renewal of anyinsurance coverage shall also be delivered to Landlord not less than thirty (30) days prior to the expiration of the coverage. In the event of a loss covered by anypolicy under which Landlord is an additional insured, Landlord shall be entitled to review a copy of such policy.3. Tenant’s commercial general liability insurance shall contain a provision that the policy shall be primary to and noncontributory with any policies carriedby Landlord, together with a provision including Landlord and any other parties in interest designated by Landlord as additional insureds. Tenant’s policiesdescribed in Subsections 1 (ii), (iii) and (iv) above shall each contain a waiver by the insurer of any right to subrogation against Landlord, its agents, employees,contractors and representatives. Tenant also waives its right of recovery for any deductible or retained limit under same policies enumerated above. Tenant will notcancel or change the coverage provided by the policy without first giving Landlord 30 days prior written notice. Tenant shall also name Landlord as an additionalinsured on any excess or umbrella liability insurance policy carried by Tenant.NOTICE TO TENANT: IN ACCORDANCE WITH THE TERMS OF THIS LEASE, TENANT MUST PROVIDE EVIDENCE OF THE REQUIREDINSURANCE TO LANDLORD’S MANAGEMENT AGENT PRIOR TO BEING AFFORDED ACCESS TO THE PREMISES. 1 EXHIBIT ERULES AND REGULATIONSThe following Rules and Regulations shall be in effect at the Building. Landlord reserves the right to adopt reasonable nondiscriminatory modifications andadditions at any time. In the case of any conflict between these regulations and the Lease, the Lease shall be controlling.1. The sidewalks, halls, passages, elevators, stairways, and other common areas shall not be obstructed by Tenant or used by it for storage, for depositingitems, or for any purpose other than for ingress to and egress from the Premises. Should Tenant have access to any balcony or patio area, Tenant shall not place anyfurniture other personal property in such area without the prior written approval of Landlord.2. Neither Tenant nor any employee or contractor of Tenant shall go upon the roof of the Building without the prior written consent of Landlord.3. Tenant shall, at its expense, be required to utilize the third party contractor designated by Landlord for the Building to provide any telephone wiringservices from the minimum point of entry of the telephone cable in the Building to the Premises.4. No antenna or satellite dish shall be installed by Tenant without the prior written agreement of Landlord.5. The sashes, sash doors, windows, glass lights, solar film and/or screen, and any lights or skylights that reflect or admit light into the halls or other places ofthe Building shall not be covered or obstructed. If Landlord, by a notice in writing to Tenant, shall object to any curtain, blind, tinting, shade or screen attached to,or hung in, or used in connection with, any window or door of the Premises, the use of that curtain, blind, tinting, shade or screen shall be immediately discontinuedand removed by Tenant. No awnings shall be permitted on any part of the Premises.6. The installation and location of any unusually heavy equipment in the Premises, including without limitation file storage units, safes and electronic dataprocessing equipment, shall require the prior written approval of Landlord. The moving of large or heavy objects shall occur only between those hours as may bedesignated by, and only upon previous notice to, Landlord. No freight, furniture or bulky matter of any description shall be received into or moved out of the lobbyof the Building or carried in any elevator other than the freight elevator (if available) designated by Landlord unless approved in writing by Landlord.7. Any pipes or tubing used by Tenant to transmit water to an appliance or device in the Premises must be made of copper or stainless steel, and in no eventshall plastic tubing be used for that purpose.8. Tenant shall not place any lock(s) on any door in the Premises or Building without Landlord’s prior written consent, which consent shall not beunreasonably withheld. Upon the termination of its tenancy, Tenant shall deliver to Landlord all the keys to offices, rooms and toilet rooms and all access cardswhich shall have been furnished to Tenant or which Tenant shall have had made.9. Tenant shall not install equipment requiring electrical or air conditioning service in excess of that to be provided by Landlord under the Lease withoutprior written approval from Landlord.10. Tenant shall not use space heaters within the Premises.11. Tenant shall not do or permit anything to be done in the Premises, or bring or keep anything in the Premises, which shall in any way increase theinsurance on the Building, or on the property kept in the Building, or interfere with the rights of other tenants, or conflict with any government rule or regulation.12. Tenant shall not use or keep any foul or noxious gas or substance in the Premises.13. Tenant shall not permit the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building byreason of noise, odors and/or vibrations, or interfere in any way with other tenants or those having business with other tenants.14. Tenant shall not permit any pets or animals in or about the Building. Bona fide service animals are permitted provided such service animals are pre-approved by Landlord, remain under the direct control of the individual they serve at all times, and do not disturb or threaten others. 15. Neither Tenant nor its employees, agents, contractors, invitees or licensees shall bring any firearm, whether loaded or unloaded, into the Project at anytime.16. Smoking, including via personal vaporizers or other electronic cigarettes, anywhere within the Premises or Building is strictly prohibited, and Landlordmay enforce such prohibition pursuant to Landlord’s leasehold remedies. Smoking is permitted outside the Building and within the project only in areas designatedby Landlord.17. Tenant shall not install an aquarium of any size in the Premises unless otherwise approved by Landlord.18. Tenant shall not utilize any name selected by Landlord from time to time for the Building and/or the Project as any part of Tenant’s corporate or tradename. Landlord shall have the right to change the name, number or designation of the Building or Project without liability to Tenant. Tenant shall not use anypicture of the Building in its advertising, stationery or in any other manner.19. Tenant shall, upon request by Landlord, supply Landlord with the names and telephone numbers of personnel designated by Tenant to be contacted on anafter-hours basis should circumstances warrant.20. Landlord may from time to time grant tenants individual and temporary variances from these Rules, provided that any variance does not have a materialadverse effect on the use and enjoyment of the Premises by Tenant.21. Fitness Center Rules. Tenant shall cause its employees (whether members or prospective members of the Fitness Center) to comply with the followingFitness Center rules and regulations (subject to change from time to time as Landlord may solely determine): 1 (a) Membership in the Fitness Center is open to the tenants of Landlord or its affiliates only. No guests will be permitted to use the Fitness Centerwithout the prior written approval of Landlord or Landlord’s representative.(b) Fitness Center users are not allowed to be in the Fitness Center other than the hours designated by Landlord from time to time. Landlord shall havethe right to alter the hours of use of the Fitness Center, at Landlord’s sole discretion.(c) All Fitness Center users must execute Landlord’s Waiver of Liability prior to use of the Fitness Center and agree to all terms and conditionsoutlined therein.(d) Individual membership and guest keycards to the Fitness Center shall not be shared and shall only be used by the individual to whom such keycardwas issued. Failure to abide by this rule may result in immediate termination of such Fitness Center user’s right to use the Fitness Center.(e) All Fitness Center users and approved guests must have a pre-authorized keycard to enter the Fitness Center. A pre-authorized keycard shall not beissued to a prospective Fitness Center user until receipt by Landlord of Landlord’s initial fee, if any, for use of the Fitness Center by such Fitness Center user(s).(f) Use of the Fitness Center is a privilege and not a right. Failure to follow gym rules or to act inappropriately while using the facilities shall result intermination of Tenant’s Fitness Center privileges. 2 EXHIBIT FPARKINGThe following parking regulations shall be in effect at the Building In the case of any conflict between these regulations and the Lease, the Lease shall becontrolling.1. Landlord agrees to maintain, or cause to be maintained, an automobile parking area (“ Parking Area ”) in reasonable proximity to the Building for thebenefit and use of the visitors and patrons and, except as otherwise provided, employees of Tenant, and other tenants and occupants of the Building. Landlord shallhave the right to determine the nature and extent of the automobile Parking Area, and of making such changes to the Parking Area from time to time which in itsopinion are desirable. Landlord shall not be liable for any damage to motor vehicles of visitors or employees, for any loss of property from within those motorvehicles, or for any injury to Tenant, its visitors or employees, unless ultimately determined to be caused by the sole active negligence or willful misconduct ofLandlord. Landlord shall also have the right to establish, and from time to time amend, and to enforce against all users of the Parking Area all reasonable rules andregulations (including the designation of areas for employee parking) as Landlord may deem necessary and advisable for the proper and efficient operation andmaintenance of the Parking Area.2. Landlord may, if it deems advisable in its sole discretion, charge for parking and may establish for the Parking Area a system or systems of permit parkingfor Tenant, its employees and its visitors. In no event shall Tenant or its employees park in reserved stalls leased to other tenants or in stalls within designatedvisitor parking zones, nor shall Tenant or its employees utilize more than the number of Parking Passes (defined below) allotted in this Lease to Tenant. Tenantshall, upon request of Landlord from time to time, furnish Landlord with a list of its employees’ names and of Tenant’s and its employees’ vehicle license numbers.Parking access devices, if applicable, shall not be transferable. Landlord shall provide the initial 20 access devices at no charge, provided that Landlord may imposea reasonable fee for additional access devices and a replacement charge for devices which are lost or stolen. Each access device shall be returned to Landlordpromptly following the Expiration Date or sooner termination of this Lease.3. Washing, waxing, cleaning or servicing of vehicles, or the parking of any vehicle on an overnight basis, in the Parking Area (other than emergencyservices) by any parker or his or her agents or employees is prohibited unless otherwise authorized by Landlord.4. It is understood that the employees of Tenant and the other tenants of Landlord within the Building and Project shall not be permitted to park theirautomobiles in the portions of the Parking Area which may from time to time be designated for patrons of the Building and/or Project. Tenant shall be obligated topurchase from Landlord for the Term of this Lease, minimum number of parking passes but no more than the maximum parking passes set forth in Item 11 of theBasic Lease Provisions (the “ Parking Passes ”) for unreserved parking, at the rate of $54.00 per month, per unreserved parking pass utilized. Tenant shall beentitled to increase or decrease the amount of Parking Passes with 30 days prior written notice to Landlord so long as the number of Parking Passes utilized are notbelow the minimum or exceed the maximum allotted. Any additional parking in excess of the maximum amount of Parking Passes shall be subject to availabilityand shall be at Landlord’s then visitor rates. Should any monthly parking charge not be paid within 5 days following the date due, then a late charge shall bepayable by Tenant equal to the greater of (i) 5% of the delinquent installment or (ii) $100.00, which late charge shall be separate and in addition to any late chargethat may be assessed pursuant to Section 14.3 of the Lease for other than delinquent monthly parking charges.5. Landlord shall be entitled to pass on to Tenant its proportionate share of any charges or parking surcharge or transportation management costs levied byany governmental agency and Tenant shall cooperate in any voluntary or mandated transportation management programs.6. Tenant shall not assign or sublet any of the Parking Passes, either voluntarily or by operation of law, without the prior written consent of Landlord, exceptin connection with an authorized assignment of this Lease or subletting of the Premises. 1 EXHIBIT GADDITIONAL PROVISIONS 1.RIGHT TO EXTEND . Provided that Tenant is not in Default under any provision of this Lease at the time of exercise of the extension right granted herein,and provided further that Tenant is occupying the entire Premises and has not assigned or sublet any of its interest in this Lease (except in connection with aPermitted Transfer of this Lease to an Affiliate as described in Section 9.2 hereof), Tenant may extend the Term of this Lease for one period of 60 months.Tenant shall exercise its right to extend the Term by and only by delivering to Landlord, not less than 9 months nor more than 12 months prior to theexpiration date of the Term, Tenant’s written notice of its irrevocable commitment to extend (the “ Commitment Notice ”). Should Tenant fail timely todeliver the Commitment Notice, then this extension right shall thereupon lapse and be of no further force or effect.The Basic Rent payable under the Lease during the extension of the Term shall be at the prevailing market rental rate (including periodic adjustments) forcomparable and similarly improved Class A office space in the University Towne Centre submarket of San Diego as of the commencement of the extensionperiod, as determined by Landlord, based on a reasonable extrapolation of Landlord’s then-current leasing rates. In no event shall the monthly Basic Rentpayable for the extension period be less than the Basic Rent payable during the month immediately preceding the commencement of such extension period.Promptly following receipt of the Commitment Notice, Landlord shall prepare an appropriate amendment to the Lease memorializing the extension of theTerm in accordance with the foregoing, and Tenant shall duly execute and return same to Landlord within 15 days. If Tenant fails timely to do so, thenLandlord, at its sole discretion, may either enforce its rights under this Section or, upon written notice to Tenant, elect to cause Tenant’s right to extend to beextinguished, in which event this Lease shall terminate as of the originally scheduled date of expiration. Should Landlord elect the latter, then this Lease shallterminate upon the scheduled date of expiration and Tenant’s rights under this paragraph shall be of no further force or effect.Any attempt to assign or transfer any right or interest created by this paragraph to other than an Affiliate shall be void from its inception. Tenant shall haveno other right to extend the Term beyond the single 60 month extension created by this paragraph. Unless agreed to in a writing signed by Landlord andTenant, any extension of the Term, whether created by an amendment to this Lease or by a holdover of the Premises by Tenant, or otherwise, shall bedeemed a part of, and not in addition to, any duly exercised extension period permitted by this Section. Tenant’s Right to Extend is subject and subordinateto the expansion rights (whether such rights are designated as a right of first offer, right of first refusal, expansion option or otherwise) of any tenant of theBuilding existing on the date hereof. Time is specifically made of the essence of this Section. 2.FITNESS CENTER AND SHOWER FACILITY . Subject to the provisions of this Section, so long as Tenant is not in Default under this Lease, andprovided Tenant’s employees execute Landlord’s standard waiver of liability form and pay the applicable one time or monthly fee, if any, then Tenant’semployees (the “ Fitness Center Users ”) shall be entitled to use the fitness center (the “ Fitness Center ”) and the shower facility (the “ Shower Facility ”)located at the Project. No separate charges shall be assessed to Fitness Center Users for the use of the Fitness Center (with the exception of towel/laundryfees, if any) during the initial Term of this Lease, provided, however, that the costs of operating, maintaining and repairing the Fitness Center shall beincluded as part of Operating Expenses. The use of the Fitness Center and Shower Facility shall be subject to the reasonable rules and regulations (includingrules regarding hours of use) established from time to time by Landlord. Landlord and Tenant acknowledge that the use of the Fitness Center by the FitnessCenter Users shall be at their own risk and that the terms and provisions of Section 10.2 of this Lease shall apply to Tenant and the Fitness Center User’s useof the Fitness Center. Tenant acknowledges that the provisions of this Section shall not be deemed to be a representation by Landlord that Landlord shallcontinuously maintain the Fitness Center (or any other fitness facility) and Shower Facility throughout the Term of this Lease, and Landlord shall have theright, at Landlord’s sole discretion, to expand, contract, eliminate or otherwise modify the Fitness Center. No expansion, contraction, elimination ormodification of the Fitness Center, and no termination of Tenant’s or the Fitness Center Users’ rights to the Fitness Center shall entitle Tenant to anabatement or reduction in Basic Rent constitute a constructive eviction, or result in an event of default by Landlord under this Lease. Tenant herebyvoluntarily releases, discharges, waives and relinquishes any and all actions or causes of action for personal injury or property damage occurring to Tenant orits employees or agents arising as a result of the use of the Fitness Center and Shower Facility, or any activities incidental thereto, wherever or however thesame may occur, and further agrees that Tenant will not prosecute any claim for personal injury or property damage against Landlord or any of its officers,agents, servants or employees for any said causes of action. It is the intention of Tenant with respect to the Fitness Center and Shower Facility to exempt andrelieve Landlord from liability for personal injury or property damage caused by negligence. 3.BALCONIES. Tenant acknowledges and agrees that (i) Tenant has access to certain balconies located on the Premises; (ii) Tenant is responsible forsupervising and controlling access to the balconies by Tenant’s employees, officers, directors, shareholders, agents, representatives, contractors and/orinvitees; (iii) Landlord is not responsible for supervising and controlling access to the balconies, and (iv) Tenant assumes the risk for any loss, claim, damageor liability arising out of the use or misuse of the balconies by Tenant’s employees, officers, directors, shareholders, agents, representatives, contractorsand/or invitees, and Tenant releases and discharges Landlord from and against any such loss, claim, damage or liability. Tenant further agrees to indemnify,defend and hold Landlord harmless from and against any and all losses and claims relating to or arising out of the use or misuse of the balconies by Tenant orTenant’s employees, officers, shareholders, directors, agents, representatives, contractors and/or invitees. Tenant shall have not have the right to install anduse outdoor furniture and planters on the balconies. Tenant furthermore agrees (a) not to store or place any personal property or other items upon saidbalconies without the prior consent of Landlord, which may be withheld in Landlord’s sole discretion, (b) to use and keep the appearance of the balconies ina manner consistent with a first-class office building, (c) not to use the balcony as an area for people to congregate or as a smoking area or for other similarpurposes, and (d) not to keep the balcony door(s) ajar. 1 EXHIBIT XWORK LETTERBUILD TO SUITLandlord, at its sole cost and expense except as provided herein, shall cause its contractor to construct the tenant improvements (the “ TenantImprovements ”) for the Premises as shown in the space plan (the “ Plan ”) prepared by Gensler and dated July 29, 2015 which plan shall include (i) a conferenceroom to accommodate a 10 person table (with room to seat up to 6 additional persons for a total of 16 persons), and a 4-plex outlet in the floor, (ii) one additionalstandard approx 10’ x 11’ sized office with similar doors and glass as the other offices in the suite, and (iii) two 4-plex outlets in floor for 8 cubicles (2 clusters of 4cubes) and enough electrical outlets in perimeter floor container to accommodate additional cubes if needed. Any additional cost resulting from changes requestedby Tenant shall be borne solely by Tenant and paid to Landlord prior to the commencement of construction. Unless otherwise specified in the Plan or hereafteragreed in writing by Landlord, all materials and finishes utilized in constructing the Tenant Improvements shall be Landlord’s building standard. Should Landlordsubmit any additional plans, equipment specification sheets, or other matters to Tenant for approval or completion, Tenant shall respond in writing, as appropriate,within 5 business days unless a shorter period is provided herein. Tenant shall not unreasonably withhold its approval of any matter, and any disapproval shall belimited to items not previously approved by Tenant in the Plan or otherwise.In the event that Tenant requests in writing a revision in the Plan or in any other plans hereafter approved by Tenant, then provided such change request isacceptable to Landlord, Landlord shall advise Tenant by written change order of any additional cost and/or Tenant Delay (as defined below) such change wouldcause. Tenant shall approve or disapprove such change order in writing within 2 business days following its receipt. Tenant’s approval of a change order shall notbe effective unless accompanied by payment in full of the additional cost of the tenant improvement work resulting from the change order. It is understood thatLandlord shall have no obligation to interrupt or modify the tenant improvement work pending Tenant’s approval of a change order.Notwithstanding any provision in the Lease to the contrary, if Tenant fails to comply with any of the time periods specified in this Work Letter, requests anychanges to the work, fails to make timely payment of any sum due hereunder, furnishes inaccurate or erroneous specifications or other information, or otherwisedelays in any manner the completion of the Tenant Improvements or the issuance of an occupancy certificate (any of the foregoing being referred to in this Lease asa “ Tenant Delay ”), then Tenant shall bear any resulting additional construction cost or other expenses and the Commencement Date shall be deemed to haveoccurred for all purposes, including Tenant’s obligation to pay Rent, as of the date Landlord reasonably determines that it would have been able to deliver thePremises to Tenant but for the collective Tenant Delays.Landlord shall permit Tenant and its agents to enter the Premises up to 3 weeks prior to the Commencement Date of the Lease in order that Tenant mayinstall its furniture, fixtures and equipment and data cabling, subject to Landlord’s prior written approval, and in a manner and upon terms and conditions and attimes satisfactory to Landlord’s representative. The foregoing license to enter the Premises prior to the Commencement Date is, however, conditioned uponTenant’s contractors and their subcontractors and employees working in harmony and not interfering with the work being performed by Landlord. If at any timethat entry shall cause disharmony or interfere with the work being performed by Landlord, this license may be withdrawn by Landlord upon 24 hours written noticeto Tenant. That license is further conditioned upon the compliance by Tenant’s contractors with all requirements imposed by Landlord on third party contractors,including without limitation the maintenance by Tenant and its contractors and subcontractors of workers’ compensation and public liability and property damageinsurance in amounts and with companies and on forms satisfactory to Landlord, with certificates of such insurance being furnished to Landlord prior to proceedingwith any such entry. The entry shall be deemed to be under all of the provisions of the Lease except as to the covenants to pay Rent unless Tenant commencesbusiness activities within the Premises. Landlord shall not be liable in any way for any injury, loss or damage which may occur to any such work being performedby Tenant, the same being solely at Tenant’s risk. In no event shall the failure of Tenant’s contractors to complete any work in the Premises extend theCommencement Date of this Lease.Tenant hereby designates Kevin Dushney, Telephone No. (617) 830-7740, as its representative, agent and attorney-in-fact for the purpose of receivingnotices, approving submittals and issuing requests for changes, and Landlord shall be entitled to rely upon authorizations and directives of such person(s) as ifgiven by Tenant. Tenant may amend the designation of its construction representative(s) at any time upon delivery of written notice to Landlord. 1 EXHIBIT 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statement on Forms S-8 (File Nos. 333-196900 and 333-204931) of Zafgen, Inc. of ourreport dated March 15, 2016 relating to the consolidated financial statements, which appears in this Form 10-K./s/ PricewaterhouseCoopers LLPBoston, MassachusettsMarch 15, 2016 Exhibit 31.1CERTIFICATIONS UNDER SECTION 302I, Thomas E. Hughes, certify that:1. I have reviewed this annual report on Form 10-K of Zafgen, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles;(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’sinternal control over financial reporting; and5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’sauditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adverselyaffect the registrant’s ability to record, process, summarize and report financial information; andb) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financialreporting.Date: March 15, 2016 /s/ Thomas E. HughesThomas E. HughesChief Executive Officer(Principal Executive Officer) Exhibit 31.2CERTIFICATIONS UNDER SECTION 302I, Patricia Allen, certify that:1. I have reviewed this annual report on Form 10-K of Zafgen, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles;(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’sinternal control over financial reporting; and5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’sauditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adverselyaffect the registrant’s ability to record, process, summarize and report financial information; andb) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financialreporting.Date: March 15, 2016 /s/ Patricia AllenPatricia AllenChief Financial Officer(Principal Financial and Accounting Officer) Exhibit 32.1CERTIFICATIONS UNDER SECTION 906Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of theundersigned officers of Zafgen, Inc., a Delaware corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:The Annual Report for the year ended December 31, 2015 (the “Form 10-K”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934, and the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results ofoperations of the Company. Dated: March 15, 2016 /s/ Thomas E. Hughes Thomas E. Hughes Chief Executive Officer (Principal Executive Officer)Dated: March 15, 2016 /s/ Patricia Allen Patricia Allen Chief Financial Officer(Principal Financial and Accounting Officer)

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